| Daniel
J. Mavico USAA Mutual Funds Trust 9800 Fredericksburg Road San Antonio, TX 78288 |
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA TOTAL RETURN STRATEGY FUND]
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SEMIANNUAL REPORT
USAA TOTAL RETURN STRATEGY FUND
FUND SHARES o INSTITUTIONAL SHARES
JUNE 30, 2016
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PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM, [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
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AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are
seeking to reduce their debt has impeded the recovery. Also, while the American
consumer was expected to benefit from the huge drop in the price of oil,
savings at the pump were offset by higher costs in other parts of the economy,
including housing and health care. As a result, consumer spending has been
lower than expected.
In response to the unexpected soft market and what the Federal Reserve (the
Fed) chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed
off its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
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compensate for this, many companies have cut operating costs, reduced
capital spending, and bought back shares. However, we think they may have
extracted most of what they can using these methods. Given the lack of revenue
and earnings growth in recent quarters, we believe it will be a challenge for
stocks to generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to
stay focused on their long-term objectives, using an investment plan that is
based on their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general
or are concerned about having too much exposure to specific asset classes,
please give one of our financial advisors a call. They will help with your
investment allocations and discuss whether you are properly aligned with your
long-term goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
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TABLE OF CONTENTS
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FUND OBJECTIVE 1
MANAGERS' COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Portfolio of Investments 12
Notes to Portfolio of Investments 17
Financial Statements 19
Notes to Financial Statements 22
EXPENSE EXAMPLE 43
ADVISORY AGREEMENT(S) 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 ASSET 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)2016, USAA. All rights reserved.
208369-0816
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FUND OBJECTIVE
THE USAA TOTAL RETURN STRATEGY FUND (THE FUND) SEEKS CAPITAL APPRECIATION
THROUGH THE USE OF A DYNAMIC ALLOCATION STRATEGY, ACROSS STOCKS, BONDS, AND
CASH INSTRUMENTS.
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TYPES OF INVESTMENTS
In seeking to achieve its objective, the Fund's assets are invested pursuant to
a dynamic asset allocation strategy that shifts assets among equity securities,
investment-grade bonds, and/or cash equivalents. The dynamic asset allocation
strategy seeks to identify the most attractive asset classes based on a
multifaceted approach using both a valuation and fundamental framework. The
Fund generally will invest in U.S. and foreign stocks and investment-grade
bonds, directly or through exchange-traded funds (ETFs), and/or cash
equivalents through investment in short-term, high-quality money market
instruments or money market funds. Equity securities in which the Fund may
invest include common stocks, securities convertible into common stocks,
securities that carry the right to buy common stocks, preferred securities, and
ETFs. The bond and money market securities in which the Fund may invest include
obligations of U.S., state, and local governments, their agencies and
instrumentalities; mortgage- and asset-backed securities; corporate debt
securities; repurchase agreements; and other securities believed to have
debt-like characteristics, including preferred and synthetic securities.
In addition, in an attempt to reduce the Fund's volatility over time, the Fund
may employ an options-based risk-management strategy by purchasing and/or
selling options on component indices or corresponding ETFs and individual
equities to attempt to provide the Fund with fairly consistent returns over a
wide range of equity market environments.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
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FUND OBJECTIVE | 1
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MANAGERS' COMMENTARY ON THE FUND
USAA Asset Management Company
WASIF A. LATIF
ANTHONY M. ERA
LANCE HUMPHREY, CFA*
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o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE REPORTING PERIOD?
Financial assets produced robust returns during the reporting period ended
June 30, 2016, with gains for stocks and bonds alike.
The investment backdrop for the reporting period proved highly supportive
for stocks. Concerns about global growth receded due to an impressive
recovery in commodity prices and signs of stabilizing economic conditions in
China. Global monetary policy, particularly the decisions of the European
Central Bank and the Bank of Japan to cut interest rates, also was
favorable. In addition, a series of Federal Reserve (the Fed) statements
gave investors confidence that interest rates would remain low for an
extended length of time. A drop in global bond yields was an additional
positive in that it increased investors' willingness to take on the higher
risk of owning equities. Although the markets experienced stretches of
volatility--most notably in the wake of the United Kingdom's vote to leave
the European Union ("Brexit")--these factors generally had a beneficial
effect on stock prices.
Emerging markets performed particularly well, as the combination of an
increased investor appetite for risk, recovering commodity prices, and low
interest rates enabled the asset class to rebound from its weak performance
during the past two years. Domestic equities also generated a gain, thanks
in part to the relative strength of the U.S. economy. However, developed
*Effective May 1, 2016, Lance Humphrey began co-managing the Fund.
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2 | USAA TOTAL RETURN STRATEGY FUND
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international markets lost ground due to the comparative weakness in Europe
and Japan, as well as the late-June 2016 sell-off in European equities
sparked by the "Brexit" vote.
Accommodative monetary policies also provided a boost to bonds by driving
down yields across the major world markets. (Prices and yields move in
opposite directions). Longer-term bonds delivered noteworthy gains, as
investors saw little threat from inflation or a more aggressive Fed policy.
The drop in yields fueled increased demand for investment-grade corporate
and high-yield bonds, allowing these categories to outpace the return of
government debt.
o HOW DID THE USAA TOTAL RETURN STRATEGY FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. At
the end of the reporting period, the Fund Shares and Institutional Shares
had total returns of 14.72% and 14.89%, respectively. This compares to total
returns of 3.84% for the S&P 500 Index(R), 1.23% for the MSCI All-Country
World Index*, 5.68% for the Barclays U.S. Universal Index, and 2.90% for the
Lipper Flexible Portfolio Funds Index.
USAA Asset Management Company (the Manager) is the Fund's investment
adviser. The investment adviser provides day-to-day discretionary management
for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE.
The Fund's strong results were a direct reflection of our active strategy,
which enables us to seek opportunities anywhere in the financial markets
while avoiding asset classes with less compelling risk/return profiles.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Refer to page 8 for benchmark definitions.
*As of May 1, 2016, the MSCI All-Country World Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
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MANAGERS' COMMENTARY ON THE FUND | 3
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Several aspects of our positioning added value in the first half of 2016,
which helps illustrate the potential value of the Fund's unique approach.
First, the Fund gained a substantial benefit from its allocation to gold and
silver, via exchange-traded funds (ETFs), as well as precious-metals
equities. The price of gold surged in January and February of 2016 behind
the pullback in the U.S. dollar, and after a three-month pause, rose again
in June of 2016 as investors sought shelter from the fallout of "Brexit".
After lagging considerably in the prior two calendar years, gold stocks
rebounded strongly in conjunction with the recovery in the commodity and
finished as one of the best performing segments within the global equity
markets.
The Fund also benefited from having more than half of its portfolio
allocated to fixed income. Almost all of the bond allocation was invested in
ETFs linked to the performance of longer-term U.S. Treasuries and Treasury
Inflation Protected Securities (TIPS). Both market segments staged
impressive rallies thanks to the backdrop of slow growth and improving
expectations regarding Fed policy. In addition, TIPS gained a further
benefit from signs of gradually rising inflation in the U.S. economy.
The Fund's position in emerging-market stocks, which it achieves through
investments in ETFs, delivered a healthy gain as well. The emerging-markets
sector lagged in 2015 on concerns about slowing growth, but stabilizing
economic data from China and improving investor sentiment in Brazil fueled
outperformance relative to the U.S. and developed international markets
during the reporting period.
The Fund's allocation to the developed-market international equities also
detracted from results. While the asset class continues to offer an
attractive valuation relative to the United States, we are cautious given
weakness in corporate earnings growth and the uncertainty in the
macroeconomic environment. We therefore reduced the extent of the Fund's
weighting in this category during the course of the reporting period.
The Fund held a short position in small-cap stocks using Russell 2000 Index
futures. (A short position rises in value when the price of the underlying
investment falls). The basis for this strategy was our view that
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4 | USAA TOTAL RETURN STRATEGY FUND
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the asset class was overvalued, particularly in relation to large cap
stocks. While this position helped smooth downside risk during times of
weak market performance, it was a net detractor given that small cap stocks
finished the reporting period with a modest gain.
Our hedging program, which is designed to help cushion the effect of large
stock market sell-offs, had mixed results. Although this strategy helped
offset some of the volatility that occurred at various points throughout the
first half of 2016, it was a slight overall detractor given equities'
positive performance.
We continue to hold a cautious view regarding the overall outlook for the
financial markets. Although the investment backdrop remains generally
favorable--highlighted by a stable U.S. economy and supportive central bank
policies globally--the likelihood of negative surprises is high. For
example, China's growth prospects, volatility in commodity prices,
geopolitical headlines, and the approaching U.S. elections are all factors
that could lead to unstable short-term market performance in the months
ahead. Amid this uncertain outlook, our approach is to remain true to our
longstanding strategy of using fundamentals and valuations to construct
portfolios that can capitalize on a wide range of possible outcomes. We
believe this steady approach is appropriate at a time in which risks and
opportunities appear to be in roughly equal balance.
Thank you for allowing us to help you manage your investments.
As interest rates rise, existing bond prices generally fall; given the
historically low interest rate environment, risks associated with rising
interest rates may be heightened. o ETFs are subject to risks similar to
those of stocks. Investment returns may fluctuate and are subject to market
volatility, so that an investor's shares, when redeemed or sold, may be
worth more or less than their original cost. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o Foreign investing is subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability.
Emerging market countries are most volatile. Emerging market countries are
less diverse and mature than other countries and tend to be politically less
stable. o Precious metals and minerals is a volatile asset class and is
subject to additional risks, such as currency fluctuation, market
illiquidity, political instability, and increased volatility. It may be more
volatile than other asset classes that diversify across many industries and
companies.
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MANAGERS' COMMENTARY ON THE FUND | 5
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INVESTMENT OVERVIEW
USAA TOTAL RETURN STRATEGY FUND SHARES (FUND SHARES)
(Ticker Symbol: USTRX)
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6/30/16 12/31/15
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Net Assets $84.0 Million $76.2 Million
Net Asset Value Per Share $9.12 $7.96
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
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12/31/15-6/30/16* 1 YEAR 5 YEARS 10 YEARS
14.72% 4.17% 1.58% 1.25%
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EXPENSE RATIO AS OF 12/31/15**
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1.56%
(Includes acquired fund fees and expenses of 0.30%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This
return is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net
investment income.
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6 | USAA TOTAL RETURN STRATEGY FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS U.S. LIPPER FLEXIBLE USAA TOTAL
S&P 500 UNIVERSAL PORTFOLIO FUNDS MSCI ALL-COUNTRY RETURN STRATEGY
INDEX INDEX INDEX WORLD INDEX FUND SHARES
6/30/2006 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
7/31/2006 10,061.69 10,137.66 10,033.24 10,068.25 10,030.00
8/31/2006 10,301.08 10,295.47 10,210.27 10,329.28 10,071.00
9/30/2006 10,566.54 10,389.34 10,322.79 10,449.66 10,104.00
10/31/2006 10,910.87 10,465.89 10,595.32 10,841.57 10,145.00
11/30/2006 11,118.35 10,590.94 10,832.29 11,148.13 10,277.00
12/31/2006 11,274.31 10,545.58 10,940.98 11,396.87 10,310.00
1/31/2007 11,444.82 10,548.42 11,070.92 11,510.24 10,444.00
2/28/2007 11,220.97 10,710.64 11,027.69 11,449.64 10,228.00
3/31/2007 11,346.47 10,713.79 11,131.22 11,679.40 10,293.00
4/30/2007 11,849.07 10,777.11 11,478.46 12,196.58 10,624.00
5/31/2007 12,262.54 10,706.86 11,736.75 12,560.31 10,944.00
6/30/2007 12,058.82 10,661.50 11,683.52 12,523.42 10,884.00
7/31/2007 11,684.94 10,715.05 11,565.27 12,332.18 10,749.00
8/31/2007 11,860.10 10,842.31 11,557.41 12,298.06 10,853.00
9/30/2007 12,303.65 10,939.65 12,012.96 12,958.25 11,163.00
10/31/2007 12,499.37 11,038.87 12,332.74 13,463.78 11,256.00
11/30/2007 11,976.81 11,198.89 12,040.80 12,868.50 10,913.00
12/31/2007 11,893.72 11,231.34 11,988.03 12,726.05 10,795.00
1/31/2008 11,180.31 11,394.19 11,598.39 11,683.72 10,530.00
2/29/2008 10,817.11 11,393.88 11,525.05 11,716.70 10,450.00
3/31/2008 10,770.41 11,417.50 11,371.76 11,544.85 10,408.00
4/30/2008 11,294.96 11,428.84 11,782.10 12,188.84 10,766.00
5/31/2008 11,441.26 11,357.97 11,968.72 12,379.42 11,009.00
6/30/2008 10,476.72 11,324.89 11,431.07 11,362.90 10,601.00
7/31/2008 10,388.65 11,307.57 11,214.90 11,067.83 10,555.00
8/31/2008 10,538.92 11,407.42 11,176.56 10,829.27 10,694.00
9/30/2008 9,599.82 11,193.85 10,129.47 9,475.82 9,977.00
10/31/2008 7,987.55 10,791.28 8,571.76 7,598.18 8,769.00
11/30/2008 7,414.41 11,075.41 8,088.89 7,099.00 8,339.00
12/31/2008 7,493.30 11,498.46 8,389.37 7,356.29 8,527.00
1/31/2009 6,861.72 11,433.25 8,033.35 6,727.78 8,054.00
2/28/2009 6,131.10 11,372.46 7,491.43 6,069.05 7,545.00
3/31/2009 6,668.15 11,543.50 7,987.80 6,568.96 7,858.00
4/30/2009 7,306.36 11,662.57 8,627.52 7,344.40 8,190.00
5/31/2009 7,715.02 11,793.30 9,176.91 8,076.18 8,605.00
6/30/2009 7,730.33 11,883.39 9,026.29 8,030.90 8,552.00
7/31/2009 8,315.03 12,108.30 9,760.89 8,737.84 8,884.00
8/31/2009 8,615.23 12,249.10 9,998.71 9,050.35 9,014.00
9/30/2009 8,936.71 12,415.42 10,422.67 9,465.56 9,182.00
10/31/2009 8,770.70 12,486.93 10,260.04 9,319.28 9,134.00
11/30/2009 9,296.79 12,645.37 10,697.70 9,702.56 9,431.00
12/31/2009 9,476.36 12,487.56 10,836.35 9,903.49 9,571.00
1/31/2010 9,135.46 12,677.50 10,553.08 9,475.49 9,403.00
2/28/2010 9,418.46 12,725.38 10,735.86 9,596.19 9,571.00
3/31/2010 9,986.81 12,742.39 11,259.94 10,213.55 9,811.00
4/30/2010 10,144.48 12,883.83 11,431.42 10,230.73 9,823.00
5/31/2010 9,334.44 12,942.10 10,774.00 9,260.80 9,535.00
6/30/2010 8,845.79 13,142.76 10,423.37 8,975.50 9,162.00
7/31/2010 9,465.56 13,312.86 10,983.37 9,705.82 9,547.00
8/31/2010 9,038.24 13,479.49 10,722.03 9,366.52 9,222.00
9/30/2010 9,844.86 13,522.33 11,403.57 10,262.58 9,763.00
10/31/2010 10,219.45 13,591.32 11,779.38 10,633.48 9,895.00
11/30/2010 10,220.76 13,501.86 11,770.26 10,396.88 9,811.00
12/31/2010 10,903.82 13,382.16 12,235.36 11,158.23 10,050.00
1/31/2011 11,162.26 13,413.66 12,490.99 11,333.34 10,159.00
2/28/2011 11,544.67 13,456.50 12,743.18 11,663.35 10,352.00
3/31/2011 11,549.26 13,472.56 12,801.11 11,651.71 10,400.00
4/30/2011 11,891.30 13,647.39 13,164.21 12,128.41 10,581.00
5/31/2011 11,756.69 13,816.23 13,050.04 11,867.70 10,520.00
6/30/2011 11,560.72 13,771.50 12,859.98 11,680.70 10,472.00
7/31/2011 11,325.64 13,985.70 12,756.29 11,490.53 10,340.00
8/31/2011 10,710.41 14,127.45 12,197.98 10,651.15 9,821.00
9/30/2011 9,957.48 14,167.77 11,378.91 9,645.55 9,412.00
10/31/2011 11,045.76 14,248.72 12,324.27 10,679.01 9,894.00
11/30/2011 11,021.35 14,206.51 12,135.79 10,359.34 10,050.00
12/31/2011 11,134.09 14,372.52 12,093.80 10,338.40 9,946.00
1/31/2012 11,633.07 14,528.13 12,651.20 10,939.55 10,235.00
2/29/2012 12,136.10 14,562.15 13,049.53 11,489.96 10,429.00
3/31/2012 12,535.49 14,495.37 13,170.02 11,566.24 10,436.00
4/30/2012 12,456.81 14,652.87 13,138.35 11,434.00 10,436.00
5/31/2012 11,708.15 14,747.68 12,438.86 10,408.85 10,061.00
6/30/2012 12,190.55 14,784.85 12,788.84 10,922.94 10,382.00
7/31/2012 12,359.86 15,005.36 12,945.88 11,072.47 10,503.00
8/31/2012 12,638.24 15,036.86 13,212.18 11,313.22 10,769.00
9/30/2012 12,964.84 15,080.96 13,498.61 11,669.54 10,993.00
10/31/2012 12,725.45 15,128.84 13,405.48 11,591.76 10,920.00
11/30/2012 12,799.27 15,165.06 13,522.91 11,739.99 10,872.00
12/31/2012 12,915.93 15,167.90 13,707.31 12,005.91 11,002.00
1/31/2013 13,584.91 15,088.83 14,128.38 12,559.01 11,221.00
2/28/2013 13,769.33 15,161.28 14,142.81 12,557.05 11,026.00
3/31/2013 14,285.72 15,179.24 14,378.65 12,786.65 11,154.00
4/30/2013 14,560.96 15,345.87 14,577.17 13,151.93 11,105.00
5/31/2013 14,901.57 15,085.68 14,570.74 13,115.85 10,959.00
6/30/2013 14,701.46 14,820.13 14,235.93 12,732.49 10,512.00
7/31/2013 15,449.53 14,868.33 14,755.64 13,342.02 10,695.00
8/31/2013 15,002.08 14,783.59 14,520.93 13,064.05 10,525.00
9/30/2013 15,472.54 14,930.70 15,031.16 13,738.82 10,727.00
10/31/2013 16,183.78 15,078.44 15,455.64 14,291.02 10,959.00
11/30/2013 16,676.96 15,029.61 15,602.69 14,493.41 10,886.00
12/31/2013 17,099.16 14,963.77 15,838.17 14,743.45 10,933.00
1/31/2014 16,507.97 15,162.23 15,571.69 14,153.70 10,885.00
2/28/2014 17,263.11 15,270.27 16,161.52 14,837.44 11,312.00
3/31/2014 17,408.22 15,256.10 16,146.76 14,903.41 11,305.00
4/30/2014 17,536.90 15,382.41 16,171.40 15,045.28 11,391.00
5/31/2014 17,948.56 15,567.63 16,494.14 15,365.28 11,513.00
6/30/2014 18,319.34 15,591.26 16,787.44 15,654.57 11,732.00
7/31/2014 18,066.70 15,542.75 16,539.89 15,464.71 11,572.00
8/31/2014 18,789.46 15,711.27 16,879.23 15,806.34 11,782.00
9/30/2014 18,525.96 15,586.53 16,478.83 15,293.77 11,365.00
10/31/2014 18,978.46 15,739.31 16,580.02 15,401.44 11,255.00
11/30/2014 19,488.88 15,822.78 16,727.17 15,659.05 11,353.00
12/31/2014 19,439.78 15,795.69 16,521.55 15,356.89 11,181.00
1/31/2015 18,856.22 16,096.20 16,503.39 15,116.79 11,230.00
2/28/2015 19,939.91 16,002.33 16,959.12 15,958.37 11,415.00
3/31/2015 19,624.57 16,068.48 16,765.48 15,711.10 11,161.00
4/30/2015 19,812.84 16,049.90 16,967.87 16,166.95 11,248.00
5/31/2015 20,067.61 16,021.86 17,004.15 16,145.85 11,174.00
6/30/2015 19,679.14 15,842.94 16,689.05 15,765.75 10,874.00
7/31/2015 20,091.45 15,935.24 16,775.31 15,902.66 10,713.00
8/31/2015 18,879.25 15,888.30 16,085.11 14,812.51 10,256.00
9/30/2015 18,412.11 15,950.36 15,682.43 14,275.87 10,085.00
10/31/2015 19,965.25 16,001.39 16,440.35 15,396.31 10,346.00
11/30/2015 20,024.62 15,943.11 16,353.87 15,269.18 10,060.00
12/31/2015 19,708.80 15,863.42 16,104.35 14,993.81 9,874.00
1/31/2016 18,730.77 16,038.56 15,501.93 14,089.52 9,812.00
2/29/2016 18,705.49 16,152.59 15,497.18 13,992.60 10,358.00
3/31/2016 19,974.44 16,350.41 16,254.08 15,029.56 10,548.00
4/30/2016 20,051.88 16,461.92 16,477.88 15,251.42 11,057.00
5/31/2016 20,411.97 16,474.83 16,526.54 15,270.64 10,536.00
6/30/2016 20,464.86 16,764.63 16,571.48 15,178.20 11,328.00
[END CHART]
Data from 6/30/06 to 6/30/16.*
See next page for benchmark definitions.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Flexible Portfolio Funds Index reflects the fees and expenses
of the underlying funds included in the Index.
*As of May 1, 2016, the MSCI All-Country World Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
The graph on page 7 illustrates the comparison of a $10,000 hypothetical
investment in the USAA Total Return Strategy Fund Shares to the following
benchmarks:
o The unmanaged S&P 500 Index represents the weighted average performance of
a group of 500 widely held, publicly traded stocks.
o The Barclays U.S. Universal Index is an index that represents the union of
the U.S. Aggregate Index, U.S. Corporate High Yield Index, Investment Grade
144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the non-ERISA
eligible portion of the CMBS Index. The index covers USD-denominated,
taxable bonds that are rated either investment grade or high-yield.
o The Lipper Flexible Portfolio Funds Index tracks the performance of the 30
largest funds within the Lipper Flexible Funds category, which includes
funds that allocate their investments across various asset classes,
including domestic common stocks, bonds, and money market instruments, with
a focus on total return.
o The unmanaged MSCI All-Country World Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
================================================================================
8 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
USAA TOTAL RETURN STRATEGY FUND INSTITUTIONAL SHARES (INSTITUTIONAL SHARES)
(Ticker Symbol: UTRIX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $22.5 Million $26.2 Million
Net Asset Value Per Share $9.13 $7.97
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
14.89% 4.50% 2.25%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
1.28%
(Includes acquired fund fees and expenses of 0.30%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This
return is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net
investment income.
The Institutional Shares are available for investment through a USAA
discretionary managed account program, and certain advisory programs sponsored
by financial intermediaries, such as brokerage firms, investment advisors,
financial planners, third-party administrators, and insurance companies.
Institutional Shares also are available to institutional investors, which
include retirement plans, endowments, foundations, and bank trusts, as well as
other persons or legal entities that the Fund may approve from time to time, or
for purchase by a USAA fund participating in a fund-of-funds investment
strategy (USAA fund-of-funds).
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA TOTAL
BARCLAYS LIPPER FLEXIBLE RETURN STRATEGY
S&P 500 MSCI ALL-COUNTRY U.S. UNIVERSAL PORTFOLIO FUNDS FUND INSTITUTIONAL
INDEX WORLD INDEX* INDEX INDEX SHARES
7/31/2013 $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2013 9,710.38 9,791.66 9,943.01 9,840.93 9,852.00
9/30/2013 10,014.90 10,297.41 10,041.95 10,186.72 10,051.00
10/31/2013 10,475.26 10,711.29 10,141.31 10,474.39 10,257.00
11/30/2013 10,794.48 10,862.98 10,108.47 10,574.05 10,188.00
12/31/2013 11,067.76 11,050.39 10,064.19 10,733.64 10,237.00
1/31/2014 10,685.10 10,608.37 10,197.67 10,553.04 10,191.00
2/28/2014 11,173.88 11,120.83 10,270.33 10,952.77 10,591.00
3/31/2014 11,267.80 11,170.28 10,260.80 10,942.77 10,592.00
4/30/2014 11,351.09 11,276.62 10,345.76 10,959.47 10,684.00
5/31/2014 11,617.55 11,516.46 10,470.33 11,178.19 10,787.00
6/30/2014 11,857.54 11,733.29 10,486.22 11,376.96 10,998.00
7/31/2014 11,694.01 11,590.98 10,453.59 11,209.19 10,848.00
8/31/2014 12,161.83 11,847.04 10,566.94 11,439.17 11,044.00
9/30/2014 11,991.28 11,462.86 10,483.04 11,167.82 10,660.00
10/31/2014 12,284.17 11,543.56 10,585.79 11,236.39 10,556.00
11/30/2014 12,614.55 11,736.64 10,641.94 11,336.11 10,660.00
12/31/2014 12,582.77 11,510.17 10,623.72 11,196.77 10,496.00
1/31/2015 12,205.04 11,330.21 10,825.83 11,184.46 10,542.00
2/28/2015 12,906.49 11,960.98 10,762.70 11,493.31 10,715.00
3/31/2015 12,702.38 11,775.65 10,807.19 11,362.08 10,483.00
4/30/2015 12,824.23 12,117.31 10,794.69 11,499.24 10,576.00
5/31/2015 12,989.14 12,101.50 10,775.83 11,523.82 10,506.00
6/30/2015 12,737.70 11,816.61 10,655.49 11,310.28 10,221.00
7/31/2015 13,004.57 11,919.23 10,717.57 11,368.74 10,070.00
8/31/2015 12,219.95 11,102.15 10,686.00 10,900.99 9,640.00
9/30/2015 11,917.59 10,699.93 10,727.74 10,628.09 9,483.00
10/31/2015 12,922.89 11,539.72 10,762.06 11,141.74 9,740.00
11/30/2015 12,961.32 11,444.43 10,722.87 11,083.13 9,460.00
12/31/2015 12,756.89 11,238.04 10,669.27 10,914.03 9,297.00
1/31/2016 12,123.85 10,560.26 10,787.06 10,505.76 9,250.00
2/29/2016 12,107.49 10,487.62 10,863.75 10,502.54 9,763.00
3/31/2016 12,928.84 11,264.83 10,996.80 11,015.50 9,938.00
4/30/2016 12,978.96 11,431.12 11,071.80 11,167.17 10,429.00
5/31/2016 13,212.03 11,445.52 11,080.49 11,200.15 9,938.00
6/30/2016 13,246.27 11,376.24 11,275.40 11,230.61 10,681.00
[END CHART]
Data from 7/31/13 to 6/30/16.**
The graph illustrates the comparison of a $10,000 hypothetical investment in
the USAA Total Return Strategy Fund Institutional Shares to the Fund's
benchmarks listed above (see page 8 for benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Flexible Portfolio Funds Index reflects the fees and expenses
of the underlying funds included in the Index.
*As of May 1, 2016, the MSCI All-Country World Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
**The performance of the S&P 500 Index, MSCI All-Country World Index, Lipper
Flexible Portfolio Funds Index, and the Barclays U.S. Universal Index is
calculated from the end of the month, July 31, 2013, while the Institutional
Shares initially invested in securities on July 15, 2013. There may be a slight
variation of the performance numbers because of this difference.
================================================================================
10 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
o TOP 10 EQUITY SECURITIES - 6/30/16 o
(% of Net Assets)
iShares TIPS Bond ETF* ................................................... 23.9%
iShares 20+ Year Treasury Bond ETF* ...................................... 22.2%
PowerShares FTSE RAFI Emerging Markets Portfolio ......................... 6.1%
iShares Gold Trust ....................................................... 4.8%
SPDR Gold Shares ......................................................... 4.8%
VanEck Vectors Gold Miners ETF ........................................... 4.4%
iShares 7-10 Year Treasury Bond ETF* ..................................... 3.9%
iShares MSCI Italy Capped ETF* ........................................... 3.3%
WisdomTree India Earnings Fund* .......................................... 3.2%
Agnico-Eagle Mines Ltd. .................................................. 0.9%
o ASSET ALLOCATION** - 6/30/16 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
FIXED-INCOME EXCHANGE-TRADED FUNDS* 50.0%
EXCHANGE-TRADED FUNDS* 27.6%
COMMON STOCKS 14.7%
EURODOLLAR AND YANKEE OBLIGATIONS 1.0%
MONEY MARKET INSTRUMENTS 1.0%
CONVERTIBLE SECURITIES 0.7%
[END CHART]
* The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set forth
in the Investment Company Act of 1940, as amended, that would otherwise be
applicable.
**Excludes options and futures.
Percentages are of net assets of the Fund and may not equal 100%.
You will find a complete list of securities that the Fund owns on pages 12-16.
================================================================================
INVESTMENT OVERVIEW | 11
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (92.3%)
COMMON STOCKS (14.7%)
CONSUMER DISCRETIONARY (3.9%)
-----------------------------
APPAREL, ACCESSORIES & LUXURY GOODS (1.7%)
27,000 Burberry Group plc ADR $ 423
54,000 Cie Financiere Richemont S.A. ADR 313
23,000 Kering ADR 375
16,000 LVMH Moet Hennessy Louis Vuitton S.A. ADR 485
18,000 Swatch Group AG ADR 262
---------
1,858
---------
AUTOMOBILE MANUFACTURERS (0.9%)
19,500 BMW AG ADR 478
7,500 Daimler AG ADR 451
---------
929
---------
CASINOS & GAMING (0.4%)
8,800 Las Vegas Sands Corp.(a) 383
---------
HOTELS, RESORTS & CRUISE LINES (0.9%)
15,120 Hilton Worldwide Holdings, Inc.(a) 341
16,470 Norwegian Cruise Line Holdings Ltd.*(a) 656
---------
997
---------
Total Consumer Discretionary 4,167
---------
FINANCIALS (0.3%)
-----------------
INVESTMENT BANKING & BROKERAGE (0.3%)
13,986 Charles Schwab Corp.(a) 354
---------
INDUSTRIALS (0.8%)
------------------
AIRLINES (0.4%)
9,612 United Continental Holdings, Inc.*(a) 395
---------
RAILROADS (0.4%)
3,294 Canadian Pacific Railway Ltd.(a) 424
---------
Total Industrials 819
---------
================================================================================
12 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY (1.6%)
-----------------------------
COMMUNICATIONS EQUIPMENT (0.2%)
10,058 Juniper Networks, Inc.(a) $ 226
---------
INTERNET SOFTWARE & SERVICES (0.7%)
6,426 Facebook, Inc. "A"*(a) 735
---------
SEMICONDUCTORS (0.7%)
9,153 NXP Semiconductors N.V.*(a) 717
---------
Total Information Technology 1,678
---------
MATERIALS (8.1%)
----------------
PRECIOUS METALS & MINERALS (8.1%)
17,500 Agnico-Eagle Mines Ltd. 936
20,000 AngloGold Ashanti Ltd. ADR*(a) 361
100,000 B2Gold Corp.* 251
20,000 Barrick Gold Corp. 427
60,000 Centerra Gold, Inc. 358
56,000 Compania de Minas Buenaventura S.A. ADR* 669
100,000 Dundee Precious Metals, Inc.* 238
85,000 Eldorado Gold Corp. 383
25,000 Goldcorp, Inc. 478
45,902 Hycroft Mining Corp.*(b),(c) 46
105,000 Kinross Gold Corp.* 513
75,000 New Gold, Inc.* 329
20,000 Newmont Mining Corp. 782
26,000 Pan American Silver Corp. 428
7,000 Randgold Resources Ltd. ADR 784
8,500 Royal Gold, Inc.(a) 612
24,000 Silver Wheaton Corp. 565
28,000 Tahoe Resources, Inc. 419
---------
8,579
---------
Total Materials 8,579
---------
Total Common Stocks (cost: $18,008) 15,597
---------
EXCHANGE-TRADED FUNDS (27.6%)
400,000 iShares Gold Trust* 5,104
320,000 iShares MSCI Italy Capped ETF 3,472
40,000 iShares Silver Trust* 715
400,000 PowerShares FTSE RAFI Emerging Markets Portfolio 6,500
15,000 Schwab Fundamental International Large Co. Index ETF 356
40,000 SPDR Gold Shares* 5,061
170,000 VanEck Vectors Gold Miners ETF 4,709
170,000 WisdomTree India Earnings Fund 3,432
---------
Total Exchange-Traded Funds (cost: $31,306) 29,349
---------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
FIXED-INCOME EXCHANGE-TRADED FUNDS (50.0%)
170,000 iShares 20+ Year Treasury Bond ETF(a) $ 23,613
37,000 iShares 7-10 Year Treasury Bond ETF 4,180
218,000 iShares TIPS Bond ETF 25,434
---------
Total Fixed-Income Exchange-Traded Funds (cost: $50,000) 53,227
---------
Total Equity Securities (cost: $99,314) 98,173
---------
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
BONDS (1.7%)
CONVERTIBLE SECURITIES (0.7%)
MATERIALS (0.7%)
----------------
GOLD (0.7%)
$ 484 Hycroft Mining Corp.(d) (cost: $465) 15.00% 10/22/2020 775
---------
EURODOLLAR AND YANKEE OBLIGATIONS (1.0%)
MATERIALS (1.0%)
----------------
GOLD (1.0%)
1,000 St. Barbara Ltd.(e) (cost: $865) 8.88 4/15/2018 1,012
---------
TOTAL BONDS (COST: $1,330) 1,787
---------
------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.0%)
MONEY MARKET FUNDS (1.0%)
1,087,531 State Street Institutional Liquid Reserves
Fund Premier Class, 0.47%(a),(f) (cost: $1,088) 1,088
---------
TOTAL INVESTMENTS (COST: $101,732) $ 101,048
=========
------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
------------------------------------------------------------------------------------------------------------------
PURCHASED OPTIONS (4.6%)
10,000 Call - iShares MSCI Emerging Markets ETF expiring January 20, 2017 at 48 15
5,000 Call - iShares MSCI Emerging Markets ETF expiring January 20, 2017 at 50 5
2,000 Call - VanEck Vectors Gold Miners ETF expiring January 19, 2018 at 25 1,465
2,000 Call - VanEck Vectors Gold Miners ETF expiring January 19, 2018 at 35 735
================================================================================
14 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
CONTRACTS SECURITY (000)
------------------------------------------------------------------------------------------------------------------
4,000 Call - VanEck Vectors Gold Miners ETF expiring January 20, 2017 at 26 $ 1,810
100 Put - Alphabet, Inc. expiring January 20, 2017 at 580 129
100 Put - Amazon.com, Inc. expiring January 20, 2017 at 470 59
300 Put - Facebook, Inc. expiring January 19, 2018 at 70 100
400 Put - Facebook, Inc. expiring January 20, 2017 at 80 52
1,189 Put - iShares MSCI EAFE ETF expiring September 16, 2016 at 52 96
2,800 Put - iShares MSCI Emerging Markets ETF expiring September 16, 2016 at 28 52
100 Put - iShares NASDAQ Biotechnology ETF expiring January 19, 2018 at 200 135
100 Put - Netflix, Inc. expiring January 20, 2017 at 80 67
500 Put - NXP Semiconductors N.V. expiring January 19, 2018 at 35 71
20 Put - S&P 500 Index expiring September 30, 2016 at 1975 62
8,000 Put - United States Oil Fund LP expiring January 20, 2017 at 5 40
---------
TOTAL PURCHASED OPTIONS (COST: $3,171) $ 4,893
=========
------------------------------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF CONTRACT APPRECIATION/
CONTRACTS EXPIRATION VALUE (DEPRECIATION)
LONG/(SHORT) DATE (000) (000)
------------------------------------------------------------------------------------------------------------------
FUTURES (3.2%)(g)
(45) Russell 2000 Mini 9/16/2016 $(5,163) $ 53
10 U.S. Treasury Bond 9/21/2016 1,723 94
------- ----
TOTAL FUTURES $(3,440) $147
======= ====
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $ 15,551 $ - $46 $ 15,597
Exchange-Traded Funds 29,349 - - 29,349
Fixed-Income Exchange-Traded Funds 53,227 - - 53,227
Bonds:
Convertible Securities - 775 - 775
Eurodollar and Yankee Obligations - 1,012 - 1,012
Money Market Instruments:
Money Market Funds 1,088 - - 1,088
Purchased Options 4,893 - - 4,893
Futures(1) 147 - - 147
------------------------------------------------------------------------------------------------------------------
Total $104,255 $1,787 $46 $106,088
------------------------------------------------------------------------------------------------------------------
(1) Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
-----------------------------------------------------------------------------------------------------------------
RECONCILIATION OF LEVEL 3 INVESTMENTS
-----------------------------------------------------------------------------------------------------------------
CONVERTIBLE COMMON
SECURITIES STOCKS
-----------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2015 $ 481 $12
Purchases - -
Sales - -
Transfers into Level 3 - -
Transfers out of Level 3 (481) -
Net realized gain (loss) on investments - -
Change in net unrealized appreciation/(depreciation)
of investments - 34
-----------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2016 $ - $46
-----------------------------------------------------------------------------------------------------------------
FAIR VALUE LEVEL TRANSFERS
--------------------------
For the period of January 1, 2016, through June 30, 2016, the table below shows
the transfers between Level 1, Level 2, and Level 3. The Fund's policy is to
recognize any transfers in and transfers out as of the beginning of the
reporting period in which the event or circumstance that caused the transfer
occurred.
TRANSFERS INTO TRANSFERS INTO TRANSFERS INTO
(OUT OF) (OUT OF) (OUT OF)
ASSETS ($ IN 000s) LEVEL 1 LEVEL 2 LEVEL 3
-----------------------------------------------------------------------------------------------------------------
Convertible Securities(I) $- $481 $(481)
-----------------------------------------------------------------------------------------------------------------
(I)Transferred from Level 3 to Level 2 as result of the securities no longer
being a single broker quote.
================================================================================
16 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
Investments in foreign securities were 38.5% of net assets at June 30, 2016.
The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940, as amended, that would
otherwise be applicable.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
TIPS Treasury Inflation Protected Securities
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 17
================================================================================
o SPECIFIC NOTES
(a) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at June 30, 2016.
(b) Security deemed illiquid by USAA Asset Management Company (the
Manager), under liquidity guidelines approved by the USAA Mutual Funds
Trust's Board of Trustees (the Board). The aggregate market value of
these securities at June 30, 2016, was $46,000, which represented less
than 0.1% of the Fund's net assets.
(c) Security was fair valued at June 30, 2016, by the Manager in accordance
with valuation procedures approved by the Board. The total value of all
such securities was $46,000, which represented less than 0.1% of the
Fund's net assets.
(d) Pay-in-kind (PIK) - security in which the issuer will have or has the
option to make all or a portion of the interest or dividend payments in
additional securities.
(e) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by the Manager under
liquidity guidelines approved by the Board, unless otherwise noted as
illiquid.
(f) Rate represents the money market fund annualized seven-day yield at
June 30, 2016.
(g) Cash of $797,000 is segregated as collateral for initial margin
requirements on open futures contracts.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
18 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $101,732) $101,048
Purchased options, at market value (cost of $3,171) 4,893
Cash 81
Cash denominated in foreign currencies (identified cost of $2) 2
Receivables:
Capital shares sold 62
Dividends and interest 50
Securities sold 318
Options sold 2
Other 3
Variation margin on futures contracts 147
--------
Total assets 106,606
--------
LIABILITIES
Payables:
Capital shares redeemed 86
Accrued management fees 49
Accrued transfer agent's fees 3
Other accrued expenses and payables 47
--------
Total liabilities 185
--------
Net assets applicable to capital shares outstanding $106,421
========
NET ASSETS CONSIST OF:
Paid-in capital $140,250
Accumulated overdistribution of net investment income (2)
Accumulated net realized loss on investments, options, and
futures transactions (35,080)
Net unrealized appreciation of investments, options, and
futures contracts 1,185
Net unrealized appreciation of foreign currency translations 68
--------
Net assets applicable to capital shares outstanding $106,421
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $83,971/9,210 shares outstanding) $ 9.12
========
Institutional Shares (net assets of $22,450/2,458 shares outstanding) $ 9.13
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 19
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $15) $ 525
Interest (net of foreign taxes withheld of $1) 131
-------
Total income 656
-------
EXPENSES
Management fees 297
Administration and servicing fees:
Fund Shares 59
Institutional Shares 12
Transfer agent's fees:
Fund Shares 125
Institutional Shares 12
Custody and accounting fees:
Fund Shares 32
Institutional Shares 10
Postage:
Fund Shares 7
Shareholder reporting fees:
Fund Shares 10
Institutional Shares 1
Trustees' fees 14
Registration fees:
Fund Shares 16
Institutional Shares 6
Professional fees 47
Other 8
-------
Total expenses 656
-------
NET INVESTMENT INCOME -
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, OPTIONS, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Investments (419)
Options (484)
Futures transactions (258)
Change in net unrealized appreciation/(depreciation) of:
Investments 12,798
Foreign currency translations (15)
Options 2,462
Futures contracts 224
-------
Net realized and unrealized gain 14,308
-------
Increase in net assets resulting from operations $14,308
=======
See accompanying notes to financial statements.
================================================================================
20 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December
31, 2015
------------------------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ - $ 1,032
Net realized loss on investments (419) (3,632)
Net realized gain on long-term capital gain distributions
from other investment companies - 95
Net realized loss on foreign currency transactions - (26)
Net realized loss on options (484) (4,575)
Net realized gain (loss) on futures transactions (258) 400
Change in net unrealized appreciation/(depreciation) of:
Investments 12,798 (12,541)
Foreign currency translations (15) 28
Options 2,462 547
Futures contracts 224 204
----------------------------
Increase (decrease) in net assets resulting from operations 14,308 (18,468)
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares (107) (655)
Institutional Shares (69) (625)
----------------------------
Distributions to shareholders (176) (1,280)
----------------------------
NET DECREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Fund Shares (3,043) (10,195)
Institutional Shares (7,040) (58,907)
----------------------------
Total net decrease in net assets from capital
share transactions (10,083) (69,102)
----------------------------
Net increase (decrease) in net assets 4,049 (88,850)
NET ASSETS
Beginning of period 102,372 191,222
----------------------------
End of period $106,421 $102,372
============================
Accumulated undistributed (overdistribution of)
net investment income:
End of period $ (2) $ 174
============================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company
Act of 1940, as amended (the 1940 Act), is an open-end management investment
company organized as a Delaware statutory trust consisting of 54 separate
funds. Additionally, the Fund qualifies as a registered investment company
under Accounting Standards Codification Topic 946. The information presented in
this semiannual report pertains only to the USAA Total Return Strategy Fund
(the Fund), which is classified as diversified under the 1940 Act. The Fund's
investment objective is to seek capital appreciation through the use of a
dynamic allocation strategy, across stocks, bonds, and cash instruments.
The Fund's assets are invested pursuant to a dynamic asset allocation strategy,
which allows the Fund's investment adviser to invest at any given time a
portion or substantially all of the Fund's assets allocated to it in stocks or
bonds, either directly or through the use of exchange-traded funds (ETFs),
and/or cash equivalents, through direct investment in short-term, high-quality
money market instruments or money market funds.
The Fund consists of two classes of shares: Total Return Strategy Fund Shares
(Fund Shares) and Total Return Strategy Fund Institutional Shares
(Institutional Shares). Each class of shares has equal rights to assets and
earnings, except that each class bears certain class-related expenses specific
to the particular class. These expenses include administration and servicing
fees, transfer agent fees, postage, shareholder reporting fees, and certain
registration and custodian fees. Expenses not attributable to a specific class,
income, and realized gains or losses on investments are allocated to each class
of shares based on each class's relative net assets. Each class has exclusive
voting rights on matters related solely to that class and separate voting
rights on matters that relate to both classes. The Institutional Shares
================================================================================
22 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
are available for investment through a USAA discretionary managed account
program, and certain advisory programs sponsored by financial intermediaries,
such as brokerage firms, investment advisors, financial planners, third-party
administrators, and insurance companies. Institutional Shares also are
available to institutional investors, which include retirement plans,
endowments, foundations, and bank trusts, as well as other persons or legal
entities that the Fund may approve from time to time, or for purchase by a USAA
Fund participating in a fund-of-funds investment strategy (USAA fund-of-funds).
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures, which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of securities
as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures during
the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and USAA Asset Management
Company (the Manager), an affiliate of the Fund. Among other things, these
monthly meetings include a review and analysis of back testing reports,
pricing service quotation comparisons, illiquid securities and fair value
determinations, pricing movements, and daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Equity securities, including ETFs, except as otherwise noted, traded
primarily on a domestic securities exchange or the over-the-counter
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
markets, are valued at the last sales price or official closing price
on the exchange or primary market on which they trade. Equity
securities traded primarily on foreign securities exchanges or markets
are valued at the last quoted sales price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale
or official closing price is reported or available, the average of the
bid and asked prices generally is used. Actively traded equity
securities listed on a domestic exchange generally are categorized in
Level 1 of the fair value hierarchy. Certain preferred and equity
securities traded in inactive markets generally are categorized in
Level 2 of the fair value hierarchy.
2. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sales or official closing prices
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and,
if necessary, the Committee will consider such available information
that it deems relevant and will determine a fair value for the affected
foreign securities in accordance with valuation procedures. In
addition, information from an external vendor or other sources may be
used to adjust the foreign market closing prices of foreign equity
securities to reflect what the Committee believes to be the fair value
of the securities as of the close of the NYSE. Fair valuation of
affected foreign equity securities may occur frequently based on events
that occur on a fairly regular basis (such as U.S. market movements)
are significant and are categorized in Level 2 of the fair value
hierarchy.
================================================================================
24 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value
hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that
amortized cost represents the fair value of such securities.
5. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board.
The Service uses an evaluated mean between quoted bid and asked prices
or the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which include consideration of yields or prices of
securities of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and general market
conditions. Generally, debt securities are categorized in Level 2 of
the fair value hierarchy; however, to the extent the valuations include
significant unobservable inputs, the securities would be categorized in
Level 3.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the last sale price at the close of market on
the principal exchange on which they are traded or, in the absence of
any transactions that day, the last sale price on the prior trading
date if it is within the spread between the closing bid and asked
prices closest to the last reported sale price.
8. Options are valued by a pricing service at the National Best
Bid/Offer (NBBO) composite price, which is derived from the best
available bid and asked prices in all participating options exchanges
determined to most closely reflect market value of the options at the
time of computation of the Fund's NAV.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
================================================================================
26 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
The valuation of securities falling in the Level 3 category are primarily
supported by quoted prices obtained from a broker-dealer participating in
the market for these securities. However, these securities are included in
the Level 3 category due to limited market transparency and/or a lack of
corroboration to support the quoted prices.
Refer to the Portfolio of Investments for a reconciliation of investments in
which significant unobservable inputs (Level 3) were used in determining
value.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Fund may buy, sell,
and enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio
manager to aid in achieving the Fund's investment objective. The Fund also
may use derivatives in circumstances where the portfolio manager believes
they offer an economical means of gaining exposure to a particular asset
class or securities market or to keep cash on hand to meet shareholder
redemptions or other needs while maintaining exposure to the market. With
exchange-listed futures contracts and options, counterparty credit risk to
the Fund is limited to the exchange's clearinghouse which, as counterparty
to all exchange-traded futures contracts and options, guarantees the
transactions against default from the actual counterparty to the
transaction. The Fund's derivative agreements held at June 30, 2016, did not
include master netting provisions.
FUTURES CONTRACTS - The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts to
gain exposure to, or hedge against, changes in the value of equities,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price
on a specified date. Upon entering into such contracts, the Fund is required
to deposit with the broker in either cash or securities an initial margin in
an amount equal to a certain percentage of the contract amount. Subsequent
payments (variation margin) are made or received by the Fund each day,
depending on the daily fluctuations in the value of the contract, and are
recorded for financial statement purposes as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was
opened and the value at the time it was closed. Upon entering into such
contracts, the Fund bears the risk of interest or exchange rates or
securities prices moving unexpectedly in an unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
OPTIONS TRANSACTIONS - The Fund is subject to equity price risk in the
normal course of pursuing its investment objectives. The Fund may use
options on underlying instruments, namely, equity securities, ETFs, and
equity indexes, to gain exposure to, or hedge against, changes in the value
of equity securities, ETFs, or equity indexes. A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying instrument at a specified price during a specified period.
Conversely, a put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying instrument at a specified price
during a specified period. The purchaser of the option pays a premium to the
writer of the option.
Premiums paid for purchased options are included in the Fund's Statement of
Assets and Liabilities as an investment. If a purchased option expires
unexercised, the premium paid is recognized as a realized loss. If a
purchased call option on a security is exercised, the cost of the security
acquired includes the exercise price and the premium paid. If a purchased
put option on a security is exercised, the realized gain or loss
================================================================================
28 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
on the security sold is determined from the exercise price, the original
cost of the security, and the premium paid. The risk associated with
purchasing a call or put option is limited to the premium paid.
Premiums received from writing options are included in the Fund's Statement
of Assets and Liabilities as a liability. If a written option expires
unexercised, the premium received is recognized as a realized gain. If a
written call option on a security is exercised, the realized gain or loss on
the security sold is determined from the exercise price, the original cost
of the security, and the premium received. If a written put option on a
security is exercised, the cost of the security acquired is the exercise
price paid less the premium received. The Fund, as a writer of an option,
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
In an attempt to reduce the Fund's volatility over time, the Fund may
implement a strategy that involves purchasing and selling options on indexes
or ETFs that represent the Fund's exposure against a highly correlated stock
portfolio. The combination of the diversified stock portfolio with index or
ETF options is designed to provide the Fund with consistent returns over a
wide range of equity market environments. This strategy may not fully
protect the Fund against declines in the portfolio's value, and the Fund
could experience a loss. Options on ETFs are similar to options on
individual securities in that the holder of the ETF call (or put) has the
right to receive (or sell) shares of the underlying ETF at the strike price
on or before exercise date. Options on securities indexes are different from
options on individual securities in that the holder of the index option has
the right to receive an amount of cash equal to the difference between the
exercise price and the settlement value of the underlying index as defined
by the exchange. If an index option is exercised, the realized gain or loss
is determined by the exercise price, the settlement value, and the premium
amount paid or received.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2016*
(IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ASSETS AND ASSETS AND
ACCOUNTED FOR AS LIABILITIES LIABILITIES
HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
--------------------------------------------------------------------------------------------------------------
Interest rate contracts Net unrealized $ 94** - $-
appreciation of
investments, options,
and futures contracts
--------------------------------------------------------------------------------------------------------------
Equity contracts Purchased options/ 4,946** - -
Net unrealized
appreciation of
investments, options,
and futures contracts
--------------------------------------------------------------------------------------------------------------
Total $5,040 $-
--------------------------------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2016, see the Portfolio of
Investments, which also is indicative of activity for the six-month
period ended June 30, 2016.
** Includes cumulative appreciation/(depreciation) of futures as reported on
the Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2016 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED APPRECIATION/
ACCOUNTED FOR AS STATEMENT OF GAIN (LOSS) (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
--------------------------------------------------------------------------------------------------------------
Interest rate contracts Net realized gain (loss) $ (22) $ 95
on Futures transactions /
Change in net unrealized
appreciation/(depreciation)
of Futures contracts
--------------------------------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) (720) 2,591
on Options and Futures
transactions / Change in
net unrealized appreciation/
(depreciation) of Options
and Futures contracts
--------------------------------------------------------------------------------------------------------------
Total $(742) $2,686
--------------------------------------------------------------------------------------------------------------
================================================================================
30 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
D. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis can take place a month or more after
the trade date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may increase or
decrease in value prior to their delivery. The Fund maintains segregated
assets with a market value equal to or greater than the amount of its
purchase commitments. The purchase of securities on a delayed-delivery or
when-issued basis may increase the volatility of the Fund's NAV to the
extent that the Fund makes such purchases while remaining substantially
fully invested.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received. At
the end of the Fund's fiscal year, these net realized foreign currency
gains/losses are reclassified from accumulated net
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
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.
F. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
G. INVESTMENTS IN SECURITIES - Security transactions are accounted for on
the date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the ex-
dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Discounts and premiums are amortized
over the life of the respective securities, using the effective yield method
for long-term securities and the straight-line method for short-term
securities. Foreign income and capital gains on some foreign securities may
be subject to foreign taxes, which are accrued as applicable, as a reduction
to such income and realized gains. These foreign taxes have been provided
for in accordance with the understanding of the applicable countries' tax
rules and rates.
H. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management purposes, realized
credits, if any, generated from cash balances in the Fund's bank accounts
may be used to directly reduce the Fund's expenses. For the six-month period
ended June 30, 2016, there were no custodian and other bank credits.
================================================================================
32 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
I. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
J. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate
of the Manager. The purpose of the agreement is to meet temporary or emergency
cash needs, including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability, the Fund may
borrow from CAPCO an amount up to 5% of the Fund's total assets at an interest
rate based on the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of less than $500, which represents 0.2% of the total fees paid to CAPCO by the
USAA Funds. The Fund had no borrowings under this agreement during the
six-month period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
The Fund is permitted to carry forward post-enactment capital losses
indefinitely. Additionally, such capital losses that are carried forward will
retain their character as short-term and/or long-term capital losses. Post-
enactment capital loss carryforwards must be used before pre-enactment capital
loss carryforwards. As a result, pre-enactment capital loss carryforwards may
be more likely to expire unused.
At December 31, 2015, the Fund had both pre-enactment capital loss
carryforwards and post-enactment capital loss carryforwards for federal income
tax purposes, as shown in the table below. If not offset by subsequent capital
gains, the pre-enactment capital loss carryforwards will expire as shown below.
It is unlikely that the Board will authorize a distribution of capital gains
realized in the future until the capital loss carryforwards have been used or
expire.
CAPITAL LOSS CARRYFORWARDS
-----------------------------------------------
EXPIRES SHORT-TERM LONG-TERM
------- ----------- ----------
2017 $17,718,000 $ -
2018 7,811,000 -
No Expiration 6,438,000 2,126,000
----------- ----------
Total $31,967,000 $2,126,000
=========== ==========
================================================================================
34 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments
to this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the three preceding fiscal reporting
year ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$19,253,000 and $29,707,000, respectively.
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $10,790,000 and $9,752,000, respectively, resulting in net
unrealized appreciation of $1,038,000.
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
persons or legal entities that the Fund may approve from time to time. Capital
share transactions for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31, 2015
------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
FUND SHARES:
Shares sold 411 $ 3,487 551 $ 4,842
Shares issued from
reinvested dividends 12 105 74 643
Shares redeemed (786) (6,635) (1,806) (15,680)
-------------------------------------------------------
Net decrease from capital
share transactions (363) $(3,043) (1,181) $(10,195)
=======================================================
INSTITUTIONAL SHARES:
Shares sold 163 $ 1,396 259 $ 2,276
Shares issued from reinvested
dividends 8 69 71 625
Shares redeemed (1,002) (8,505) (7,346) (61,808)
-------------------------------------------------------
Net decrease from capital
share transactions (831) $(7,040) (7,016) $(58,907)
=======================================================
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to
the Fund pursuant to an Advisory Agreement. Under this agreement, the
Manager is responsible for managing the business and affairs of the Fund,
and for directly managing the day-to-day investment of the Fund's assets,
subject to the authority of and supervision by the Board. The Manager also
is authorized to select (with approval of the Board and without shareholder
approval) one or more subadvisers to manage the day-to-day investment of a
portion of the Fund's assets. For the six-month period ended June 30, 2016,
the Fund had no subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid
monthly at an annualized rate of 0.65% of the Fund's average net assets.
================================================================================
36 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
The performance adjustment is calculated separately for each share class on
a monthly basis by comparing each class' performance over the performance
period to that of the Lipper Flexible Portfolio Funds Index. The Lipper
Flexible Portfolio Funds Index tracks the total return performance of the 30
largest funds in the Lipper Flexible Portfolio Funds category. For the Fund
Shares, the performance period consists of the current month plus the
previous 35 months. The performance period for the Institutional Shares
includes the performance of the Fund Shares for periods prior to July 12,
2013. The following table is utilized to determine the extent of the
performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------
+/-100 to 400 +/-4
+/-401 to 700 +/-5
+/-701 and greater +/-6
(1)Based on the difference between average annual performance relevant
share class of the Fund and its relevant index, rounded to the nearest
basis point. Average net assets of the share class are calculated over
a rolling 36-month period.
Each class' 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.
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper Flexible Portfolio Funds Index over that period, even
if the Fund had overall negative returns during the performance period.
For the six-month period ended June 30, 2016, the Fund incurred total
management fees, paid or payable to the Manager, of $297,000, which included
a performance adjustment for the Fund Shares and
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
Institutional Shares of $(24,000) and $(15,000), respectively. For the Fund
Shares and Institutional Shares, the performance adjustments were (0.06)%
and (0.12)%, respectively.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and 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 average net assets of the Fund Shares and 0.10% of average net
assets of the Institutional Shares. For the six-month period ended June 30,
2016, the Fund Shares and Institutional Shares incurred administration and
servicing fees, paid or payable to the Manager, of $59,000 and $12,000,
respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For
the six-month period ended June 30, 2016, the Fund reimbursed the Manager
$1,000 for these compliance and legal services. These expenses are included
in the professional fees on the Fund's Statement of Operations.
C. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund Shares based on an annual charge of $23
per shareholder account plus out-of-pocket expenses. SAS pays a portion of
these fees to certain intermediaries for the administration and servicing of
accounts that are held with such intermediaries. Transfer agent's fees for
Institutional Shares are paid monthly based on a fee accrued daily at an
annualized rate of 0.10% of the Institutional Shares' average net assets,
plus out-of-pocket expenses. For the six-month period ended June 30, 2016,
the Fund Shares and Institutional Shares incurred transfer agent's fees,
paid or payable to SAS, of $125,000 and $12,000, respectively.
D. UNDERWRITING SERVICES - USAA Investment Management Company provides
exclusive underwriting and distribution of the Fund's shares on a continuing
best-efforts basis and receives no fee or other compensation for these
services.
================================================================================
38 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
(7) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA funds and
is one of 20 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control. As of June 30, 2016, the USAA
fund-of-funds owned the following percentages of the total outstanding shares
of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Target Retirement Income 2.0
Target Retirement 2020 3.8
Target Retirement 2030 6.5
Target Retirement 2040 4.4
Target Retirement 2050 4.1
Target Retirement 2060 0.3
The Manager is indirectly wholly owned by United Services Automobile
Association (USAA), a large, diversified financial services institution.
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 six-month period ended June 30, 2016, in accordance with affiliated
transaction procedures approved by the Board, purchases and sales of security
transactions were executed between the Fund and the following affiliated USAA
funds at the then-current market price with no brokerage commissions incurred.
NET REALIZED
COST TO GAIN (LOSS) TO
SELLER PURCHASER PURCHASER SELLER
----------------------------------------------------------------------------------------------
Cornerstone Moderately Conservative Total Return Strategy $ 6,000 $ (4,000)
Cornerstone Moderate Total Return Strategy 42,000 (33,000)
Cornerstone Aggressive Total Return Strategy 13,000 (10,000)
Cornerstone Moderately Aggressive Total Return Strategy 113,000 (88,000)
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(9) FINANCIAL HIGHLIGHTS -- FUND SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 7.96 $ 9.08 $ 8.95 $ 9.05 $ 8.24 $ 8.34
------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income (loss) (.00)(a) .05 .06 .08 .06 .02
Net realized and
unrealized gain (loss) 1.17 (1.11) .14(b) (.14) .81 (.11)
------------------------------------------------------------------------------------
Total from investment
operations 1.17 (1.06) .20 (.06) .87 (.09)
------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.01) (.06) (.07) (.04) (.06) (.01)
------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.12 $ 7.96 $ 9.08 $ 8.95 $ 9.05 $ 8.24
====================================================================================
Total return (%)* 14.72 (11.69) 2.26(b) (.62) 10.62 (1.04)
Net assets at
end of period (000) $83,971 $76,165 $97,658 $105,313 $122,021 $125,895
Ratios to average
net assets:**
Expenses including
dividend expense on
securities sold short (%)
Including reimbursements(c) - - - - - 1.72
Excluding reimbursements(c) 1.35(d) 1.26 1.22 1.24 1.32 1.72
Expenses excluding
dividend expense on
securities sold short (%)
Including reimbursements(c) - - - - - 1.35
Excluding reimbursements(c) 1.35(d) 1.26 1.22 1.24 1.31 1.35
Net investment
income (loss) (%) (.07)(d) .54 .66 .87 .73 .23
Portfolio turnover (%) 19 123(e) 88 105 171(e),(f),(g) 92(e),(f)
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$79,137,000.
================================================================================
40 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
(a) Represents less than $0.01 per share.
(b) For the year ended December 31, 2014, the Manager reimbursed the Fund
Shares $3,000 for a loss incurred due to a trading error. The effect of this
reimbursement on the Fund Shares' net realized loss and total return was
less than $0.01/0.01% per share.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(e) The Fund's various investment strategies will create a large volume of
purchase and sales transactions relative to the market value of portfolio
investments, which results in portfolio turnover rates exceeding 100%.
(f) Prior to January 27, 2012, calculated excluding securities sold short,
covers on securities sold short, and options transactions.
(g) Reflects increased trading activity due to changes in subadviser(s) and
asset allocation strategies.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
(9) FINANCIAL HIGHLIGHTS (CONTINUED) - INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------
2016 2015 2014 2013***
--------------------------------------------------------------
Net asset value at beginning of period $ 7.97 $ 9.08 $ 8.95 $ 8.78
--------------------------------------------------------
Income (loss) from investment operations:
Net investment income .01 .06 .08 .06
Net realized and unrealized gain (loss) 1.18 (1.09) .15(a) .15
--------------------------------------------------------
Total from investment operations 1.19 (1.03) .23 .21
--------------------------------------------------------
Less distributions from:
Net investment income (.03) (.08) (.10) (.04)
--------------------------------------------------------
Net asset value at end of period $ 9.13 $ 7.97 $ 9.08 $ 8.95
========================================================
Total return (%)* 14.89 (11.42) 2.53(a) 2.37
Net assets at end of period (000) $22,450 $26,207 $93,564 $85,301
Ratios to average net assets:**
Expenses (%)(b) 1.00(c) .98 .98 1.02(c)
Expenses, excluding reimbursements (%)(b) 1.00(c) .98 .98 1.02(c)
Net investment income (%) .23(c) .80 .91 1.69(c)
Portfolio turnover (%) 19 123(d) 88 105
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$24,895,000.
*** Institutional Shares commenced operations on July 12, 2013.
(a) For the year ended December 31, 2014, the Manager reimbursed the
Institutional Shares $2,000 for a loss incurred due to a trading error. The
effect of this reimbursement on the Institutional Shares' net realized loss
and total return was less than $0.01/0.01% per share.
(b) Reflects total annual operating expenses of the Institutional Shares
before reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+)
(+)Represents less than 0.01% of average net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) The Fund's various investment strategies will create a large volume of
purchase and sales transactions relative to the market value of portfolio
investments, which results in portfolio turnover rates exceeding 100%.
================================================================================
42 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire six-month period of January 1, 2016, through
June 30, 2016.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the
beginning of the period, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
for your share class in the "actual" line under the heading "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based
on the Fund's actual expense ratios for each class and an assumed rate of
return of 5% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the
================================================================================
EXPENSE EXAMPLE | 43
================================================================================
period. You may use this information to compare the ongoing costs of investing
in the Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder reports of
other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled
"hypothetical" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. In addition, if
these direct costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016-
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,147.20 $7.21
Hypothetical
(5% return before expenses) 1,000.00 1,018.15 6.77
INSTITUTIONAL SHARES
Actual 1,000.00 1,148.90 5.34
Hypothetical
(5% return before expenses) 1,000.00 1,019.89 5.02
*Expenses are equal to the annualized expense ratio of 1.35% for Fund Shares
and 1.00% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 182 days/366 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of 14.72% for Fund Shares and 14.89% for Institutional Shares for the six-month
period of January 1, 2016, through June 30, 2016.
================================================================================
44 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for
their consideration of the proposed continuance of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuance of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management
were present. At each regularly scheduled meeting of the Board and its
committees, the Board receives and reviews, among other things, information
concerning the Fund's performance and related services provided by the Manager.
At the meeting at which the renewal of the Advisory Agreement is
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
considered, particular focus is given to information concerning Fund
performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager is an
ongoing one. In this regard, the Board and its committees' consideration of the
Advisory Agreement included certain information previously received at such
meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge of
the Manager's management and the quality of the performance of the Manager's
duties through Board meetings, discussions, and reports during the preceding
year. The Board considered the fees paid to the Manager and the services
provided to the Fund by the Manager under the Advisory Agreement, as well as
other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and
the Trust.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional experience
and qualifications of senior personnel and investment personnel,
================================================================================
46 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
as well as current staffing levels. The allocation of the Fund's brokerage,
including the Manager's process for monitoring "best execution," was also
considered. The Manager's role in coordinating the activities of the Fund's
other service providers also was considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust. The Board also
reviewed the compliance and administrative services provided to the Fund by the
Manager, including the Manager's oversight of the Fund's day-to-day operations
and oversight of Fund accounting. The Trustees, guided also by information
obtained from their experiences as trustees of the Trust, also focused on the
quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
front-end load and no sales loads), asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
front-end load and no-load retail open-end investment companies with the same
investment classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data, the Board noted
that the Fund's management fee rate - which includes advisory and
administrative services and the effects of any performance adjustment - was
below the median of its expense group and its expense universe. The data
indicated that the Fund's total expenses were below the median of its expense
group and its expense universe. The Board took into account the various
services provided to the Fund by the Manager and its affiliates, including the
high quality of services received by the Fund from
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
the Manager. The Board also noted the level and method of computing the
management fee, including any performance adjustment to such fee. In
considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total returns with its Lipper index and with that of other mutual funds deemed
to be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary
channel of distribution. This comparison indicated that, among other data, the
Fund's performance was lower than the average of its performance universe and
its Lipper index for the one-, three-, five-year, and ten- periods ended
December 31, 2015. The Board also noted that the was in the bottom 50% of its
performance universe for the one-, three-, five-, and ten-year periods ended
December 31, 2015. The Board took into account management's discussion of the
Fund's performance, as well as management's continued monitoring of the Fund's
performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level
and method of computing the Fund's management fee. The information considered
by the Board included operating profit margin information for the Manager's
business as a whole. The Board also received and considered profitability
information related to the management revenues from the Fund. This information
included a review of the methodology used in the allocation of certain costs to
the Fund. The Trustees reviewed the profitability of the Manager's relationship
with the Fund before tax expenses. In reviewing the overall profitability of
the management fee to the Manager, the Board also considered the fact that
affiliates provide shareholder servicing and administrative services to the
Fund for which they receive compensation. The Board also considered the
possible direct and indirect benefits to the Manager from its relationship with
the Trust, including that the Manager may derive reputational and other
benefits from its association with the Fund. The Trustees recognized that the
Manager should be entitled to earn a reasonable
================================================================================
48 | USAA TOTAL RETURN STRATEGY FUND
================================================================================
level of profits in exchange for the level of services it provides to the Fund
and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to participate
in any economies of scale. The Board took into account management's discussion
of the Fund's current advisory fee structure. The Board also considered the
effect of the Fund's growth and size on its performance and fees, noting that
if the Fund's assets increase over time, the Fund may realize other economies
of scale if assets increase proportionally more than some expenses. The Board
determined that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is being
addressed; (iv) the Fund's advisory expenses are reasonable in relation to
those of similar funds and to the services to be provided by the Manager; and
(v) the Manager and its affiliates' level of profitability from their
relationship with the Fund is reasonable in light of the nature and high
quality of services provided by the Manager and the type of fund. Based on its
conclusions, the Board determined that the continuation of the Advisory
Agreement would be in the interests of the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 49
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210)
531-8722; (ii) at USAA.COM; and (iii) in summary within the Statement of
Additional Information on the SEC's website at HTTP://WWW.SEC.GOV. Information
regarding how the Fund voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30 is available without charge (i)
at USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling (800) 732-0330.
================================================================================
--------------
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USAA
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48704-0816 (C)2016, USAA. All rights reserved.
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[GRAPHIC OF USAA S&P 500 INDEX FUND]
=============================================================
SEMIANNUAL REPORT
USAA S&P 500 INDEX FUND
MEMBER SHARES o REWARD SHARES
JUNE 30, 2016
=============================================================
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FUND OBJECTIVE 1
MANAGER'S COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 4
FINANCIAL INFORMATION
Portfolio of Investments 9
Notes to Portfolio of Investments 29
Financial Statements 31
Notes to Financial Statements 34
EXPENSE EXAMPLE 49
ADVISORY AGREEMENT(S) 51
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 ASSET 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)2016, USAA. All rights reserved.
208367-0816
================================================================================
================================================================================
FUND OBJECTIVE
THE USAA S&P 500 INDEX FUND (THE FUND) SEEKS TO MATCH, BEFORE FEES AND EXPENSES,
THE PERFORMANCE OF THE STOCKS COMPOSING THE S&P 500(R) INDEX. THE S&P 500 INDEX
EMPHASIZES STOCKS OF LARGE U.S. COMPANIES.
--------------------------------------------------------------------------------
TYPES OF INVESTMENTS
The Fund's principal investment strategy is, under normal market conditions, to
invest at least 80% of the Fund's assets in the common stocks of companies
composing the S&P 500 Index. This strategy may be changed upon 60 days' written
notice to shareholders.
In seeking to track the performance of the S&P 500 Index, the Fund's sub-
adviser, Northern Trust Investments, Inc. (NTI), attempts to allocate the Fund's
investments among stocks in approximately the same weightings as the S&P 500
Index, beginning with the stocks that make up the larger portion of the index's
value. The Fund is rebalanced as required to reflect index changes and to
accommodate Fund cash flows. NTI may exclude or remove any S&P stock from the
Fund if NTI believes that the stock is illiquid or has been impaired by
financial conditions or other extraordinary events.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of distribution,
federal income tax will be withheld from the taxable portion of your
distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
================================================================================
FUND OBJECTIVE | 1
================================================================================
MANAGER'S COMMENTARY ON THE FUND
BRENT REEDER
Northern Trust Investments, Inc.
--------------------------------------------------------------------------------
o WHAT WERE THE MARKET CONDITIONS DURING THE REPORTING PERIOD?
U.S. equities ended the June 30, 2016 reporting period in positive
territory after periods of significant volatility, largely related to the
United Kingdom's (U.K.) referendum on leaving the European Union (E.U.) at
the end of June 2016. Slow growth continued to be a concern for U.S. and
international markets during the second quarter of 2016, and this helped to
drive a continuation of accommodative monetary policy across global central
banks and further drops in global bond yields. While many investors had
anticipated a second Federal Reserve (the Fed) interest rate increase at
its June 2016 meeting, continued weak economic data helped push the Fed
into further delaying an increase. While this may have provided a slight
boost to U.S. equity markets, investors globally became more concerned
about the return outlook across asset classes as a longer duration
sovereign bond yield in several markets dipped into negative territory.
Markets rose in anticipation of the U.K. voting to remain in the E.U. in
its June 23, 2016 referendum, but a surprise victory by the "leave"
campaign significantly increased volatility across asset classes and caused
an immediate drop in global equity markets. U.S. equities rallied from
their lows in subsequent days and finished the reporting period with
positive returns.
o HOW DID THE USAA S&P 500 INDEX FUND (THE FUND) PERFORM DURING THE REPORTING
PERIOD?
The Fund closely tracked its benchmark, the broad-based S&P 500(R) Index
(the Index), during the reporting period ended June 30, 2016.
================================================================================
2 | USAA S&P 500 INDEX FUND
================================================================================
The USAA S&P 500 Index Fund Member Shares and Reward Shares returned 3.71%
and 3.76%, respectively, during the reporting period versus the Index which
returned 3.84%. The Index emphasizes large U.S. company stocks and is not
available for direct investment.
o PLEASE DESCRIBE SECTOR PERFORMANCE DURING THE REPORTING PERIOD.
In the second quarter of 2016, the S&P 500 Index returned 2.46%. U.S.
large cap equities underperformed mid cap equities, represented by the S&P
400 Index, which returned 3.99% in the second quarter of 2016.
The top performing sectors over this time period were Energy and
Telecommunication Services, returning 11.62% and 7.06%, respectively.
Information Technology and Consumer Discretionary were the worst performing
sectors for this quarter, with returns of -2.84% and -0.91%, respectively.
Thank you for the opportunity to help you with your investment needs.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. o INVESTING IN
SECURITIES PRODUCTS INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
Refer to page 5 for the benchmark definition.
================================================================================
MANAGER'S COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
USAA S&P 500 INDEX FUND MEMBER SHARES
(MEMBER SHARES) (Ticker Symbol: USSPX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $2.9 Billion $2.8 Billion
Net Asset Value Per Share $29.93 $29.18
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS* AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16** 1 YEAR 5 YEARS 10 YEARS
3.71% 3.74% 11.81% 7.18%
--------------------------------------------------------------------------------
EXPENSE RATIOS AS OF 12/31/15***
--------------------------------------------------------------------------------
BEFORE REIMBURSEMENT 0.29% AFTER REIMBURSEMENT 0.26%
(Includes acquired fund fees and expenses of 0.01%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Returns for the Member Shares exclude the account maintenance fee.
**Total returns for periods of less than one year are not annualized. This
return is cumulative.
***The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees so that the total annual operating
expenses of the Member Shares (exclusive of commission recapture, expense offset
arrangements, acquired fund fees and expenses, and extraordinary expenses) do
not exceed an annual rate of 0.25% of the Member Shares' average net assets.
This reimbursement arrangement may not be changed or terminated during this time
period without approval of the Fund's Board of Trustees and may be changed or
terminated by the Manager at any time after May 1, 2017. If the total annual
operating expense ratio of the Member Shares is lower than 0.25%, the Member
Shares will operate at the lower expense ratio. These expense ratios may differ
from the expense ratios disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income. The performance data excludes the impact of a $10 account maintenance
fee that is assessed on accounts of less than $10,000. Performance of Member
Shares will vary from Reward Shares due to differences in expenses.
================================================================================
4 | USAA S&P 500 INDEX FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA S&P 500
INDEX FUND
S&P 500 INDEX MEMBER SHARES
6/30/2006 $10,000.00 $10,000.00
7/31/2006 10,061.69 10,058.00
8/31/2006 10,301.08 10,294.00
9/30/2006 10,566.54 10,559.00
10/31/2006 10,910.87 10,902.00
11/30/2006 11,118.35 11,108.00
12/31/2006 11,274.31 11,259.00
1/31/2007 11,444.82 11,429.00
2/28/2007 11,220.97 11,206.00
3/31/2007 11,346.47 11,329.00
4/30/2007 11,849.07 11,830.00
5/31/2007 12,262.54 12,240.00
6/30/2007 12,058.82 12,037.00
7/31/2007 11,684.94 11,663.00
8/31/2007 11,860.10 11,834.00
9/30/2007 12,303.65 12,277.00
10/31/2007 12,499.37 12,470.00
11/30/2007 11,976.81 11,944.00
12/31/2007 11,893.72 11,858.00
1/31/2008 11,180.31 11,146.00
2/29/2008 10,817.11 10,785.00
3/31/2008 10,770.41 10,732.00
4/30/2008 11,294.96 11,258.00
5/31/2008 11,441.26 11,399.00
6/30/2008 10,476.72 10,437.00
7/31/2008 10,388.65 10,350.00
8/31/2008 10,538.92 10,497.00
9/30/2008 9,599.82 9,557.00
10/31/2008 7,987.55 7,952.00
11/30/2008 7,414.41 7,377.00
12/31/2008 7,493.30 7,455.00
1/31/2009 6,861.72 6,826.00
2/28/2009 6,131.10 6,098.00
3/31/2009 6,668.15 6,632.00
4/30/2009 7,306.36 7,265.00
5/31/2009 7,715.02 7,671.00
6/30/2009 7,730.33 7,687.00
7/31/2009 8,315.03 8,268.00
8/31/2009 8,615.23 8,564.00
9/30/2009 8,936.71 8,881.00
10/31/2009 8,770.70 8,713.00
11/30/2009 9,296.79 9,234.00
12/31/2009 9,476.36 9,414.00
1/31/2010 9,135.46 9,076.00
2/28/2010 9,418.46 9,352.00
3/31/2010 9,986.81 9,919.00
4/30/2010 10,144.48 10,072.00
5/31/2010 9,334.44 9,263.00
6/30/2010 8,845.79 8,776.00
7/31/2010 9,465.56 9,389.00
8/31/2010 9,038.24 8,963.00
9/30/2010 9,844.86 9,760.00
10/31/2010 10,219.45 10,131.00
11/30/2010 10,220.76 10,131.00
12/31/2010 10,903.82 10,808.00
1/31/2011 11,162.26 11,061.00
2/28/2011 11,544.67 11,439.00
3/31/2011 11,549.26 11,436.00
4/30/2011 11,891.30 11,777.00
5/31/2011 11,756.69 11,638.00
6/30/2011 11,560.72 11,446.00
7/31/2011 11,325.64 11,209.00
8/31/2011 10,710.41 10,595.00
9/30/2011 9,957.48 9,849.00
10/31/2011 11,045.76 10,925.00
11/30/2011 11,021.35 10,896.00
12/31/2011 11,134.09 11,005.00
1/31/2012 11,633.07 11,496.00
2/29/2012 12,136.10 11,993.00
3/31/2012 12,535.49 12,382.00
4/30/2012 12,456.81 12,306.00
5/31/2012 11,708.15 11,560.00
6/30/2012 12,190.55 12,037.00
7/31/2012 12,359.86 12,202.00
8/31/2012 12,638.24 12,474.00
9/30/2012 12,964.84 12,795.00
10/31/2012 12,725.45 12,552.00
11/30/2012 12,799.27 12,623.00
12/31/2012 12,915.93 12,739.00
1/31/2013 13,584.91 13,397.00
2/28/2013 13,769.33 13,572.00
3/31/2013 14,285.72 14,074.00
4/30/2013 14,560.96 14,345.00
5/31/2013 14,901.57 14,678.00
6/30/2013 14,701.46 14,478.00
7/31/2013 15,449.53 15,223.00
8/31/2013 15,002.08 14,768.00
9/30/2013 15,472.54 15,229.00
10/31/2013 16,183.78 15,928.00
11/30/2013 16,676.96 16,410.00
12/31/2013 17,099.16 16,819.00
1/31/2014 16,507.97 16,232.00
2/28/2014 17,263.11 16,972.00
3/31/2014 17,408.22 17,111.00
4/30/2014 17,536.90 17,233.00
5/31/2014 17,948.56 17,637.00
6/30/2014 18,319.34 17,992.00
7/31/2014 18,066.70 17,741.00
8/31/2014 18,789.46 18,449.00
9/30/2014 18,525.96 18,185.00
10/31/2014 18,978.46 18,624.00
11/30/2014 19,488.88 19,121.00
12/31/2014 19,439.78 19,069.00
1/31/2015 18,856.22 18,492.00
2/28/2015 19,939.91 19,556.00
3/31/2015 19,624.57 19,245.00
4/30/2015 19,812.84 19,421.00
5/31/2015 20,067.61 19,662.00
6/30/2015 19,679.14 19,280.00
7/31/2015 20,091.45 19,679.00
8/31/2015 18,879.25 18,488.00
9/30/2015 18,412.11 18,024.00
10/31/2015 19,965.25 19,543.00
11/30/2015 20,024.62 19,602.00
12/31/2015 19,708.80 19,285.00
1/31/2016 18,730.77 18,327.00
2/29/2016 18,705.49 18,294.00
3/31/2016 19,974.44 19,533.00
4/30/2016 20,051.88 19,606.00
5/31/2016 20,411.97 19,952.00
6/30/2016 20,464.86 20,002.00
[END CHART]
Data from 6/30/06 to 6/30/16.
The graph illustrates how a $10,000 hypothetical investment in the USAA S&P 500
Index Fund Member Shares closely tracks the S&P 500 Index. The S&P 500 Index is
an unmanaged index representing the weighted average performance of a group of
500 widely held, publicly traded U.S. stocks.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for our use. The USAA S&P 500 Index Fund is not sponsored, endorsed, sold, or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the USAA S&P 500 Index Fund. o Index
products incur fees and expenses and may not always be invested in all
securities of the index the Fund attempts to mirror.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the index
does not reflect the deduction of any fees, expenses, or taxes.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
USAA S&P 500 INDEX FUND REWARD SHARES
(REWARD SHARES) (Ticker Symbol: USPRX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $2.8 Billion $2.6 Billion
Net Asset Value Per Share $29.94 $29.19
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS 10 YEARS
3.76% 3.84% 11.93% 7.31%
--------------------------------------------------------------------------------
EXPENSE RATIOS AS OF 12/31/15**
--------------------------------------------------------------------------------
BEFORE REIMBURSEMENT 0.19% AFTER REIMBURSEMENT 0.16%
(Includes acquired fund fees and expenses of 0.01%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees so that the total annual operating
expenses of the Reward Shares (exclusive of commission recapture, expense offset
arrangements, acquired fund fees and expenses, and extraordinary expenses) do
not exceed an annual rate of 0.15% of the Reward Shares' average net assets.
This reimbursement arrangement may not be changed or terminated during this time
period without approval of the Fund's Board of Trustees and may be changed or
terminated by the Manager at any time after May 1, 2017. If the total annual
operating expense ratio of the Reward Shares is lower than 0.15%, the Reward
Shares will operate at the lower expense ratio. These expense ratios may differ
from the expense ratios disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
The Reward Shares are currently offered for sale to qualified shareholders, USAA
discretionary managed account program, and a USAA Fund participating in a
fund-of-funds investment strategy.
================================================================================
6 | USAA S&P 500 INDEX FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA S&P 500 INDEX
FUND REWARD
S&P 500 INDEX SHARES
6/30/2006 $10,000.00 $10,000.00
7/31/2006 10,061.69 10,063.00
8/31/2006 10,301.08 10,300.00
9/30/2006 10,566.54 10,567.00
10/31/2006 10,910.87 10,910.00
11/30/2006 11,118.35 11,115.00
12/31/2006 11,274.31 11,270.00
1/31/2007 11,444.82 11,440.00
2/28/2007 11,220.97 11,217.00
3/31/2007 11,346.47 11,338.00
4/30/2007 11,849.07 11,844.00
5/31/2007 12,262.54 12,254.00
6/30/2007 12,058.82 12,049.00
7/31/2007 11,684.94 11,675.00
8/31/2007 11,860.10 11,851.00
9/30/2007 12,303.65 12,292.00
10/31/2007 12,499.37 12,485.00
11/30/2007 11,976.81 11,964.00
12/31/2007 11,893.72 11,881.00
1/31/2008 11,180.31 11,168.00
2/29/2008 10,817.11 10,801.00
3/31/2008 10,770.41 10,756.00
4/30/2008 11,294.96 11,277.00
5/31/2008 11,441.26 11,424.00
6/30/2008 10,476.72 10,464.00
7/31/2008 10,388.65 10,371.00
8/31/2008 10,538.92 10,524.00
9/30/2008 9,599.82 9,586.00
10/31/2008 7,987.55 7,972.00
11/30/2008 7,414.41 7,401.00
12/31/2008 7,493.30 7,477.00
1/31/2009 6,861.72 6,852.00
2/28/2009 6,131.10 6,121.00
3/31/2009 6,668.15 6,654.00
4/30/2009 7,306.36 7,295.00
5/31/2009 7,715.02 7,702.00
6/30/2009 7,730.33 7,716.00
7/31/2009 8,315.03 8,298.00
8/31/2009 8,615.23 8,601.00
9/30/2009 8,936.71 8,917.00
10/31/2009 8,770.70 8,754.00
11/30/2009 9,296.79 9,278.00
12/31/2009 9,476.36 9,456.00
1/31/2010 9,135.46 9,117.00
2/28/2010 9,418.46 9,400.00
3/31/2010 9,986.81 9,967.00
4/30/2010 10,144.48 10,120.00
5/31/2010 9,334.44 9,313.00
6/30/2010 8,845.79 8,822.00
7/31/2010 9,465.56 9,444.00
8/31/2010 9,038.24 9,016.00
9/30/2010 9,844.86 9,821.00
10/31/2010 10,219.45 10,194.00
11/30/2010 10,220.76 10,194.00
12/31/2010 10,903.82 10,874.00
1/31/2011 11,162.26 11,128.00
2/28/2011 11,544.67 11,508.00
3/31/2011 11,549.26 11,516.00
4/30/2011 11,891.30 11,853.00
5/31/2011 11,756.69 11,719.00
6/30/2011 11,560.72 11,523.00
7/31/2011 11,325.64 11,284.00
8/31/2011 10,710.41 10,672.00
9/30/2011 9,957.48 9,919.00
10/31/2011 11,045.76 11,003.00
11/30/2011 11,021.35 10,979.00
12/31/2011 11,134.09 11,087.00
1/31/2012 11,633.07 11,587.00
2/29/2012 12,136.10 12,082.00
3/31/2012 12,535.49 12,483.00
4/30/2012 12,456.81 12,400.00
5/31/2012 11,708.15 11,654.00
6/30/2012 12,190.55 12,132.00
7/31/2012 12,359.86 12,298.00
8/31/2012 12,638.24 12,572.00
9/30/2012 12,964.84 12,899.00
10/31/2012 12,725.45 12,660.00
11/30/2012 12,799.27 12,732.00
12/31/2012 12,915.93 12,845.00
1/31/2013 13,584.91 13,509.00
2/28/2013 13,769.33 13,692.00
3/31/2013 14,285.72 14,203.00
4/30/2013 14,560.96 14,476.00
5/31/2013 14,901.57 14,812.00
6/30/2013 14,701.46 14,606.00
7/31/2013 15,449.53 15,358.00
8/31/2013 15,002.08 14,905.00
9/30/2013 15,472.54 15,368.00
10/31/2013 16,183.78 16,073.00
11/30/2013 16,676.96 16,559.00
12/31/2013 17,099.16 16,976.00
1/31/2014 16,507.97 16,391.00
2/28/2014 17,263.11 17,137.00
3/31/2014 17,408.22 17,276.00
4/30/2014 17,536.90 17,405.00
5/31/2014 17,948.56 17,806.00
6/30/2014 18,319.34 18,176.00
7/31/2014 18,066.70 17,923.00
8/31/2014 18,789.46 18,637.00
9/30/2014 18,525.96 18,375.00
10/31/2014 18,978.46 18,819.00
11/30/2014 19,488.88 19,321.00
12/31/2014 19,439.78 19,273.00
1/31/2015 18,856.22 18,690.00
2/28/2015 19,939.91 19,758.00
3/31/2015 19,624.57 19,448.00
4/30/2015 19,812.84 19,632.00
5/31/2015 20,067.61 19,876.00
6/30/2015 19,679.14 19,495.00
7/31/2015 20,091.45 19,898.00
8/31/2015 18,879.25 18,695.00
9/30/2015 18,412.11 18,230.00
10/31/2015 19,965.25 19,766.00
11/30/2015 20,024.62 19,825.00
12/31/2015 19,708.80 19,510.00
1/31/2016 18,730.77 18,534.00
2/29/2016 18,705.49 18,508.00
3/31/2016 19,974.44 19,764.00
4/30/2016 20,051.88 19,838.00
5/31/2016 20,411.97 20,195.00
6/30/2016 20,464.86 20,244.00
[END CHART]
Data from 6/30/06 to 6/30/16.
The graph illustrates how a $10,000 hypothetical investment in the USAA S&P 500
Index Fund Reward Shares closely tracks the S&P 500 Index (see page 5 for the
benchmark definition).
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for our use. The USAA S&P 500 Index Fund is not sponsored, endorsed, sold, or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the USAA S&P 500 Index Fund. o Index
products incur fees and expenses and may not always be invested in all
securities of the index the Fund attempts to mirror.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the index
does not reflect the deduction of any fees, expenses, or taxes.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o TOP 10 EQUITY HOLDINGS - 6/30/16 o
(% of Net Assets)
Apple, Inc. .......................................................... 2.8%
Microsoft Corp. ...................................................... 2.2%
Exxon Mobil Corp. .................................................... 2.1%
Johnson & Johnson .................................................... 1.8%
General Electric Co. ................................................. 1.6%
Amazon.com, Inc. ..................................................... 1.5%
Berkshire Hathaway, Inc. "B" ......................................... 1.5%
AT&T, Inc. ........................................................... 1.4%
Facebook, Inc. "A" ................................................... 1.4%
Verizon Communications, Inc. ......................................... 1.2%
You will fund a complete list of securities that the Fund owns on pages 9-28.
o SECTOR ALLOCATION* - 6/30/16 o
[PIE CHART OF SECTOR ALLOCATION]
INFORMATION TECHNOLOGY 19.4%
FINANCIALS 15.4%
HEALTH CARE 14.4%
CONSUMER DISCRETIONARY 12.0%
CONSUMER STAPLES 10.3%
INDUSTRIALS 10.0%
ENERGY 7.3%
UTILITIES 3.6%
TELECOMMUNICATION SERVICES 2.9%
MATERIALS 2.8%
[END CHART]
*Excludes money market instruments.
Percentages are of the net assets of the Fund, and may not equal 100%.
================================================================================
8 | USAA S&P 500 INDEX FUND
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
COMMON STOCKS (98.1%)
CONSUMER DISCRETIONARY (12.0%)
------------------------------
ADVERTISING (0.2%)
122,393 Interpublic Group of Companies, Inc. $ 2,828
71,913 Omnicom Group, Inc. 5,860
----------
8,688
----------
APPAREL & ACCESSORIES & LUXURY GOODS (0.4%)
83,602 Coach, Inc. 3,406
114,368 Hanesbrands, Inc. 2,874
54,088 Michael Kors Holdings Ltd.* 2,676
24,551 PVH Corp. 2,313
17,014 Ralph Lauren Corp. 1,525
54,870 Under Armour, Inc. "A"* 2,202
55,259 Under Armour, Inc. "C"* 2,012
101,187 V.F. Corp. 6,222
----------
23,230
----------
APPAREL RETAIL (0.6%)
41,368 Foot Locker, Inc. 2,270
68,571 Gap, Inc. 1,455
76,524 L Brands, Inc. 5,137
122,178 Ross Stores, Inc. 6,926
199,954 TJX Companies, Inc. 15,442
25,996 Urban Outfitters, Inc.* 715
----------
31,945
----------
AUTO PARTS & EQUIPMENT (0.3%)
65,807 BorgWarner, Inc. 1,943
82,728 Delphi Automotive plc 5,179
195,967 Johnson Controls, Inc. 8,673
----------
15,795
----------
AUTOMOBILE MANUFACTURERS (0.5%)
1,181,014 Ford Motor Co. 14,845
422,852 General Motors Co. 11,967
----------
26,812
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
AUTOMOTIVE RETAIL (0.4%)
22,069 Advance Auto Parts, Inc. $ 3,567
21,009 AutoNation, Inc.* 987
9,031 AutoZone, Inc.* 7,169
59,044 CarMax, Inc. * 2,895
29,296 O'Reilly Automotive, Inc.* 7,942
----------
22,560
----------
BROADCASTING (0.2%)
125,621 CBS Corp. "B" 6,839
46,099 Discovery Communications, Inc. "A"* 1,163
71,694 Discovery Communications, Inc. "C"* 1,710
28,345 Scripps Network Interactive "A" 1,765
66,885 TEGNA, Inc. 1,550
----------
13,027
----------
CABLE & SATELLITE (0.9%)
731,293 Comcast Corp. "A" 47,673
----------
CASINOS & GAMING (0.0%)
24,815 Wynn Resorts Ltd. 2,249
----------
COMPUTER & ELECTRONIC RETAIL (0.1%)
85,000 Best Buy Co., Inc. 2,601
----------
CONSUMER ELECTRONICS (0.1%)
34,960 Garmin Ltd. 1,483
21,256 Harman International Industries, Inc. 1,527
----------
3,010
----------
DEPARTMENT STORES (0.1%)
54,914 Kohl's Corp. 2,082
93,074 Macy's, Inc. 3,128
38,485 Nordstrom, Inc. 1,465
----------
6,675
----------
DISTRIBUTORS (0.1%)
45,216 Genuine Parts Co. 4,578
92,289 LKQ Corp.* 2,926
----------
7,504
----------
FOOTWEAR (0.4%)
402,879 NIKE, Inc. "B" 22,239
----------
GENERAL MERCHANDISE STORES (0.5%)
85,908 Dollar General Corp. 8,075
71,387 Dollar Tree, Inc.* 6,728
178,373 Target Corp. 12,454
----------
27,257
----------
================================================================================
10 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
HOME FURNISHINGS (0.1%)
40,737 Leggett & Platt, Inc. $ 2,082
19,245 Mohawk Industries, Inc.* 3,652
----------
5,734
----------
HOME IMPROVEMENT RETAIL (1.3%)
376,269 Home Depot, Inc. 48,046
268,032 Lowe's Companies, Inc. 21,220
----------
69,266
----------
HOMEBUILDING (0.1%)
98,957 D.R. Horton, Inc. 3,115
56,534 Lennar Corp. "A" 2,607
95,233 PulteGroup, Inc. 1,856
----------
7,578
----------
HOMEFURNISHING RETAIL (0.0%)
46,921 Bed Bath & Beyond, Inc. 2,028
----------
HOTELS, RESORTS & CRUISE LINES (0.4%)
132,617 Carnival Corp. 5,862
58,159 Marriott International, Inc. "A" 3,865
50,956 Royal Caribbean Cruises Ltd. 3,422
50,776 Starwood Hotels & Resorts Worldwide, Inc. 3,755
33,811 Wyndham Worldwide Corp. 2,408
----------
19,312
----------
HOUSEHOLD APPLIANCES (0.1%)
22,961 Whirlpool Corp. 3,826
----------
HOUSEWARES & SPECIALTIES (0.1%)
137,662 Newell Rubbermaid, Inc. 6,686
----------
INTERNET RETAIL (2.1%)
117,028 Amazon.com, Inc.* 83,748
35,741 Expedia, Inc. 3,799
129,730 Netflix, Inc.* 11,868
15,017 Priceline Group, Inc.* 18,747
34,486 TripAdvisor, Inc.* 2,217
----------
120,379
----------
LEISURE PRODUCTS (0.1%)
33,993 Hasbro, Inc. 2,855
102,345 Mattel, Inc. 3,202
----------
6,057
----------
MOTORCYCLE MANUFACTURERS (0.0%)
55,460 Harley-Davidson, Inc. 2,512
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
MOVIES & ENTERTAINMENT (1.4%)
238,084 Time Warner, Inc. $ 17,509
331,422 Twenty-First Century Fox, Inc. "A" 8,965
130,261 Twenty-First Century Fox, Inc. "B" 3,549
104,771 Viacom, Inc. "B" 4,345
451,474 Walt Disney Co. 44,163
----------
78,531
----------
PUBLISHING (0.0%)
113,514 News Corp. "A" 1,288
32,131 News Corp. "B" 375
----------
1,663
----------
RESTAURANTS (1.3%)
8,834 Chipotle Mexican Grill, Inc.* 3,558
34,813 Darden Restaurants, Inc. 2,205
265,397 McDonald's Corp. 31,938
443,043 Starbucks Corp. 25,307
123,167 Yum! Brands, Inc. 10,213
----------
73,221
----------
SPECIALIZED CONSUMER SERVICES (0.0%)
67,281 H&R Block, Inc. 1,547
----------
SPECIALTY STORES (0.2%)
23,817 Signet Jewelers Ltd. 1,963
192,497 Staples, Inc. 1,659
33,379 Tiffany & Co. 2,024
40,519 Tractor Supply Co. 3,694
18,895 Ulta Salon, Cosmetics & Fragrance, Inc.* 4,604
----------
13,944
----------
TIRES & RUBBER (0.0%)
80,357 Goodyear Tire & Rubber Co. 2,062
----------
Total Consumer Discretionary 675,611
----------
CONSUMER STAPLES (10.3%)
------------------------
AGRICULTURAL PRODUCTS (0.1%)
177,196 Archer-Daniels-Midland Co. 7,600
----------
BREWERS (0.1%)
55,401 Molson Coors Brewing Co. "B" 5,603
----------
DISTILLERS & VINTNERS (0.2%)
30,537 Brown-Forman Corp. "B" 3,046
53,452 Constellation Brands, Inc. "A" 8,841
----------
11,887
----------
================================================================================
12 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
DRUG RETAIL (0.9%)
324,846 CVS Health Corp. $ 31,101
261,436 Walgreens Boots Alliance, Inc. 21,770
----------
52,871
----------
FOOD DISTRIBUTORS (0.2%)
158,736 Sysco Corp. 8,054
----------
FOOD RETAIL (0.2%)
288,549 Kroger Co. 10,616
97,858 Whole Foods Market, Inc. 3,133
----------
13,749
----------
HOUSEHOLD PRODUCTS (2.0%)
38,595 Church & Dwight Co., Inc. 3,971
39,108 Clorox Co. 5,412
270,149 Colgate-Palmolive Co. 19,775
109,088 Kimberly-Clark Corp. 14,998
805,188 Procter & Gamble Co.(f) 68,175
----------
112,331
----------
HYPERMARKETS & SUPER CENTERS (1.0%)
132,511 Costco Wholesale Corp. 20,809
461,955 Wal-Mart Stores, Inc.(f) 33,732
----------
54,541
----------
PACKAGED FOOD & MEAT (1.7%)
54,424 Campbell Soup Co. 3,621
132,566 ConAgra Foods, Inc. 6,338
180,297 General Mills, Inc. 12,859
42,314 Hershey Co. 4,802
81,487 Hormel Foods Corp. 2,982
36,043 J.M. Smucker Co. 5,493
75,837 Kellogg Co. 6,192
180,288 Kraft Heinz Co. 15,952
34,597 McCormick & Co., Inc. 3,691
56,484 Mead Johnson Nutrition Co. 5,126
469,660 Mondelez International, Inc. "A" 21,374
90,936 Tyson Foods, Inc. "A" 6,074
----------
94,504
----------
PERSONAL PRODUCTS (0.1%)
67,414 Estee Lauder Companies, Inc. "A" 6,136
----------
Soft Drinks (2.0%)
1,177,846 Coca-Cola Co. 53,392
56,470 Dr Pepper Snapple Group, Inc. 5,457
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
42,395 Monster Beverage Corp.* $ 6,813
437,015 PepsiCo, Inc. 46,297
----------
111,959
----------
TOBACCO (1.8%)
591,675 Altria Group, Inc. 40,802
469,129 Philip Morris International, Inc. 47,720
250,877 Reynolds American, Inc. 13,530
----------
102,052
----------
Total Consumer Staples 581,287
----------
ENERGY (7.3%)
-------------
INTEGRATED OIL & GAS (3.5%)
570,122 Chevron Corp. 59,766
1,254,358 Exxon Mobil Corp. 117,584
231,222 Occidental Petroleum Corp. 17,471
----------
194,821
----------
OIL & GAS DRILLING (0.1%)
19,752 Diamond Offshore Drilling, Inc. 480
32,321 Helmerich & Payne, Inc. 2,170
102,325 Transocean Ltd. 1,217
----------
3,867
----------
OIL & GAS EQUIPMENT & SERVICES (1.0%)
132,122 Baker Hughes, Inc. 5,963
68,460 FMC Technologies, Inc.* 1,826
260,647 Halliburton Co. 11,805
114,698 National Oilwell Varco, Inc. 3,859
420,378 Schlumberger Ltd. 33,243
----------
56,696
----------
OIL & GAS EXPLORATION & PRODUCTION (1.7%)
154,815 Anadarko Petroleum Corp. 8,244
115,141 Apache Corp. 6,410
140,986 Cabot Oil & Gas Corp. 3,629
177,039 Chesapeake Energy Corp.* 758
28,673 Cimarex Energy Co. 3,421
39,442 Concho Resources, Inc.* 4,704
374,664 ConocoPhillips 16,335
158,560 Devon Energy Corp. 5,748
166,646 EOG Resources, Inc. 13,902
52,278 EQT Corp. 4,048
79,855 Hess Corp. 4,799
254,331 Marathon Oil Corp. 3,818
================================================================================
14 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
48,445 Murphy Oil Corp. $ 1,538
59,756 Newfield Exploration Co.* 2,640
129,395 Noble Energy, Inc. 4,641
49,655 Pioneer Natural Resources Co. 7,508
50,684 Range Resources Corp. 2,187
139,852 Southwestern Energy Co.* 1,759
----------
96,089
----------
OIL & GAS REFINING & MARKETING (0.5%)
159,730 Marathon Petroleum Corp. 6,063
141,437 Phillips 66 11,222
36,107 Tesoro Corp. 2,705
141,780 Valero Energy Corp. 7,231
----------
27,221
----------
OIL & GAS STORAGE & TRANSPORTATION (0.5%)
120,567 Columbia Pipeline Group, Inc. 3,073
555,481 Kinder Morgan, Inc. 10,399
64,108 ONEOK, Inc. 3,042
207,040 Spectra Energy Corp. 7,584
205,224 Williams Companies, Inc. 4,439
----------
28,537
----------
Total Energy 407,231
----------
FINANCIALS (15.4%)
------------------
ASSET MANAGEMENT & CUSTODY BANKS (1.0%)
16,179 Affiliated Managers Group, Inc.* 2,277
50,159 Ameriprise Financial, Inc. 4,507
325,999 Bank of New York Mellon Corp. 12,665
38,046 BlackRock, Inc. 13,032
112,174 Franklin Resources, Inc. 3,743
125,611 Invesco Ltd. 3,208
32,684 Legg Mason, Inc. 964
63,759 Northern Trust Corp.(c) 4,225
119,614 State Street Corp. 6,450
75,475 T. Rowe Price Group, Inc. 5,507
----------
56,578
----------
CONSUMER FINANCE (0.7%)
244,502 American Express Co. 14,856
154,877 Capital One Financial Corp. 9,836
124,955 Discover Financial Services 6,696
102,924 Navient Corp. 1,230
251,362 Synchrony Financial* 6,355
----------
38,973
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
DIVERSIFIED BANKS (4.2%)
3,106,400 Bank of America Corp.(f) $ 41,222
888,419 Citigroup, Inc. 37,660
53,160 Comerica, Inc. 2,186
1,105,992 JPMorgan Chase & Co.(f) 68,726
491,806 U.S. Bancorp 19,835
1,397,484 Wells Fargo & Co. 66,143
----------
235,772
----------
INSURANCE BROKERS (0.5%)
80,186 Aon plc 8,759
53,345 Arthur J. Gallagher & Co. 2,539
158,220 Marsh & McLennan Companies, Inc. 10,832
41,656 Willis Towers Watson plc 5,178
----------
27,308
----------
INVESTMENT BANKING & BROKERAGE (0.7%)
364,633 Charles Schwab Corp. 9,229
85,328 E*TRADE Financial Corp.* 2,004
116,844 Goldman Sachs Group, Inc. 17,361
456,996 Morgan Stanley 11,873
----------
40,467
----------
LIFE & HEALTH INSURANCE (0.8%)
125,322 Aflac, Inc. 9,043
72,702 Lincoln National Corp. 2,819
332,473 MetLife, Inc. 13,242
81,445 Principal Financial Group, Inc. 3,348
134,162 Prudential Financial, Inc. 9,571
33,769 Torchmark Corp. 2,088
71,861 Unum Group 2,285
----------
42,396
----------
MULTI-LINE INSURANCE (0.5%)
338,683 American International Group, Inc. 17,913
18,451 Assurant, Inc. 1,592
119,650 Hartford Financial Services Group, Inc. 5,310
81,055 Loews Corp. 3,331
----------
28,146
----------
MULTI-SECTOR HOLDINGS (1.5%)
566,724 Berkshire Hathaway, Inc. "B"* 82,056
100,538 Leucadia National Corp. 1,742
----------
83,798
----------
================================================================================
16 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY INSURANCE (0.9%)
113,043 Allstate Corp. $ 7,907
140,489 Chubb Ltd. 18,363
44,571 Cincinnati Financial Corp. 3,338
176,116 Progressive Corp. 5,900
88,313 Travelers Companies, Inc. 10,513
85,134 XL Group plc 2,836
----------
48,857
----------
REAL ESTATE SERVICES (0.0%)
87,862 CBRE Group, Inc. "A"* 2,327
----------
REGIONAL BANKS (0.9%)
248,789 BB&T Corp. 8,859
161,293 Citizens Financial Group, Inc. 3,223
232,230 Fifth Third Bancorp 4,085
240,530 Huntington Bancshares, Inc. 2,150
256,206 KeyCorp 2,831
48,057 M&T Bank Corp. 5,682
92,821 People's United Financial, Inc. 1,361
151,144 PNC Financial Services Group, Inc. 12,302
381,716 Regions Financial Corp. 3,248
150,907 SunTrust Banks, Inc. 6,199
61,131 Zions Bancorp 1,536
----------
51,476
----------
REITs - HEALTH CARE (0.4%)
140,969 HCP, Inc. 4,987
102,279 Ventas, Inc. 7,448
107,993 Welltower, Inc. 8,226
----------
20,661
----------
REITs - HOTEL & RESORTS (0.1%)
226,600 Host Hotels & Resorts, Inc. 3,673
----------
REITs - INDUSTRIAL (0.1%)
159,542 Prologis, Inc. 7,824
----------
REITs - OFFICE (0.3%)
46,209 Boston Properties, Inc. 6,095
30,104 SL Green Realty Corp. 3,205
54,024 Vornado Realty Trust 5,409
----------
14,709
----------
REITs - RESIDENTIAL (0.4%)
46,812 Apartment Investment & Management Co. "A" 2,067
41,692 AvalonBay Communities, Inc. 7,521
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
111,077 Equity Residential $ 7,651
19,791 Essex Property Trust, Inc. 4,514
80,522 UDR, Inc. 2,973
----------
24,726
----------
REITs - RETAIL (0.7%)
21,553 Federal Realty Investment Trust 3,568
175,879 General Growth Properties, Inc. 5,245
127,101 Kimco Realty Corp. 3,988
38,001 Macerich Co. 3,245
77,921 Realty Income Corp. 5,405
93,579 Simon Property Group, Inc. 20,297
----------
41,748
----------
REITs - SPECIALIZED (1.1%)
128,380 American Tower Corp. 14,585
101,922 Crown Castle International Corp. 10,338
44,250 Digital Realty Trust, Inc. 4,823
21,001 Equinix, Inc. 8,143
37,696 Extra Space Storage, Inc. 3,488
72,618 Iron Mountain, Inc. 2,892
44,661 Public Storage 11,415
225,151 Weyerhaeuser Co. 6,703
----------
62,387
----------
SPECIALIZED FINANCE (0.6%)
102,785 CME Group, Inc. 10,011
36,120 Intercontinental Exchange, Inc. 9,246
50,883 Moody's Corp. 4,768
35,288 NASDAQ OMX Group, Inc. 2,282
79,992 S&P Global, Inc. 8,580
----------
34,887
----------
Total Financials 866,713
----------
HEALTH CARE (14.4%)
-------------------
BIOTECHNOLOGY (2.9%)
489,203 AbbVie, Inc. 30,287
68,028 Alexion Pharmaceuticals, Inc.* 7,943
227,167 Amgen, Inc. 34,564
66,251 Biogen, Inc.* 16,021
234,251 Celgene Corp.* 23,104
402,854 Gilead Sciences, Inc.(f) 33,606
23,527 Regeneron Pharmaceuticals, Inc.* 8,216
75,057 Vertex Pharmaceuticals, Inc.* 6,456
----------
160,197
----------
================================================================================
18 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
HEALTH CARE DISTRIBUTORS (0.5%)
55,592 AmerisourceBergen Corp. $ 4,410
98,366 Cardinal Health, Inc. 7,673
24,962 Henry Schein, Inc.* 4,413
68,086 McKesson Corp. 12,708
24,694 Patterson Companies, Inc. 1,183
----------
30,387
----------
HEALTH CARE EQUIPMENT (2.3%)
443,922 Abbott Laboratories 17,450
167,168 Baxter International, Inc. 7,559
64,218 Becton, Dickinson and Co. 10,891
410,439 Boston Scientific Corp.* 9,592
22,345 C.R. Bard, Inc. 5,255
63,939 Edwards Lifesciences Corp.* 6,377
74,373 Hologic, Inc.* 2,573
11,513 Intuitive Surgical, Inc.* 7,615
425,338 Medtronic plc 36,907
85,698 St. Jude Medical, Inc. 6,684
95,008 Stryker Corp. 11,385
28,624 Varian Medical Systems, Inc.* 2,354
60,271 Zimmer Biomet Holdings, Inc. 7,255
----------
131,897
----------
HEALTH CARE FACILITIES (0.2%)
91,089 HCA Holdings, Inc.* 7,015
27,329 Universal Health Services, Inc. "B" 3,665
----------
10,680
----------
HEALTH CARE SERVICES (0.5%)
49,027 DaVita HealthCare Partners, Inc.* 3,791
191,625 Express Scripts Holding Co.* 14,525
30,828 Laboratory Corp. of America Holdings* 4,016
42,685 Quest Diagnostics, Inc. 3,475
----------
25,807
----------
HEALTH CARE SUPPLIES (0.1%)
70,912 DENTSPLY SIRONA, Inc. 4,399
----------
HEALTH CARE TECHNOLOGY (0.1%)
91,537 Cerner Corp.* 5,364
----------
LIFE SCIENCES TOOLS & SERVICES (0.6%)
99,021 Agilent Technologies, Inc. 4,393
44,298 Illumina, Inc.* 6,219
33,069 PerkinElmer, Inc. 1,733
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
118,815 Thermo Fisher Scientific, Inc. $ 17,556
24,595 Waters Corp.* 3,459
----------
33,360
----------
MANAGED HEALTH CARE (1.5%)
106,106 Aetna, Inc. 12,959
79,564 Anthem, Inc. 10,450
51,193 Centene Corp.* 3,654
77,780 Cigna Corp. 9,955
45,113 Humana, Inc. 8,115
287,608 UnitedHealth Group, Inc. 40,610
----------
85,743
----------
PHARMACEUTICALS (5.7%)
119,653 Allergan plc* 27,651
504,838 Bristol-Myers Squibb Co. 37,131
294,299 Eli Lilly and Co. 23,176
62,026 Endo International plc* 967
832,106 Johnson & Johnson(f) 100,934
33,514 Mallinckrodt plc* 2,037
837,571 Merck & Co., Inc.(f) 48,253
129,172 Mylan N.V.* 5,585
43,271 Perrigo Co. plc 3,923
1,834,316 Pfizer, Inc.(f) 64,586
137,813 Zoetis, Inc. 6,541
----------
320,784
----------
Total Health Care 808,618
----------
INDUSTRIALS (10.0%)
-------------------
AEROSPACE & DEFENSE (2.6%)
181,145 Boeing Co. 23,525
86,914 General Dynamics Corp. 12,102
230,519 Honeywell International, Inc. 26,814
23,499 L-3 Communications Holdings, Inc. 3,447
79,191 Lockheed Martin Corp. 19,653
54,713 Northrop Grumman Corp. 12,161
89,979 Raytheon Co. 12,233
39,308 Rockwell Collins, Inc. 3,347
80,624 Textron, Inc. 2,948
15,936 TransDigm Group, Inc.* 4,202
235,464 United Technologies Corp. 24,147
----------
144,579
----------
AGRICULTURE & FARM MACHINERY (0.1%)
90,231 Deere & Co. 7,312
----------
================================================================================
20 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
AIR FREIGHT & LOGISTICS (0.7%)
43,056 C.H. Robinson Worldwide, Inc. $ 3,197
54,922 Expeditors International of Washington, Inc. 2,693
75,542 FedEx Corp. 11,466
208,961 United Parcel Service, Inc. "B" 22,509
----------
39,865
----------
AIRLINES (0.5%)
37,585 Alaska Air Group, Inc. 2,191
175,719 American Airlines Group, Inc. 4,975
232,781 Delta Air Lines, Inc. 8,480
192,252 Southwest Airlines Co. 7,538
101,498 United Continental Holdings, Inc.* 4,165
----------
27,349
----------
BUILDING PRODUCTS (0.1%)
29,088 Allegion plc 2,019
46,397 Fortune Brands Home & Security, Inc. 2,690
100,460 Masco Corp. 3,108
----------
7,817
----------
CONSTRUCTION & ENGINEERING (0.1%)
42,100 Fluor Corp. 2,075
36,924 Jacobs Engineering Group, Inc.* 1,839
45,493 Quanta Services, Inc.* 1,052
----------
4,966
----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.4%)
176,868 Caterpillar, Inc. 13,408
48,054 Cummins, Inc. 5,403
105,969 PACCAR, Inc. 5,497
----------
24,308
----------
DIVERSIFIED SUPPORT SERVICES (0.1%)
25,868 Cintas Corp. 2,538
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.5%)
13,191 Acuity Brands, Inc. 3,271
71,360 AMETEK, Inc. 3,299
138,318 Eaton Corp. plc 8,262
195,028 Emerson Electric Co. 10,173
39,499 Rockwell Automation, Inc. 4,535
----------
29,540
----------
ENVIRONMENTAL & FACILITIES SERVICES (0.3%)
71,757 Republic Services, Inc. 3,682
25,602 Stericycle, Inc.* 2,666
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
125,214 Waste Management, Inc. $ 8,298
----------
14,646
----------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.0%)
39,805 Robert Half International, Inc. 1,519
----------
INDUSTRIAL CONGLOMERATES (2.5%)
183,531 3M Co. 32,140
181,381 Danaher Corp. 18,320
2,781,781 General Electric Co. 87,570
30,506 Roper Technologies, Inc. 5,203
----------
143,233
----------
INDUSTRIAL MACHINERY (0.7%)
46,623 Dover Corp. 3,232
39,692 Flowserve Corp. 1,793
98,023 Illinois Tool Works, Inc. 10,210
78,387 Ingersoll-Rand plc 4,992
40,641 Parker-Hannifin Corp. 4,391
54,203 Pentair plc 3,160
17,407 Snap-on, Inc. 2,747
45,243 Stanley Black & Decker, Inc. 5,032
53,691 Xylem, Inc. 2,397
----------
37,954
----------
OFFICE SERVICES & SUPPLIES (0.0%)
57,684 Pitney Bowes, Inc. 1,027
----------
RAILROADS (0.7%)
290,141 CSX Corp. 7,567
32,905 Kansas City Southern 2,964
89,850 Norfolk Southern Corp. 7,649
254,242 Union Pacific Corp. 22,183
----------
40,363
----------
RESEARCH & CONSULTING SERVICES (0.3%)
10,749 Dun & Bradstreet Corp. 1,309
36,128 Equifax, Inc. 4,639
109,045 Nielsen Holdings plc 5,667
46,841 Verisk Analytics, Inc.* 3,798
----------
15,413
----------
SECURITY & ALARM SERVICES (0.1%)
129,093 Tyco International plc 5,499
----------
TRADING COMPANIES & DISTRIBUTORS (0.2%)
88,028 Fastenal Co. 3,908
26,605 United Rentals, Inc.* 1,785
================================================================================
22 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
17,095 W.W. Grainger, Inc. $ 3,885
----------
9,578
----------
TRUCKING (0.1%)
26,795 J.B. Hunt Transport Services, Inc. 2,168
15,995 Ryder System, Inc. 978
----------
3,146
----------
Total Industrials 560,652
----------
INFORMATION TECHNOLOGY (19.4%)
------------------------------
APPLICATION SOFTWARE (0.8%)
151,266 Adobe Systems, Inc.* 14,490
67,593 Autodesk, Inc.* 3,659
46,973 Citrix Systems, Inc.* 3,762
77,436 Intuit, Inc. 8,643
192,665 salesforce.com, Inc.* 15,300
----------
45,854
----------
COMMUNICATIONS EQUIPMENT (1.0%)
1,521,758 Cisco Systems, Inc. 43,659
20,012 F5 Networks, Inc.* 2,278
37,692 Harris Corp. 3,145
105,612 Juniper Networks, Inc. 2,375
47,881 Motorola Solutions, Inc. 3,159
----------
54,616
----------
DATA PROCESSING & OUTSOURCED SERVICES (2.3%)
17,862 Alliance Data Systems Corp.* 3,500
137,613 Automatic Data Processing, Inc. 12,643
83,945 Fidelity National Information Services, Inc. 6,185
67,239 Fiserv, Inc.* 7,311
46,441 Global Payments, Inc. 3,315
293,601 MasterCard, Inc. "A" 25,854
96,885 Paychex, Inc. 5,765
333,398 PayPal Holdings, Inc.* 12,172
51,768 Total System Services, Inc. 2,749
576,098 Visa, Inc. "A" 42,729
148,022 Western Union Co. 2,839
288,424 Xerox Corp. 2,737
----------
127,799
----------
ELECTRONIC COMPONENTS (0.2%)
92,796 Amphenol Corp. "A" 5,320
325,673 Corning, Inc. 6,670
----------
11,990
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.0%)
40,686 FLIR Systems, Inc. $ 1,259
----------
ELECTRONIC MANUFACTURING SERVICES (0.1%)
108,385 TE Connectivity Ltd. 6,190
----------
HOME ENTERTAINMENT SOFTWARE (0.3%)
154,710 Activision Blizzard, Inc. 6,131
91,248 Electronic Arts, Inc.* 6,913
----------
13,044
----------
INTERNET SOFTWARE & SERVICES (4.1%)
53,025 Akamai Technologies, Inc.* 2,966
88,824 Alphabet, Inc. "A"* 62,490
89,333 Alphabet, Inc. "C"* 61,827
319,663 eBay, Inc. * 7,483
699,311 Facebook, Inc. "A"* 79,917
29,180 VeriSign, Inc.* 2,523
264,416 Yahoo!, Inc.* 9,932
----------
227,138
----------
IT CONSULTING & OTHER SERVICES (1.3%)
188,625 Accenture plc "A" 21,369
183,608 Cognizant Technology Solutions Corp. "A"* 10,510
41,375 CSRA, Inc. 969
267,163 International Business Machines Corp. 40,550
39,919 Teradata Corp.* 1,001
----------
74,399
----------
SEMICONDUCTOR EQUIPMENT (0.3%)
329,554 Applied Materials, Inc. 7,900
46,872 KLA-Tencor Corp. 3,433
48,510 Lam Research Corp. 4,078
----------
15,411
----------
SEMICONDUCTORS (2.5%)
92,460 Analog Devices, Inc. 5,237
112,207 Broadcom Ltd. 17,437
23,033 First Solar, Inc.* 1,117
1,428,254 Intel Corp. 46,847
73,041 Linear Technology Corp. 3,398
65,681 Microchip Technology, Inc. 3,334
312,886 Micron Technology, Inc.* 4,305
153,212 NVIDIA Corp. 7,202
38,704 Qorvo, Inc.* 2,139
444,347 QUALCOMM, Inc. 23,804
57,445 Skyworks Solutions, Inc. 3,635
================================================================================
24 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
304,221 Texas Instruments, Inc. $ 19,059
76,840 Xilinx, Inc. 3,545
----------
141,059
----------
SYSTEMS SOFTWARE (3.0%)
88,699 CA, Inc. 2,912
2,377,728 Microsoft Corp.(f) 121,668
941,447 Oracle Corp. 38,534
55,182 Red Hat, Inc.* 4,006
183,734 Symantec Corp. 3,774
----------
170,894
----------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS (3.5%)
1,656,950 Apple, Inc.(f) 158,404
590,681 EMC Corp. 16,049
502,771 Hewlett Packard Enterprise Co. 9,186
520,065 HP, Inc. 6,527
87,584 NetApp, Inc. 2,154
89,980 Seagate Technology plc 2,192
85,106 Western Digital Corp. 4,022
----------
198,534
----------
Total Information Technology 1,088,187
----------
MATERIALS (2.8%)
----------------
ALUMINUM (0.1%)
394,891 Alcoa, Inc. 3,661
----------
COMMODITY CHEMICALS (0.1%)
103,284 LyondellBasell Industries N.V. "A" 7,686
----------
CONSTRUCTION MATERIALS (0.1%)
19,360 Martin Marietta Materials, Inc. 3,717
40,214 Vulcan Materials Co. 4,840
----------
8,557
----------
DIVERSIFIED CHEMICALS (0.7%)
339,718 Dow Chemical Co. 16,887
264,261 E.I. du Pont de Nemours and Co. 17,124
45,209 Eastman Chemical Co. 3,070
----------
37,081
----------
DIVERSIFIED METALS & MINING (0.1%)
379,706 Freeport-McMoRan, Inc. 4,230
----------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.4%)
70,871 CF Industries Holdings, Inc. 1,708
39,970 FMC Corp. 1,851
================================================================================
PORTFOLIO OF INVESTMENTS | 25
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
132,038 Monsanto Co. $ 13,654
106,240 Mosaic Co. 2,781
----------
19,994
----------
GOLD (0.1%)
159,920 Newmont Mining Corp. 6,256
----------
INDUSTRIAL GASES (0.3%)
59,020 Air Products and Chemicals, Inc. 8,383
86,410 Praxair, Inc. 9,712
----------
18,095
----------
METAL & GLASS CONTAINERS (0.1%)
42,380 Ball Corp. 3,803
48,409 Owens-Illinois, Inc.* 872
----------
4,675
----------
PAPER PACKAGING (0.2%)
27,296 Avery Dennison Corp. 2,040
124,429 International Paper Co. 5,273
59,072 Sealed Air Corp. 2,716
76,811 WestRock Co. 2,986
----------
13,015
----------
SPECIALTY CHEMICALS (0.5%)
33,976 Albemarle Corp. 2,695
79,669 Ecolab, Inc. 9,449
24,030 International Flavors & Fragrances, Inc. 3,029
80,291 PPG Industries, Inc. 8,362
23,801 Sherwin-Williams Co. 6,990
----------
30,525
----------
STEEL (0.1%)
96,953 Nucor Corp. 4,791
----------
Total Materials 158,566
----------
TELECOMMUNICATION SERVICES (2.9%)
---------------------------------
ALTERNATIVE CARRIERS (0.1%)
88,288 Level 3 Communications, Inc.* 4,546
----------
INTEGRATED TELECOMMUNICATION SERVICES (2.8%)
1,861,498 AT&T, Inc.(f) 80,435
165,804 CenturyLink, Inc. 4,810
361,783 Frontier Communications Corp. 1,787
1,232,750 Verizon Communications, Inc.(f) 68,837
----------
155,869
----------
Total Telecommunication Services 160,415
----------
================================================================================
26 | USAA S&P 500 INDEX FUND
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
UTILITIES (3.6%)
----------------
ELECTRIC UTILITIES (2.2%)
68,719 Alliant Energy Corp. $ 2,728
148,956 American Electric Power Co., Inc. 10,440
208,616 Duke Energy Corp. 17,897
99,086 Edison International 7,696
54,049 Entergy Corp. 4,397
95,369 Eversource Energy 5,713
279,465 Exelon Corp. 10,161
127,720 FirstEnergy Corp. 4,459
139,623 NextEra Energy, Inc. 18,207
150,366 PG&E Corp. 9,611
33,230 Pinnacle West Capital Corp. 2,694
205,047 PPL Corp. 7,741
284,029 Southern Co. 15,232
153,485 Xcel Energy, Inc. 6,873
----------
123,849
----------
GAS UTILITIES (0.0%)
36,455 AGL Resources, Inc. 2,405
----------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.1%)
198,010 AES Corp. 2,471
96,532 NRG Energy, Inc. 1,447
----------
3,918
----------
MULTI-UTILITIES (1.2%)
73,224 Ameren Corp. 3,923
130,382 CenterPoint Energy, Inc. 3,129
83,813 CMS Energy Corp. 3,844
92,234 Consolidated Edison, Inc. 7,419
186,549 Dominion Resources, Inc. 14,538
54,061 DTE Energy Co. 5,359
96,628 NiSource, Inc. 2,563
154,069 Public Service Enterprise Group, Inc. 7,181
42,760 SCANA Corp. 3,235
71,853 Sempra Energy 8,193
71,812 TECO Energy, Inc. 1,985
95,136 WEC Energy Group, Inc. 6,212
----------
67,581
----------
WATER UTILITIES (0.1%)
53,800 American Water Works Co., Inc. 4,546
----------
Total Utilities 202,299
----------
Total Common Stock (Cost: $3,252,467) 5,509,579
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
================================================================================
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.8%)
MONEY MARKET FUND (1.6%)
------------------------
92,308,002 Northern Institutional Funds - Diversified Assets Portfolio, 0.23%(a),(d) $ 92,308
----------
--------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
--------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS (0.2%)
--------------------------
$12,955 0.31%, 9/15/16(b),(e) 12,949
----------
Total Money Market Instruments (cost: $105,255) 105,257
----------
TOTAL INVESTMENTS (COST: $3,357,722) $5,614,836
==========
--------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $5,509,579 $- $- $5,509,579
Money Market Instruments:
Money Market Fund 92,308 - - 92,308
U.S. Treasury Bills 12,949 - - 12,949
Other financial instruments(1) 561 - - 561
--------------------------------------------------------------------------------------------------------
Total $5,615,397 $- $- $5,615,397
--------------------------------------------------------------------------------------------------------
(1)Other financial instruments are derivative instruments not reflected in the
Portfolio of Investments, such as futures, which are valued at the unrealized
appreciation/(depreciation) of the investment.
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
28 | USAA S&P 500 INDEX FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
REIT Real estate investment trust
o SPECIFIC NOTES
(a) Rate represents the money market fund annualized seven-day yield at June
30, 2016.
(b) Rate represents an annualized yield at time of purchase, not a coupon
rate.
(c) Northern Trust Corp. is the parent to Northern Trust Investments, Inc.
(NTI), which is the subadviser of the Fund.
(d) NTI is both the subadviser of the Fund and the adviser of the Northern
Institutional Funds.
(e) Security with a value of $12,949,000 is segregated as collateral for
initial margin requirements on open futures contracts.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 29
================================================================================
(f) Security, or a portion thereof, is segregated to cover the value of open
futures contracts at June 30, 2016.
CONTRACT UNREALIZED
TYPE OF FUTURE EXPIRATION CONTRACTS POSITION VALUE APPRECIATION
--------------------------------------------------------------------------------------------------------
E-mini S&P 500
Index Futures September 16, 2016 1,051 Long $109,840,000 $561,000
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
30 | USAA S&P 500 INDEX FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $3,357,722) $5,614,836
Receivables:
Capital shares sold 2,497
USAA Asset Management Company (Note 6D) 12
Dividends and interest 6,245
Other 11
Variation margin on futures contracts 1,230
----------
Total assets 5,624,831
----------
LIABILITIES
Payables:
Securities purchased 6,487
Capital shares redeemed 2,250
Accrued management fees 455
Accrued administration and servicing fees 6
Accrued transfer agent's fees 62
Other accrued expenses and payables 67
----------
Total liabilities 9,327
----------
Net assets applicable to capital shares outstanding $5,615,504
==========
NET ASSETS CONSIST OF:
Paid-in capital $3,370,989
Accumulated undistributed net investment income 1,763
Accumulated net realized loss on investments and futures transactions (14,923)
Net unrealized appreciation of investments and futures contracts 2,257,675
----------
Net assets applicable to capital shares outstanding $5,615,504
----------
Net asset value, redemption price, and offering price per share:
Member Shares (net assets of $2,861,626/95,611 shares outstanding) $ 29.93
==========
Reward Shares (net assets of $2,753,878/91,990 shares outstanding) $ 29.94
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 31
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 58,536
Interest 232
--------
Total income 58,768
--------
EXPENSES
Management fees 2,650
Administration and servicing fees:
Member Shares 817
Reward Shares 773
Transfer agent's fees:
Member Shares 1,359
Reward Shares 106
Custody and accounting fees:
Member Shares 12
Reward Shares 10
Postage:
Member Shares 90
Reward Shares 25
Shareholder reporting fees:
Member Shares 37
Reward Shares 3
Trustees' fees 14
Registration fees:
Member Shares 62
Reward Shares 62
Professional fees 151
Other 139
--------
Total expenses 6,310
Expenses reimbursed:
Member Shares (471)
Reward Shares (472)
--------
Net expenses 5,367
--------
NET INVESTMENT INCOME 53,401
--------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS AND FUTURES CONTRACTS
Net realized gain on:
Investments 13,320
Futures transactions 7,595
Change in net unrealized appreciation/(depreciation) of:
Investments 129,918
Futures contracts 138
--------
Net realized and unrealized gain 150,971
--------
Increase in net assets resulting from operations $204,372
========
See accompanying notes to financial statements.
================================================================================
32 | USAA S&P 500 INDEX FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
--------------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 53,401 $ 102,000
Net realized gain on investments 13,320 5,902
Net realized gain (loss) on futures transactions 7,595 (4,696)
Change in net unrealized appreciation/(depreciation) of:
Investments 129,918 (40,579)
Futures contracts 138 (3,323)
----------------------------
Increase in net assets resulting from operations 204,372 59,304
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Member Shares (31,012) (49,323)
Reward Shares (30,647) (46,758)
----------------------------
Total distributions of net investment income (61,659) (96,081)
----------------------------
Net realized gains:
Member Shares - (2,620)
Reward Shares - (2,460)
----------------------------
Total distributions of net realized gains - (5,080)
----------------------------
Distributions to shareholders (61,659) (101,161)
----------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Member Shares 10,705 34,412
Reward Shares 70,893 330,361
----------------------------
Total net increase in net assets from capital
share transactions 81,598 364,773
----------------------------
Capital contribution from USAA Transfer Agency Company:
Reward Shares - 5
----------------------------
Net increase in net assets 224,311 322,921
NET ASSETS
Beginning of period 5,391,193 5,068,272
----------------------------
End of period $5,615,504 $5,391,193
============================
Accumulated undistributed net investment income:
End of period $ 1,763 $ 10,021
============================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 33
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment
company organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA S&P 500 Index Fund (the Fund), which
is classified as diversified under the 1940 Act. The Fund seeks to match, before
fees and expenses, the performance of the stocks composing the S&P 500 Index.
The S&P 500 Index emphasizes stocks of large U.S. companies. USAA Asset
Management Company (the Manager), an affiliate of the Fund, has retained
Northern Trust Investments, Inc. (NTI) to serve as subadviser for the Fund. NTI
is responsible for investing the Fund's assets. Under normal market conditions,
NTI attempts to achieve the Fund's objective by investing at least 80% of the
Fund's assets in the common stocks of companies composing the S&P 500 Index.
The Fund consists of two classes of shares: Member Shares and Reward Shares.
Each class of shares has equal rights to assets and earnings, except that each
class bears certain class-related expenses specific to the particular class.
These expenses include administration and servicing fees, transfer agency fees,
postage, shareholder reporting fees, and certain registration and custodian
fees. Expenses not attributable to a specific class, income, and realized gains
or losses on investments are allocated to each class of shares based on each
class's relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to both classes. The Reward Shares are currently offered for sale to qualified
shareholders, USAA discretionary managed account program, and
================================================================================
34 | USAA S&P 500 INDEX FUND
================================================================================
a USAA Fund participating in a fund-of-funds investment strategy (USAA
fund-of-funds).
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of securities
as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures during
the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and the Manager. Among other
things, these monthly meetings include a review and analysis of back testing
reports, pricing service quotation comparisons, illiquid securities and fair
value determinations, pricing movements, and daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Equity securities, including exchange-traded funds (ETFs), except
as otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Equity securities traded primarily on foreign securities exchanges
or markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated according to local
market convention, available at the time the Fund is valued.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
If no last sale or official closing price is reported or available, the
average of the bid and asked prices generally is used. Actively traded
equity securities listed on a domestic exchange generally are categorized
in Level 1 of the fair value hierarchy. Certain preferred and equity
securities traded in inactive markets generally are categorized in Level
2 of the fair value hierarchy.
2. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their net asset value (NAV) at the
end of each business day and are categorized in Level 1 of the fair value
hierarchy.
3. Futures are valued at the last sale price at the close of market on
the principal exchange on which they are traded or, in the absence of any
transactions that day, the last sale price on the prior trading date if
it is within the spread between the closing bid and asked prices closest
to the last reported sale price.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
5. Debt securities with maturities greater than 60 days are valued
each business day by a pricing service (the Service) approved by the
Board. The Service uses an evaluated mean between quoted bid and asked
prices or the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based on
methods which include consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications as to values
from dealers in securities; and general market conditions. Generally,
debt securities are categorized in Level 2 of the fair value hierarchy;
however, to the extent the valuations include significant unobservable
inputs, the securities would be categorized in Level 3.
================================================================================
36 | USAA S&P 500 INDEX FUND
================================================================================
6. Repurchase agreements are valued at cost.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event has
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
the Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation systems.
General factors considered in determining the fair value of securities
include fundamental analytical data, the nature and duration of any
restrictions on disposition of the securities, evaluation of credit
quality, and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Fund may buy, sell,
and enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio
manager to aid in achieving the Fund's investment objective. The Fund also
may use derivatives in circumstances where the portfolio manager believes
they offer an economical means of gaining exposure to a particular asset
class or securities market or to keep cash on hand to meet shareholder
redemptions or other needs while maintaining exposure to the market. With
exchange-listed futures contracts and options, counterparty credit risk to
the Fund is limited to the exchange's clearinghouse which, as counterparty
to all exchange-traded futures contracts and options, guarantees the
transactions against default from the actual counterparty to the
transaction. The Fund's derivative agreements held at June 30, 2016, did not
include master netting provisions.
FUTURES CONTRACTS - The Fund is subject to cash flow and tracking error risk
in the normal course of pursuing its investment objectives. The Fund may use
stock index futures contracts in an attempt to reduce any performance
discrepancies between the Fund and the S&P 500 Index. A futures contract
represents a commitment for the future purchase or sale of an asset at a
specified price on a specified date. Upon entering into such contracts, the
Fund is required to deposit with the broker in either cash or securities an
initial margin in an amount equal to a certain percentage of the contract
amount. Subsequent payments (variation margin) are made or received by the
Fund each day, depending on the daily fluctuations in the value of the
contract, and are recorded for financial statement purposes as unrealized
gains or losses. When the contract is closed, the Fund records a realized
gain or loss equal to the
================================================================================
38 | USAA S&P 500 INDEX FUND
================================================================================
difference between the value of the contract at the time it was opened and
the value at the time it was closed. Upon entering into such contracts, the
Fund bears the risk of interest or exchange rates or securities prices
moving unexpectedly in an unfavorable direction, in which case, the Fund may
not achieve the anticipated benefits of the futures contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2016*
(IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ASSETS AND ASSETS AND
ACCOUNTED FOR AS LIABILITIES LIABILITIES
HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
--------------------------------------------------------------------------------------------------------
Equity contracts Net unrealized $561** - $-
appreciation of
investments and
futures contracts
--------------------------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2016, see the Notes to
Portfolio of Investments, which also is indicative of activity for the
six-month period ended June 30, 2016.
** Includes cumulative appreciation/(depreciation) of futures as reported on the
Notes to Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT APPRECIATION/
ACCOUNTED FOR AS STATEMENT OF REALIZED GAIN (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
--------------------------------------------------------------------------------------------------------
Equity contracts Net realized gain $7,595 $138
on Futures transactions/
Change in net unrealized
appreciation/(depreciation)
Futures contracts
--------------------------------------------------------------------------------------------------------
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
E. INVESTMENTS IN SECURITIES - Security transactions are accounted for on
the date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the ex-
dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Discounts and premiums on short-term
securities are amortized on a straight-line basis over the life of the
respective securities.
F. EXPENSES PAID INDIRECTLY - Through arrangements with banks utilized by
the Fund for cash management purposes, realized credits, if any, generated
from cash balances in the Fund's bank accounts may be used to directly
reduce the Fund's expenses. For the six-month period ended June 30, 2016,
there were no custodian and other bank credits.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund
================================================================================
40 | USAA S&P 500 INDEX FUND
================================================================================
may borrow from CAPCO an amount up to 5% of the Fund's total assets at an
interest rate based on the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of $17,000, which represents 7.7% of the total fees paid to CAPCO by the USAA
Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At December 31, 2015, the Fund had no capital loss carryforwards, for federal
income tax purposes.
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
three preceding fiscal reporting year ends and remain subject to examination by
the Internal Revenue Service and state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$249,065,000 and $127,311,000, respectively.
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $2,454,075,000 and $196,961,000, respectively, resulting in net
unrealized appreciation of $2,257,114,000.
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31, 2015
--------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
MEMBER SHARES:
Shares sold 8,224 $ 235,568 15,977 $ 469,450
Shares issued from reinvested
dividends 1,047 30,551 1,777 51,069
Shares redeemed (8,836) (255,414) (16,474) (486,107)
-----------------------------------------------------------
Net increase from capital
share transactions 435 $ 10,705 1,280 $ 34,412
===========================================================
REWARD SHARES:
Shares sold 6,061 $ 175,125 17,547 $ 520,435
Shares issued from reinvested
dividends 1,009 29,456 1,647 47,276
Shares redeemed (4,636) (133,688) (8,053) (237,350)
-----------------------------------------------------------
Net increase from capital
share transactions 2,434 $ 70,893 11,141 $ 330,361
===========================================================
================================================================================
42 | USAA S&P 500 INDEX FUND
================================================================================
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to
the Fund pursuant to a Management Agreement. Under this agreement, the
Manager is responsible for managing the business and affairs of the Fund.
The Manager also is authorized to select (with approval of the Board and
without shareholder approval) one or more subadvisers to manage the
day-to-day investment of a portion of the Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether
each subadviser's agreement should be renewed, terminated, or modified. The
Manager is also responsible for determining the asset allocation for the
subadviser(s). The allocation for each subadviser could range from 0% to
100% of the Fund's assets, and the Manager could change the allocations
without shareholder approval.
The investment management fee for the Fund is accrued daily and paid
monthly at an annualized rate of 0.10% of the Fund's average net assets.
For the six-month period ended June 30, 2016, the Fund incurred management
fees, paid or payable to the Manager, of $2,650,000.
B. SUBADVISORY ARRANGEMENT(S) - The Manager has entered into an Investment
Subadvisory Agreement with NTI, under which NTI directs the investment and
reinvestment of the Fund's assets (as allocated from time to time by the
Manager).
The Manager (not the Fund) pays NTI a subadvisory fee in an annual amount of
0.02% of the Fund's average daily net assets on amounts up to $1.5 billion;
0.01% of the Fund's average daily net assets for the next $1.5 billion; and
0.005% of the Fund's average daily net assets that exceed $3 billion. For
the six-month period ended June 30, 2016, the Manager incurred subadvisory
fees with respect to the Fund, paid or payable to NTI, of $281,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
NTI has agreed to remit to the Fund all subadvisory fees earned on Fund
assets invested in any of NTI's affiliated money market funds. For the
six-month period ended June 30, 2016, NTI remitted $11,000 to the Fund for
the investments in the Northern Institutional Funds-Diversified Assets
Portfolio.
NTI is a subsidiary of The Northern Trust Company, the Fund's custodian and
accounting agent.
C. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and servicing functions for the Fund. For such services, the
Manager receives a fee accrued daily and paid monthly at an annualized rate
of 0.06% of the Fund's average net assets for the fiscal year. For the
six-month period ended June 30, 2016, the Member Shares and Reward Shares
incurred administration and servicing fees, paid or payable to the Manager,
of $817,000 and $773,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For
the six-month period ended June 30, 2016, the Fund reimbursed the Manager
$76,000 for these compliance and legal services. These expenses are
included in the professional fees on the Fund's Statement of Operations.
D. EXPENSE LIMITATION - The Manager agreed, through May 1, 2017 to limit the
total annual operating expenses of the Member Shares and the Reward Shares
to 0.25% and 0.15%, respectively, of their average net assets, excluding
extraordinary expenses and before reductions of any expenses paid
indirectly, and to reimburse the Fund for all expenses in excess of those
amounts. This expense limitation arrangement may not be changed or
terminated through May 1, 2017, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended June 30, 2016, the Fund incurred reimbursable
expenses from the Manager for the Member
================================================================================
44 | USAA S&P 500 INDEX FUND
================================================================================
Shares and the Reward Shares of $471,000 and $472,000, respectively, of
which $12,000 was receivable from the Manager.
In addition, NTI has contractually agreed to reimburse the Fund for all
license fees paid by the Fund to Standard & Poor's, in amounts not exceeding
the annual rate of 0.001% of the average daily net assets of the Fund. For
the six-month period ended June 30, 2016, the Fund incurred reimbursable
expenses from NTI for the Member Shares and the Reward Shares of $16,000
each.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund based on an annual charge of $20 per
shareholder account plus out-of-pocket expenses. SAS pays a portion of these
fees to certain intermediaries for the administration and servicing of
accounts that are held with such intermediaries. For the six-month period
ended June 30, 2016, the Fund incurred transfer agent's fees, paid or
payable to SAS for the Member Shares and Reward Shares, of $1,359,000 and
$106,000, respectively.
F. UNDERWRITING SERVICES - USAA Investment Management Company provides
exclusive underwriting and distribution of the Fund's shares on a continuing
best-efforts basis and receives no fee or other compensation for these
services.
G. ACCOUNT MAINTENANCE FEE - SAS assesses a $10 annual account maintenance
fee to the Member Shares to allocate part of the fixed cost of maintaining
shareholder accounts. This fee is charged directly to the shareholders'
accounts and does not impact the Fund. The fee is waived on accounts with
balances of $10,000 or more.
(7) TRANSACTIONS WITH AFFILIATES
The Fund's Reward Shares is one of 20 USAA mutual funds in which the affiliated
USAA fund-of-funds invest. The USAA fund-of-funds do not invest in the
underlying funds for the purpose of exercising management or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
control. As of June 30, 2016, the USAA fund-of-funds owned the following
percentages of the total outstanding shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Cornerstone Conservative 0.1
Cornerstone Equity 0.3
Target Retirement Income 0.3
Target Retirement 2020 0.8
Target Retirement 2030 2.0
Target Retirement 2040 2.5
Target Retirement 2050 1.4
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
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.
================================================================================
46 | USAA S&P 500 INDEX FUND
================================================================================
(8) FINANCIAL HIGHLIGHTS - MEMBER SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-----------------------------------------------------------------------------
Net asset value at
beginning of period $ 29.18 $ 29.41 $ 26.39 $ 20.34 $ 18.83 $ 18.86
-----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .28 .56 .49 .44 .41 .39
Net realized and
unrealized gain (loss) .79 (.24) 3.01 6.02 2.54 (.05)
-----------------------------------------------------------------------------
Total from investment
operations 1.07 .32 3.50 6.46 2.95 .34
-----------------------------------------------------------------------------
Less distributions from:
Net investment income (.32) (.52) (.48))) (.41) (.43) (.37)
Realized capital gains - (.03) --- - (1.01) -
-----------------------------------------------------------------------------
Total distributions (.32) (.55) (.48))) (.41) (1.44) (.37)
-----------------------------------------------------------------------------
Net asset value at end
of period $ 29.93 $ 29.18 $ 29.41 $ 26.39 $ 20.34 $ 18.83
=============================================================================
Total return (%)* 3.71 1.13 13.38 32.03 15.75 1.82
Net assets at end of
period (000) $2,861,626 $2,777,361 $2,761,616 $2,571,828 $2,116,203 $1,967,983
Ratios to average
net assets:**
Expenses (%)(a) .25(b) .25 .25 .25 .25 .25
Expenses, excluding
reimbursements (%)(a) .28(b) .28 .28 .30 .32 .33
Net investment
income (%) 1.96(b) 1.88 1.76 1.85 2.06 2.03
Portfolio turnover (%) 2 4 3 3 4 3
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period; does not reflect $10 annual
account maintenance fee. Includes adjustments in accordance with U.S.
generally accepted accounting principles and could differ from the Lipper
reported return. Total returns for periods of less than one year are not
annualized.
** For the six-month period ended June 30, 2016, average net assets were
$2,753,315,000.
(a)Reflects total annual operating expenses of the Member Shares before
reductions of any expenses paid indirectly. The Member Shares' expenses paid
indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(b)Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
(8) FINANCIAL HIGHLIGHTS (CONTINUED) - REWARD SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-----------------------------------------------------------------------------
Net asset value at
beginning of period $ 29.19 $ 29.42 $ 26.39 $ 20.34 $ 18.83 $ 18.86
-----------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .29 .59 .51 .45 .43 .40
Net realized and
unrealized gain (loss) .80 (.24) 3.03 6.04 2.54 (.04)
-----------------------------------------------------------------------------
Total from investment
operations 1.09 .35 3.54 6.49 2.97 .36
-----------------------------------------------------------------------------
Less distributions from:
Net investment income (.34) (.55) (.51) (.44) (.45) (.39)
Realized capital gains - (.03) - - (1.01) -
-----------------------------------------------------------------------------
Total distributions (.34) (.58) (.51) (.44) (1.46) (.39)
-----------------------------------------------------------------------------
Net asset value at end
of period $ 29.94 $ 29.19 $ 29.42 $ 26.39 $ 20.34 $ 18.83
=============================================================================
Total return (%)* 3.76 1.23 13.53 32.16 15.86 1.96
Net assets at end of
period (000) $2,753,878 $2,613,832 $2,306,656 $1,832,575 $1,173,588 $1,316,754
Ratios to average
net assets:**
Expenses (%)(a) .15(c) .15 .15 .15 .15 .13(b)
Expenses, excluding
reimbursements (%)(a) .19(c) .18 .18 .20 .27 .24
Net investment
income (%) 2.05(c) 1.99 1.86 1.95 2.15 2.14
Portfolio turnover (%) 2 4 3 3 4 3
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$2,605,785,000.
(a) Reflects total annual operating expenses of the Reward Shares before
reductions of any expenses paid indirectly. The Reward Shares' expenses
paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(b) Effective May 1, 2011, the Manager voluntarily agreed to reimburse the
Reward Shares for expenses in excess of 0.15% of their annual average net
assets. Prior to May 1, 2011, the Manager voluntarily agreed to reimburse
the Reward Shares for expenses in excess of 0.09% of their annual average
net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
48 | USAA S&P 500 INDEX FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as account maintenance fees, wire fees, redemption fees, and low balance fees;
and indirect costs, including management fees, transfer agency fees, and other
Fund operating expenses. This example is intended to help you understand your
indirect costs, also referred to as "ongoing costs" (in dollars), of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through June
30, 2016.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
Actual expenses in the table on the next page do not reflect the effect of the
annual $10.00 account maintenance fee that is assessed on Member Share accounts
with balances of less than $10,000, at a rate of $2.50 per quarter. To include
the effect of this fee on the expenses that you paid, add $5.00 ($2.50 for two
quarters) to your calculated estimated expenses. If you are currently assessed
this fee, your ending account value reflects the quarterly deduction from your
account.
================================================================================
EXPENSE EXAMPLE | 49
================================================================================
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as account
maintenance fees, wire fees, redemption fees, or low balance fees. Therefore,
the line labeled "hypothetical" is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these direct costs were included, your costs would have been
higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
---------------------------------------------------------------
MEMBER SHARES
Actual $1,000.00 $1,037.10 $1.27
Hypothetical
(5% return before expenses) 1,000.00 1,023.62 1.26
REWARD SHARES
Actual 1,000.00 1,037.60 0.76
Hypothetical
(5% return before expenses) 1,000.00 1,024.12 0.75
*Expenses are equal to the Fund's annualized expense ratio of 0.25% for Member
Shares and 0.15% for Reward Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 182 days/366 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of 3.71% for Member Shares and 3.76% for Reward Shares for the six-month period
of January 1, 2016, through June 30, 2016.
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50 | USAA S&P 500 INDEX FUND
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Management Agreement between the Trust and the Manager with respect to
the Fund and the Subadvisory Agreement between the Manager and the Subadviser
with respect to the Fund. In advance of the meeting, the Trustees received and
considered a variety of information relating to the Management Agreement and
Subadvisory Agreement and the Manager and the Subadviser, and were given the
opportunity to ask questions and request additional information from management.
The information provided to the Board included, among other things: (i) a
separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's and
Subadviser's operations and personnel. Prior to voting, the Independent Trustees
reviewed the proposed continuance of the Management Agreement and the
Subadvisory Agreement with management and with experienced counsel retained by
the Independent Trustees (Independent Counsel) and received materials from such
Independent Counsel discussing the legal standards for their consideration of
the proposed continuation of the Management Agreement and the Subadvisory
Agreement with respect to the Fund. The Independent Trustees also reviewed the
proposed continuation of the Management Agreement and the Subadvisory Agreement
with respect to the Fund in private sessions with Independent Counsel at which
no representatives of management were present.
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager and by the Subadviser.
At the meeting at which the renewal of the Management Agreement and Subadvisory
Agreement is considered, particular focus is given to information concerning
Fund performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager and the
Subadviser is an ongoing one. In this regard, the Board's and its committees'
consideration of the Management Agreement and Subadvisory Agreement included
certain information previously received at such meetings.
MANAGEMENT AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Management Agreement. In approving
the Management Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Management Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Management Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust.
================================================================================
52 | USAA S&P 500 INDEX FUND
================================================================================
The Board considered the Manager's management style and the performance of the
Manager's duties under the Management Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional experience and
qualifications of senior personnel and investment personnel, as well as current
staffing levels. The Board discussed the Manager's effectiveness in monitoring
the performance of the Subadviser and its timeliness in responding to
performance issues. The allocation of the Fund's brokerage, including the
Manager's process for monitoring "best execution," also was considered. The
Manager's role in coordinating the activities of the Fund's other service
providers also was considered. The Board also considered the Manager's risk
management processes. The Board considered the Manager's financial condition and
that it had the financial wherewithal to continue to provide the same scope and
high quality of services under the Management Agreement. In reviewing the
Management Agreement, the Board focused on the experience, resources, and
strengths of the Manager and its affiliates in managing the Fund, as well as the
other funds in the Trust. The Board also reviewed the compliance and
administrative services provided to the Fund by the Manager, including the
Manager's oversight of the Fund's day-to-day operations and oversight of Fund
accounting. The Trustees, guided also by information obtained from their
experiences as trustees of the Trust, also focused on the quality of the
Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the
Management Agreement, the Board evaluated the advisory fees and total expense
ratios of each of the Member Shares and Reward Shares classes of the Fund as
compared to other open-end investment companies deemed to be comparable to each
class of the Fund as determined by the independent third party in its report.
The expenses of each class of the Fund were compared to (i) a group of
investment companies chosen by the independent third party to be comparable to
the class of the Fund based upon certain factors, including fund type,
comparability of investment objective and classification, sales load type (in
this case, retail investment companies with front-end loads and no sales loads),
asset size, and expense components (the "expense group") and (ii) a larger group
of investment companies that includes all front-end load and no-load retail
open-end investment companies with the same investment classification/objective
as the Fund regardless of asset
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
size, excluding outliers (the "expense universe"). Among other data, the Board
noted that the Fund's management fee rate - which includes advisory and
administrative services as well as any fee waivers or reimbursements - was below
the median of its expense group and its expense universe for the Member Shares
and for the Reward Shares. The data indicated that the Fund's total expenses,
after reimbursements, were below the median of its expense group and its expense
universe for the Member Shares and for the Reward Shares. The Trustees also took
into account the Manager's current undertakings to maintain expense limitations
for the Fund. The Board took into account the various services provided to the
Fund by the Manager and its affiliates, including the high quality of services
received by the Fund from the Manager. The Board also noted the high level of
correlation between the S&P 500 Index and the Fund and the relatively low
tracking error between the Fund and the S&P 500 Index, and noted that it reviews
such information on a quarterly basis. The Board also noted the level and method
of computing the management fee. The Trustees also took into account that the
subadvisory fees under the Subadvisory Agreement are paid by the Manager. The
Board also considered and discussed information about the Subadviser's fees,
including the amount of management fees retained by the Manager after payment of
the subadvisory fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Management Agreement,
including, among other information, a comparison of the average annual total
returns of each class of the Fund with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The performance universe of each class
of the Fund consisted of the Fund and all retail and institutional open-end
investment companies with the same classification/objective as the Fund
regardless of asset size or primary channel of distribution. This comparison
indicated that, among other data, the performance of the Fund's Member Shares
and Reward Shares was above the average of its performance universe and its
Lipper index for the one-, three-, and five-year periods ended December 31, 2015
and was above
================================================================================
54 | USAA S&P 500 INDEX FUND
================================================================================
the average of its performance universe and equal to its Lipper index for the
ten-year period ended December 31, 2015. The Board also noted that the
percentile performance ranking of the Fund's Member Shares was in the top 35% of
its performance universe for the one-, three-, five- and ten-year periods ended
December 31, 2015, and that the percentile performance ranking for the Fund's
Reward Shares was in the top 20% of its performance universe for the one-,
three-, and five-year periods ended December 31, 2015 and in the top 15% of its
performance universe for the ten-year period ended December 31, 2015.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the Fund's management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the level of management revenues from the Fund. This information
included a review of the methodology used in the allocation of certain costs to
the Fund. In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager reimbursed a portion of its management fees to
the Fund and also pays the Fund's subadvisory fees. The Trustees reviewed the
profitability of the Manager's relationship with the Fund before tax expenses.
In reviewing the overall profitability of the management fee to the Manager, the
Board also considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund. The Trustees
recognized that the Manager should be able to earn a reasonable level of profits
in exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the Fund's current advisory fee structure. The Board also considered the fee
waivers and expense reimbursements arrangements by the Manager and noted the
fact that the Manager pays the
================================================================================
ADVISORY AGREEMENT(S) | 55
================================================================================
subadvisory fee. The Board also considered the effects of each class's growth
and size on the class's performance and fees, noting that if the Fund's assets
increase over time, the Fund may realize other economies of scale if assets
increase proportionally more than some expenses. The Board determined that the
current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Management Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Management Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager's and its affiliates' level of
profitability, if any, from its relationship with the Fund is reasonable in
light of the nature and high quality of services provided by the Manager and the
type of fund. Based on its conclusions, the Board determined that continuation
of the Management Agreement would be in the best interests of the Fund and its
shareholders.
SUBADVISORY AGREEMENT
In approving the Fund's Subadvisory Agreement, the Board considered various
factors, among them: (i) the nature, extent, and quality of services provided to
the Fund, including the personnel providing services; (ii) the Subadviser's
compensation and any other benefits derived from the subadvisory relationship;
(iii) comparisons, to the extent applicable, of subadvisory fees and performance
to comparable investment companies; and (iv) the terms of the Subadvisory
Agreement. The Board's analysis of these factors is set forth below. After full
consideration of a variety of factors, the Board, including the Independent
Trustees, voted to approve the Subadvisory Agreement. In approving the
Subadvisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
================================================================================
56 | USAA S&P 500 INDEX FUND
================================================================================
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL - The
Trustees considered information provided to them regarding the services provided
by the Subadviser, including information presented periodically throughout the
previous year. The Board noted that the Subadviser and its affiliates also
provide accounting and custody services to the Fund at no additional charge. The
Board considered the Subadviser's level of knowledge and investment style. The
Board reviewed the experience and credentials of the investment personnel who
are responsible for managing the investment of portfolio securities with respect
to the Fund and the Subadviser's level of staffing. The Trustees considered,
based on the materials provided to them, whether the method of compensating
portfolio managers is reasonable and includes mechanisms to prevent a manager
with underperformance from taking undue risks. The Trustees also noted the
Subadviser's brokerage practices. The Board also considered the Subadviser's
regulatory and compliance history. The Board also took into account the
Subadviser's risk management processes. The Board noted that the Manager's
monitoring processes of the Subadviser include: (i) regular telephonic meetings
to discuss, among other matters, investment strategies and to review portfolio
performance; (ii) monthly portfolio compliance checklists and quarterly
compliance certifications to the Board; and (iii) due diligence visits to the
Subadviser.
SUBADVISER COMPENSATION - The Board also took into consideration the financial
condition of the Subadviser. In considering the cost of services to be provided
by the Subadviser and the profitability to the Subadviser of its relationship
with the Fund, the Trustees noted the undertakings of the Manager to maintain
expense limitations for the Fund and also noted that the fees under the
Subadvisory Agreement were paid by the Manager and that the Subadviser had
agreed to reimburse the Fund for license fees paid to Standard & Poor's. The
Trustees also relied on the ability of the Manager to negotiate the Subadvisory
Agreement and the fees thereunder at arm's length. For the above reasons, the
Board determined that the profitability of the Subadviser from its relationship
with the Fund was not a material factor in its deliberations with respect to the
consideration of the approval of the Subadvisory Agreement. For similar reasons,
the Board concluded that the potential for economies of scale in the
Subadviser's management of the Fund
================================================================================
ADVISORY AGREEMENT(S) | 57
================================================================================
was not a material factor in considering the Subadvisory Agreement, although the
Board noted that the Subadvisory Agreement contains breakpoints in its fee
schedule.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board compared the subadvisory fees
for the Fund with the fees that the Subadviser charges to comparable clients, as
applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to the Subadviser.
As noted above, the Board considered, among other data, the Fund's performance
with respect to each class during the one-, three-, five-, and ten-year periods
ended December 31, 2015, as compared to the Fund's peer group and noted that the
Board reviews at its regularly scheduled meetings information about the Fund's
performance results. The Board noted the Manager's experience and resources in
monitoring the performance, investment style, and risk-adjusted performance of
the Subadviser.
CONCLUSIONS - The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified to manage
the Fund's assets in accordance with its investment objectives and policies;
(ii) the Subadviser maintains an appropriate compliance program; (iii) the
performance of the Fund is reasonable in relation to the performance of funds
with similar investment objectives and to relevant indices; and (iv) the Fund's
advisory expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager and the Subadviser. Based on its
conclusions, the Board determined that approval of the Subadvisory Agreement
with respect to the Fund would be in the best interests of the Fund and its
shareholders.
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58 | USAA S&P 500 INDEX FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND The Northern Trust Company
ACCOUNTING AGENT 50 S. LaSalle St.
Chicago, Illinois 60603
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) in summary within the Statement of Additional
Information on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge (i) at
USAA.COM; and (ii) on the SEC's website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
28651-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA EXTENDED MARKET INDEX FUND]
=============================================================
SEMIANNUAL REPORT
USAA EXTENDED MARKET INDEX FUND
JUNE 30, 2016
=============================================================
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general, non-U.S.
stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FUND OBJECTIVE 1
MANAGERS' COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 4
FINANCIAL INFORMATION
USAA EXTENDED MARKET INDEX FUND:
Financial Statements 8
Financial Highlights 11
Notes to Financial Statements 13
EXPENSE EXAMPLE 18
ADVISORY AGREEMENT(S) 20
MASTER EXTENDED MARKET INDEX SERIES:
Schedule of Investments 28
Financial Statements 75
Financial Highlights 78
Notes to Financial Statements 79
ADVISORY AGREEMENT(S) 94
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 ASSET 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)2016, USAA. All rights reserved.
208358-0816
================================================================================
================================================================================
FUND OBJECTIVE
THE USAA EXTENDED MARKET INDEX FUND (THE FUND) SEEKS TO MATCH, BEFORE FEES AND
EXPENSES, THE PERFORMANCE OF THE U.S. STOCKS NOT INCLUDED IN THE S&P 500(R)
INDEX AS REPRESENTED BY THE DOW JONES U.S. COMPLETION TOTAL STOCK MARKET
INDEX(SMI). THE DOW JONES U.S. COMPLETION TOTAL STOCK MARKET INDEX MEASURES THE
PERFORMANCE OF ALL SMALL- AND MID-CAP STOCKS AS MEASURED BY THE DOW JONES U.S.
TOTAL STOCK MARKET INDEX(SM) LESS THE STOCKS IN THE S&P 500 INDEX.
--------------------------------------------------------------------------------
TYPES OF INVESTMENTS
The Fund's principal investment strategy is to invest all of the Fund's
investable assets in the Master Extended Market Index Series of the Quantitative
Master Series LLC (Extended Market Portfolio), which is a separate fund advised
by BlackRock Advisors, LLC (BlackRock), with a substantially similar investment
objective as the Fund. Therefore, your interest in the Extended Market
Portfolio's securities is indirect, and the investment characteristics of the
Fund will correspond directly to those of the Extended Market Portfolio. This
type of arrangement is commonly referred to as a master-feeder structure.
The Extended Market Portfolio seeks to track, before fees and expenses, the
performance of the Dow Jones U.S. Completion Total Stock Market Index as closely
as possible, and normally, at least 80% of its assets will be invested in
securities or other financial instruments of companies that are components of or
have economic characteristics similar to the securities included in the Dow
Jones U.S. Completion Total Stock Market Index.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
================================================================================
FUND OBJECTIVE | 1
================================================================================
MANAGERS' COMMENTARY ON THE FUND
BlackRock Advisors, LLC
ALAN MASON RACHEL M. AGUIRRE
GREG SAVAGE, CFA CREIGHTON JUE, CFA
--------------------------------------------------------------------------------
o HOW DID THE USAA EXTENDED MARKET INDEX FUND (THE FUND) PERFORM?
For the reporting period ended June 30, 2016, the Fund had a total return of
2.18%, while the benchmark Dow Jones U.S. Completion Total Stock Market
Index(SM) (the "Benchmark Index") returned 2.37%.
o DESCRIBE THE MARKET ENVIRONMENT.
Market-moving events and headlines in the first half of the year have been
dominated by slowing global growth fears and geopolitical events.
The first week of the year was the worst start to a year since 2009, and by
February 11, the S&P 500(R) Total Return Index hit a low for the year of
(10.27)%. With fears of a global economic slowdown, oil prices cratering,
and terrorist attacks in Istanbul, Jakarta, and Pakistan, equities suffered.
Russia and Saudi Arabia agreed to freeze oil production, and oil began to
rebound in February. U.S. equities responded in kind, aided by dovish
comments from the Federal Reserve (the "Fed") officials. In March, the
European Central Bank unexpectedly cut rates and increased asset purchases,
while the Fed kept rates unchanged and scaled back the expected number of
rate hikes this year.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Refer to page 5 for benchmark definition.
================================================================================
2 | USAA EXTENDED MARKET INDEX FUND
================================================================================
Domestic equity markets posted gains in the first half of the year despite
increased volatility in June from the "Brexit", i.e., the United Kingdom's
vote to leave the European Union. Following the vote, equity markets
declined worldwide, and investors rushed to high quality assets, driving
U.S. Treasury yields further down. However, U.S. equities capitalized on the
upward momentum from their March rally, which continued through the second
quarter as commodities rebounded and dovish comments from the Fed fueled the
market.
o DESCRIBE RECENT PORTFOLIO ACTIVITY.
During the period, as changes were made to the composition of the Benchmark
Index, the Series purchased and sold securities to maintain its objective of
matching the performance of the Benchmark Index as closely as possible
before the deduction of Series expenses.
o DESCRIBE PORTFOLIO POSITIONING AT PERIOD END.
The Series remains positioned to attempt to match the risk characteristics
of the Benchmark Index, irrespective of the market's future direction.
THE VIEWS EXPRESSED REFLECT THE OPINIONS OF BLACKROCK AS OF THE DATE OF THIS
REPORT AND ARE SUBJECT TO CHANGE BASED ON CHANGES IN MARKET, ECONOMIC OR
OTHER CONDITIONS. THESE VIEWS ARE NOT INTENDED TO BE A FORECAST OF FUTURE
EVENTS AND ARE NO GUARANTEE OF FUTURE RESULTS.
INVESTING INVOLVES RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. INTERNATIONAL
INVESTING INVOLVES RISKS, INCLUDING RISKS RELATED TO FOREIGN CURRENCY,
LIMITED LIQUIDITY, LESS GOVERNMENT REGULATION, AND THE POSSIBILITY OF
SUBSTANTIAL VOLATILITY DUE TO ADVERSE POLITICAL, ECONOMIC OR OTHER
DEVELOPMENTS.
THIS MATERIAL IS NOT INTENDED TO BE RELIED UPON AS A FORECAST, RESEARCH OR
INVESTMENT ADVICE, AND IS NOT A RECOMMENDATION, OFFER OR SOLICITATION TO BUY
OR SELL ANY SECURITIES OR TO ADOPT ANY INVESTMENT STRATEGY. THE OPINIONS
EXPRESSED ARE AS OF JUNE 30, 2016, AND MAY CHANGE AS SUBSEQUENT CONDITIONS
VARY. THE INFORMATION AND OPINIONS CONTAINED IN THIS MATERIAL ARE DERIVED
FROM PROPRIETARY AND NON-PROPRIETARY SOURCES DEEMED BY BLACKROCK TO BE
RELIABLE, ARE NOT NECESSARILY ALL-INCLUSIVE AND ARE NOT GUARANTEED AS TO
ACCURACY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. THERE IS NO
GUARANTEE THAT ANY FORECASTS MADE WILL COME TO PASS. ANY INVESTMENTS NAMED
WITHIN THIS MATERIAL MAY NOT NECESSARILY BE HELD IN ANY ACCOUNTS MANAGED BY
BLACKROCK. RELIANCE UPON INFORMATION IN THIS MATERIAL IS AT THE SOLE
DISCRETION OF THE READER. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS. INDEX PERFORMANCE IS SHOWN FOR ILLUSTRATIVE PURPOSES ONLY. IT IS
NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
PREPARED BY BLACKROCK INVESTMENTS, LLC, MEMBER FINRA.
(C)2016 BLACKROCK, INC. ALL RIGHTS RESERVED.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
USAA EXTENDED MARKET INDEX FUND (THE FUND)
(Ticker Symbol: USMIX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $609.4 Million $619.6 Million
Net Asset Value Per Share $16.41 $16.06
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS 10 YEARS
2.18% -5.94% 8.82% 7.08%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.48%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
* Total returns for periods of less than one year are not annualized. This
return is cumulative.
** The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including the Fund's share of the
allocated expenses of the Master Extended Market Index Series, as reported in
the Fund's prospectus dated May 1, 2016, and is calculated as a percentage of
average net assets. This expense ratio may differ from the expense ratio
disclosed in the Financial Highlights.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
4 | USAA EXTENDED MARKET INDEX FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
DOW JONES USAA
U.S. COMPLETION TOTAL STOCK EXTENDED MARKET INDEX
MARKET INDEX* FUND
6/30/2006 $10,000.00 $10,000.00
7/31/2006 9,724.66 9,717.00
8/31/2006 9,924.91 9,922.00
9/30/2006 10,012.52 10,031.00
10/31/2006 10,513.14 10,526.00
11/30/2006 10,901.13 10,911.00
12/31/2006 10,926.16 10,952.00
1/31/2007 11,276.60 11,314.00
2/28/2007 11,251.56 11,248.00
3/31/2007 11,376.72 11,363.00
4/30/2007 11,652.07 11,618.00
5/31/2007 12,152.69 12,104.00
6/30/2007 11,977.47 11,948.00
7/31/2007 11,439.30 11,429.00
8/31/2007 11,551.94 11,536.00
9/30/2007 11,902.38 11,898.00
10/31/2007 12,252.82 12,277.00
11/30/2007 11,564.46 11,561.00
12/31/2007 11,514.39 11,468.00
1/31/2008 10,801.00 10,718.00
2/29/2008 10,575.72 10,501.00
3/31/2008 10,387.98 10,291.00
4/30/2008 10,951.19 10,858.00
5/31/2008 11,464.33 11,346.00
6/30/2008 10,613.27 10,492.00
7/31/2008 10,513.14 10,387.00
8/31/2008 10,713.39 10,596.00
9/30/2008 9,549.44 9,455.00
10/31/2008 7,584.48 7,503.00
11/30/2008 6,720.90 6,649.00
12/31/2008 7,020.15 6,956.00
1/31/2009 6,495.62 6,420.00
2/28/2009 5,857.32 5,792.00
3/31/2009 6,370.46 6,291.00
4/30/2009 7,321.65 7,233.00
5/31/2009 7,622.03 7,528.00
6/30/2009 7,684.61 7,584.00
7/31/2009 8,385.48 8,267.00
8/31/2009 8,698.37 8,581.00
9/30/2009 9,199.00 9,071.00
10/31/2009 8,698.37 8,563.00
11/30/2009 9,048.81 8,905.00
12/31/2009 9,649.56 9,485.00
1/31/2010 9,411.76 9,253.00
2/28/2010 9,874.84 9,699.00
3/31/2010 10,600.75 10,405.00
4/30/2010 11,101.38 10,897.00
5/31/2010 10,262.83 10,080.00
6/30/2010 9,549.44 9,383.00
7/31/2010 10,212.77 10,024.00
8/31/2010 9,649.56 9,457.00
9/30/2010 10,738.42 10,535.00
10/31/2010 11,226.53 11,000.00
11/30/2010 11,564.46 11,315.00
12/31/2010 12,408.89 12,151.00
1/31/2011 12,565.71 12,296.00
2/28/2011 13,128.91 12,844.00
3/31/2011 13,391.74 13,104.00
4/30/2011 13,792.24 13,479.00
5/31/2011 13,617.02 13,306.00
6/30/2011 13,291.61 12,988.00
7/31/2011 12,866.08 12,575.00
8/31/2011 11,814.77 11,545.00
9/30/2011 10,538.17 10,304.00
10/31/2011 12,015.02 11,747.00
11/30/2011 11,952.44 11,670.00
12/31/2011 11,939.92 11,662.00
1/31/2012 12,841.05 12,537.00
2/29/2012 13,366.71 13,030.00
3/31/2012 13,667.08 13,322.00
4/30/2012 13,566.96 13,221.00
5/31/2012 12,615.77 12,295.00
6/30/2012 13,016.27 12,678.00
7/31/2012 12,928.66 12,587.00
8/31/2012 13,379.22 13,020.00
9/30/2012 13,704.63 13,332.00
10/31/2012 13,516.90 13,151.00
11/30/2012 13,717.15 13,352.00
12/31/2012 14,079.22 13,698.00
1/31/2013 15,056.32 14,644.00
2/28/2013 15,206.51 14,777.00
3/31/2013 15,919.90 15,466.00
4/30/2013 16,020.65 15,558.00
5/31/2013 16,447.81 15,959.00
6/30/2013 16,286.11 15,795.00
7/31/2013 17,391.86 16,853.00
8/31/2013 16,914.14 16,381.00
9/30/2013 17,907.38 17,336.00
10/31/2013 18,426.53 17,840.00
11/30/2013 18,868.21 18,271.00
12/31/2013 19,436.42 18,802.00
1/31/2014 19,085.36 18,429.00
2/28/2014 20,130.16 19,432.00
3/31/2014 19,984.73 19,293.00
4/30/2014 19,470.46 18,813.00
5/31/2014 19,763.95 19,090.00
6/30/2014 20,642.18 19,922.00
7/31/2014 19,725.78 19,037.00
8/31/2014 20,702.75 19,975.00
9/30/2014 19,652.07 18,941.00
10/31/2014 20,446.06 19,709.00
11/30/2014 20,717.77 19,965.00
12/31/2014 20,919.40 20,153.00
1/31/2015 20,523.03 19,762.00
2/28/2015 21,760.70 20,947.00
3/31/2015 22,029.04 21,193.00
4/30/2015 21,688.24 20,858.00
5/31/2015 22,085.23 21,227.00
6/30/2015 21,917.52 21,070.00
7/31/2015 21,890.61 21,014.00
8/31/2015 20,601.88 19,784.00
9/30/2015 19,604.01 18,811.00
10/31/2015 20,682.85 19,862.00
11/30/2015 21,025.28 20,187.00
12/31/2015 20,204.13 19,395.00
1/31/2016 18,419.02 17,693.00
2/29/2016 18,502.00 17,765.00
3/31/2016 20,014.64 19,202.00
4/30/2016 20,351.06 19,516.00
5/31/2016 20,713.64 19,866.00
6/30/2016 20,683.10 19,818.00
[END CHART]
Data from 6/30/06 to 6/30/16.
The graph illustrates how a $10,000 hypothetical investment in the USAA Extended
Market Index Fund closely tracks the Dow Jones U.S. Completion Total Stock
Market Index, which is a market-capitalization-weighted index of approximately
3,500 U.S. equity securities. It includes all the stocks in the Dow Jones U.S.
Total Stock Market Index except for stocks included in the S&P 500 Index.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The Dow Jones U.S. Completion Total Stock Market Index is a subset of the Dow
Jones U.S. Total Stock Market Index that excludes components of the S&P 500
Index. The Dow Jones U.S. Total Stock Market Index is an all-inclusive measure
composed of all U.S. equity securities with readily available prices. This broad
index is divided according to stock-size segment, style, and sector to create
distinct sub-indexes that track every major segment of the market.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
Dow Jones U.S. Completion Total Stock Market Index is a service mark of Dow
Jones & Company, Inc. Dow Jones does not have any relationship to the Fund
other than the licensing and sublicensing of the Dow Jones U.S. Completion Total
Stock Market Index and its service marks for use in connection with the Fund.
o Dow Jones does not sponsor, endorse, sell, or promote the Fund; recommend that
any person invest in the Fund or any other securities; have any responsibility
or liability for or make any decisions about the timing, amount, or pricing of
the Fund; have any responsibility or liability for the administration,
management, or marketing of the Fund; consider the needs of the Fund or the
owners of the Fund in determining, composing, or calculating the Dow Jones U.S.
Completion Total Stock Market Index, or have any obligation to do so.
Dow Jones will have no liability in connection with the Fund. Specifically, Dow
Jones makes no warranty, express or implied, and Dow Jones disclaims any
warranty about: the results to be obtained by the Fund, the owner of the Fund,
or any other person in connection with the use of the Dow Jones U.S. Completion
Total Stock Market Index and the data included in the Dow Jones U.S. Completion
Total Stock Market Index; the accuracy or completeness of the Dow Jones U.S.
Completion Total Stock Market Index and any related data; the merchantability
and the fitness for a particular purpose or use of the Dow Jones U.S. Completion
Total Stock Market Index and/or its related data; Dow Jones will have no
liability for any errors, omissions, or interruptions in the Dow Jones U.S.
Completion Total Stock Market Index or related data; under no circumstances will
Dow Jones be liable for any lost profits or indirect, punitive, special, or
consequential damages or losses, even if Dow Jones knows that they might occur.
o The licensing agreement between BlackRock Advisors, LLC (or its predecessor),
and Dow Jones, and the sublicensing agreement between the Fund and BlackRock
Advisors, LLC (or its predecessor), are solely for the benefit of the parties to
these agreements and not for the benefit of the owners of the USAA Extended
Market Index Fund or any other third parties.
================================================================================
6 | USAA EXTENDED MARKET INDEX FUND
================================================================================
o TOP 10 HOLDINGS - 6/30/16 o
(% of Net Assets)*
Charter Communications, Inc. ......................................... 1.2%
Tesla Motors, Inc. ................................................... 0.6%
LinkedIn Corp., Class A .............................................. 0.5%
Liberty Global PLC, Class C .......................................... 0.5%
Las Vegas Sands Corp. ................................................ 0.4%
Incyte Corp. ......................................................... 0.3%
SBA Communications Corp., Class A .................................... 0.3%
Markel Corp. ......................................................... 0.3%
BioMarin Pharmaceutical, Inc. ........................................ 0.3%
T-Mobile U.S., Inc. .................................................. 0.3%
o TOP 10 INDUSTRY SECTORS - 6/30/16 o
(% of Net Assets)*
Real Estate Investment Trusts (REITs) ................................ 9.4%
Software & Computer Services ......................................... 7.1%
Banks ................................................................ 6.2%
Media ................................................................ 5.3%
Health Care Equipment & Services ..................................... 5.1%
Pharmaceuticals & Biotechnology ...................................... 5.0%
Support Services ..................................................... 4.6%
Travel & Leisure ..................................................... 4.6%
General Retailers .................................................... 4.0%
Technology Hardware & Equipment ...................................... 3.9%
*Percentages are of the net assets of the Master Extended Market Index Series
(the Series), not the net assets of the Fund.
You will find a complete list of securities that the Series owns on pages 28-74.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investment in Master Extended Market Index Series, at fair value $609,453,876
Receivables:
Capital shares sold 319,725
------------
Total assets 609,773,601
------------
LIABILITIES
Payables:
Capital shares redeemed 319,725
Accrued transfer agent's fees 20,539
Other accrued expenses and payables 81,606
------------
Total liabilities 421,870
------------
Net assets applicable to capital shares outstanding $609,351,731
============
NET ASSETS CONSIST OF:
Paid-in capital $456,145,031
Accumulated undistributed net investment income 4,789,631
Accumulated net realized gain on investments and futures transactions 26,081,646
Net unrealized appreciation of investments and futures contracts 122,335,425
Net unrealized depreciation of foreign currency translations (2)
------------
Net assets applicable to capital shares outstanding $609,351,731
============
Capital shares outstanding 37,123,364
============
Net asset value, redemption price, and offering price per share $ 16.41
============
See accompanying notes to financial statements and accompanying
financial statements of the Master Extended Market Index Series (the
Series) attached.
================================================================================
8 | USAA EXTENDED MARKET INDEX FUND
================================================================================
STATEMENT OF OPERATIONS
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Allocated from Master Extended Market Index Series:
Dividends - unaffiliated $ 5,009,953
Foreign taxes withheld (2,761)
Securities lending - affiliated 445,405
Dividends - affiliated 27,883
------------
Total income 5,480,480
Expenses (Note 4D) (210,110)
------------
Net allocated investment income 5,270,370
------------
FUND EXPENSES
Administration and servicing fees 727,685
Transfer agent's fees 372,519
Custody and accounting fees 4,415
Postage 19,891
Shareholder reporting fees 20,388
Trustees' fees 14,421
Registration fees 16,409
Professional fees 72,120
Other 9,459
------------
Total Fund expenses 1,257,307
------------
NET INVESTMENT INCOME 4,013,063
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS ALLOCATED
FROM MASTER EXTENDED MARKET INDEX SERIES
Net realized gain on:
Investment transactions 23,000,445
Futures transactions 283,390
Change in net unrealized appreciation/(depreciation) of:
Investments (14,632,804)
Foreign currency translations (1)
Futures contracts (344,327)
------------
Net allocated realized and unrealized gain 8,306,703
------------
Increase in net assets resulting from operations $ 12,319,766
============
See accompanying notes to financial statements and accompanying
financial statements of the Series attached.
================================================================================
FINANCIAL STATEMENTS | 9
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
-------------------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
-------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 4,013,063 $ 5,677,950
Net realized gain on investments 23,000,445 41,473,730
Net realized gain (loss) on futures transactions 283,390 (22,157)
Change in net unrealized appreciation/(depreciation) of:
Investments (14,632,804) (71,258,855)
Foreign currency translations (1) (1)
Futures contracts (344,327) (435,477)
------------------------------------
Increase (decrease) in net assets resulting
from operations 12,319,766 (24,564,810)
------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - (5,578,764)
Net realized gains - (41,089,807)
------------------------------------
Distributions to shareholders - (46,668,571)
------------------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 24,221,186 74,606,931
Reinvested dividends - 45,996,730
Cost of shares redeemed (46,813,653) (90,676,428)
------------------------------------
Increase (decrease) in net assets from
capital share transactions (22,592,467) 29,927,233
------------------------------------
Net decrease in net assets (10,272,701) (41,306,148)
NET ASSETS
Beginning of period 619,624,432 660,930,580
------------------------------------
End of period $609,351,731 $619,624,432
====================================
Accumulated undistributed net investment income:
End of period $ 4,789,631 $ 776,568
====================================
CHANGE IN SHARES OUTSTANDING
Shares sold 1,578,407 4,083,753
Shares issued for dividends reinvested - 2,830,556
Shares redeemed (3,045,182) (5,002,682)
------------------------------------
Increase (decrease) in shares outstanding (1,466,775) 1,911,627
====================================
See accompanying notes to financial statements and accompanying financial
statements of the Series attached.
================================================================================
10 | USAA EXTENDED MARKET INDEX FUND
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
Contained below are selected ratios and supplemental data for the periods
indicated for the USAA Extended Market Index Fund.
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
----------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 16.06 $ 18.02 $ 17.63 $ 13.33 $ 11.59 $ 12.63
----------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .11 .14 .16 .13 .19 .11
Net realized and
unrealized gain (loss)
on investments and
futures transactions .24 (.81) 1.09 4.82 1.83 (.63)(b)
----------------------------------------------------------------------------------------
Total from investment
operations .35 (.67) 1.25 4.95 2.02 (.52)
----------------------------------------------------------------------------------------
Less distributions from:
Net investment income - (.15) (.16) (.13) (.19) (.09)
Realized capital gains - (1.14) (.70) (.52) (.09) (.43)
----------------------------------------------------------------------------------------
Total distributions - (1.29) (.86) (.65) (.28) (.52)
----------------------------------------------------------------------------------------
Net asset value at
end of period $ 16.41 $ 16.06 $ 18.02 $ 17.63 $ 13.33 $ 11.59
========================================================================================
Total return (%)* 2.18 (3.76) 7.18 37.26 17.47 (4.03)
Net assets at
end of period (000) $609,352 $619,624 $660,930 $615,739 $398,395 $353,660
Ratios to average
net assets:**
Expenses, including
expenses of the
Series (%)(a) .50(d) .48(c) .48 .50 .50 .50
Expenses before
reimbursements,
including expenses of
the Series (%)(a) .50(d) .48 .48 .51 .65 .75
Net investment income (%) 1.38(d) .86 .94 .89 1.45 .87
Portfolio turnover (%)*** 5 14 10 18 12 12
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$585,397,867.
================================================================================
FINANCIAL HIGHLIGHTS | 11
================================================================================
*** Represents the portfolio turnover of the Master Extended Market Index Series
(the Series).
(a) Reflects total annual operating expenses of the Fund before reductions of
any expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(b) Reflected a net realized and unrealized loss per share, whereas the
Statement of Operations reflected a net realized and unrealized gain for
the period. The difference in realized and unrealized gains and losses was
due to the timing of sales and repurchases of shares in relation to
fluctuating market values for the portfolio.
(c) Prior to May 1, 2015, the Manager had voluntarily agreed to limit the annual
expenses of the Fund to 0.50% of the Fund's average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
See accompanying notes to financial statements and accompanying financial
statements of the Series attached.
================================================================================
12 | USAA EXTENDED MARKET INDEX FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment
company organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Extended Market Index Fund (the
Fund), which is classified as diversified under the 1940 Act. The Fund's primary
investment objective is to seek to match, before fees and expenses, the
performance of the U.S. stocks not included in the S&P 500 Index as represented
by the Dow Jones U.S. Completion Total Stock Market Index.
USAA Asset Management Company (the Manager), an affiliate of the Fund, attempts
to achieve this objective by investing all of the Fund's investable assets in
the Master Extended Market Index Series (the Series) of the Quantitative Master
Series LLC (Master LLC), which is a separate open-end investment management
company advised by BlackRock Advisors, LLC (BlackRock), with a substantially
similar investment objective. At June 30, 2016, the Fund's investment was 99.9%
of the Series.
The financial statements of the Series, including the Schedule of Investments,
are contained later in this report and should be read in conjunction with the
Fund's financial statements. See Table of Contents for location.
A. VALUATION OF INVESTMENTS - The Fund records its investment in the Series at
fair value, which reflects its proportionate interest in the net assets of
the Series. Valuation of the securities held by the Series is discussed in
Note 2 of the Series' Notes to Financial Statements included later in this
report.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 13
================================================================================
B. FAIR VALUE MEASUREMENTS - Refer to the Schedule of Investments of the Series
for a discussion of fair value measurements and a summary of the inputs used
to value the Series' assets.
C. DERIVATIVE FINANCIAL INSTRUMENTS - Refer to Note 5 in the Series' Notes to
Financial Statements for a discussion of derivative financial instruments
and how they are accounted for in the Series' financial statements.
D. INVESTMENT INCOME AND EXPENSES - The Fund records daily its pro rata share
of the Series' income, expenses, and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
E. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
F. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management purposes, realized
credits, if any, generated from cash balances in the Fund's bank accounts
may be used to directly reduce the Fund's expenses. For the six-month period
ended June 30, 2016, there were no custodian and other bank credits.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
================================================================================
14 | USAA EXTENDED MARKET INDEX FUND
================================================================================
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of $1,897, which represents 1.0% of the total fees paid to CAPCO by the USAA
Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of
December 31, 2016, in accordance with applicable tax law.
Distributions of net investment income and the Fund's pro rata share of the
Series' 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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 15
================================================================================
At December 31, 2015, the Fund had no capital loss carryforwards, for federal
income tax purposes.
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the three preceding fiscal reporting
year ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
(4) TRANSACTIONS WITH MANAGER
A. ADMINISTRATION AND SERVICING FEES - The Manager provides administration and
shareholder servicing functions for the Fund. For such services, the Manager
receives a fee accrued daily and paid monthly at an annualized rate of 0.25%
of the Fund's average net assets for the fiscal year. For the six-month
period ended June 30, 2016, the Fund incurred administration and servicing
fees, paid or payable to the Manager, of $727,685.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Trust's Board of Trustees
(the Board) has approved the reimbursement of a portion of these expenses
incurred by the Manager. For the six-month period ended June 30, 2016, the
Fund reimbursed the Manager $8,377 for these compliance and legal services.
These expenses are included in the professional fees on the Fund's Statement
of Operations.
Out of the administration and servicing fees received from the Fund, the
Manager pays BlackRock up to 0.10% for subadministration services provided
on the Manager's behalf. For the six-month period ended June 30, 2016, the
Manager incurred subadministration fees, paid or payable to BlackRock, of
$83,192.
B. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the Manager, provides transfer
agency services to the Fund based on an annual charge
================================================================================
16 | USAA EXTENDED MARKET INDEX FUND
================================================================================
of $23 per shareholder account, plus out-of-pocket expenses. SAS pays a
portion of these fees to certain intermediaries for the administration and
servicing of accounts that are held with such intermediaries. For the six-
month period ended June 30, 2016, the Fund incurred transfer agent's fees
paid or payable to SAS, of $372,519.
C. UNDERWRITING AGREEMENT - The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis. The
Manager receives no commissions or fees for this service.
D. MANAGEMENT AGREEMENT - The Manager serves as investment adviser to the Fund
pursuant to a Management Agreement and is responsible for monitoring the
services provided to the Series by BlackRock. While the Fund maintains its
investment in the Series, the Manager receives no fee from the Fund for the
monitoring service performed on its behalf.
Additionally, the expenses allocated to the Fund from the Series included
fees waived by BlackRock Advisors, LLC of $4,640 (See Master Feeder Notes to
Financials). Refer to Note 6 in the Series' Notes to Financial Statements.
(5) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including administration fees, transfer agency fees, expenses allocated to the
Fund by the Master Extended Market Index Series (the Series), and other Fund
operating expenses. This example is intended to help you understand your
indirect costs, also referred to as "ongoing costs" (in dollars), of investing
in the Fund and to compare these costs with the ongoing costs of investing in
other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through June
30, 2016.
ACTUAL EXPENSES
The line labeled "actual" in the table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested at the beginning of the period, to estimate the
expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the "actual" line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" in the table provides information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account
================================================================================
18 | USAA EXTENDED MARKET INDEX FUND
================================================================================
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
---------------------------------------------------------------
Actual
$1,000.00 $1,021.80 $2.51
Hypothetical
(5% return before expenses) 1,000.00 1,022.38 2.51
*Expenses are equal to the Fund's annualized expense ratio of 0.50%, which
includes expenses of the Series, and is net of any reimbursements and expenses
paid indirectly, multiplied by the average account value over the period,
multiplied by 182 days/366 days (to reflect the one-half-year period). The
Fund's actual ending account value is based on its actual total return of 2.18%
for the six-month period of January 1, 2016, through June 30, 2016.
================================================================================
EXPENSE EXAMPLE | 19
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Management Agreement between the Trust and the Manager with respect to
the Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Management Agreement and the Manager and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Management Agreement with management and with experienced
independent legal counsel retained by the Independent Trustees (Independent
Counsel) and received materials from such Independent Counsel discussing the
legal standards for their consideration of the proposed continuation of the
Management Agreement with respect to the Fund. The Independent Trustees also
reviewed the proposed continuation of the Management Agreement with respect to
the Fund in private sessions with Independent Counsel at which no
representatives of management were present. At each regularly scheduled meeting
of the Board and its committees, the Board receives and reviews, among other
things, information concerning the Fund's performance and services provided by
the Manager. At the meeting at which
================================================================================
20 | USAA EXTENDED MARKET INDEX FUND
================================================================================
renewal of the Management Agreement is considered, particular focus is given to
information concerning Fund performance, fees and total expenses as compared to
comparable investment companies, and the Manager's profitability with respect
to the Fund. However, the Board noted that the evaluation process with respect
to the Manager is an ongoing one. In this regard, the Board's and its
committees' consideration of the Management Agreement included certain
information previously received at such meetings.
MANAGEMENT AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Management Agreement. In approving
the Management Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel. The Trustees took into account
the fact that the Fund operates in a master-feeder structure through which the
Fund invests all of its investable assets in the Master Extended Market Index
Series (the Master Fund) of Quantitative Master Series LLC, which is a separate
registered investment company advised by BlackRock Advisors, LLC (the Adviser).
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Management
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge of
the Manager's management and the quality of the performance of the Manager's
duties through Board meetings, discussions, and reports during the preceding
year. The Board considered the services provided to the Fund by the Manager
under the Management Agreement, as well as other services provided by the
Manager and its affiliates under other agreements, and the personnel who
provide these services. The Board noted that the Manager receives no investment
advisory fee for serving as the investment adviser to the Fund so long as the
Fund operates in a master-feeder structure. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates provide
administrative services, stockholder services, oversight of
================================================================================
ADVISORY AGREEMENT(S) | 21
================================================================================
fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and
the Trust.
The Board considered the level and depth of knowledge of the Manager, including
the professional experience and qualifications of senior personnel, as well as
current staffing levels. The Board discussed the Manager's effectiveness in
monitoring the performance of the Adviser to the Master Fund. The Manager's
role in coordinating the activities of the Fund's other service providers was
also considered. The Board also considered the Manager's risk management
processes. The Board considered the Manager's financial condition and that it
had the financial wherewithal to continue to provide the same scope and high
quality of services under the Management Agreement. In reviewing the
Management Agreement, the Board focused on the experience, resources, and
strengths of the Manager and its affiliates in managing the Fund, as well as
the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager, including oversight of the Master Fund's operations
and of the Fund's day-to-day operations and oversight of Fund accounting. The
Trustees, guided also by information obtained from their experiences as
trustees of the Trust, also focused on the quality of the Manager's compliance
and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the
Management Agreement, the Board evaluated the Fund's advisory fees and total
expense ratio as compared to other open-end investment companies deemed to be
comparable to the Fund as determined by the independent third party in its
report. The Fund's expenses were compared to a group of investment companies
chosen by the independent third party to be comparable to the Fund based upon
certain factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
front-end loads and no sales loads), asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
all front-end load and no-load retail open end investment companies with the
same investment classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe").
================================================================================
22 | USAA EXTENDED MARKET INDEX FUND
================================================================================
Among other data, the Board noted that the Fund's management fee rate - which
reflects the advisory fee paid by the Master Fund to the Adviser as well as
administrative services provided to the Fund by the Manager and its affiliates
was below the median of its expense group and its expense universe. The data
indicated that the Fund's total expenses were below the median of its expense
group and above the median of its expense universe. The Board noted that the
Manager does not currently receive an advisory fee from the Fund for the
services that it provides under the Management Agreement. The Trustees took
into account that the management fee and total expenses reflected both the
expenses of the Fund as well as those of the Master Fund. The Board also took
into account the various services provided to the Fund by the Manager and its
affiliates, including the high quality of services received by the Fund from
the Manager. The Trustees also noted the high level of correlation between the
Fund and its corresponding index and the relatively low tracking error between
the two, and noted that it reviews such information on a quarterly basis.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings detailed information about the Fund's and the
Master Fund's performance results. The Trustees also reviewed various
comparative data provided to them in connection with their consideration of the
renewal of the Management Agreement, including, among other information, a
comparison of the Fund's average annual total returns with its Lipper index and
with that of other mutual funds deemed to be in its peer group by the
independent third party in its report (the "performance universe"). The Fund's
performance universe consisted of the Fund and all retail and institutional
open-end investment companies with the same classification/objective as the
Fund regardless of asset size or primary channel of distribution. This
comparison indicated that, among other data, the Fund's performance was above
the average of its performance universe and lower than its Lipper index for the
one- and three-year periods ended December 31, 2015, and was above the average
of its performance universe and its Lipper index for the five- and ten-year
periods ended December 31, 2015. The Board also noted that the Fund's
percentile performance ranking was in the bottom 50% of its performance
universe for the one-year period ended December 31, 2015, was in the top 45% of
its performance universe for
================================================================================
ADVISORY AGREEMENT(S) | 23
================================================================================
the three-year period ended December 31, 2015, and was in the top 40% of its
performance universe for the five-year period ended December 31, 2015. The
Board took into account management's discussion of the Fund's performance,
including the Fund's high level of correlation between the Fund's performance
and its corresponding index.
COMPENSATION AND PROFITABILITY - The Board noted that the Manager does not
currently receive an advisory fee from the Fund under the Management Agreement.
The information considered by the Board included operating profit margin
information for the Manager's business as a whole. The Board also received and
considered profitability information related to the revenues from the Fund.
This information included a review of the methodology used in the allocation of
certain costs to the Fund. The Trustees reviewed the profitability of the
Manager's relationship with the Fund before tax expenses. In reviewing the
overall profitability of the Fund to the Manager, the Board also considered the
fact that affiliates provide shareholder servicing and administrative services
to the Fund for which they receive compensation. The Board also considered the
possible direct and indirect benefits to the Manager from its relationship with
the Trust, including that the Manager may derive reputational and other
benefits from its association with the Fund. The Trustees recognized that the
Manager should be able to earn a reasonable level of profits in exchange for
the level of services it provides to the Fund and the entrepreneurial risk that
it assumes as Manager.
ECONOMIES OF SCALE - With respect to the consideration of any economies of
scale to be realized by the Fund, the Board took into account that the Manager
does not receive any advisory fees under the Management Agreement and that the
management fee for the Fund reflects the advisory fee paid at the Master Fund
level to the Master Fund's Adviser. The Board took into account Management's
discussion of the Fund's current advisory fee structure. The Board also
considered the effects of the Fund's growth and size on the Fund's performance
and fees, noting that if the Fund's assets increase over time, the Fund may
realize other economies of scale if assets increase proportionally more than
some expenses. The Board determined that the current fee structure was
reasonable.
================================================================================
24 | USAA EXTENDED MARKET INDEX FUND
================================================================================
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Management Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Management Agreement; (ii) the Manager
maintains an appropriate compliance program; (iii) the performance of the Fund
is reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager and its affiliates' level of
profitability, if any, from their relationship with the Fund is reasonable in
light of the nature and high quality of services provided by the Manager and
the type of fund. Based on its conclusions, the Board determined that the
continuation of the Management Agreement would be in the best interests of the
Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 25
Semiannual report of the
MASTER EXTENDED MARKET INDEX SERIES
in which the USAA EXTENDED MARKET INDEX FUND
invests
PORTFOLIO INFORMATION AS OF JUNE 30, 2016
--------------------------------------------------------------------------------
PERCENT OF
SECTOR ALLOCATION NET ASSETS
--------------------------------------------------------------------------------
Financials 25%
Technology 16
Consumer Discretionary 15
Industrial 12
Health Care 11
Materials 5
Utilities 4
Energy 4
Consumer Staples 3
Telecommunications 1
Short-Term Securities 5
Liabilities in Excess of Other Assets (1)
--------------------------------------------------------------------------------
For Series compliance purposes, the Series' sector classifications refer to one
or more of the sector sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by the investment
adviser. These definitions may not apply for purposes of this report, which may
combine such sector sub-classifications for reporting ease.
--------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
The Series may invest in various derivative financial instruments. These
instruments are used to obtain exposure to a security, commodity, index, market,
and/or other asset without owning or taking physical custody of securities,
commodities and/or other referenced assets or to manage market, equity, credit,
interest rate, foreign currency exchange rate, commodity and/or other risks.
Derivative financial instruments may give rise to a form of economic leverage
and involve risks, including the imperfect correlation between the value of a
derivative financial instrument and the underlying asset, possible default of
the counterparty to the transaction or illiquidity of the instrument. The
Series' successful use of a derivative financial instrument depends on the
investment adviser's ability to predict pertinent market movements accurately,
which cannot be assured. The use of these instruments may result in losses
greater than if they had not been used, may limit the amount of appreciation the
Series can realize on an investment and/or may result in lower distributions
paid to shareholders. The Series' investments in these instruments, if any, are
discussed in detail in the Notes to Financial Statements.
================================================================================
PORTFOLIO INFORMATION | 27
================================================================================
SCHEDULE OF INVESTMENTS
June 30, 2016 (unaudited)
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE - 1.5%
4,851 AAR Corp. $ 113,222
9,549 Aerojet Rocketdyne Holdings, Inc.(a) 174,556
3,384 Aerovironment, Inc.(a) 94,075
3,142 Astronics Corp.(a) 104,503
15,284 B/E Aerospace, Inc. 705,739
15,397 BWX Technologies, Inc. 550,751
2,281 CPI Aerostructures, Inc.(a) 14,028
3,115 Cubic Corp. 125,098
6,621 Curtiss-Wright Corp. 557,819
1,874 Ducommun, Inc.(a) 37,068
2,637 Engility Holdings, Inc.(a) 55,693
4,542 Esterline Technologies Corp.(a) 281,786
2,587 HEICO Corp. 172,838
5,544 HEICO Corp., Class A 297,436
14,187 Hexcel Corp. 590,747
7,115 Huntington Ingalls Industries, Inc. 1,195,533
4,600 Innovative Solutions & Support, Inc.(a) 12,972
7,865 KLX, Inc.(a) 243,815
7,970 Kratos Defense & Security Solutions, Inc.(a) 32,677
2,720 LMI Aerospace, Inc.(a) 21,869
3,277 Mantech International Corp., Class A 123,936
4,945 Moog, Inc., Class A(a) 266,634
8,889 Orbital ATK, Inc. 756,810
3,324 RBC Bearings, Inc.(a) 240,990
8,345 Smith & Wesson Holding Corp.(a) 226,817
17,895 Spirit Aerosystems Holdings, Inc., Class A(a) 769,485
2,841 Sturm Ruger & Co., Inc. 181,852
8,193 Taser International, Inc.(a) 203,842
5,168 Teledyne Technologies, Inc.(a) 511,890
7,156 Triumph Group, Inc. 254,038
644 VSE Corp. 43,019
------------
8,961,538
------------
ALTERNATIVE ENERGY - 0.1%
3,787 Aemetis, Inc.(a) 8,634
8,820 Amyris, Inc.(a)(b) 3,973
5,033 Enphase Energy, Inc.(a)(b) 10,016
3,805 FuelCell Energy, Inc.(a)(b) 23,667
5,235 Green Brick Partners, Inc.(a) 38,059
5,207 Green Plains, Inc. 102,682
3,416 MagneGas Corp.(a) 2,016
1,146 Ocean Power Technologies, Inc.(a) 2,911
8,739 Pattern Energy Group, Inc. 200,735
26,664 Plug Power, Inc.(a) 49,595
5,628 Renewable Energy Group, Inc.(a) 49,695
921 REX American Resources Corp.(a) 55,103
7,815 SunPower Corp.(a) 121,054
13,122 TerraVia Holdings, Inc.(a)(b) 34,380
------------
702,520
------------
AUTOMOBILES & PARTS - 1.8%
25,654 Allison Transmission Holdings, Inc. 724,212
11,370 American Axle & Manufacturing Holdings, Inc.(a) 164,638
13,229 Autoliv, Inc. 1,421,456
8,072 Cooper Tire & Rubber Co. 240,707
PORTFOLIO ABBREVIATIONS
S&P Standard and Poor's
================================================================================
28 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,584 Cooper-Standard Holding, Inc.(a) $ 204,110
21,805 Dana Holding Corp. 230,261
4,690 Dorman Products, Inc.(a) 268,268
4,135 Federal-Mogul Corp.(a) 34,362
42,897 Gentex Corp. 662,759
5,419 Gentherm, Inc.(a) 185,601
10,980 Lear Corp. 1,117,325
6,807 Modine Manufacturing Co.(a) 59,902
2,943 Motorcar Parts of America, Inc.(a) 79,991
2,952 Standard Motor Products, Inc. 117,430
4,259 Stoneridge, Inc.(a) 63,629
573 Strattec Security Corp. 23,361
3,414 Superior Industries International, Inc. 91,427
8,465 Tenneco, Inc.(a) 394,554
16,789 Tesla Motors, Inc.(a)(b) 3,563,969
6,931 Titan International, Inc. 42,972
3,363 Tower International, Inc. 69,210
7,139 U.S. Auto Parts Network, Inc.(a) 28,199
5,070 Visteon Corp. 333,657
7,941 WABCO Holdings, Inc.(a) 727,157
------------
10,849,157
------------
BANKS - 6.2%
2,325 1st Source Corp. 75,307
2,205 American National Bankshares, Inc. 55,522
4,285 Ameris Bancorp 127,264
2,125 Ames National Corp. 56,992
2,712 Arrow Financial Corp. 82,146
23,244 Associated Banc-Corp 398,635
13,130 Astoria Financial Corp. 201,283
5,336 Banc of California, Inc. 96,582
1,174 Bancfirst Corp. 70,816
2,128 Bancorp of New Jersey, Inc. 24,834
6,496 Bancorp, Inc.(a) 39,106
12,177 BancorpSouth, Inc. 276,296
7,238 Bank Mutual Corp. 55,588
6,647 Bank of Hawaii Corp. 457,314
1,247 Bank of Marin Bancorp 60,317
12,274 Bank of the Ozarks, Inc. 460,520
3,939 BankFinancial Corp. 47,229
15,771 BankUnited, Inc. 484,485
3,084 Banner Corp. 131,193
1,552 Bar Harbor Bankshares 54,475
3,436 BCB Bancorp, Inc. 35,185
2,595 Bear State Financial, Inc. 24,471
12,843 Beneficial Bancorp, Inc.(a) 163,363
4,850 Berkshire Hills Bancorp, Inc. 130,562
4,128 Blue Hills Bancorp, Inc. 60,929
5,419 BNC Bancorp 123,065
8,936 BofI Holding, Inc.(a) 158,257
3,095 BOK Financial Corp. 194,056
12,591 Boston Private Financial Holdings, Inc. 148,322
2,180 Bridge Bancorp, Inc. 61,912
11,463 Brookline Bancorp, Inc. 126,437
2,983 Bryn Mawr Bank Corp. 87,104
882 California First National Bancorp 13,027
1,576 Camden National Corp. 66,192
3,578 Capital Bank Financial Corp., Class A 103,046
2,343 Capital City Bank Group, Inc. 32,615
18,668 Capitol Federal Financial, Inc. 260,419
5,232 Cardinal Financial Corp. 114,790
7,559 Cascade Bancorp(a) 41,877
10,846 Cathay General Bancorp 305,857
7,831 Centerstate Banks, Inc. 123,338
4,905 Central Pacific Financial Corp. 115,758
997 Century Bancorp, Inc., Class A 42,203
5,643 Chemical Financial Corp. 210,427
1,164 Chicopee Bancorp, Inc. 21,255
2,833 Citizens & Northern Corp. 57,283
2,469 City Holding Co. 112,265
1,968 Civista Bancshares, Inc. 25,781
4,768 Clifton Bancorp, Inc. 71,854
================================================================================
SCHEDULE OF INVESTMENTS | 29
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,894 CNB Financial Corp. $ 51,513
6,271 CoBiz Financial, Inc. 73,371
463 Colony Bankcorp, Inc.(a) 4,403
8,543 Columbia Banking System, Inc. 239,717
12,380 Commerce Bancshares, Inc. 593,002
6,838 Community Bank System, Inc. 280,973
2,821 Community Trust Bancorp, Inc. 97,776
2,905 CommunityOne Bancorp(a) 36,719
4,852 ConnectOne Bancorp, Inc. 76,128
8,160 Cullen/Frost Bankers, Inc. 520,037
4,166 Customers Bancorp, Inc.(a) 104,692
14,284 CVB Financial Corp. 234,115
5,246 Dime Community Bancshares, Inc. 89,234
4,741 Eagle Bancorp, Inc.(a) 228,090
21,677 East West Bancorp, Inc. 740,920
2,546 Eastern Virginia Bankshares, Inc. 19,222
1,672 Enterprise Bancorp, Inc. 40,111
3,377 Enterprise Financial Services Corp. 94,185
3,300 ESSA Bancorp, Inc. 44,220
1,739 Farmers Capital Bank Corp. 47,562
3,242 Fidelity Southern Corp. 50,802
2,741 Financial Institutions, Inc. 71,458
2,552 First Bancorp, Inc. 54,970
3,105 First Bancorp, North Carolina 54,586
17,284 First BanCorp, Puerto Rico(a) 68,617
4,827 First Busey Corp. 103,250
1,312 First Citizens BancShares, Inc., Class A 339,690
13,854 First Commonwealth Financial Corp. 127,457
3,087 First Community Bancshares, Inc. 69,272
2,363 First Connecticut Bancorp, Inc. 39,131
1,962 First Defiance Financial Corp. 76,224
9,179 First Financial Bancorp 178,532
10,240 First Financial Bankshares, Inc. 335,770
2,125 First Financial Corp. 77,817
3,414 First Financial Northwest, Inc. 45,338
34,701 First Horizon National Corp. 478,180
2,871 First Interstate Bancsystem, Inc. 80,675
6,100 First Merchants Corp. 152,073
11,596 First Midwest Bancorp, Inc. 203,626
2,797 First NBC Bank Holding Co.(a) 46,962
53,971 First Niagara Financial Group, Inc. 525,678
2,494 First of Long Island Corp. 71,503
21,420 First Republic Bank 1,499,186
3,052 First South Bancorp, Inc. 28,506
2,396 First United Corp.(a) 23,577
25,439 FirstMerit Corp. 515,649
3,391 Flagstar Bancorp, Inc.(a) 82,774
4,602 Flushing Financial Corp. 91,488
31,145 FNB Corp. 390,558
1,816 Fox Chase Bancorp, Inc. 36,937
25,185 Fulton Financial Corp. 339,997
2,419 German American Bancorp, Inc. 77,335
11,034 Glacier Bancorp, Inc. 293,284
1,720 Great Southern Bancorp, Inc. 63,588
7,597 Great Western Bancorp, Inc. 239,609
3,466 Greene County Bancshares, Inc. -
3,221 Guaranty Bancorp 53,791
8,046 Hampton Roads Bankshares, Inc.(a) 14,402
12,278 Hancock Holding Co. 320,579
5,135 Hanmi Financial Corp. 120,621
================================================================================
30 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,648 Heartland Financial USA, Inc. $ 93,448
4,396 Heritage Commerce Corp. 46,290
5,517 Heritage Financial Corp. 96,989
1,907 HMN Financial, Inc.(a) 25,897
1,130 Home Bancorp, Inc. 31,041
18,592 Home BancShares, Inc. 367,936
3,639 HomeStreet, Inc.(a) 72,489
2,731 HomeTrust Bancshares, Inc.(a) 50,523
2,007 Horizon Bancorp 50,456
4,836 Iberiabank Corp. 288,854
4,043 Independent Bank Corp. 184,765
4,221 Independent Bank Corp./MI 61,247
1,515 Independent Bank Group, Inc. 65,009
8,860 International Bancshares Corp. 231,157
54,036 Investors Bancorp, Inc. 598,719
4,495 Kearny Financial Corp. 56,547
6,073 Lakeland Bancorp, Inc. 69,111
2,799 Lakeland Financial Corp. 131,581
6,540 LegacyTexas Financial Group, Inc. 175,991
6,531 Macatawa Bank Corp. 48,460
3,542 MainSource Financial Group, Inc. 78,101
10,080 MB Financial, Inc. 365,702
3,191 Mercantile Bank Corp. 76,137
1,376 Merchants Bancshares, Inc. 41,940
7,399 Meridian Bancorp, Inc. 109,357
985 Meta Financial Group, Inc. 50,196
2,061 MidSouth Bancorp, Inc. 20,692
1,520 MidWestOne Financial Group, Inc. 43,411
1,697 MutualFirst Financial, Inc. 46,413
5,381 National Bank Holdings Corp., Class A 109,557
1,700 National Bankshares, Inc. 59,364
6,464 NBT Bancorp, Inc. 185,064
72,798 New York Community Bancorp, Inc. 1,091,242
6,319 Northfield Bancorp, Inc. 93,711
1,757 Northrim BanCorp, Inc. 46,192
15,090 Northwest Bancshares, Inc. 223,785
859 Norwood Financial Corp. 24,052
3,257 OceanFirst Financial Corp. 59,180
7,031 OFG Bancorp 58,357
1,099 Ohio Valley Banc Corp. 24,024
16,667 Old National Bancorp 208,838
6,505 Old Second Bancorp, Inc. 44,429
2,751 Opus Bank 92,984
6,327 Oritani Financial Corp. 101,169
2,093 Orrstown Financial Services, Inc. 37,779
3,946 Pacific Continental Corp. 61,992
3,502 Pacific Premier Bancorp, Inc.(a) 84,048
17,153 PacWest Bancorp 682,346
1,932 Park National Corp. 177,319
9,934 Park Sterling Corp. 70,432
2,576 Peapack Gladstone Financial Corp. 47,682
1,209 Penns Woods Bancorp, Inc. 50,766
1,497 Peoples Bancorp of North Carolina, Inc. 29,356
3,210 Peoples Bancorp, Inc. 69,946
1,245 Peoples Financial Corp.(a) 12,823
5,097 Pinnacle Financial Partners, Inc. 248,988
15,112 Popular, Inc. 442,782
6,148 Porter Bancorp, Inc.(a) 9,345
2,333 Preferred Bank 67,365
11,605 PrivateBancorp, Inc. 510,968
10,189 Prosperity Bancshares, Inc. 519,537
2,303 Provident Financial Holdings, Inc. 42,145
8,649 Provident Financial Services, Inc. 169,866
================================================================================
SCHEDULE OF INVESTMENTS | 31
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
1,651 QCR Holdings, Inc. $ 44,891
5,565 Renasant Corp. 179,916
1,667 Republic Bancorp, Inc., Class A 46,059
9,649 Republic First Bancorp, Inc.(a) 41,587
8,387 Riverview Bancorp, Inc. 39,671
5,190 S&T Bancorp, Inc. 126,895
3,931 Sandy Spring Bancorp, Inc. 114,235
4,770 Seacoast Banking Corp. of Florida(a) 77,465
3,175 ServisFirst Bancshares, Inc. 156,813
3,680 Shore Bancshares, Inc. 43,240
2,508 Sierra Bancorp 41,859
8,039 Signature Bank(a) 1,004,232
4,197 Simmons First National Corp., Class A 193,838
3,633 South State Corp. 247,226
4,104 Southside Bancshares, Inc. 126,896
3,696 Southwest Bancorp, Inc. 62,573
5,894 State Bank Financial Corp. 119,943
18,367 Sterling Bancorp 288,362
3,828 Stock Yards Bancorp, Inc. 108,064
1,619 Stonegate Bank 52,245
2,452 Suffolk Bancorp 76,772
2,289 Summit Financial Group, Inc. 40,057
2,292 Sun Bancorp, Inc.(a) 47,353
7,813 SVB Financial Group(a) 743,485
19,459 Synovus Financial Corp. 564,116
9,264 Talmer Bancorp, Inc., Class A 177,591
24,414 TCF Financial Corp. 308,837
2,198 Territorial Bancorp, Inc. 58,181
6,837 Texas Capital Bancshares, Inc.(a) 319,698
10,626 TFS Financial Corp. 182,980
2,027 Tompkins Financial Corp. 131,755
7,726 TowneBank 167,268
3,317 Trico Bancshares 91,549
14,741 TrustCo Bank Corp. NY 94,490
9,709 Trustmark Corp. 241,269
6,522 UMB Financial Corp. 347,036
33,825 Umpqua Holdings Corp. 523,273
7,003 Union Bankshares Corp. 173,044
3,115 United Bancorp, Inc. 30,434
9,354 United Bankshares, Inc. 350,869
8,915 United Community Banks, Inc. 163,055
11,244 United Community Financial Corp. 68,364
8,517 United Financial Bancorp, Inc. 110,551
4,051 United Security Bancshares(a) 26,007
3,005 Univest Corp. of Pennsylvania 63,165
33,096 Valley National Bancorp 301,836
13,426 Washington Federal, Inc. 325,715
2,472 Washington Trust Bancorp, Inc. 93,738
4,056 Waterstone Financial, Inc. 62,178
13,343 Webster Financial Corp. 452,995
5,376 WesBanco, Inc. 166,925
3,190 West BanCorp., Inc. 59,302
3,773 Westamerica Bancorp 185,858
13,567 Western Alliance Bancorp(a) 442,963
4,895 Westfield Financial, Inc. 37,691
11,170 Wilshire Bancorp, Inc. 116,391
7,511 Wintrust Financial Corp. 383,061
4,170 WSFS Financial Corp. 134,232
6,794 Yadkin Financial Corp. 170,461
633 Your Community Bankshares, Inc. 23,522
------------
37,857,005
------------
BEVERAGES - 0.1%
1,480 Boston Beer Co., Inc., Class A(a) 253,125
720 Coca-Cola Bottling Co. Consolidated 106,178
1,760 Craft Brew Alliance, Inc.(a) 20,275
1,810 National Beverage Corp.(a) 113,686
================================================================================
32 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
4,659 Primo Water Corp.(a) $ 55,023
2,312 Willamette Valley Vineyards, Inc.(a) 19,398
------------
567,685
------------
CHEMICALS - 2.3%
4,402 A. Schulman, Inc. 107,497
4,429 Aceto Corp. 96,951
3,882 American Vanguard Corp. 58,657
9,264 Ashland, Inc. 1,063,229
25,261 Axalta Coating Systems Ltd.(a) 670,174
10,170 Axiall Corp. 331,644
4,662 Balchem Corp. 278,088
9,570 Cabot Corp. 436,966
7,617 Calgon Carbon Corp. 100,163
4,820 Cambrex Corp.(a) 249,339
22,045 Celanese Corp., Series A 1,442,845
1,295 Chase Corp. 76,496
26,379 Chemours Co. 217,363
9,961 Chemtura Corp.(a) 262,771
2,567 CSW Industrials, Inc.(a) 83,710
13,135 Ferro Corp.(a) 175,746
3,639 FutureFuel Corp. 39,592
10,527 GCP Applied Technologies, Inc.(a) 274,123
1,620 Hawkins, Inc. 70,324
7,330 HB Fuller Co. 322,447
29,331 Huntsman Corp. 394,502
6,229 Ingevity Corp.(a) 212,035
2,611 Innophos Holdings, Inc. 110,210
3,555 Innospec, Inc. 163,494
8,477 Intrepid Potash, Inc.(a) 12,207
1,469 KMG Chemicals, Inc. 38,179
3,035 Koppers Holdings, Inc.(a) 93,266
4,717 Kraton Performance Polymers, Inc.(a) 131,746
1,631 Kronos Worldwide, Inc. 8,563
2,939 LSB Industries, Inc.(a) 35,503
2,331 Metabolix, Inc.(a) 1,935
5,227 Minerals Technologies, Inc. 296,894
1,502 NewMarket Corp. 622,399
23,890 Olin Corp. 593,428
7,759 OMNOVA Solutions, Inc.(a) 56,253
23,518 Platform Specialty Products Corp.(a) 208,840
12,483 PolyOne Corp. 439,901
2,000 Quaker Chemical Corp. 178,400
6,271 Rayonier Advanced Materials, Inc. 85,223
3,065 Rentech, Inc.(a) 7,356
20,087 RPM International, Inc. 1,003,346
7,801 Senomyx, Inc.(a) 21,453
6,656 Sensient Technologies Corp. 472,842
2,616 Stepan Co. 155,730
1,000 TOR Minerals International, Inc.(a) 4,540
3,711 Tredegar Corp. 59,821
4,316 Trinseo SA(a) 185,286
9,237 Tronox Ltd., Class A 40,735
5,098 Univar, Inc.(a) 96,403
11,061 Valspar Corp. 1,194,920
6,012 Westlake Chemical Corp. 258,035
10,527 WR Grace & Co. 770,682
4,990 ZAGG, Inc.(a) 26,197
------------
14,338,449
------------
CONSTRUCTION & MATERIALS - 2.3%
5,823 AAON, Inc. 160,191
5,190 Advanced Drainage Systems, Inc. 142,050
23,080 AECOM(a) 733,252
5,610 Aegion Corp.(a) 109,451
3,372 Ameresco, Inc., Class A(a) 14,736
13,435 American DG Energy, Inc.(a) 3,130
2,117 American Woodmark Corp.(a) 140,527
11,094 AO Smith Corp. 977,492
4,223 Apogee Enterprises, Inc. 195,736
1,952 Argan, Inc. 81,437
3,478 Armstrong Flooring, Inc.(a) 58,952
6,956 Armstrong World Industries, Inc.(a) 272,327
================================================================================
SCHEDULE OF INVESTMENTS | 33
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,204 BlueLinx Holdings, Inc.(a) $ 15,538
1,496 Blueprint Medicines Corp.(a) 30,294
6,784 BMC Stock Holdings, Inc.(a) 120,891
5,862 Boise Cascade Co.(a) 134,533
9,577 Builders FirstSource, Inc.(a) 107,741
14,383 Chicago Bridge & Iron Co. NV 498,083
5,608 Continental Building Products, Inc.(a) 124,666
7,472 Eagle Materials, Inc. 576,465
8,964 EMCOR Group, Inc. 441,567
9,771 Generac Holdings, Inc.(a) 341,594
4,813 Gibraltar Industries, Inc.(a) 151,946
5,591 Granite Construction, Inc. 254,670
9,666 Great Lakes Dredge & Dock Corp.(a) 42,144
6,030 Griffon Corp. 101,666
11,159 Headwaters, Inc.(a) 200,193
7,303 Hill International, Inc.(a) 29,723
2,641 IES Holdings, Inc.(a) 32,801
2,837 Installed Building Products, Inc.(a) 102,955
2,808 Insteel Industries, Inc. 80,281
4,943 Inteliquent, Inc. 98,316
21,005 KBR, Inc. 278,106
3,913 Layne Christensen Co.(a) 31,695
1,479 LB Foster Co., Class A 16,106
5,793 Lennox International, Inc. 826,082
21,086 Louisiana-Pacific Corp.(a) 365,842
4,207 Masonite International Corp.(a) 278,251
9,529 MasTec, Inc.(a) 212,687
29,843 MDU Resources Group, Inc. 716,232
23,103 Mueller Water Products, Inc., Series A 263,836
3,403 MYR Group, Inc.(a) 81,944
4,543 NCI Building Systems, Inc.(a) 72,643
1,510 Nortek, Inc.(a) 89,558
2,132 Northwest Pipe Co.(a) 22,983
980 Omega Flex, Inc. 37,279
5,034 Orion Marine Group, Inc.(a) 26,731
17,628 Owens Corning 908,195
2,393 Patrick Industries, Inc.(a) 144,274
7,825 PGT, Inc.(a) 80,598
3,732 Ply Gem Holdings, Inc.(a) 54,375
5,751 Primoris Services Corp. 108,866
5,075 Quanex Building Products Corp. 94,344
5,779 Simpson Manufacturing Co., Inc. 230,987
3,307 Sterling Construction Co., Inc.(a) 16,237
9,278 Summit Materials, Inc., Class A(a) 189,828
5,345 Thermon Group Holdings, Inc.(a) 102,678
5,711 TopBuild Corp.(a) 206,738
4,693 TRC Cos., Inc.(a) 29,660
4,657 Trex Co., Inc.(a) 209,193
5,464 Tutor Perini Corp.(a) 128,677
2,945 Universal Forest Products, Inc. 272,972
2,197 US Concrete, Inc.(a) 133,819
13,456 USG Corp.(a) 362,774
3,342 Valmont Industries, Inc. 452,072
3,927 Watsco, Inc. 552,490
4,067 Watts Water Technologies, Inc., Class A 236,943
------------
14,211,043
------------
ELECTRICITY - 1.5%
6,636 ALLETE, Inc. 428,885
8,369 Avangrid, Inc. 385,476
7,705 Black Hills Corp. 485,723
49,082 Calpine Corp.(a) 723,960
19,675 Covanta Holding Corp. 323,654
16,100 Dynegy, Inc.(a) 277,564
6,084 El Paso Electric Co. 287,591
================================================================================
34 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
6,920 Empire District Electric Co. $ 235,072
22,821 Great Plains Energy, Inc. 693,758
15,944 Hawaiian Electric Industries, Inc. 522,804
7,492 IDACORP, Inc. 609,474
23,310 ITC Holdings Corp. 1,091,374
5,145 MGE Energy, Inc. 290,770
7,217 NorthWestern Corp. 455,176
5,198 Ormat Technologies, Inc. 227,464
13,362 Portland General Electric Co. 589,531
9,651 Talen Energy Corp.(a) 130,771
8,295 TerraForm Global, Inc., Class A(a) 27,042
11,225 TerraForm Power, Inc., Class A(a) 122,353
45,850 U.S. Geothermal, Inc.(a) 37,528
2,550 Unitil Corp. 108,809
3,153 Vivint Solar, Inc.(a)(b) 9,680
21,335 Westar Energy, Inc. 1,196,680
------------
9,261,139
------------
ELECTRONIC & ELECTRICAL EQUIPMENT - 2.9%
1,620 Allied Motion Technologies, Inc. 37,681
1,261 American Science & Engineering, Inc. 47,174
4,088 Anixter International, Inc.(a) 217,809
2,619 Applied DNA Sciences, Inc.(a)(b) 8,459
13,660 Arrow Electronics, Inc.(a) 845,554
19,078 Avnet, Inc. 772,850
6,239 AVX Corp. 84,726
3,802 AZZ, Inc. 228,044
2,244 Badger Meter, Inc. 163,879
2,157 Bel Fuse, Inc., Class B 38,351
6,197 Belden, Inc. 374,113
7,614 Benchmark Electronics, Inc.(a) 161,036
6,616 Brady Corp., Class A 202,185
3,678 Capstone Turbine Corp.(a) 5,076
12,485 Cognex Corp. 538,104
3,619 Coherent, Inc.(a) 332,152
3,575 Control4 Corp.(a) 29,172
5,283 CTS Corp. 94,671
1,081 CyberOptics Corp.(a) 16,193
6,043 Daktronics, Inc. 37,769
3,274 Electro Rent Corp. 50,452
5,070 Electro Scientific Industries, Inc.(a) 29,609
6,297 eMagin Corp.(a) 12,090
3,187 Encore Wire Corp. 118,811
610 Energy Focus, Inc.(a) 3,806
4,406 EnerNOC, Inc.(a) 27,846
6,398 EnerSys 380,489
3,900 ESCO Technologies, Inc. 155,766
4,815 Fabrinet(a) 178,733
2,690 FARO Technologies, Inc.(a) 91,003
5,958 FEI Co. 636,791
7,405 General Cable Corp. 94,118
3,110 Houston Wire & Cable Co. 16,328
7,742 Hubbell, Inc. 816,549
8,248 II-VI, Inc.(a) 154,732
3,968 Integer Holdings Corp.(a) 122,730
5,485 Intevac, Inc.(a) 31,155
2,740 IntriCon Corp.(a) 14,632
5,438 IPG Photonics Corp.(a) 435,040
5,713 Itron, Inc.(a) 246,230
27,930 Jabil Circuit, Inc. 515,867
8,847 Kemet Corp.(a) 25,922
26,018 Keysight Technologies, Inc.(a) 756,864
3,441 Kimball Electronics, Inc.(a) 42,840
13,186 Knowles Corp.(a) 180,384
1,662 Landauer, Inc. 68,408
6,052 LightPath Technologies, Inc., Class A(a) 10,530
3,291 Littelfuse, Inc. 388,963
4,195 LSI Industries, Inc. 46,439
2,990 MA-COM Technology Solutions Holdings, Inc.(a) 98,610
5,619 Maxwell Technologies, Inc.(a) 29,668
445 Mesa Laboratories, Inc. 54,735
5,654 Methode Electronics, Inc. 193,536
================================================================================
SCHEDULE OF INVESTMENTS | 35
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
4,002 Mettler-Toledo International, Inc.(a) $ 1,460,410
10,983 Microvision, Inc.(a) 18,451
2,264 MTS Systems Corp. 99,254
4,487 NAPCO Security Technologies, Inc.(a) 28,537
15,074 National Instruments Corp. 413,028
5,584 Novanta, Inc.(a) 84,598
1,322 Nuvectra Corp.(a) 9,783
974 NVE Corp. 57,125
7,855 Orion Energy Systems, Inc.(a) 9,112
2,791 OSI Systems, Inc.(a) 162,241
3,206 Park Electrochemical Corp. 46,583
5,087 Plexus Corp.(a) 219,758
1,398 Powell Industries, Inc. 54,997
6,610 Regal-Beloit Corp. 363,881
5,552 Research Frontiers, Inc.(a) 20,265
4,390 Rofin-Sinar Technologies, Inc.(a) 140,217
2,685 Rogers Corp.(a) 164,054
5,299 Rubicon Technology, Inc.(a) 3,603
11,339 Sanmina Corp.(a) 303,999
25,803 Sensata Technologies Holding NV(a) 900,267
5,951 Synthesis Energy Systems, Inc.(a)(b) 6,249
38,043 Trimble Navigation Ltd.(a) 926,728
9,582 TTM Technologies, Inc.(a) 72,152
6,063 Turtle Beach Corp.(a) 5,881
4,545 Ultralife Corp.(a) 22,770
6,278 Universal Display Corp.(a) 425,648
6,043 Veeco Instruments, Inc.(a) 100,072
3,135 Vicor Corp.(a) 31,569
19,362 Vishay Intertechnology, Inc. 239,895
2,569 Vishay Precision Group, Inc.(a) 34,476
6,116 WESCO International, Inc.(a) 314,913
7,748 Zebra Technologies Corp., Class A(a) 388,175
------------
17,393,365
------------
FINANCIAL SERVICES - 3.7%
8,447 Actinium Pharmaceuticals, Inc.(a) 14,951
64,424 Ally Financial, Inc.(a) 1,099,718
5,804 Artisan Partners Asset Management, Inc., Class A 160,655
394 Ashford, Inc.(a) 19,700
805 Associated Capital Group, Inc., Class A 23,087
1,501 Asta Funding, Inc.(a) 15,866
251 Atlanticus Holdings Corp.(a) 730
4,219 Bats Global Markets, Inc.(a) 108,386
12,023 BBCN Bancorp, Inc. 179,383
26,138 BGC Partners, Inc., Class A 227,662
8,375 Blackhawk Network Holdings, Inc.(a) 280,479
3,789 Calamos Asset Management, Inc., Class A 27,698
4,144 Cash America International, Inc. 176,617
12,335 CBOE Holdings, Inc. 821,758
25,885 CIT Group, Inc. 825,990
3,036 Cohen & Steers, Inc. 122,776
5,716 Consumer Portfolio Services, Inc.(a) 21,549
17,299 Cowen Group, Inc., Class A(a) 51,205
1,567 Credit Acceptance Corp.(a)(b) 290,020
4,986 Del Taco Restaurants, Inc.(a) 45,373
522 Diamond Hill Investment Group, Inc. 98,355
17,521 Eaton Vance Corp. 619,192
5,857 Emergent Capital, Inc.(a) 19,680
================================================================================
36 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
3,846 Encore Capital Group, Inc.(a) $ 90,496
4,701 Enova International, Inc.(a) 34,599
10,209 Essent Group Ltd.(a) 222,658
11,962 EverBank Financial Corp. 177,755
6,040 Evercore Partners, Inc., Class A 266,908
8,094 Ezcorp, Inc., Class A(a) 61,191
1,765 FBR & Co. 26,351
1,734 Federal Agricultural Mortgage Corp., Class C 60,378
13,995 Federated Investors, Inc., Class B 402,776
7,748 Financial Engines, Inc. 200,441
4,380 First Cash Financial Services, Inc. 224,825
1,974 First Marblehead Corp.(a) 9,594
41,181 FNF Group 1,544,287
10,595 FNFV Group(a) 121,525
1,155 FXCM, Inc.(a) 9,991
805 GAMCO Investors, Inc., Class A 26,380
7,212 Green Dot Corp., Class A(a) 165,804
4,276 Greenhill & Co., Inc. 68,844
5,106 HealthEquity, Inc.(a) 155,146
18,302 HRG Group, Inc.(a) 251,286
1,830 Impac Mortgage Holdings, Inc.(a) 28,694
8,315 Interactive Brokers Group, Inc., Class A 294,351
2,537 INTL. FCStone, Inc.(a) 69,235
5,189 Investment Technology Group, Inc. 86,760
21,344 Janus Capital Group, Inc. 297,108
4,507 Jason Industries, Inc.(a) 16,270
8,227 KCG Holdings, Inc., Class A(a) 109,419
8,046 Ladder Capital Corp. 98,161
20,288 Ladenburg Thalmann Financial Services, Inc.(a) 47,880
19,524 Lazard Ltd., Class A 581,425
31,122 LendingClub Corp.(a) 133,825
1,072 LendingTree, Inc.(a)(b) 94,690
3,689 Liberty Broadband Corp., Class A(a) 219,127
10,186 Liberty Broadband Corp., Class C(a) 611,160
9,896 Liberty TripAdvisor Holdings, Inc., Series A(a) 216,524
12,122 LPL Financial Holdings, Inc. 273,109
5,541 MarketAxess Holdings, Inc. 805,661
1,640 Marlin Business Services Corp. 26,732
50,456 MGIC Investment Corp.(a) 300,213
3,091 Moelis & Co., Class A 69,547
5,436 MoneyGram International, Inc.(a) 37,237
12,932 MSCI, Inc. 997,316
2,846 Nelnet, Inc., Class A 98,898
4,431 NewStar Financial, Inc.(a) 37,309
7,757 NMI Holdings, Inc., Class A(a) 42,508
29,889 NorthStar Asset Management Group, Inc. 305,167
5,864 NRG Yield, Inc., Class A 89,250
9,117 NRG Yield, Inc., Class C 142,134
16,212 Ocwen Financial Corp.(a) 27,723
3,478 Ohr Pharmaceutical, Inc.(a) 9,530
6,601 On Deck Capital, Inc.(a)(b) 33,995
6,952 OneMain Holdings, Inc.(a) 158,645
1,705 Oppenheimer Holdings, Inc., Class A 26,359
4,035 PICO Holdings, Inc.(a) 38,171
2,366 Piper Jaffray Cos.(a) 89,198
2,864 PJT Partners, Inc. 65,872
7,260 PRA Group, Inc.(a) 175,256
3,173 Pzena Investment Management, Inc., Class A 24,147
30,769 Radian Group, Inc. 320,613
19,181 Raymond James Financial, Inc. 945,623
================================================================================
SCHEDULE OF INVESTMENTS | 37
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
4,370 Resource America, Inc., Class A $ 42,476
4,085 Safeguard Scientifics, Inc.(a) 51,022
15,868 Santander Consumer USA Holdings, Inc.(a) 163,916
20,453 SEI Investments Co. 983,994
63,092 SLM Corp.(a) 389,909
3,587 Stewart Information Services Corp. 148,538
10,297 Stifel Financial Corp.(a) 323,841
29,777 Synergy Resources Corp.(a) 198,315
39,960 TD Ameritrade Holding Corp. 1,137,861
4,426 TESARO, Inc.(a) 372,005
4,302 U.S. Global Investors, Inc., Class A 7,313
3,390 Virtu Financial, Inc., Class A 61,020
1,102 Virtus Investment Partners, Inc. 78,440
1,424 VolitionRX Ltd.(a) 4,486
30,439 Voya Financial, Inc. 753,670
12,521 Waddell & Reed Financial, Inc., Class A 215,612
4,301 Walker & Dunlop, Inc.(a) 97,977
1,466 Westwood Holdings Group, Inc. 75,939
17,278 WisdomTree Investments, Inc.(b) 169,152
16,943 WMIH Corp.(a) 37,613
1,335 World Acceptance Corp.(a) 60,876
------------
22,790,882
------------
FIXED LINE TELECOMMUNICATIONS - 0.3%
14,330 8x8, Inc.(a) 209,361
34,307 Cincinnati Bell, Inc.(a) 156,783
7,761 Consolidated Communications Holdings, Inc. 211,410
16,238 EarthLink Holdings Corp. 103,923
3,773 Fairpoint Communications, Inc.(a) 55,388
4,977 General Communication, Inc., Class A(a) 78,637
3,853 GTT Communications, Inc.(a) 71,203
2,127 Hawaiian Telcom Holdco, Inc.(a) 45,071
2,972 IDT Corp., Class B 42,173
10,267 inContact, Inc.(a) 142,198
4,097 Lumos Networks Corp.(a) 49,574
1,752 Straight Path Communications, Inc., Class B(a)(b) 48,478
27,920 Vonage Holdings Corp.(a) 170,312
15,457 Windstream Holdings, Inc.(b) 143,286
6,452 Zayo Group Holdings, Inc.(a) 180,204
------------
1,708,001
------------
FOOD & DRUG RETAILERS - 0.7%
5,850 Casey's General Stores, Inc. 769,334
3,358 Chefs' Warehouse, Inc.(a) 53,728
6,788 Core-Mark Holding Co., Inc. 318,086
5,266 Diplomat Pharmacy, Inc.(a) 184,310
10,229 GNC Holdings, Inc., Class A 248,462
1,941 Ingles Markets, Inc., Class A 72,399
1,354 Natural Health Trends Corp.(b) 38,169
5,092 Performance Food Group Co.(a) 137,026
3,455 PetMed Express, Inc. 64,816
158,048 Rite Aid Corp.(a) 1,183,780
4,080 Smart & Final Stores, Inc.(a) 60,751
5,521 SpartanNash Co. 168,832
================================================================================
38 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
21,616 Sprouts Farmers Market, Inc.(a) $ 495,006
38,696 Supervalu, Inc.(a) 182,645
7,385 United Natural Foods, Inc.(a) 345,618
3,693 Vitamin Shoppe, Inc.(a) 112,895
1,733 Weis Markets, Inc. 87,603
------------
4,523,460
------------
FOOD PRODUCERS - 2.1%
610 Alico, Inc. 18,452
4,336 Amplify Snack Brands, Inc.(a) 63,956
3,787 The Andersons, Inc. 134,590
8,676 B&G Foods, Inc. 418,183
4,931 Blue Buffalo Pet Products, Inc.(a) 115,089
20,826 Bunge Ltd. 1,231,858
4,515 Cal-Maine Foods, Inc.(b) 200,105
2,423 Calavo Growers, Inc. 162,341
24,480 Darling International, Inc.(a) 364,752
13,709 Dean Foods Co. 247,996
1,150 Farmer Bros Co.(a) 36,869
28,358 Flowers Foods, Inc. 531,712
4,797 Fresh Del Monte Produce, Inc. 261,101
277 Golden Enterprises, Inc. 1,997
1,073 Griffin Industrial Realty, Inc. 32,887
15,237 Hain Celestial Group, Inc.(a) 758,041
9,513 Herbalife Ltd.(a) 556,796
4,100 HQ Sustainable Maritime Industries, Inc.(a)(b) --
10,768 Ingredion, Inc. 1,393,487
2,190 J&J Snack Foods Corp. 261,201
1,422 John B Sanfilippo & Son, Inc. 60,620
2,973 Lancaster Colony Corp. 379,384
3,491 Lifevantage Corp.(a) 47,478
1,804 Lifeway Foods, Inc.(a) 17,445
2,404 Limoneira Co. 42,358
1,692 Lipocine, Inc.(a) 5,144
644 Mannatech, Inc.(a) 13,035
1,806 Medifast, Inc. 60,086
2,244 MGP Ingredients, Inc. 85,788
1,950 Nutraceutical International Corp.(a) 45,142
4,434 Nutrisystem, Inc. 112,446
3,642 Omega Protein Corp.(a) 72,804
2,839 Phibro Animal Health Corp., Class A 52,976
9,693 Pilgrim's Pride Corp. 246,978
16,714 Pinnacle Foods, Inc. 773,691
9,425 Post Holdings, Inc.(a) 779,353
414 Reliv International, Inc.(a) 257
2,724 Rocky Mountain Chocolate Factory, Inc. 27,649
2,865 Sanderson Farms, Inc. 248,224
38 Seaboard Corp.(a) 109,084
1,343 Seneca Foods Corp., Class A(a) 48,630
10,702 Snyders-Lance, Inc. 362,691
2,699 Tootsie Roll Industries, Inc. 103,992
8,338 TreeHouse Foods, Inc.(a) 855,896
877 USANA Health Sciences, Inc.(a) 97,724
26,610 WhiteWave Foods Co.(a) 1,249,073
------------
12,689,361
------------
FORESTRY & PAPER - 0.2%
2,737 Clearwater Paper Corp.(a) 178,918
1,749 Deltic Timber Corp. 117,410
9,827 Domtar Corp. 344,043
12,527 KapStone Paper and Packaging Corp. 162,976
6,229 Mercer International, Inc. 49,708
2,503 Neenah Paper, Inc. 181,142
6,319 PH Glatfelter Co. 123,600
12,838 Resolute Forest Products(a) 67,913
1,388 Veritiv Corp.(a) 52,161
------------
1,277,871
------------
GAS, WATER & MULTI-UTILITIES - 1.9%
5,470 American States Water Co. 239,695
26,323 Aqua America, Inc. 938,678
================================================================================
SCHEDULE OF INVESTMENTS | 39
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
1,250 Artesian Resources Corp., Class A $ 42,400
14,996 Atmos Energy Corp. 1,219,475
9,467 Avista Corp. 424,122
4,485 Cadiz, Inc.(a)(b) 26,327
7,033 California Water Service Group 245,663
2,272 Chesapeake Utilities Corp. 150,361
1,727 Connecticut Water Service, Inc. 97,057
1,302 Delta Natural Gas Co., Inc. 35,076
4,001 Gas Natural, Inc. 27,967
3,673 Genie Energy Ltd.(a) 24,866
2,966 Middlesex Water Co. 128,665
12,933 National Fuel Gas Co. 735,629
12,795 New Jersey Resources Corp. 493,247
3,904 Northwest Natural Gas Co. 253,057
7,517 ONE Gas, Inc. 500,557
11,797 Piedmont Natural Gas Co., Inc. 709,236
11,554 PNM Resources, Inc. 409,474
25,879 Questar Corp. 656,550
1,849 RGC Resources, Inc. 44,875
2,621 SJW Corp. 103,215
11,762 South Jersey Industries, Inc. 371,914
7,138 Southwest Gas Corp. 561,832
6,580 Spire, Inc. 466,127
25,767 UGI Corp. 1,165,957
12,237 Vectren Corp. 644,523
7,393 WGL Holdings, Inc. 523,351
1,717 York Water Co. 55,013
------------
11,294,909
------------
GENERAL INDUSTRIALS - 1.5%
8,768 Actuant Corp., Class A 198,244
774 AEP Industries, Inc. 62,276
9,486 AptarGroup, Inc. 750,627
14,201 Bemis Co., Inc. 731,209
17,837 Berry Plastics Group, Inc.(a) 692,967
9,575 Carlisle Cos., Inc. 1,011,886
21,093 Crown Holdings, Inc.(a) 1,068,782
3,673 Global Brass & Copper Holdings, Inc. 100,236
48,500 Graphic Packaging Holding Co. 608,190
3,901 Greif, Inc., Class A 145,390
1,169 Greif, Inc., Class B 64,003
11,862 Harsco Corp. 78,764
13,665 ITT, Inc. 437,007
4,881 Landec Corp.(a) 52,520
2,155 Multi-Color Corp. 136,627
3,762 Myers Industries, Inc. 54,173
5,434 Otter Tail Corp. 181,985
14,054 Packaging Corp. of America 940,634
5,522 Raven Industries, Inc. 104,587
14,887 Rexnord Corp.(a) 292,232
6,041 Silgan Holdings, Inc. 310,870
15,316 Sonoco Products Co. 760,593
6,652 TriMas Corp.(a) 119,736
1,471 UFP Technologies, Inc.(a) 33,156
------------
8,936,694
------------
GENERAL RETAILERS - 4.0%
4,286 1-800-Flowers.com, Inc., Class A(a) 38,660
9,518 Aaron's, Inc. 208,349
9,807 Abercrombie & Fitch Co., Class A 174,663
897 AMERCO, Inc. 335,971
1,386 America's Car-Mart, Inc.(a) 39,141
26,091 American Eagle Outfitters, Inc. 415,630
2,731 American Public Education, Inc.(a) 76,741
19,960 Antero Resources Corp.(a) 518,561
13,712 Apollo Education Group, Inc.(a) 125,053
3,284 Asbury Automotive Group, Inc.(a) 173,198
25,130 Ascena Retail Group, Inc.(a) 175,659
================================================================================
40 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,014 Autobytel, Inc.(a) $ 27,934
6,163 Barnes & Noble Education, Inc.(a) 62,554
8,898 Barnes & Noble, Inc. 100,992
8,828 Beacon Roofing Supply, Inc.(a) 401,409
2,684 Big 5 Sporting Goods Corp. 24,881
6,639 Big Lots, Inc. 332,680
1,962 Blue Nile, Inc. 53,720
2,228 Bon-Ton Stores, Inc. 3,141
777 Boot Barn Holdings, Inc.(a) 6,698
2,758 Bridgepoint Education, Inc.(a) 19,968
6,601 Bright Horizons Family Solutions, Inc.(a) 437,712
3,973 Buckle, Inc.(b) 103,258
2,727 Build-A-Bear Workshop, Inc.(a) 36,596
10,713 Burlington Stores, Inc.(a) 714,664
7,278 Cabela's, Inc.(a) 364,337
6,284 Caleres, Inc. 152,136
4,720 Cambium Learning Group, Inc.(a) 21,287
1,580 Capella Education Co. 83,171
10,687 Career Education Corp.(a) 63,588
3,000 Carriage Services, Inc. 71,040
3,894 Cato Corp., Class A 146,882
23,150 CDK Global, Inc. 1,284,593
8,886 Chegg, Inc.(a) 44,430
2,443 Chemed Corp. 333,005
20,490 Chico's FAS, Inc. 219,448
3,046 Children's Place Retail Stores, Inc. 244,228
6,159 Christopher & Banks Corp.(a) 13,488
2,593 Citi Trends, Inc. 40,269
11,329 Clean Energy Fuels Corp.(a) 39,312
1,741 Collectors Universe, Inc. 34,385
3,781 Conn's, Inc.(a)(b) 28,433
2,847 Container Store Group, Inc.(a) 15,231
14,839 Copart, Inc.(a) 727,259
11,043 CST Brands, Inc. 475,732
2,770 Destination Maternity Corp. 16,288
8,559 Destination XL Group, Inc.(a) 39,115
13,283 Dick's Sporting Goods, Inc. 598,532
3,545 Dillard's, Inc., Class A 214,827
10,606 DSW, Inc., Class A 224,635
7,906 EVINE Live, Inc.(a) 13,045
10,713 Express, Inc.(a) 155,446
6,356 Finish Line, Inc., Class A 128,328
8,038 Five Below, Inc.(a) 373,044
6,453 Francesca's Holdings Corp.(a) 71,306
4,994 Fred's, Inc., Class A 80,453
3,190 FTD Cos., Inc.(a) 79,622
3,595 Gaiam, Inc., Class A(a) 27,825
15,735 GameStop Corp., Class A 418,236
3,296 Genesco, Inc.(a) 211,966
7,107 Grand Canyon Education, Inc.(a) 283,711
3,316 Group 1 Automotive, Inc. 163,678
11,684 GrubHub, Inc.(a) 363,022
9,276 Guess?, Inc. 139,604
3,228 Haverty Furniture Cos., Inc. 58,201
3,484 Hibbett Sports, Inc.(a) 121,208
9,114 Hillenbrand, Inc. 273,785
15,421 Houghton Mifflin Harcourt Co.(a) 241,030
4,539 HSN, Inc. 222,093
4,668 ITT Educational Services, Inc.(a)(b) 8,963
45,165 JC Penney Co., Inc.(a) 401,065
4,637 K12, Inc.(a) 57,916
20,346 KAR Auction Services, Inc. 849,242
2,707 Kirkland's, Inc.(a) 39,739
2,707 Lands' End, Inc.(a)(b) 44,449
4,477 Liquidity Services, Inc.(a) 35,100
3,487 Lithia Motors, Inc., Class A 247,821
================================================================================
SCHEDULE OF INVESTMENTS | 41
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
4,057 Lumber Liquidators Holdings, Inc.(a)(b) $ 62,559
4,129 MarineMax, Inc.(a) 70,069
4,866 Matthews International Corp., Class A 270,744
3,155 Mattress Firm Holding Corp.(a)(b) 105,850
13,941 Michaels Cos., Inc.(a) 396,482
4,709 Monro Muffler Brake, Inc. 299,304
5,763 Murphy USA, Inc.(a) 427,384
72,051 Office Depot, Inc.(a) 238,489
2,738 Ollie's Bargain Outlet Holdings, Inc.(a) 68,149
2,756 Outerwall, Inc.(b) 115,752
2,766 Overstock.com, Inc.(a) 44,560
4,723 Party City Holdco, Inc.(a) 65,697
1,516 PCM, Inc.(a) 16,888
6,182 Penske Automotive Group, Inc. 194,486
1,362 Perfumania Holdings, Inc.(a) 3,296
12,905 Pier 1 Imports, Inc. 66,332
2,929 PriceSmart, Inc. 274,066
2,023 Providence Service Corp.(a) 90,792
5,145 RealNetworks, Inc.(a) 22,175
5,786 Regis Corp.(a) 72,036
7,864 Rent-A-Center, Inc. 96,570
5,536 Restoration Hardware Holdings, Inc.(a) 158,772
13,847 Rollins, Inc. 405,302
5,240 Rush Enterprises, Inc., Class A(a) 112,922
21,920 Sally Beauty Holdings, Inc.(a) 644,667
7,621 Sears Holdings Corp.(a)(b) 103,722
29,146 Service Corp. International 788,108
20,442 ServiceMaster Global Holdings, Inc.(a) 813,592
2,381 Shoe Carnival, Inc. 59,668
5,540 Shutterfly, Inc.(a) 258,219
8,832 SolarCity Corp.(a)(b) 211,350
4,835 Sonic Automotive, Inc., Class A 82,727
7,729 Sotheby's 211,775
2,950 SP Plus Corp.(a) 66,611
4,298 Sportsman's Warehouse Holdings, Inc.(a) 34,642
4,672 Stage Stores, Inc. 22,799
2,254 Stamps.com, Inc.(a) 197,045
4,383 Stein Mart, Inc. 33,837
1,653 Strayer Education, Inc.(a) 81,212
7,130 Tailored Brands, Inc. 90,266
4,824 Tile Shop Holdings, Inc.(a) 95,901
2,671 Titan Machinery, Inc.(a) 29,782
8,752 TrueCar, Inc.(a) 68,703
6,404 Tuesday Morning Corp.(a) 44,956
11,975 VCA, Inc.(a) 809,630
4,031 Weight Watchers International, Inc.(a)(b) 46,880
3,086 West Marine, Inc.(a) 25,892
12,296 Williams-Sonoma, Inc. 640,990
437 Winmark Corp. 43,556
2,839 Zumiez, Inc.(a) 40,626
------------
24,439,214
------------
HEALTH CARE EQUIPMENT & SERVICES - 5.1%
1,552 AAC Holdings, Inc.(a)(b) 35,417
3,253 Abaxis, Inc. 153,639
5,769 ABIOMED, Inc.(a) 630,494
10,503 Acadia Healthcare Co., Inc.(a) 581,866
12,884 Accuray, Inc.(a) 66,868
7,324 AdCare Health Systems, Inc. 13,476
1,286 Addus HomeCare Corp.(a) 22,415
1,896 Adeptus Health, Inc., Class A(a)(b) 97,947
5,272 Air Methods Corp.(a) 188,896
12,711 Alere, Inc.(a) 529,794
10,895 Align Technology, Inc.(a) 877,592
2,209 Alliance HealthCare Services, Inc.(a) 13,784
1,371 Almost Family, Inc.(a) 58,418
================================================================================
42 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
22,800 Alphatec Holdings, Inc.(a) $ 7,985
4,240 Amedisys, Inc.(a) 214,035
8,158 Amsurg Corp.(a) 632,571
1,873 Analogic Corp. 148,791
4,708 AngioDynamics, Inc.(a) 67,654
2,272 Anika Therapeutics, Inc.(a) 121,893
26,095 Antares Pharma, Inc.(a) 27,400
4,498 AtriCure, Inc.(a) 63,557
253 Atrion Corp. 108,249
1,640 AxoGen, Inc.(a) 11,283
3,109 Bio-Rad Laboratories, Inc., Class A(a) 444,649
11,125 Biolase, Inc.(a) 13,016
10,652 BioScrip, Inc.(a) 27,163
3,656 Biostage, Inc.(a) 4,168
4,630 BioTelemetry, Inc.(a) 75,469
7,643 Bovie Medical Corp.(a) 12,535
27,192 Brookdale Senior Living, Inc.(a) 419,844
16,447 Bruker Corp. 374,005
11,398 CalAtlantic Group, Inc. 418,421
5,470 Cantel Medical Corp. 375,953
4,670 Capital Senior Living Corp.(a) 82,519
4,419 Cardiovascular Systems, Inc.(a) 81,199
10,748 Cepheid, Inc.(a) 330,501
2,868 Civitas Solutions, Inc.(a) 59,740
13,771 Cogentix Medical, Inc.(a) 13,248
17,321 Community Health Systems, Inc.(a) 208,718
3,885 CONMED Corp. 185,431
7,351 Cooper Cos., Inc. 1,261,211
10,253 Corindus Vascular Robotics, Inc.(a)(b) 14,662
1,959 Corvel Corp.(a) 84,590
4,639 CryoLife, Inc. 54,787
3,451 Cutera, Inc.(a) 38,686
3,689 Cynosure, Inc., Class A(a) 179,451
864 CytoSorbents Corp.(a) 3,931
2,182 Derma Sciences, Inc.(a) 8,597
12,207 DexCom, Inc.(a) 968,381
3,562 Dextera Surgical, Inc.(a) 6,412
11,018 Endologix, Inc.(a) 137,284
6,892 Ensign Group, Inc. 144,801
28,340 Envision Healthcare Holdings, Inc.(a) 718,986
1,399 Escalon Medical Corp.(a) 951
2,338 Exactech, Inc.(a) 62,518
7,271 Five Star Quality Care, Inc.(a) 17,014
4,592 Fluidigm Corp.(a) 41,466
1,417 FONAR Corp.(a) 28,850
5,313 Genesis Healthcare, Inc.(a) 9,404
7,790 GenMark Diagnostics, Inc.(a) 67,773
1,601 Glaukos Corp.(a) 46,685
10,458 Globus Medical, Inc., Class A(a) 249,214
7,760 Haemonetics Corp.(a) 224,962
6,988 Halyard Health, Inc.(a) 227,250
10,637 Healthcare Services Group, Inc. 440,159
13,450 HealthSouth Corp. 522,129
3,976 HealthStream, Inc.(a) 105,443
5,011 Healthways, Inc.(a) 57,877
2,769 HeartWare International, Inc.(a) 159,910
8,276 Hill-Rom Holdings, Inc. 417,524
12,478 HMS Holdings Corp.(a) 219,738
639 Hooper Holmes, Inc.(a) 773
2,177 ICU Medical, Inc.(a) 245,457
13,385 IDEXX Laboratories, Inc.(a) 1,242,931
2,088 Inogen, Inc.(a) 104,630
8,659 Insulet Corp.(a) 261,848
4,336 Integra LifeSciences Holdings Corp.(a) 345,926
3,106 Intersect ENT, Inc.(a) 40,161
4,891 Invacare Corp. 59,328
10,725 Juno Therapeutics, Inc.(a) 412,269
4,001 K2M Group Holdings, Inc.(a) 62,096
12,162 Kindred Healthcare, Inc. 137,309
3,794 LDR Holding Corp.(a) 140,188
2,077 LHC Group, Inc.(a) 89,893
================================================================================
SCHEDULE OF INVESTMENTS | 43
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
6,433 LifePoint Hospitals, Inc.(a) $ 420,525
6,207 LivaNova PLC(a) 311,778
3,939 Magellan Health Services, Inc.(a) 259,068
6,979 Masimo Corp.(a) 366,502
14,189 MEDNAX, Inc.(a) 1,027,709
6,734 Meridian Bioscience, Inc. 131,313
7,010 Merit Medical Systems, Inc.(a) 139,008
5,992 Molina Healthcare, Inc.(a) 299,001
564 Natera, Inc.(a) 6,805
1,868 National Healthcare Corp. 120,934
5,169 Natus Medical, Inc.(a) 195,388
26,298 Navidea Biopharmaceuticals, Inc.(a)(b) 13,951
5,645 Neogen Corp.(a) 317,531
9,277 NeoGenomics, Inc.(a) 74,587
2,155 Nevro Corp.(a) 158,953
7,400 NuVasive, Inc.(a) 441,928
9,415 NxStage Medical, Inc.(a) 204,117
5,518 Omnicell, Inc.(a) 188,881
9,831 OraSure Technologies, Inc.(a) 58,101
3,072 Orthofix International NV(a) 130,253
9,148 Owens & Minor, Inc. 341,952
7,939 PAREXEL International Corp.(a) 499,204
696 Penumbra, Inc.(a) 41,412
4,613 PharMerica Corp.(a) 113,757
2,424 Psychemedics Corp. 33,306
4,975 Quidel Corp.(a) 88,853
4,330 Quorum Health Corp.(a) 46,374
5,911 RadNet, Inc.(a) 31,565
21,002 ResMed, Inc. 1,327,956
4,605 Retractable Technologies, Inc.(a) 11,605
7,565 Rockwell Medical, Inc.(a)(b) 57,267
10,112 RTI Surgical, Inc.(a) 36,302
1,779 SeaSpine Holdings Corp.(a) 18,644
15,096 Select Medical Holdings Corp.(a) 164,093
1,974 Spark Therapeutics, Inc.(a) 100,931
6,991 Spectranetics Corp.(a) 130,802
5,027 Staar Surgical Co.(a) 27,699
12,865 STERIS PLC 884,469
2,554 Surgery Partners, Inc.(a) 45,717
3,963 Surgical Care Affiliates, Inc.(a) 188,916
2,327 SurModics, Inc.(a) 54,638
2,920 Symmetry Surgical, Inc.(a) 38,340
2,209 T2 Biosystems, Inc.(a)(b) 17,429
3,670 Tandem Diabetes Care, Inc.(a) 27,672
10,634 Team Health Holdings, Inc.(a) 432,485
6,279 Teleflex, Inc. 1,113,329
14,770 Tenet Healthcare Corp.(a) 408,243
3,526 Triple-S Management Corp., Class B(a) 86,140
1,955 U.S. Physical Therapy, Inc. 117,711
2,413 Unilife Corp.(a)(b) 7,939
8,418 Universal American Corp. 63,808
860 Utah Medical Products, Inc. 54,180
3,038 Vascular Solutions, Inc.(a) 126,563
11,520 VWR Corp.(a) 332,928
6,434 WellCare Health Plans, Inc.(a) 690,239
10,534 West Pharmaceutical Services, Inc. 799,320
13,460 Wright Medical Group NV(a) 233,800
2,989 Zafgen, Inc.(a) 17,904
5,066 Zeltiq Aesthetics, Inc.(a) 138,454
------------
31,282,337
------------
HOUSEHOLD GOODS & HOME CONSTRUCTION - 1.5%
16,442 ACCO Brands Corp.(a) 169,846
1,739 Bassett Furniture Industries, Inc. 41,632
4,476 Beazer Homes USA, Inc.(a) 34,689
================================================================================
44 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
6,373 Briggs & Stratton Corp. $ 134,980
1,393 Cavco Industries, Inc.(a) 130,524
6,265 Central Garden and Pet Co., Class A(a) 136,013
1,034 Compx International, Inc. 11,891
1,729 Comstock Holdings Cos., Inc.(a) 3,078
2,900 Dixie Group, Inc.(a) 10,324
9,133 Edgewell Personal Care Co.(a) 770,917
9,214 Energizer Holdings, Inc. 474,429
3,943 Ethan Allen Interiors, Inc. 130,277
965 Flexsteel Industries, Inc. 38,233
2,823 Forward Industries, Inc.(a) 3,359
8,604 Herman Miller, Inc. 257,174
6,427 HNI Corp. 298,791
1,876 Hooker Furniture Corp. 40,315
21,351 Hovnanian Enterprises, Inc., Class A(a) 35,870
9,610 Interface, Inc. 146,552
4,579 iRobot Corp.(a) 160,631
13,093 KB Home 199,145
7,374 Knoll, Inc. 179,041
7,437 La-Z-Boy, Inc. 206,897
2,469 LGI Homes, Inc.(a) 78,860
3,627 Libbey, Inc. 57,633
2,050 Lifetime Brands, Inc. 29,909
4,013 M/I Homes, Inc.(a) 75,565
19,950 Manitowoc Foodservice, Inc.(a) 351,519
5,655 MDC Holdings, Inc. 137,643
5,485 Meritage Homes Corp.(a) 205,907
790 National Presto Industries, Inc. 74,536
560 NVR, Inc.(a) 996,990
1,129 Oil-Dri Corp. of America 38,984
7,005 Scotts Miracle-Gro Co., Class A 489,720
7,541 Select Comfort Corp.(a) 161,227
4,044 Spectrum Brands Holdings, Inc. 482,490
12,921 Steelcase, Inc., Class A 175,338
5,375 Taylor Morrison Home Corp., Class A(a) 79,765
9,200 Tempur Sealy International, Inc.(a) 508,944
22,796 Toll Brothers, Inc.(a) 613,440
22,019 TRI Pointe Group, Inc.(a) 260,265
7,258 Tupperware Brands Corp. 408,480
5,315 Virco Manufacturing Corp.(a) 23,120
3,640 Wayfair, Inc., Class A(a)(b) 141,960
3,484 WCI Communities, Inc.(a) 58,880
2,030 WD-40 Co. 238,423
3,017 William Lyon Homes, Class A(a) 48,634
------------
9,352,840
------------
INDUSTRIAL ENGINEERING - 2.6%
6,798 Accuride Corp.(a) 8,429
10,869 AGCO Corp. 512,256
1,409 Alamo Group, Inc. 92,952
4,299 Albany International Corp., Class A 171,659
4,066 Altra Industrial Motion Corp. 109,701
1,354 American Railcar Industries, Inc. 53,442
2,723 Astec Industries, Inc. 152,896
8,137 Babcock & Wilcox Enterprises, Inc.(a) 119,532
4,880 Broadwind Energy, Inc.(a) 20,594
4,277 Ceco Environmental Corp. 37,381
494 Chicago Rivet & Machine Co. 13,447
2,547 CIRCOR International, Inc. 145,153
7,187 CLARCOR, Inc. 437,185
14,850 Colfax Corp.(a) 392,931
2,933 Columbus McKinnon Corp. 41,502
5,294 Commercial Vehicle Group, Inc.(a) 27,529
7,274 Crane Co. 412,581
================================================================================
SCHEDULE OF INVESTMENTS | 45
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
18,884 Donaldson Co., Inc. $ 648,854
3,445 Douglas Dynamics, Inc. 88,640
2,800 Dynamic Materials Corp. 30,100
5,232 Energy Recovery, Inc.(a) 46,512
3,380 EnPro Industries, Inc. 150,038
9,098 Federal Signal Corp. 117,182
5,460 Franklin Electric Co., Inc. 180,453
1,751 FreightCar America, Inc. 24,602
6,015 GATX Corp. 264,479
2,838 Gorman-Rupp Co. 77,790
8,356 Graco, Inc. 660,040
1,902 Graham Corp. 35,035
3,912 Greenbrier Cos., Inc. 113,957
4,783 H&E Equipment Services, Inc. 91,020
3,297 Horizon Global Corp.(a) 37,421
1,373 Hurco Cos., Inc. 38,211
1,367 Hyster-Yale Materials Handling, Inc. 81,323
11,311 IDEX Corp. 928,633
4,305 John Bean Technologies Corp. 263,552
13,737 Joy Global, Inc. 290,400
1,829 Kadant, Inc. 94,212
11,461 Kennametal, Inc. 253,403
998 Key Technology, Inc.(a) 9,192
5,240 Kimball International, Inc., Class B 59,631
9,295 Lincoln Electric Holdings, Inc. 549,149
1,728 Lindsay Corp. 117,262
2,799 Lydall, Inc.(a) 107,929
2,717 Manitex International, Inc.(a)(b) 18,829
19,950 Manitowoc Co., Inc. 108,727
3,097 Materion Corp. 76,682
14,359 Meritor, Inc.(a) 103,385
1,937 MFRI, Inc.(a) 14,450
8,715 Middleby Corp.(a) 1,004,404
2,019 Miller Industries, Inc. 41,571
4,681 MSA Safety, Inc. 245,893
8,443 Mueller Industries, Inc. 269,163
799 NACCO Industries, Inc., Class A 44,744
9,906 Navistar International Corp.(a) 115,801
4,181 NN, Inc. 58,492
7,978 Nordson Corp. 667,041
10,857 Oshkosh Corp. 517,987
2,829 Paylocity Holding Corp.(a) 122,213
3,660 Proto Labs, Inc.(a) 210,670
7,892 Spartan Motors, Inc. 49,404
5,860 SPX Corp. 87,021
5,860 SPX FLOW, Inc.(a) 152,770
1,909 Standex International Corp. 157,741
3,481 Sun Hydraulics Corp. 103,351
2,625 Tennant Co. 141,409
16,794 Terex Corp. 341,086
10,204 Timken Co. 312,855
5,808 TimkenSteel Corp. 55,873
8,388 Toro Co. 739,822
22,496 Trinity Industries, Inc. 417,751
1,831 Twin Disc, Inc. 19,665
10,252 Wabash National Corp.(a) 130,200
13,510 Wabtec Corp. 948,807
8,136 Woodward, Inc. 468,959
------------
15,854,956
------------
INDUSTRIAL METALS & MINING - 0.6%
28,196 AK Steel Holding Corp.(a) 131,393
15,897 Allegheny Technologies, Inc. 202,687
1,955 Ampco-Pittsburgh Corp. 22,111
7,069 Carpenter Technology Corp. 232,782
7,937 Century Aluminum Co.(a) 50,241
20,973 Cliffs Natural Resources, Inc.(a)(b) 118,917
16,716 Commercial Metals Co. 282,501
2,787 Friedman Industries, Inc. 16,248
780 Handy & Harman Ltd.(a) 20,428
2,039 Haynes International, Inc. 65,411
2,591 Kaiser Aluminum Corp. 234,252
34,884 McEwen Mining, Inc. 134,303
================================================================================
46 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
1,597 Olympic Steel, Inc. $ 43,614
10,768 Reliance Steel & Aluminum Co. 828,059
35,590 Steel Dynamics, Inc. 871,955
2,147 Synalloy Corp. 16,446
21,089 United States Steel Corp. 355,561
1,302 Universal Stainless & Alloy Products, Inc.(a) 14,192
19,733 Uranium Energy Corp.(a) 17,322
6,908 Worthington Industries, Inc. 292,209
------------
3,950,632
------------
INDUSTRIAL TRANSPORTATION - 1.1%
14,293 Air Lease Corp. 382,767
8,433 Air Transport Services Group, Inc.(a) 109,292
9,055 Aircastle Ltd. 177,116
3,519 ArcBest Corp. 57,184
4,637 Ardmore Shipping Corp. 31,392
3,769 Atlas Air Worldwide Holdings, Inc.(a) 156,112
2,930 CAI International, Inc.(a) 21,975
4,175 Celadon Group, Inc. 34,110
2,275 Covenant Transportation Group, Inc., Class A(a) 41,109
4,008 Echo Global Logistics, Inc.(a) 89,859
4,502 Forward Air Corp. 200,474
1,209 FRP Holdings, Inc.(a) 41,710
1,779 Genco Shipping & Trading, Ltd.(a)(b) 1,014
8,719 Genesee & Wyoming, Inc., Class A(a) 513,985
9,094 Heartland Express, Inc. 158,145
5,287 Hub Group, Inc., Class A(a) 202,862
8,071 Kirby Corp.(a) 503,550
8,854 Knight Transportation, Inc. 235,339
6,328 Landstar System, Inc. 434,480
11,196 Macquarie Infrastructure Corp. 829,064
3,567 Marten Transport Ltd. 70,627
6,683 Matson, Inc. 215,794
10,218 Old Dominion Freight Line, Inc.(a) 616,248
659 PAM Transportation Services, Inc.(a) 10,471
627 Patriot Transportation Holding, Inc.(a) 12,195
7,484 PHH Corp.(a) 99,687
5,032 Rand Logistics, Inc.(a) 5,183
4,706 Roadrunner Transportation Systems, Inc.(a) 35,107
3,715 Saia, Inc.(a) 93,395
13,364 Swift Transportation Co.(a) 205,939
4,790 TAL International Group, Inc. 64,234
6,907 Teekay Corp. 49,247
3,736 Textainer Group Holdings Ltd. 41,619
1,233 Universal Truckload Services, Inc. 15,906
1,622 USA Truck, Inc.(a) 28,401
6,158 Werner Enterprises, Inc. 141,449
7,931 Wesco Aircraft Holdings, Inc.(a) 106,434
1,351 Willis Lease Finance Corp.(a) 30,033
10,630 World Fuel Services Corp. 504,819
13,650 XPO Logistics, Inc.(a)(b) 358,449
4,920 YRC Worldwide, Inc.(a) 43,296
------------
6,970,072
------------
LEISURE GOODS - 0.8%
2,143 Arctic Cat, Inc. 36,431
4,738 Black Diamond, Inc.(a) 19,615
13,523 Brunswick Corp. 612,862
12,565 Callaway Golf Co. 128,289
3,649 Drew Industries, Inc. 309,581
2,922 DTS, Inc.(a) 77,287
6,958 Eastman Kodak Co.(a) 111,884
2,070 Escalade, Inc. 21,197
8,249 Fitbit, Inc., Series A(a) 100,803
================================================================================
SCHEDULE OF INVESTMENTS | 47
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,854 Fox Factory Holding Corp.(a) $ 49,574
17,785 Glu Mobile, Inc.(a) 39,127
11,137 GoPro, Inc., Class A(a)(b) 120,391
3,744 Malibu Boats, Inc.(a) 45,227
2,700 Marine Products Corp. 22,842
4,821 Nautilus, Inc.(a) 86,007
9,046 Polaris Industries, Inc. 739,601
6,307 Pool Corp. 593,047
3,869 Skullcandy, Inc.(a) 23,756
12,772 Take-Two Interactive Software, Inc.(a) 484,314
7,042 Thor Industries, Inc. 455,899
15,413 TiVo, Inc.(a) 152,589
2,235 Universal Electronics, Inc.(a) 161,546
9,401 Vista Outdoor, Inc.(a) 448,710
4,162 Winnebago Industries, Inc. 95,393
990 Zedge, Inc., Class B(a) 4,544
------------
4,940,516
------------
LIFE INSURANCE - 0.3%
11,676 American Equity Investment Life Holding Co. 166,383
3,104 AMERISAFE, Inc. 190,027
2,927 Atlantic American Corp. 11,006
8,213 Citizens, Inc.(a)(b) 62,419
26,587 CNO Financial Group, Inc. 464,209
2,920 eHealth, Inc.(a) 40,938
4,842 Employers Holdings, Inc. 140,515
1,432 FBL Financial Group, Inc., Class A 86,879
72,971 Genworth Financial, Inc., Class A(a) 188,265
1,686 Independence Holding Co. 30,297
341 National Western Life Group, Inc. 66,587
7,153 Primerica, Inc. 409,438
------------
1,856,963
------------
MEDIA - 5.3%
11,802 Acxiom Corp.(a) 259,526
3,599 AH Belo Corp. 17,995
9,120 AMC Networks, Inc., Class A(a) 551,030
2,129 Ascent Capital Group, Inc., Class A(a) 32,765
5,767 Avid Technology, Inc.(a) 33,506
8,691 Bankrate, Inc.(a) 65,009
784 Beasley Broadcasting Group, Inc., Class A 3,301
666 Cable One, Inc. 340,599
32,299 Charter Communications, Inc.(a) 7,384,843
5,624 Clear Channel Outdoor Holdings, Inc., Class A 34,981
7,063 ComScore, Inc.(a) 168,664
1,461 CSS Industries, Inc. 39,169
50 CTN Media Group, Inc.(a) --
25,485 Cumulus Media, Inc., Class A(a) 7,900
33,879 DISH Network Corp., Class A(a) 1,775,260
7,942 Dolby Laboratories, Inc., Class A 380,025
10,491 DreamWorks Animation SKG, Inc., Class A(a) 428,767
10,615 Emmis Communications Corp., Class A(a) 7,722
4,346 Entercom Communications Corp., Class A 58,975
8,669 Entravision Communications Corp., Class A 58,256
8,572 EW Scripps Co.(a) 135,781
6,094 FactSet Research Systems, Inc. 983,694
16,769 Gannett Co., Inc. 231,580
7,875 Global Eagle Entertainment, Inc.(a) 52,290
660 Graham Holdings Co., Class B 323,096
10,007 Gray Television, Inc.(a) 108,576
63,105 Groupon, Inc.(a) 205,091
6,749 Harte-Hanks, Inc. 10,731
================================================================================
48 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
10,064 IHS, Inc., Class A(a) $ 1,163,499
7,267 John Wiley & Sons, Inc., Class A 379,192
12,357 Lamar Advertising Co., Class A 819,269
12,326 Lee Enterprises, Inc.(a) 23,543
42,550 Liberty Global PLC, Class A(a) 1,236,503
97,562 Liberty Global PLC, Class C(a) 2,795,151
7,847 Liberty Global PLC LiLAC, Class A(a) 253,142
16,978 Liberty Global PLC LiLAC, Class C(a) 551,605
67,482 Liberty Interactive Corp QVC Group, Series A(a) 1,712,018
3,856 Liberty Media Group, Class A(a) 73,804
7,389 Liberty Media Group, Class C(a) 140,169
14,588 Liberty SiriusXM Group, Class A(a) 457,480
29,557 Liberty SiriusXM Group, Class C(a) 912,425
20,640 Liberty Ventures, Series A(a) 765,125
14,068 Lions Gate Entertainment Corp. 284,596
21,752 Live Nation Entertainment, Inc.(a) 511,172
5,246 Marchex, Inc., Class B(a) 16,682
1,090 McClatchy Co., Class A(a) 15,936
14,375 Media General, Inc.(a) 247,106
5,493 Meredith Corp. 285,142
2,699 Morningstar, Inc. 220,724
9,210 MSG Networks, Inc., Class A(a) 141,281
9,730 National CineMedia, Inc. 150,620
6,330 New Media Investment Group, Inc. 114,383
18,334 New York Times Co., Class A 221,841
4,695 Nexstar Broadcasting Group, Inc., Class A 223,388
20,371 Outfront Media, Inc. 492,367
29,602 Pandora Media, Inc.(a) 368,545
7,427 QuinStreet, Inc.(a) 26,366
10,529 Quotient Technology, Inc.(a)(b) 141,194
1,421 Remark Media, Inc.(a)(b) 6,025
5,483 RetailMeNot, Inc.(a) 42,274
3,761 Rubicon Project, Inc.(a) 51,338
1,046 Saga Communications, Inc., Class A 41,359
3,775 Scholastic Corp. 149,528
10,372 Sinclair Broadcast Group, Inc., Class A 309,708
311,083 Sirius XM Holdings, Inc.(a) 1,228,778
3,896 Sizmek, Inc.(a) 8,922
1,474 Spanish Broadcasting System, Inc.(a) 5,247
3,165 SPAR Group, Inc.(a) 3,323
12,237 Starz, Class A(a) 366,131
3,655 TechTarget, Inc.(a) 29,606
16,585 TheStreet, Inc. 18,741
15,923 Time, Inc. 262,093
11,990 Tribune Media Co., Class A 469,768
3,616 TRONC, Inc. 49,901
2,942 TubeMogul, Inc.(a) 35,010
1,830 Value Line, Inc. 29,921
5,811 WebMD Health Corp.(a) 337,677
4,167 XO Group, Inc.(a) 72,631
8,383 Yelp, Inc.(a) 254,508
------------
32,215,889
------------
MINING - 0.5%
9,192 Cloud Peak Energy, Inc.(a) 18,936
20,713 Coeur Mining, Inc.(a) 220,801
5,190 Compass Minerals International, Inc. 385,046
34,380 CONSOL Energy, Inc. 553,174
9,888 Fairmount Santrol Holdings, Inc.(a) 76,236
21,436 General Moly, Inc.(a) 7,395
2,918 Gold Resource Corp. 10,476
9,302 Golden Minerals Co.(a)(b) 6,057
================================================================================
SCHEDULE OF INVESTMENTS | 49
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
58,333 Hecla Mining Co. $ 297,498
2,249 Pershing Gold Corp.(a)(b) 9,648
9,624 Royal Gold, Inc. 693,121
15,315 Solitario Exploration & Royalty Corp.(a) 7,971
18,398 Stillwater Mining Co.(a) 218,200
9,743 SunCoke Energy, Inc. 56,704
9,412 U.S. Silica Holdings, Inc. 324,432
3,275 Westmoreland Coal Co.(a) 31,178
------------
2,916,873
------------
MOBILE TELECOMMUNICATIONS - 0.9%
1,577 ATN International, Inc. 122,706
39,879 Globalstar, Inc.(a)(b) 48,254
12,372 Iridium Communications, Inc.(a) 109,863
14,857 NII Holdings, Inc.(a) 47,245
10,768 ORBCOMM, Inc.(a) 107,142
1,832 pdvWireless, Inc.(a) 39,187
18,760 SBA Communications Corp., Class A(a) 2,024,954
6,758 Shenandoah Telecommunications Co. 263,968
3,740 Spok Holdings, Inc. 71,677
116,574 Sprint Corp.(a) 528,080
41,537 T-Mobile U.S., Inc.(a) 1,797,306
14,543 Telephone & Data Systems, Inc. 431,345
15,223 Towerstream Corp.(a) 2,557
1,710 United States Cellular Corp.(a) 67,152
------------
5,661,436
------------
NONLIFE INSURANCE - 3.5%
2,323 Alleghany Corp.(a) 1,276,674
13,854 Allied World Assurance Co. Holdings AG 486,830
6,380 Ambac Financial Group, Inc.(a) 105,015
10,754 American Financial Group, Inc. 795,043
1,391 American National Insurance Co. 157,392
12,162 AmTrust Financial Services, Inc. 297,969
18,353 Arch Capital Group Ltd.(a) 1,321,416
4,567 Argo Group International Holdings Ltd. 237,027
9,312 Aspen Insurance Holdings Ltd. 431,891
19,922 Assured Guaranty Ltd. 505,421
13,888 Axis Capital Holdings Ltd. 763,840
2,261 Baldwin & Lyons, Inc., Class B 55,756
17,387 Brown & Brown, Inc. 651,491
4,047 CNA Financial Corp. 127,157
2,337 Donegal Group, Inc., Class A 38,537
1,652 EMC Insurance Group, Inc. 45,793
9,278 Endurance Specialty Holdings Ltd. 623,111
1,736 Enstar Group Ltd.(a) 281,215
3,611 Erie Indemnity Co., Class A 358,717
6,331 Everest Re Group Ltd. 1,156,484
2,537 Federated National Holding Co. 48,304
8,599 First Acceptance Corp.(a) 12,039
16,507 First American Financial Corp. 663,912
1,701 Global Indemnity PLC(a) 46,829
5,039 Greenlight Capital Re Ltd.(a) 101,586
6,561 Hanover Insurance Group, Inc. 555,192
1,768 HCI Group, Inc. 48,231
4,282 Heritage Insurance Holdings, Inc. 51,256
12,181 Hilltop Holdings, Inc.(a) 255,679
6,108 Horace Mann Educators Corp. 206,389
1,707 Infinity Property & Casualty Corp. 137,687
1,976 James River Group Holdings Ltd. 67,105
7,077 Kemper Corp. 219,245
================================================================================
50 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
8,614 Maiden Holdings Ltd. $ 105,435
2,090 Markel Corp.(a) 1,991,310
21,248 MBIA, Inc.(a) 145,124
3,553 Mercury General Corp. 188,877
9,047 National General Holdings Corp. 193,787
1,300 National Interstate Corp. 39,325
1,797 Navigators Group, Inc. 165,270
36,839 Old Republic International Corp. 710,624
3,598 OneBeacon Insurance Group Ltd. 49,652
1,044 Prism Technologies Group, Inc.(a) 279
7,994 ProAssurance Corp. 428,079
9,568 Reinsurance Group of America, Inc. 928,000
6,409 RenaissanceRe Holdings Ltd. 752,673
5,503 RLI Corp. 378,496
2,336 Safety Insurance Group, Inc. 143,851
8,303 Selective Insurance Group, Inc. 317,258
2,450 State Auto Financial Corp. 53,680
5,202 State National Cos., Inc. 54,777
9,561 Third Point Reinsurance Ltd.(a) 112,055
3,306 United Fire Group, Inc. 140,274
3,080 United Insurance Holdings Corp. 50,450
4,997 Universal Insurance Holdings, Inc. 92,844
12,433 Validus Holdings Ltd. 604,119
14,911 W.R. Berkley Corp. 893,467
766 White Mountains Insurance Group Ltd. 644,972
------------
21,314,911
------------
OIL & GAS PRODUCERS - 2.1%
16,317 Abraxas Petroleum Corp.(a) 18,438
460 Adams Resources & Energy, Inc. 17,710
4,552 Alon USA Energy, Inc. 29,497
5,719 Approach Resources, Inc.(a) 12,010
4,904 Barnwell Industries, Inc.(a) 7,601
7,950 Bill Barrett Corp.(a) 50,800
6,854 Bonanza Creek Energy, Inc.(a)(b) 13,777
7,389 C&J Energy Services Ltd.(a)(b) 4,450
4,626 California Resources Corp. 56,437
18,790 Callon Petroleum Co.(a) 211,012
8,650 Carrizo Oil & Gas, Inc.(a) 310,102
35,665 Cheniere Energy, Inc.(a) 1,339,221
984 Clayton Williams Energy, Inc.(a)(b) 27,021
50,294 Cobalt International Energy, Inc.(a) 67,394
7,198 Comstock Resources, Inc.(a) 6,048
3,254 Contango Oil & Gas Co.(a) 39,829
12,172 Continental Resources, Inc.(a) 551,026
2,373 CVR Energy, Inc. 36,781
5,308 Dawson Geophysical Co.(a) 43,260
8,207 Delek U.S. Holdings, Inc. 108,414
51,927 Denbury Resources, Inc. 186,418
10,779 Diamondback Energy, Inc.(a) 983,153
7,534 Eclipse Resources Corp.(a) 25,164
14,564 Energen Corp. 702,130
5,570 EP Energy Corp., Class A(a) 28,853
2,473 Era Group, Inc.(a) 23,246
5,834 Evolution Petroleum Corp. 31,912
28,887 EXCO Resources, Inc.(a) 37,553
14,658 Gastar Exploration, Inc.(a) 16,124
18,469 Gulfport Energy Corp.(a) 577,341
12,564 Halcon Resources Corp.(a)(b) 5,830
9,380 Harvest Natural Resources, Inc.(a) 7,832
================================================================================
SCHEDULE OF INVESTMENTS | 51
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
27,229 HollyFrontier Corp. $ 647,233
5,104 Houston American Energy Corp.(a)(b) 1,133
299 Isramco, Inc.(a)(b) 24,593
21,898 Kosmos Energy Ltd.(a) 119,344
18,495 Laredo Petroleum, Inc.(a) 193,828
3,259 Magellan Petroleum Corp.(a) 3,846
11,961 Matador Resources Co.(a) 236,828
14,621 Memorial Resource Development Corp.(a) 232,181
42,757 Nabors Industries Ltd. 429,708
8,538 Northern Oil and Gas, Inc.(a) 39,446
26,353 Oasis Petroleum, Inc.(a) 246,137
3,564 Pacific Ethanol, Inc.(a) 19,424
3,171 Panhandle Oil and Gas, Inc. 52,861
21,715 Parsley Energy, Inc., Class A(a) 587,608
14,864 PBF Energy, Inc., Class A 353,466
6,819 PDC Energy, Inc.(a) 392,843
2,933 PetroQuest Energy, Inc.(a) 9,767
10,165 Pioneer Energy Services Corp.(a) 46,759
28,652 QEP Resources, Inc. 505,135
5,282 Resolute Energy Corp.(a) 15,688
7,757 Rex Energy Corp.(a) 5,124
4,792 Ring Energy, Inc.(a) 42,265
11,114 RSP Permian, Inc.(a) 387,767
8,884 Sanchez Energy Corp.(a) 62,721
6,506 SemGroup Corp., Class A 211,835
10,043 SM Energy Co. 271,161
854 Stone Energy Corp.(a) 10,299
2,214 Syntroleum Corp.(a) -
24,424 Targa Resources Corp. 1,029,227
5,009 Torchlight Energy Resources, Inc.(a) 2,755
2,960 Trecora Resources(a) 30,873
11,728 Triangle Petroleum Corp.(a) 3,367
10,701 VAALCO Energy, Inc.(a) 11,343
5,629 W&T Offshore, Inc.(a)(b) 13,059
10,390 Western Refining, Inc. 214,346
30,214 Whiting Petroleum Corp.(a) 279,782
42,043 WPX Energy, Inc.(a) 391,420
14,230 Zion Oil & Gas, Inc.(a) 19,780
------------
12,721,336
------------
OIL EQUIPMENT, SERVICES & DISTRIBUTION - 1.3%
10,345 Archrock, Inc. 97,450
8,556 Atwood Oceanics, Inc. 107,121
7,015 Basic Energy Services, Inc.(a) 11,785
5,197 Bristow Group, Inc. 59,298
2,969 CARBO Ceramics, Inc. 38,894
4,432 Chart Industries, Inc.(a) 106,944
6,288 Core Laboratories NV 779,020
17,287 Dakota Plains Holdings, Inc.(a) 1,902
5,798 Dril-Quip, Inc.(a) 338,777
44,868 Ensco PLC, Class A 435,668
5,172 Exterran Corp.(a) 66,460
8,081 Flotek Industries, Inc.(a) 106,669
10,079 Forum Energy Technologies, Inc.(a) 174,468
5,565 Frank's International NV 81,305
2,032 Geospace Technologies Corp.(a) 33,264
7,230 Glori Energy, Inc.(a) 1,627
2,513 Gulf Island Fabrication, Inc. 17,440
4,514 Gulfmark Offshore, Inc., Class A(a) 14,129
14,959 Helix Energy Solutions Group, Inc.(a) 101,123
5,026 Hornbeck Offshore Services, Inc.(a) 41,917
1,418 ION Geophysical Corp.(a) 8,834
21,036 Key Energy Services, Inc.(a) 4,878
4,118 Matrix Service Co.(a) 67,906
35,472 McDermott International, Inc.(a) 175,232
4,047 Mitcham Industries, Inc.(a) 15,176
================================================================================
52 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
15,474 MRC Global, Inc.(a) $ 219,886
2,730 Natural Gas Services Group, Inc.(a) 62,517
13,319 Newpark Resources, Inc.(a) 77,117
35,223 Noble Corp. PLC 290,238
16,086 NOW, Inc.(a) 291,800
14,456 Oceaneering International, Inc. 431,656
30,032 OGE Energy Corp. 983,548
7,588 Oil States International, Inc.(a) 249,493
3,939 Par Pacific Holdings, Inc.(a) 60,424
19,733 Parker Drilling Co.(a) 45,189
21,569 Patterson-UTI Energy, Inc. 459,851
1,452 PHI, Inc.(a) 25,962
18,179 Rowan Cos. PLC, Class A 321,041
9,161 RPC, Inc. 142,270
2,530 SEACOR Holdings, Inc.(a) 146,614
22,046 Superior Energy Services, Inc. 405,867
6,257 Tesco Corp. 41,859
12,273 TETRA Technologies, Inc.(a) 78,179
6,879 Tidewater, Inc. 30,336
7,562 Unit Corp.(a) 117,665
132,004 Weatherford International PLC(a) 732,622
9,067 Willbros Group, Inc.(a) 22,940
------------
8,124,361
------------
PERSONAL GOODS - 1.2%
62,759 Avon Products, Inc. 237,229
7,612 Carter's, Inc. 810,450
1,956 Cherokee, Inc.(a) 21,731
4,523 Columbia Sportswear Co. 260,253
10,484 Coty, Inc., Class A(b) 272,479
11,409 Crocs, Inc.(a) 128,693
1,628 Culp, Inc. 44,982
4,841 Deckers Outdoor Corp.(a) 278,454
4,198 Elizabeth Arden, Inc.(a) 57,764
6,075 Fossil Group, Inc.(a) 173,320
5,912 G-III Apparel Group Ltd.(a) 270,297
4,169 Helen of Troy Ltd.(a) 428,740
7,394 Iconix Brand Group, Inc.(a) 49,983
2,513 Inter Parfums, Inc. 71,796
19,026 Kate Spade & Co.(a) 392,126
2,101 Lakeland Industries, Inc.(a) 18,216
16,213 lululemon athletica, Inc.(a) 1,197,492
2,476 Movado Group, Inc. 53,680
8,367 Nu Skin Enterprises, Inc., Class A 386,472
1,530 Orchids Paper Products Co. 54,422
2,185 Oxford Industries, Inc. 123,715
2,072 Perry Ellis International, Inc.(a) 41,689
1,899 Revlon, Inc., Class A(a) 61,110
1,306 Rocky Brands, Inc. 14,915
4,739 Sequential Brands Group, Inc.(a) 37,817
19,809 Skechers U.S.A., Inc., Class A(a) 588,723
8,495 Steven Madden Ltd.(a) 290,359
8,676 Tumi Holdings, Inc.(a) 231,996
2,485 Unifi, Inc.(a) 67,667
3,075 Vera Bradley, Inc.(a) 43,573
2,985 Vince Holding Corp.(a) 16,358
1,357 Weyco Group, Inc. 37,697
15,101 Wolverine World Wide, Inc. 306,852
------------
7,071,050
------------
PHARMACEUTICALS & BIOTECHNOLOGY - 5.0%
13,397 ACADIA Pharmaceuticals, Inc.(a) 434,867
3,723 Accelerate Diagnostics, Inc.(a) 53,574
5,084 Acceleron Pharma, Inc.(a) 172,754
6,998 AcelRx Pharmaceuticals, Inc.(a) 18,825
17,165 Achillion Pharmaceuticals, Inc.(a) 133,887
================================================================================
SCHEDULE OF INVESTMENTS | 53
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
273 Aclaris Therapeutics, Inc.(a) $ 5,042
6,291 Acorda Therapeutics, Inc.(a) 160,452
3,204 Acura Pharmaceuticals, Inc.(a) 5,927
2,439 Adamas Pharmaceuticals, Inc.(a) 36,926
4,970 Adamis Pharmaceuticals Corp.(a) 13,916
520 Aduro Biotech, Inc.(a) 5,881
4,185 Advaxis, Inc.(a)(b) 33,857
2,724 Adverum Biotechnologies, Inc.(a) 8,608
4,608 Aegerion Pharmaceuticals, Inc.(a) 6,866
4,225 Aerie Pharmaceuticals, Inc.(a) 74,360
11,520 Agenus, Inc.(a) 46,656
3,858 Agios Pharmaceuticals, Inc.(a) 161,631
856 Aimmune Therapeutics, Inc.(a) 9,262
5,628 Akebia Therapeutics, Inc.(a) 42,097
12,104 Akorn, Inc.(a) 344,782
4,097 Albany Molecular Research, Inc.(a) 55,064
6,378 Alder Biopharmaceuticals, Inc.(a) 159,259
2,978 Aldeyra Therapeutics, Inc.(a)(b) 16,945
7,469 Alimera Sciences, Inc.(a) 9,187
22,579 Alkermes PLC(a) 975,864
11,123 Alnylam Pharmaceuticals, Inc.(a) 617,215
5,495 AMAG Pharmaceuticals, Inc.(a) 131,440
17,896 Amicus Therapeutics, Inc.(a) 97,712
5,565 Amphastar Pharmaceuticals, Inc.(a) 89,708
8,902 Ampio Pharmaceuticals, Inc.(a)(b) 11,484
3,648 Anavex Life Sciences Corp.(a)(b) 22,289
1,215 ANI Pharmaceuticals, Inc.(a) 67,821
5,522 Anthera Pharmaceuticals, Inc.(a) 17,063
2,151 Applied Genetic Technologies Corp.(a) 30,394
12,376 Apricus Biosciences, Inc.(a) 4,944
895 Aquinox Pharmaceuticals, Inc.(a) 5,925
4,787 Aratana Therapeutics, Inc.(a) 30,254
36,143 Arena Pharmaceuticals, Inc.(a) 61,805
28,457 Ariad Pharmaceuticals, Inc.(a) 210,297
14,883 ArQule, Inc.(a) 28,278
20,224 Array BioPharma, Inc.(a) 71,997
9,457 Arrowhead Pharmaceuticals, Inc.(a)(b) 50,311
2,704 Assembly Biosciences, Inc.(a) 15,007
2,508 Atara Biotherapeutics, Inc.(a) 56,455
16,987 Athersys, Inc.(a)(b) 36,862
13,305 AVEO Pharmaceuticals, Inc.(a) 12,787
9,180 Aviragen Therapeutics, Inc.(a) 12,852
16,724 Bio-Path Holdings, Inc.(a) 33,281
5,650 Bio-Techne Corp. 637,150
10,728 BioCryst Pharmaceuticals, Inc.(a) 30,468
8,009 BioDelivery Sciences International, Inc.(a)(b) 18,901
24,231 BioMarin Pharmaceutical, Inc.(a) 1,885,172
943 Biospecifics Technologies Corp.(a) 37,663
9,573 Biotime, Inc.(a)(b) 24,986
5,386 Bluebird Bio, Inc.(a) 233,160
================================================================================
54 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,540 Calithera Biosciences, Inc.(a) $ 9,423
1,665 Capricor Therapeutics, Inc.(a) 6,577
1,704 Cara Therapeutics, Inc.(a) 8,196
3,615 Carbylan Therapeutics, Inc.(a) 2,395
15,224 Cascadian Therapeutics, Inc.(a) 14,358
7,740 CASI Pharmaceuticals, Inc.(a) 9,056
14,925 Catalent, Inc.(a) 343,126
12,442 Catalyst Pharmaceutical, Inc.(a) 8,834
21,543 CEL-SCI Corp.(a) 9,910
4,755 Celator Pharmaceuticals, Inc.(a) 143,506
14,541 Celldex Therapeutics, Inc.(a) 63,835
1,597 Cellular Biomedicine Group, Inc.(a)(b) 19,148
6,547 Cempra, Inc.(a) 107,960
15,994 Cerus Corp.(a) 99,803
7,089 Charles River Laboratories International, Inc.(a) 584,417
321 Chiasma, Inc.(a)(b) 928
6,230 Chimerix, Inc.(a) 24,484
2,800 Cleveland BioLabs, Inc.(a) 7,896
4,926 Clovis Oncology, Inc.(a) 67,585
1,824 Coherus Biosciences, Inc.(a) 30,807
1,959 Collegium Pharmaceutical, Inc.(a) 23,214
2,663 Concert Pharmaceuticals, Inc.(a) 29,905
5,453 ContraVir Pharmaceuticals, Inc.(a)(b) 5,671
6,152 Corbus Pharmaceuticals Holdings, Inc.(a) 18,394
12,029 Corcept Therapeutics, Inc.(a) 65,678
7,588 CorMedix, Inc.(a)(b) 15,100
26,414 CTI BioPharma Corp.(a) 8,981
4,500 Cumberland Pharmaceuticals, Inc.(a) 20,250
19,155 Curis, Inc.(a) 29,882
6,535 Cytokinetics, Inc.(a) 62,017
374 CytomX Therapeutics, Inc.(a) 3,820
2,594 Cytori Therapeutics, Inc.(a) 5,421
9,758 CytRx Corp.(a)(b) 21,760
9,157 Depomed, Inc.(a) 179,660
2,843 Dermira, Inc.(a) 83,158
2,670 Dicerna Pharmaceuticals, Inc.(a) 8,010
19,556 Durect Corp.(a) 23,858
21,860 Dyax Corp. 24,265
6,009 Dynavax Technologies Corp.(a) 87,611
1,453 Eagle Pharmaceuticals, Inc.(a) 56,362
477 Edge Therapeutics, Inc.(a) 4,822
911 Editas Medicine, Inc.(a)(b) 22,228
613 Egalet Corp.(a)(b) 3,040
304 Eiger Biopharmaceuticals, Inc.(a) 6,025
4,498 Emergent Biosolutions, Inc.(a) 126,484
2,059 Enanta Pharmaceuticals, Inc.(a) 45,401
7,477 Endocyte, Inc.(a) 24,001
8,028 Enzo Biochem, Inc.(a) 47,927
6,286 Epizyme, Inc.(a) 64,369
2,194 Esperion Therapeutics, Inc.(a) 21,677
14,395 Exact Sciences Corp.(a) 176,339
30,516 Exelixis, Inc.(a) 238,330
4,030 Fate Therapeutics, Inc.(a) 6,851
4,586 Fibrocell Science, Inc.(a) 5,274
7,203 FibroGen, Inc.(a) 118,201
3,699 Five Prime Therapeutics, Inc.(a) 152,954
493 Flex Pharma, Inc.(a) 5,034
1,752 Flexion Therapeutics, Inc.(a) 26,219
6,807 Fortress Biotech, Inc.(a) 18,311
2,028 Foundation Medicine, Inc.(a) 37,842
27,712 Galena Biopharma, Inc.(a)(b) 12,917
================================================================================
SCHEDULE OF INVESTMENTS | 55
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
3,917 Genocea Biosciences, Inc.(a) $ 16,060
2,857 Genomic Health, Inc.(a) 73,982
8,267 GenVec, Inc.(a) 4,735
25,126 Geron Corp.(a) 67,338
1,338 Global Blood Therapeutics, Inc.(a) 22,197
17,845 GTx, Inc.(a) 9,815
16,253 Halozyme Therapeutics, Inc.(a) 140,263
6,840 Harvard Bioscience, Inc.(a) 19,562
2,991 Heat Biologics, Inc.(a) 2,124
68,726 Hemispherx Biopharma, Inc.(a) 7,917
4,649 Heron Therapeutics, Inc.(a) 83,914
1,354 Histogenics Corp.(a)(b) 2,315
21,184 Horizon Pharma PLC(a) 348,900
21,015 iBio, Inc.(a) 15,131
15,546 Idera Pharmaceuticals, Inc.(a)(b) 23,785
3,804 Ignyta, Inc.(a) 20,618
1,494 Immune Design Corp.(a) 12,191
12,865 ImmunoGen, Inc.(a) 39,624
17,696 Immunomedics, Inc.(a)(b) 41,055
9,869 Impax Laboratories, Inc.(a) 284,425
6,070 INC Research Holdings, Inc., Class A(a) 231,449
25,424 Incyte Corp.(a) 2,033,412
7,013 Infinity Pharmaceuticals, Inc.(a) 9,327
12,381 Innoviva, Inc. 130,372
1,292 Inotek Pharmaceuticals Corp.(a) 9,612
10,866 Inovio Pharmaceuticals, Inc.(a) 100,402
9,141 Insmed, Inc.(a) 90,130
3,557 Insys Therapeutics, Inc.(a)(b) 46,028
2,543 Intercept Pharmaceuticals, Inc.(a) 362,835
7,312 Intrexon Corp.(a)(b) 179,948
1,860 Invitae Corp.,(a)(b) 13,745
5,769 InVivo Therapeutics Holdings Corp.(a) 33,345
18,154 Ionis Pharmaceuticals, Inc.(a) 422,807
19,090 Ironwood Pharmaceuticals, Inc.(a) 249,602
15,938 IsoRay, Inc.(a) 13,866
9,029 Jazz Pharmaceuticals PLC(a) 1,275,888
2,517 Juniper Pharmaceuticals, Inc.(a) 17,644
3,090 Karyopharm Therapeutics, Inc.(a) 20,734
384 KemPharm, Inc.(a) 1,528
16,183 Keryx Biopharmaceuticals, Inc.(a)(b) 107,131
6,397 Kite Pharma, Inc.(a) 319,850
2,049 La Jolla Pharmaceutical Co.(a) 32,784
4,175 Lannett Co., Inc.(a) 99,323
6,848 Lexicon Pharmaceuticals, Inc.(a) 98,269
2,712 Ligand Pharmaceuticals, Inc., Class B(a) 323,460
7,492 Lion Biotechnologies, Inc.(a) 60,685
1,133 Loxo Oncology, Inc.(a) 26,263
5,868 Luminex Corp.(a) 118,710
4,547 MacroGenics, Inc.(a) 122,724
39,844 MannKind Corp.(a)(b) 46,219
15,428 Mast Therapeutics, Inc.(a)(b) 7,251
4,609 Medgenics, Inc.(a) 25,580
10,582 Medicines Co.(a) 355,873
4,864 MediciNova, Inc.(a)(b) 36,723
24,662 Medivation, Inc.(a) 1,487,119
8,459 MEI Pharma, Inc.(a) 11,504
15,780 Merrimack Pharmaceuticals, Inc.(a) 85,054
15,260 MiMedx Group, Inc.(a) 121,775
1,890 Minerva Neurosciences, Inc.(a) 19,297
1,760 Mirati Therapeutics, Inc.(a) 9,610
9,395 Momenta Pharmaceuticals, Inc.(a) 101,466
================================================================================
56 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
10,099 Myriad Genetics, Inc.(a) $ 309,029
2,146 NanoString Technologies, Inc.(a) 27,040
344 NantKwest, Inc.(a) 2,140
20,082 Nektar Therapeutics(a) 285,767
1,616 Neothetics, Inc.(a)(b) 1,584
17,361 Neuralstem, Inc.(a)(b) 5,052
11,665 Neurocrine Biosciences, Inc.(a) 530,174
3,137 NewLink Genetics Corp.(a) 35,323
7,566 Northwest Biotherapeutics, Inc.(a) 4,398
39,656 Novavax, Inc.(a) 288,299
5,409 Omeros Corp.(a)(b) 56,903
478 Oncocyte Corp.(a) 1,702
2,147 OncoMed Pharmaceuticals, Inc.(a) 26,430
4,138 Ophthotech Corp.(a) 211,162
47,499 OPKO Health, Inc.(a)(b) 443,641
18,080 Orexigen Therapeutics, Inc.(a)(b) 7,774
12,913 Organovo Holdings, Inc.(a) 48,036
2,766 Osiris Therapeutics, Inc.(a) 14,079
2,684 Otonomy, Inc.(a) 42,622
3,839 OvaScience, Inc.(a) 20,001
9,227 Pacific Biosciences of California, Inc.(a) 64,912
5,481 Pacira Pharmaceuticals, Inc.(a) 184,874
8,736 Pain Therapeutics, Inc.(a) 19,132
23,498 Palatin Technologies, Inc.(a) 10,372
841 Paratek Pharmaceuticals, Inc.(a) 11,698
23,556 PDL BioPharma, Inc. 73,966
35,720 Peregrine Pharmaceuticals, Inc.(a) 13,006
7,631 Pernix Therapeutics Holdings(a)(b) 3,419
2,551 Pfenex, Inc.(a) 21,352
14,512 PharmAthene, Inc.(a) 35,409
8,510 Portola Pharmaceuticals, Inc.(a) 200,836
4,511 PRA Health Sciences, Inc.(a) 188,379
7,922 Prestige Brands Holdings, Inc.(a) 438,879
10,933 Progenics Pharmaceuticals, Inc.(a) 46,137
1,374 Proteon Therapeutics, Inc.(a) 11,033
4,746 Prothena Corp. PLC(a) 165,920
14,312 Provectus Biopharmaceuticals, Inc.(a) 5,295
6,822 pSivida Corp.(a) 19,306
4,711 PTC Therapeutics, Inc.(a) 33,071
3,236 Puma Biotechnology, Inc.(a) 96,400
13,920 Quintiles Transnational Holdings, Inc.(a) 909,254
5,022 Radius Health, Inc.(a) 184,558
13,164 Raptor Pharmaceutical Corp.(a) 70,691
1,103 Recro Pharma, Inc.(a)(b) 8,769
450 REGENXBIO, Inc.(a) 3,600
4,368 Regulus Therapeutics, Inc.(a) 12,624
4,515 Relypsa, Inc.(a)(b) 83,528
782 Rennova Health, Inc.(a) 493
5,025 Repligen Corp.(a) 137,484
4,528 Repros Therapeutics, Inc.(a) 7,290
4,674 Retrophin, Inc.(a) 83,244
2,714 Revance Therapeutics, Inc.(a) 36,910
44,878 Rexahn Pharmaceuticals, Inc.(a) 11,273
16,778 Rigel Pharmaceuticals, Inc.(a) 37,415
2,623 Sage Therapeutics, Inc.(a) 79,031
3,816 Sagent Pharmaceuticals, Inc.(a) 57,164
10,912 Sangamo Biosciences, Inc.(a) 63,180
5,742 Sarepta Therapeutics, Inc.(a)(b) 109,500
8,444 Sciclone Pharmaceuticals, Inc.(a) 110,279
================================================================================
SCHEDULE OF INVESTMENTS | 57
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
16,241 Seattle Genetics, Inc.(a) $ 656,299
22,329 Sequenom, Inc.(a)(b) 20,402
684 Seres Therapeutics, Inc.(a) 19,870
3,786 Sorrento Therapeutics, Inc.(a) 21,202
9,945 Spectrum Pharmaceuticals, Inc.(a) 65,339
2,213 StemCells, Inc.(a)(b) 891
3,075 Stemline Therapeutics, Inc.(a) 20,818
3,182 Sucampo Pharmaceuticals, Inc., Class A(a) 34,907
14,059 Sunesis Pharmaceuticals, Inc.(a) 7,700
5,391 Supernus Pharmaceuticals, Inc.(a) 109,815
26,838 Synergy Pharmaceuticals, Inc.(a) 101,984
19,557 Synta Pharmaceuticals Corp.(a) 5,089
13,497 Synthetic Biologics, Inc.(a)(b) 24,295
6,994 Teligent, Inc.(a) 49,937
1,873 Tenax Therapeutics, Inc.(a) 4,795
6,125 Tetraphase Pharmaceuticals, Inc.(a) 26,338
6,103 TG Therapeutics, Inc.(a) 36,984
21,220 TherapeuticsMD, Inc.(a) 180,370
3,971 Theravance Biopharma, Inc.(a)(b) 90,102
10,962 Threshold Pharmaceuticals, Inc.(a) 6,965
1,364 Titan Pharmaceuticals, Inc.(a)(b) 7,461
1,487 Tokai Pharmaceuticals, Inc.(a)(b) 8,193
1,554 Tonix Pharmaceuticals Holding Corp.(a) 3,092
1,428 Tracon Pharmaceuticals, Inc.(a) 6,255
5,222 Trevena, Inc.(a) 32,899
5,524 Trovagene, Inc.(a)(b) 25,024
3,113 Trubion Pharmaceuticals, Inc. -
5,133 Ultragenyx Pharmaceutical, Inc.(a) 251,055
6,632 United Therapeutics Corp.(a) 702,461
6,494 Vanda Pharmaceuticals, Inc.(a) 72,668
5,333 Verastem, Inc.(a) 6,933
3,367 Versartis, Inc.(a) 37,239
2,976 Vical, Inc.(a) 13,481
2,075 Vitae Pharmaceuticals, Inc.(a) 22,389
3,761 Vital Therapies, Inc.(a)(b) 23,318
17,507 Vivus, Inc.(a) 19,608
286 Voyager Therapeutics, Inc.(a) 3,143
438 WaVe Life Sciences Pte Ltd.(a) 9,062
2,806 Windtree Therapeutics, Inc.(a) 5,416
5,212 Xencor, Inc.(a) 98,976
9,305 XenoPort, Inc.(a) 65,507
21,795 XOMA Corp.(a) 12,016
18,936 ZIOPHARM Oncology, Inc.(a)(b) 103,959
2,100 Zogenix, Inc.(a) 16,905
------------
30,206,973
------------
REAL ESTATE INVESTMENT & SERVICES - 1.7%
5,690 AG Mortgage Investment Trust, Inc. 82,164
6,845 Alexander & Baldwin, Inc. 247,378
1,818 Altisource Portfolio Solutions SA(a) 50,613
1,631 American Realty Investors, Inc.(a) 11,058
2,544 AV Homes, Inc.(a) 31,088
993 BBX Capital Corp., Class A(a) 15,262
2,887 Black Knight Financial Services, Inc., Class A(a) 108,551
8,513 CareTrust REIT, Inc. 117,309
28,664 Chimera Investment Corp. 450,025
18,995 Columbia Property Trust, Inc. 406,493
================================================================================
58 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
18,455 Communications Sales & Leasing, Inc. $ 533,349
1,260 Consolidated-Tomoka Land Co. 59,812
8,841 Dynex Capital, Inc. 61,357
33,228 Forest City Realty Trust, Inc., Class A 741,317
5,654 Forestar Group, Inc.(a) 67,226
28,470 Gaming and Leisure Properties, Inc. 981,646
5,400 Hannon Armstrong Sustainable Infrastructure Capital, Inc. 116,640
5,216 HFF, Inc., Class A 150,638
5,306 Howard Hughes Corp.(a) 606,582
3,898 InfraREIT, Inc. 68,371
6,780 Jones Lang LaSalle, Inc. 660,711
14,339 Kennedy-Wilson Holdings, Inc. 271,867
2,234 Marcus & Millichap, Inc.(a) 56,766
5,106 Maui Land & Pineapple Co., Inc.(a) 36,865
26,236 Monogram Residential Trust, Inc. 267,870
5,990 Nationstar Mortgage Holdings, Inc.(a) 67,447
25,617 Paramount Group, Inc. 408,335
6,955 QTS Realty Trust, Inc., Class A 389,341
2,929 RE/MAX Holdings, Inc., Class A 117,921
22,355 Realogy Holdings Corp.(a) 648,742
1,837 Reis, Inc. 45,741
9,563 Rexford Industrial Realty, Inc. 201,684
9,326 Select Income REIT 242,383
10,898 St. Joe Co.(a) 193,113
22,639 STORE Capital Corp. 666,719
2,659 Tejon Ranch Co.(a) 62,859
3,760 Whitestone REIT 56,701
16,431 Xenia Hotels & Resorts, Inc. 275,712
6,601 Zillow Group, Inc., Class A(a)(b) 241,927
15,637 Zillow Group, Inc., Class C(a)(b) 567,310
------------
10,386,893
------------
REAL ESTATE INVESTMENT TRUSTS (REITs) - 9.4%
10,118 Acadia Realty Trust 359,391
3,375 Agree Realty Corp. 162,810
587 Alexander's, Inc. 240,218
10,779 Alexandria Real Estate Equities, Inc. 1,115,842
9,073 Altisource Residential Corp. 83,381
5,923 American Assets Trust, Inc. 251,372
19,566 American Campus Communities, Inc. 1,034,454
49,652 American Capital Agency Corp. 984,103
8,007 American Capital Mortgage Investment Corp. 126,431
26,397 American Homes 4 Rent, Class A 540,611
138,535 Annaly Capital Management, Inc. 1,533,582
16,369 Anworth Mortgage Asset Corp. 76,934
10,045 Apollo Commercial Real Estate Finance, Inc. 161,423
6,308 Apollo Residential Mortgage, Inc. 84,527
24,383 Apple Hospitality REIT, Inc. 458,644
9,585 Arbor Realty Trust, Inc. 68,916
3,980 Ares Commercial Real Estate Corp. 48,914
1,883 Arlington Asset Investment Corp. 24,498
4,463 Armada Hoffler Properties, Inc. 61,322
5,832 ARMOUR Residential REIT, Inc. 116,640
4,229 Ashford Hospitality Prime, Inc. 59,798
================================================================================
SCHEDULE OF INVESTMENTS | 59
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
13,385 Ashford Hospitality Trust, Inc. $ 71,877
13,669 Blackstone Mortgage Trust, Inc., Class A 378,221
3,607 Bluerock Residential Growth REIT, Inc. 46,891
26,057 Brandywine Realty Trust 437,758
30,860 Brixmor Property Group, Inc. 816,556
3,601 BRT Realty Trust(a) 25,747
12,927 Camden Property Trust 1,143,005
13,401 Capstead Mortgage Corp. 129,990
13,061 Care Capital Properties, Inc. 342,329
4,936 Catchmark Timber Trust, Inc. 60,318
21,754 CBL & Associates Properties, Inc. 202,530
12,109 Cedar Realty Trust, Inc. 89,970
6,442 Chatham Lodging Trust 141,595
8,980 Chesapeake Lodging Trust 208,785
2,730 CIM Commercial Trust Corp. 44,335
16,809 Colony Capital, Inc., Class A 258,018
6,388 Colony Starwood Homes 194,323
985 Condor Hospitality Trust, Inc.(a) 1,517
1,780 CorEnergy Infrastructure Trust, Inc. 51,353
4,664 Coresite Realty Corp. 413,650
13,663 Corporate Office Properties Trust 404,015
30,507 Cousins Properties, Inc. 317,273
25,770 CubeSmart 795,778
10,460 CyrusOne, Inc. 582,204
22,334 CYS Investments, Inc. 186,936
13,433 DCT Industrial Trust, Inc. 645,321
45,849 DDR Corp. 831,701
28,628 DiamondRock Hospitality Co. 258,511
21,078 Douglas Emmett, Inc. 748,691
51,778 Duke Realty Corp. 1,380,401
11,019 DuPont Fabros Technology, Inc. 523,843
3,072 Easterly Government Properties, Inc. 60,611
4,658 EastGroup Properties, Inc. 321,029
9,417 Education Realty Trust, Inc. 434,500
18,394 Empire State Realty Trust, Inc., Class A 349,302
9,040 EPR Properties 729,347
18,933 Equity Commonwealth(a) 551,518
11,946 Equity Lifestyle Properties, Inc. 956,277
13,460 Equity One, Inc. 433,143
19,873 FelCor Lodging Trust, Inc. 123,809
16,146 First Industrial Realty Trust, Inc. 449,182
9,864 First Potomac Realty Trust 90,749
13,397 Franklin Street Properties Corp. 164,381
10,865 Geo Group, Inc. 371,366
4,972 Getty Realty Corp. 106,649
3,875 Gladstone Commercial Corp. 65,449
24,902 Global Net Lease, Inc. 197,971
8,160 Government Properties Income Trust 188,170
64,138 Gramercy Property Trust 591,352
12,951 Hatteras Financial Corp. 212,396
15,200 Healthcare Realty Trust, Inc. 531,848
20,339 Healthcare Trust of America, Inc., Class A 657,763
7,268 Hersha Hospitality Trust 124,646
14,290 Highwoods Properties, Inc. 754,512
22,162 Hospitality Properties Trust 638,266
13,128 Hudson Pacific Properties, Inc. 383,075
================================================================================
60 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
7,288 Independence Realty Trust, Inc. $ 59,616
17,973 Invesco Mortgage Capital, Inc. 246,050
19,805 Investors Real Estate Trust 128,138
13,163 iStar, Inc.(a) 126,233
13,909 Kilroy Realty Corp. 922,028
12,411 Kite Realty Group Trust 347,880
17,528 LaSalle Hotel Properties 413,310
31,494 Lexington Realty Trust 318,404
21,777 Liberty Property Trust 864,982
5,446 LTC Properties, Inc. 281,722
13,694 Mack-Cali Realty Corp. 369,738
34,243 Medical Properties Trust, Inc. 520,836
57,166 MFA Financial, Inc. 415,597
11,286 Mid-America Apartment Communities, Inc. 1,200,830
10,718 Monmouth Real Estate Investment Corp., Class A 142,121
5,116 National Health Investors, Inc. 384,160
21,480 National Retail Properties, Inc. 1,110,946
4,267 National Storage Affiliates Trust 88,839
34,896 New Residential Investment Corp. 482,961
13,583 New Senior Investment Group, Inc. 145,066
18,994 New York Mortgage Trust, Inc. 115,863
25,678 New York REIT, Inc. 237,522
11,272 Newcastle Investment Corp. 51,738
3,178 NexPoint Residential Trust, Inc. 57,840
10,974 NorthStar Realty Europe Corp. 101,510
27,321 NorthStar Realty Finance Corp. 312,279
24,620 Omega Healthcare Investors, Inc. 835,849
2,409 One Liberty Properties, Inc. 57,455
12,106 Parkway Properties, Inc. 202,533
10,510 Pebblebrook Hotel Trust 275,887
10,348 Pennsylvania Real Estate Investment Trust 221,965
10,450 PennyMac Mortgage Investment Trust(c) 169,604
20,078 Physicians Realty Trust 421,839
21,034 Piedmont Office Realty Trust, Inc., Class A 453,072
8,146 Post Properties, Inc. 497,313
6,073 Potlatch Corp. 207,089
4,287 Preferred Apartment Communities, Inc. 63,105
2,790 PS Business Parks, Inc. 295,963
12,466 RAIT Financial Trust 39,019
12,330 Ramco-Gershenson Properties Trust 241,791
18,797 Rayonier, Inc. 493,233
12,292 Redwood Trust, Inc. 169,753
14,569 Regency Centers Corp. 1,219,862
5,570 Resource Capital Corp. 71,630
14,615 Retail Opportunity Investments Corp. 316,707
35,413 Retail Properties of America, Inc., Class A 598,480
18,720 RLJ Lodging Trust 401,544
1,008 RMR Group, Inc., Class A 31,218
6,090 Rouse Properties, Inc. 111,143
9,890 Sabra Health Care REIT, Inc. 204,080
2,059 Saul Centers, Inc. 127,061
35,010 Senior Housing Properties Trust 729,258
2,183 Seritage Growth Properties 108,801
6,204 Silver Bay Realty Trust Corp. 105,654
6,889 Sovran Self Storage, Inc. 722,794
71,654 Spirit Realty Capital, Inc. 915,022
10,717 STAG Industrial, Inc. 255,172
36,066 Starwood Property Trust, Inc. 747,288
================================================================================
SCHEDULE OF INVESTMENTS | 61
================================================================================
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SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
12,562 Summit Hotel Properties, Inc. $ 166,321
9,621 Sun Communities, Inc. 737,353
31,374 Sunstone Hotel Investors, Inc. 378,684
13,947 Tanger Factory Outlet Centers, Inc. 560,390
9,078 Taubman Centers, Inc. 673,588
7,115 Terreno Realty Corp. 184,065
7,404 Tier REIT, Inc. 113,503
54,500 Two Harbors Investment Corp. 466,520
4,588 UMH Properties, Inc. 51,615
6,320 United Development Funding IV(b) 20,224
1,725 Universal Health Realty Income Trust 98,636
14,359 Urban Edge Properties 428,760
3,630 Urstadt Biddle Properties, Inc., Class A 89,951
137,005 VEREIT, Inc. 1,389,231
5,793 Walter Investment Management Corp.(a)(b) 15,989
9,975 Washington Real Estate Investment Trust 313,813
17,240 Weingarten Realty Investors 703,737
7,954 Western Asset Mortgage Capital Corp. 74,688
14,708 WP Carey, Inc. 1,021,029
27,493 WP Glimcher, Inc. 307,647
------------
57,367,701
------------
SOFTWARE & COMPUTER SERVICES - 7.1%
4,418 2U, Inc.(a) 129,933
6,913 A10 Networks, Inc.(a) 44,727
17,713 ACI Worldwide, Inc.(a) 345,581
6,343 Actua Corp.(a) 57,277
28,232 Allscripts Healthcare Solutions, Inc.(a) 358,546
5,062 American Software, Inc., Class A 53,050
7,272 Angie's List, Inc.(a) 47,341
13,241 ANSYS, Inc.(a) 1,201,621
5,223 Arista Networks, Inc.(a) 336,257
12,618 Aspen Technology, Inc.(a) 507,748
5,889 athenahealth, Inc.(a) 812,741
3,575 Barracuda Networks, Inc.(a) 54,125
1,942 Benefitfocus, Inc.(a) 74,029
6,883 Blackbaud, Inc. 467,356
6,758 Blucora, Inc.(a) 70,013
5,309 Boingo Wireless, Inc.(a) 47,356
6,070 Bottomline Technologies, Inc.(a) 130,687
5,636 Box, Inc., Class A(a)(b) 58,276
5,883 Brightcove, Inc.(a) 51,770
4,650 BroadSoft, Inc.(a) 190,789
3,542 CACI International, Inc., Class A(a) 320,232
44,902 Cadence Design Systems, Inc.(a) 1,091,119
7,426 Calix, Inc.(a) 51,314
9,011 Callidus Software, Inc.(a) 180,040
9,141 Castlight Health, Inc.(a) 36,198
21,887 CDW Corp. 877,231
3,748 ChannelAdvisor Corp.(a) 54,308
11,476 Ciber, Inc.(a) 17,214
6,326 Cogent Communications Group, Inc. 253,420
6,399 CommVault Systems, Inc.(a) 276,373
1,686 Computer Programs & Systems, Inc. 67,305
20,994 Computer Sciences Corp. 1,042,352
2,432 Computer Task Group, Inc. 12,087
7,517 Cornerstone OnDemand, Inc.(a) 286,097
8,788 Covisint Corp.(a) 19,158
4,927 CSG Systems International, Inc. 198,607
3,881 Cvent, Inc.(a) 138,629
3,557 Datalink Corp.(a) 26,677
5,110 Demandware, Inc.(a) 382,739
2,985 Determine, Inc.(a) 4,537
7,969 DeVry Education Group, Inc. 142,167
================================================================================
62 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
1,549 Digimarc Corp.(a) $ 49,506
4,633 DST Systems, Inc. 539,420
3,961 Ebix, Inc. 189,732
1,227 eGain Corp.(a) 3,460
4,520 Ellie Mae, Inc.(a) 414,258
9,536 Endurance International Group Holdings, Inc.(a) 85,729
5,451 Envestnet, Inc.(a) 181,573
6,180 EPAM Systems, Inc.(a) 397,436
5,356 EPIQ Systems, Inc. 78,198
2,275 Evolving Systems, Inc. 11,762
4,603 Fair Isaac Corp. 520,185
12,659 FalconStor Software, Inc.(a) 13,292
21,090 FireEye, Inc.(a) 347,352
3,880 Five9, Inc.(a) 46,172
1,630 Forrester Research, Inc. 60,082
21,569 Fortinet, Inc.(a) 681,365
12,310 Gartner, Inc.(a) 1,199,117
4,348 Gigamon, Inc.(a) 162,572
6,373 GoDaddy, Inc., Class A(a) 198,774
7,304 Gogo, Inc.(a)(b) 61,281
1,986 Great Elm Capital Group, Inc.(a) 13,088
5,963 GSE Systems, Inc.(a) 13,297
4,351 Guidance Software, Inc.(a) 26,933
10,574 Guidewire Software, Inc.(a) 653,050
4,211 Hackett Group, Inc. 58,407
2,556 Hortonworks, Inc.(a) 27,324
1,623 HubSpot, Inc.(a) 70,471
11,345 IAC/InterActiveCorp 638,723
5,072 Immersion Corp.(a) 37,228
21,740 IMS Health Holdings, Inc.(a) 551,326
8,169 Infoblox, Inc.(a) 153,250
6,741 Innodata, Inc.(a) 16,515
2,898 Interactive Intelligence Group, Inc.(a) 118,789
9,211 Internap Corp.(a) 18,975
6,886 IntraLinks Holdings, Inc.(a) 44,759
6,782 j2 Global, Inc. 428,419
9,460 Jive Software, Inc.(a) 35,570
6,373 KEYW Holding Corp.(a) 63,348
9,689 Leidos Holdings, Inc. 463,812
11,498 Limelight Networks, Inc.(a) 17,132
8,346 LivePerson, Inc.(a) 52,914
3,829 LogMeIn, Inc.(a) 242,873
6,321 LookSmart Group, Inc.(a) 855
10,859 Manhattan Associates, Inc.(a) 696,388
5,810 Marketo, Inc.(a) 202,304
1,020 Mastech Holdings, Inc.(a) 6,783
5,754 Match Group, Inc.(a)(b) 86,742
8,309 Medidata Solutions, Inc.(a) 389,443
2,854 MeetMe, Inc.(a) 15,212
14,365 Mentor Graphics Corp. 305,400
1,413 MicroStrategy, Inc., Class A(a) 247,303
8,172 MobileIron, Inc.(a) 24,925
4,111 Model N, Inc.(a) 54,882
6,127 Monotype Imaging Holdings, Inc. 150,908
14,675 Netscout Systems, Inc.(a) 326,519
5,625 NetSuite, Inc.(a) 409,500
2,948 New Relic, Inc.(a) 86,612
9,058 NIC, Inc. 198,732
33,356 Nuance Communications, Inc.(a) 521,354
11,385 Palo Alto Networks, Inc.(a) 1,396,256
5,627 Paycom Software, Inc.(a) 243,143
4,538 PC-Tel, Inc. 21,374
4,645 PDF Solutions, Inc.(a) 64,984
5,608 Pegasystems, Inc. 151,136
5,910 Perficient, Inc.(a) 120,032
6,675 Premier, Inc., Class A(a) 218,272
7,757 Progress Software Corp.(a) 213,007
6,101 Proofpoint, Inc.(a) 384,912
4,092 PROS Holdings, Inc.(a) 71,324
16,936 PTC, Inc.(a) 636,455
3,374 Q2 Holdings, Inc.(a) 94,539
906 QAD, Inc., Class A 17,459
1,021 QAD, Inc., Class B 17,663
13,774 QLIK Technologies, Inc.(a) 407,435
6,990 Quality Systems, Inc. 83,251
3,823 Qualys, Inc.(a) 113,964
16,926 Rackspace Hosting, Inc.(a) 353,076
7,873 RealPage, Inc.(a) 175,804
================================================================================
SCHEDULE OF INVESTMENTS | 63
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,809 Rightside Group Ltd.(a) $ 29,888
2,435 RigNet, Inc.(a) 32,605
8,920 RingCentral, Inc., Class A(a) 175,902
5,595 Rocket Fuel, Inc.(a)(b) 12,421
3,678 Rosetta Stone, Inc.(a) 28,504
12,141 Rovi Corp.(a) 189,885
6,113 Science Applications International Corp. 356,693
4,688 SciQuest, Inc.(a) 82,790
22,483 ServiceNow, Inc.(a) 1,492,871
2,987 Shutterstock, Inc.(a) 136,805
5,785 Silver Spring Networks, Inc.(a) 70,288
12,346 Smith Micro Software, Inc.(a) 7,305
114 SoftBrands, Inc.(a) -
19,416 Splunk, Inc.(a) 1,051,959
2,618 SPS Commerce, Inc.(a) 158,651
4,661 Square, Inc., Class A(a) 42,182
24,220 SS&C Technologies Holdings, Inc. 680,098
17,347 Support.com, Inc.(a) 14,589
6,000 Synchronoss Technologies, Inc.(a) 191,160
22,657 Synopsys, Inc.(a) 1,225,291
4,722 Syntel, Inc.(a) 213,718
7,967 Tableau Software, Inc., Class A(a) 389,746
6,350 Tangoe, Inc.(a) 49,022
5,854 TeleNav, Inc.(a) 29,855
89,194 Twitter, Inc.(a) 1,508,270
4,853 Tyler Technologies, Inc.(a) 809,044
4,299 Ultimate Software Group, Inc.(a) 904,037
7,423 Unisys Corp.(a) 54,039
2,616 United Online, Inc.(a) 28,776
23,521 Vantiv, Inc., Class A(a) 1,331,289
2,808 Varonis Systems, Inc.(a) 67,448
4,683 VASCO Data Security International, Inc.(a) 76,754
1,852 Vectrus, Inc.(a) 52,763
14,382 Veeva Systems, Inc., Class A(a) 490,714
9,128 Verint Systems, Inc.(a) 302,411
6,877 VirnetX Holding Corp.(a)(b) 27,508
4,107 Virtusa Corp.(a) 118,610
11,522 VMware, Inc., Class A(a) 659,289
1,272 Voltari Corp.(a)(b) 4,605
8,012 Web.com Group, Inc.(a) 145,658
17,626 Workday, Inc., Class A(a) 1,316,133
3,410 Workiva, Inc.(a) 46,581
3,640 Xura, Inc.(a) 88,925
8,667 Zendesk, Inc.(a) 228,635
10,588 Zix Corp.(a) 39,705
116,831 Zynga, Inc., Class A(a) 290,909
------------
43,266,775
------------
SUPPORT SERVICES - 4.6%
8,327 ABM Industries, Inc. 303,769
8,239 Acacia Research Corp. 36,252
6,250 Advisory Board Co.(a) 221,187
3,838 AM Castle & Co.(a) 6,294
22,361 Amdocs Ltd. 1,290,677
7,153 AMN Healthcare Services, Inc.(a) 285,905
5,724 Applied Industrial Technologies, Inc. 258,381
6,901 ARC Document Solutions, Inc.(a) 26,845
7,338 Barnes Group, Inc. 243,035
1,189 Barrett Business Services, Inc. 49,129
12,100 Bazaarvoice, Inc.(a) 48,521
2,668 Black Box Corp. 34,897
18,929 Booz Allen Hamilton Holding Corp. 561,056
7,067 Brink's Co. 201,339
17,839 Broadridge Financial Solutions, Inc. 1,163,103
6,774 Cardtronics, Inc.(a) 269,673
2,116 Cartesian, Inc.(a) 2,116
7,582 Casella Waste Systems, Inc.(a) 59,519
1,314 Cass Information Systems, Inc. 67,934
7,954 CBIZ, Inc.(a) 82,801
================================================================================
64 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
1,891 CDI Corp. $ 11,535
4,960 CEB, Inc. 305,933
14,736 Cenveo, Inc.(a) 12,023
7,847 Clean Harbors, Inc.(a) 408,907
5,684 Comfort Systems USA, Inc. 185,128
14,425 Convergys Corp. 360,625
13,014 CoreLogic, Inc.(a) 500,779
17,287 Corrections Corp. of America 605,391
4,952 CoStar Group, Inc.(a) 1,082,804
1,964 CRA International, Inc.(a) 49,532
4,806 Crawford & Co., Class B 40,803
5,168 Cross Country Healthcare, Inc.(a) 71,939
7,253 Deluxe Corp. 481,382
7,060 DHI Group, Inc.(a) 43,984
8,747 DigitalGlobe, Inc.(a) 187,098
1,896 DXP Enterprises, Inc.(a) 28,307
3,906 Ennis, Inc. 74,917
5,328 Essendant, Inc. 162,824
7,608 Euronet Worldwide, Inc.(a) 526,398
10,402 Everi Holdings, Inc.(a) 11,962
10,201 EVERTEC, Inc. 158,524
6,007 ExamWorks Group, Inc.(a) 209,344
5,026 ExlService Holdings, Inc.(a) 263,413
1,784 ExOne Co.(a) 18,857
3,885 Exponent, Inc. 226,923
27,590 First Data Corp., Class A(a) 305,421
11,639 FleetCor Technologies, Inc.(a) 1,665,890
2,677 Franklin Covey Co.(a) 41,038
300 Frontline Capital Group(a) -
6,259 FTI Consulting, Inc.(a) 254,616
2,985 G&K Services, Inc., Class A 228,561
22,806 Genpact Ltd.(a) 612,113
2,813 GP Strategies Corp.(a) 61,014
27,167 HD Supply Holdings, Inc.(a) 945,955
2,753 Heidrick & Struggles International, Inc. 46,471
3,226 Heritage-Crystal Clean, Inc.(a) 39,389
7,183 Higher One Holdings, Inc.(a) 36,705
7,493 Hudson Global, Inc. 14,761
3,442 Huron Consulting Group, Inc.(a) 207,966
3,065 ICF International, Inc.(a) 125,358
4,008 Imperva, Inc.(a) 172,384
7,279 InnerWorkings, Inc.(a) 60,197
7,229 Inovalon Holdings, Inc., Class A(a)(b) 130,194
2,406 Insperity, Inc. 185,815
11,869 Jack Henry & Associates, Inc. 1,035,808
3,995 Kaman Corp. 169,867
4,059 Kelly Services, Inc., Class A 76,999
3,944 Kforce, Inc. 66,614
7,608 Korn/Ferry International 157,486
13,189 LifeLock, Inc.(a) 208,518
17,612 LinkedIn Corp., Class A(a) 3,333,071
10,173 Lionbridge Technologies, Inc.(a) 40,183
10,664 ManpowerGroup, Inc. 686,122
9,617 MAXIMUS, Inc. 532,493
3,244 McGrath RentCorp 99,234
2,701 Mistras Group, Inc.(a) 64,473
6,403 Mobile Mini, Inc. 221,800
9,568 ModusLink Global Solutions, Inc.(a) 11,769
14,709 Monster Worldwide, Inc.(a) 35,155
7,144 MSC Industrial Direct Co., Inc., Class A 504,081
7,309 Navigant Consulting, Inc.(a) 118,040
7,934 NeuStar, Inc., Class A(a) 186,528
2,444 Odyssey Marine Exploration, Inc.(a)(b) 4,937
7,077 On Assignment, Inc.(a) 261,495
1,321 Park-Ohio Holdings Corp. 37,358
4,810 Perma-Fix Environmental Services(a) 24,483
9,438 Planet Payment, Inc.(a) 42,377
================================================================================
SCHEDULE OF INVESTMENTS | 65
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
815 Power Solutions International, Inc.(a)(b) $ 14,548
1,307 Press Ganey Holdings, Inc.(a) 51,430
6,115 PRGX Global, Inc.(a) 31,920
3,486 Quad/Graphics, Inc. 81,189
17,930 Quest Resource Holding Corp.(a) 5,200
5,694 Resources Connection, Inc. 84,157
8,380 RPX Corp.(a) 76,845
30,792 RR Donnelley & Sons Co. 521,001
4,015 Schnitzer Steel Industries, Inc., Class A 70,664
10,518 ServiceSource International, Inc.(a) 42,388
3,499 Sharps Compliance Corp.(a) 15,361
3,340 StarTek, Inc.(a) 14,596
5,857 Sykes Enterprises, Inc.(a) 169,619
4,703 Team, Inc.(a) 116,775
2,549 TeleTech Holdings, Inc. 69,154
8,381 Tetra Tech, Inc. 257,674
10,341 TransUnion(a) 345,803
6,322 TriNet Group, Inc.(a) 131,434
6,460 TrueBlue, Inc.(a) 122,223
3,348 U.S. Ecology, Inc. 153,841
2,249 UniFirst Corp. 260,254
3,377 Universal Technical Institute, Inc. 7,632
3,107 Viad Corp. 96,317
5,411 WageWorks, Inc.(a) 323,632
5,676 WEX, Inc.(a) 503,291
------------
27,861,452
------------
TECHNOLOGY HARDWARE & EQUIPMENT - 3.9%
15,956 3D Systems Corp.(a)(b) 218,438
7,492 ADTRAN, Inc. 139,726
6,210 Advanced Energy Industries, Inc.(a) 235,732
94,030 Advanced Micro Devices, Inc.(a) 483,314
3,119 Agilysys, Inc.(a) 32,656
14,118 Amkor Technology, Inc.(a) 81,178
2,148 Amtech Systems, Inc.(a) 12,824
12,769 Applied Micro Circuits Corp.(a) 81,977
2,758 Applied Optoelectronics, Inc.(a)(b) 30,752
27,030 ARRIS International PLC(a) 566,549
19,244 Axcelis Technologies, Inc.(a) 51,766
71,037 Brocade Communications Systems, Inc. 652,120
9,688 Brooks Automation, Inc. 108,699
3,590 Cabot Microelectronics Corp. 152,001
5,908 CalAmp Corp.(a) 87,497
8,256 Cavium, Inc.(a) 318,682
3,467 CEVA, Inc.(a) 94,198
19,544 Ciena Corp.(a) 366,450
9,403 Cirrus Logic, Inc.(a) 364,742
2,370 Clearfield, Inc.(a)(b) 42,399
4,081 Cohu, Inc. 44,279
22,077 CommScope Holding Co., Inc.(a) 685,049
2,512 Comtech Telecommunications Corp. 32,254
3,805 Concurrent Computer Corp. 19,862
6,048 Cray, Inc.(a) 180,956
14,947 Cree, Inc.(a) 365,305
46,389 Cypress Semiconductor Corp. 489,404
893 Dataram Corp.(a) 540
9,376 Diebold, Inc. 232,806
4,719 Digi International, Inc.(a) 50,635
5,690 Diodes, Inc.(a) 106,915
4,564 DSP Group, Inc.(a) 48,424
4,935 Dycom Industries, Inc.(a) 442,966
6,431 EchoStar Corp., Class A(a) 255,311
7,109 Electronics for Imaging, Inc.(a) 305,971
4,624 Emcore Corp.(a) 27,467
20,712 Entegris, Inc.(a) 299,703
966 ePlus, Inc.(a) 79,009
7,831 Exar Corp.(a) 63,040
================================================================================
66 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
15,559 Extreme Networks, Inc.(a) $ 52,745
16,610 Fairchild Semiconductor International, Inc.(a) 329,708
15,714 Finisar Corp.(a) 275,152
8,934 FormFactor, Inc.(a) 80,317
3,517 GigPeak, Inc.(a) 6,893
4,254 GSI Technology, Inc.(a) 17,739
14,595 Harmonic, Inc.(a) 41,596
7,004 Hutchinson Technology, Inc.(a) 23,744
3,541 ID Systems, Inc.(a) 17,032
3,365 Identiv, Inc.(a) 6,023
20,931 Infinera Corp.(a) 236,102
22,024 Ingram Micro, Inc., Class A 765,995
5,391 Inphi Corp.(a) 172,674
5,507 Insight Enterprises, Inc.(a) 143,182
19,885 Integrated Device Technology, Inc.(a) 400,285
5,293 InterDigital, Inc. 294,714
18,742 Intersil Corp., Class A 253,767
4,559 Intra-Cellular Therapies, Inc.(a) 176,980
12,074 InvenSense, Inc.(a) 74,014
9,113 Ixia(a) 89,490
3,911 IXYS Corp. 40,088
11,813 Kopin Corp.(a) 26,225
10,388 Kulicke & Soffa Industries, Inc.(a) 126,422
2,945 KVH Industries, Inc.(a) 22,676
9,095 Lantronix, Inc.(a) 8,822
17,195 Lattice Semiconductor Corp.(a) 91,993
8,961 Lexmark International, Inc., Class A 338,278
1,784 Loral Space & Communications, Inc.(a) 62,922
8,678 LRAD Corp. 15,534
7,236 Lumentum Holdings, Inc.(a) 175,111
69,881 Marvell Technology Group Ltd. 665,966
42,897 Maxim Integrated Products, Inc. 1,530,994
8,148 MaxLinear, Inc., Class A(a) 146,501
5,217 Mercury Systems, Inc.(a) 129,695
17,128 Microsemi Corp.(a) 559,743
7,749 MKS Instruments, Inc. 333,672
5,291 Monolithic Power Systems, Inc. 361,481
14,659 MoSys, Inc.(a) 5,937
4,363 Nanometrics, Inc.(a) 90,707
18,586 NCR Corp.(a) 516,133
2,930 Neonode, Inc.(a) 4,278
4,199 NeoPhotonics Corp.(a) 40,016
4,686 NETGEAR, Inc.(a) 222,772
7,733 Nimble Storage, Inc.(a) 61,555
16,359 Oclaro, Inc.(a) 79,832
60,825 ON Semiconductor Corp.(a) 536,476
1,750 Optical Cable Corp. 3,885
3,332 PAR Technology Corp.(a) 15,960
1,706 ParkerVision, Inc.(a)(b) 5,357
2,523 PC Connection, Inc. 60,047
28,997 Pendrell Corp.(a) 14,629
9,668 Photronics, Inc.(a) 86,142
5,286 Pixelworks, Inc.(a) 9,726
5,004 Plantronics, Inc. 220,176
19,912 Polycom, Inc.(a) 224,010
4,157 Power Integrations, Inc. 208,141
9,124 Pure Storage, Inc., Class A(a) 99,452
12,388 QLogic Corp.(a) 182,599
45,364 Quantum Corp.(a) 19,053
9,826 QuickLogic Corp.(a) 9,531
2,149 Qumu Corp.(a) 9,542
17,314 Rambus, Inc.(a) 209,153
5,365 Rudolph Technologies, Inc.(a) 83,318
4,115 ScanSource, Inc.(a) 152,708
7,106 Seachange International, Inc.(a) 22,668
9,792 Semtech Corp.(a) 233,637
10,755 ShoreTel, Inc.(a) 71,951
6,054 Sigma Designs, Inc.(a) 38,927
5,817 Silicon Graphics International Corp.(a) 29,259
5,746 Silicon Laboratories, Inc.(a) 280,060
================================================================================
SCHEDULE OF INVESTMENTS | 67
================================================================================
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SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
2,214 Sonic Foundry, Inc.(a) $ 13,705
8,411 Sonus Networks, Inc.(a) 73,092
6,099 SunEdison Semiconductor, Ltd.(a) 36,167
4,851 Sunworks, Inc.(a)(b) 11,303
5,471 Super Micro Computer, Inc.(a) 135,954
5,402 Synaptics, Inc.(a) 290,357
4,224 SYNNEX Corp. 400,520
1,844 Systemax, Inc.(a) 15,729
5,095 Tech Data Corp.(a) 366,076
30,394 Teradyne, Inc. 598,458
6,770 Tessera Technologies, Inc. 207,433
2,692 TransAct Technologies, Inc. 21,590
10,957 TransEnterix, Inc.(a)(b) 13,368
3,764 Ubiquiti Networks, Inc.(a) 145,516
5,086 Ultra Clean Holdings, Inc.(a) 28,939
4,365 Ultratech, Inc.(a) 100,264
3,189 USA Technologies, Inc.(a) 13,617
17,047 VeriFone Systems, Inc.(a) 316,051
6,611 ViaSat, Inc.(a) 472,025
34,458 Viavi Solutions, Inc.(a) 228,457
16,615 Violin Memory, Inc.(a) 15,282
4,197 Vocera Communications, Inc.(a) 53,931
4,073 VOXX International Corp.(a) 11,364
7,325 West Corp. 144,009
9,468 Xcerra Corp.(a) 54,441
------------
23,561,156
------------
TOBACCO - 0.1%
1,357 Alliance One International, Inc.(a) 20,898
4,407 Schweitzer-Mauduit International, Inc. 155,479
3,258 Universal Corp. 188,117
12,892 Vector Group Ltd. 289,038
------------
653,532
------------
TRAVEL & LEISURE - 4.6%
2,017 Allegiant Travel Co. 305,575
3,122 AMC Entertainment Holdings, Inc., Class A 86,198
34,185 Aramark 1,142,463
14,064 Avis Budget Group, Inc.(a) 453,283
13,554 Belmond Ltd., Class A(a) 134,185
187 Biglari Holdings, Inc.(a) 75,425
3,216 BJ's Restaurants, Inc.(a) 140,957
18,301 Bloomin' Brands, Inc. 327,039
3,169 Bob Evans Farms, Inc. 120,264
12,026 Boyd Gaming Corp.(a) 221,278
3,322 Bravo Brio Restaurant Group, Inc.(a) 27,207
8,416 Brinker International, Inc. 383,180
2,828 Buffalo Wild Wings, Inc.(a) 392,951
6,057 Caesars Entertainment Corp.(a) 46,578
3,932 Carmike Cinemas, Inc.(a) 118,432
6,109 Carrols Restaurant Group, Inc.(a) 72,697
6,355 Century Casinos, Inc.(a) 39,592
6,609 Cheesecake Factory, Inc. 318,157
5,187 Choice Hotels International, Inc. 247,005
1,825 Churchill Downs, Inc. 230,607
2,773 Chuy's Holdings, Inc.(a) 95,973
15,545 Cinemark Holdings, Inc. 566,771
10,670 ClubCorp Holdings, Inc. 138,710
3,506 Cracker Barrel Old Country Store, Inc.(b) 601,174
4,119 Dave & Buster's Entertainment, Inc.(a) 192,728
4,306 Del Frisco's Restaurant Group, Inc.(a) 61,662
13,450 Denny's Corp.(a) 144,318
8,250 Diamond Resorts International, Inc.(a) 247,170
2,576 DineEquity, Inc. 218,393
7,475 Domino's Pizza, Inc. 982,065
6,916 Dover Downs Gaming & Entertainment, Inc.(a) 7,331
1,592 Dover Motorsports, Inc. 3,455
14,048 Dunkin' Brands Group, Inc. 612,774
3,382 El Pollo Loco Holdings, Inc.(a) 43,966
4,161 Eldorado Resorts, Inc.(a) 63,226
827 Empire Resorts, Inc.(a)(b) 13,067
================================================================================
68 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
791 Entertainment Gaming Asia, Inc.(a) $ 1,448
10,631 Extended Stay America, Inc. 158,933
1,498 Famous Dave's Of America, Inc.(a) 7,535
4,111 Fiesta Restaurant Group, Inc.(a) 89,661
7,624 Four Corners Property Trust, Inc. 156,978
12,945 Full House Resorts, Inc.(a) 26,149
1,026 Gaming Partners International Corp.(a) 9,542
2,486 Habit Restaurants, Inc.(a) 40,721
6,926 Hawaiian Holdings, Inc.(a) 262,911
57,627 Hertz Global Holdings, Inc.(a) 637,931
78,456 Hilton Worldwide Holdings, Inc. 1,767,614
3,696 Hyatt Hotels Corp., Class A(a) 181,621
3,864 International Speedway Corp., Class A 129,251
16,522 Interval Leisure Group, Inc. 262,700
3,638 Isle of Capri Casinos, Inc.(a) 66,648
2,293 J Alexander's Holdings, Inc.(a) 22,769
4,878 Jack in the Box, Inc. 419,118
3,045 Jamba, Inc.(a) 31,333
47,276 JetBlue Airways Corp.(a) 782,891
9,511 Krispy Kreme Doughnuts, Inc.(a) 199,351
13,587 La Quinta Holdings, Inc.(a) 154,892
54,859 Las Vegas Sands Corp. 2,385,818
1,542 Liberty Braves Group, Class A(a) 23,192
5,069 Liberty Braves Group, Class C(a) 74,312
5,639 Luby's, Inc.(a) 28,308
3,070 Madison Square Garden Co., Class A(a) 529,606
3,067 Marcus Corp. 64,714
3,630 Marriott Vacations Worldwide Corp. 248,619
71,118 MGM Resorts International(a) 1,609,400
2,088 Monarch Casino & Resort, Inc.(a) 45,873
6,164 Morgans Hotel Group Co.(a) 13,191
3,634 Noodles & Co.(a)(b) 35,540
23,785 Norwegian Cruise Line Holdings Ltd.(a) 947,594
3,443 Panera Bread Co., Class A(a) 729,709
4,382 Papa John's International, Inc. 297,976
10,967 Penn National Gaming, Inc.(a) 152,990
8,495 Pinnacle Entertainment, Inc.(a) 94,125
3,011 Planet Fitness, Inc., Class A(a) 56,848
3,582 Popeyes Louisiana Kitchen, Inc.(a) 195,720
4,799 Potbelly Corp.(a) 60,179
2,654 RCI Hospitality Holdings, Inc. 27,044
3,819 Reading International, Inc., Class A(a) 47,699
5,052 Red Lion Hotels Corp.(a) 36,677
2,228 Red Robin Gourmet Burgers, Inc.(a) 105,674
4,223 Red Rock Resorts, Inc., Class A(a) 92,822
9,987 Regal Entertainment Group, Class A(b) 220,113
10,132 Ruby Tuesday, Inc.(a) 36,576
5,660 Ruth's Hospitality Group, Inc. 90,277
7,361 Ryman Hospitality Properties, Inc. 372,835
30,792 Sabre Corp. 824,918
7,878 Scientific Games Corp., Class A(a) 72,399
9,937 SeaWorld Entertainment, Inc. 142,397
================================================================================
SCHEDULE OF INVESTMENTS | 69
================================================================================
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
1,092 Shake Shack, Inc., Class A(a)(b) $ 39,782
12,858 Six Flags Entertainment Corp. 745,121
6,975 SkyWest, Inc. 184,558
7,561 Sonic Corp. 204,525
1,762 Speedway Motorsports, Inc. 31,275
10,893 Spirit Airlines, Inc.(a) 488,769
9,171 Texas Roadhouse, Inc. 418,198
5,154 Town Sports International Holdings, Inc.(a) 14,019
14,146 Travelport Worldwide Ltd. 182,342
2,100 Travelzoo, Inc.(a) 16,842
5,519 Vail Resorts, Inc. 762,891
31,601 Wendy's Co. 304,002
2,730 Virgin America, Inc.(a) 153,453
2,241 Wingstop, Inc.(a) 61,067
4,999 World Wrestling Entertainment, Inc.(b) 92,032
3,126 Zoe's Kitchen, Inc.(a) 113,380
------------
27,761,254
------------
Total Common Stocks - 96.3% 587,102,201
------------
---------------------------------------------------------------------------------------------------
BENEFICIAL
INTEREST
(000)
---------------------------------------------------------------------------------------------------
OTHER INTERESTS(d)
PHARMACEUTICALS & BIOTECHNOLOGY - 0.0%
$3 Merck KGaA -
------------
REAL ESTATE INVESTMENT TRUSTS (REITs) - 0.0%
4 AmeriVest Properties, Inc.(a) -
------------
TECHNOLOGY HARDWARE & EQUIPMENT - 0.0%
4 Gerber Scientific, Inc. 45
------------
TRAVEL & LEISURE - 0.0%
13 FRD Acquisition Co. -
------------
TOTAL OTHER INTERESTS - 0.0% 45
------------
---------------------------------------------------------------------------------------------------
SHARES
HELD INDUSTRY/ISSUE VALUE
---------------------------------------------------------------------------------------------------
RIGHTS
TECHNOLOGY HARDWARE & EQUIPMENT - 0.0%
8,850 Leap Wireless, CVR(a) $ 28,099
------------
Total Long-Term Investments
(Cost - $418,506,662) - 96.3% 587,130,345
------------
SHORT-TERM SECURITIES
17,711,861 BlackRock Liquidity Funds,
TempFund, Institutional Class, 0.40%(c)(e) 17,711,861
---------------------------------------------------------------------------------------------------
BENEFICIAL
INTEREST
(000)
---------------------------------------------------------------------------------------------------
$ 10184 BlackRock Liquidity Series, LLC,
Money Market Series, 0.59%(c)(e)(f) 10,184,473
------------
Total Short-Term Securities
(Cost - $27,896,334) - 4.6% 27,896,334
------------
TOTAL INVESTMENTS (Cost - $446,402,996) - 100.9% 615,026,679
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.9)% (5,569,141)
------------
NET ASSETS - 100.0% $609,457,538
============
NOTES TO SCHEDULE OF INVESTMENTS
(a) Non-income producing security.
(b) Security, or a portion of security, is on loan.
================================================================================
70 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
(c) During the six months ended June 30, 2016, investments in issuers considered
to be affiliates of the Series for purposes of Section 2(a)(3) of the
Investment Company Act of 1940, as amended, were as follows:
SHARES/ SHARES/
BENEFICIAL BENEFICIAL
INTEREST SHARES/ SHARES/ INTEREST
HELD AT BENEFICIAL BENEFICIAL HELD AT VALUE AT
DECEMBER 31, INTEREST INTEREST JUNE 30, JUNE 30,
AFFILIATE 2015 PURCHASED SOLD 2016 2016 INCOME
--------------------------------------------------------------------------------------------------------------------------
BlackRock Liquidity Funds,
TempFund, Institutional Class 15,610,860 2,101,001(1) - 17,711,861 $17,711,861 $ 26,117
BlackRock Liquidity Series, LLC,
Money Market Series 9,970,723 213,750(1) - 10,184,473 10,184,473 445,409(2)
PennyMac Mortgage
Investment Trust 10,450 - - 10,450 169,604 4,912
--------------------------------------------------------------------------------------------------------------------------
Total $28,065,938 $476,438
--------------------------------------------------------------------------------------------------------------------------
(1) Represents net shares/beneficial interest purchased.
(2) Represents securities lending income earned from the reinvestment of cash
collateral loaned from securities, net of fees and collateral investment
expenses, and other payments to and from borrowers of securities.
(d) Other interests represent beneficial interests in liquidation trusts and
other reorganization or private entities.
(e) Current yield as of period end.
(f) Security was purchased with the cash collateral from loaned securities.
The Series may withdraw up to 25% of its investment daily, although the
manager of the BlackRock Liquidity Series, LLC, Money Market Series, in its
sole discretion, may permit an investor to withdraw more than 25% on any one
day.
DERIVATIVE FINANCIAL INSTRUMENTS OUTSTANDING AS OF PERIOD END
FUTURES CONTRACTS
CONTRACTS NOTIONAL UNREALIZED
LONG ISSUE EXPIRATION VALUE DEPRECIATION
--------------------------------------------------------------------------
111 Russell 2000 September
Mini Index 2016 $12,736,140 $(331,964)
65 S&P MidCap September
400 E-Mini Index 2016 $ 9,704,500 (77,402)
---------
TOTAL $(409,366)
=========
DERIVATIVE FINANCIAL INSTRUMENTS CATEGORIZED BY RISK EXPOSURE
As of period end, the fair values of derivative financial instruments located in
the Statement of Assets and Liabilities were as follows:
FOREIGN
CURRENCY INTEREST
LIABILITIES - DERIVATIVE COMMODITY CREDIT EQUITY EXCHANGE RATE OTHER
FINANCIAL INSTRUMENTS CONTRACTS CONTRACTS CONTRACTS CONTRACTS CONTRACTS CONTRACTS TOTAL
---------------------------------------------------------------------------------------------------------------------------------
Futures contracts Net unrealized
depreciation(1) - - $409,366 - - - $409,366
---------------------------------------------------------------------------------------------------------------------------------
(1) Includes cumulative depreciation on futures contracts, if any, as reported
in the Schedule of Investments. Only current day's variation margin is
reported within the Statements of Assets and Liabilities.
================================================================================
SCHEDULE OF INVESTMENTS | 71
================================================================================
For the six months ended June 30, 2016, the effect of derivative financial
instruments in the Statement of Operation was as follows:
FOREIGN
CURRENCY INTEREST
COMMODITY CREDIT EQUITY EXCHANGE RATE OTHER
CONTRACTS CONTRACTS CONTRACTS CONTRACTS CONTRACTS CONTACTS TOTAL
----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN (LOSS) FROM:
Futures contracts - - $ 283,392 - - - $ 283,392
----------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) ON:
Futures contracts - - $(344,329) - - - $ (344,329)
----------------------------------------------------------------------------------------------------------------------------------
AVERAGE QUARTERLY BALANCES OF OUTSTANDING
DERIVATIVE FINANCIAL INSTRUMENTS
Futures contracts:
Average notional value of contracts - long $18,330,680
----------------------------------------------------------------------------------------------------------------------------------
For more information about the Series' investment risks regarding derivative
financial instruments, refer to the Notes to Financial Statements.
FAIR VALUE HIERARCHY AS OF PERIOD END
Various inputs are used in determining the fair value of investments and
derivative financial instruments. For information about the Series' policy
regarding valuation of investments and derivative financial instruments, refer
to the Notes to Financial Statements.
================================================================================
72 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
The following tables summarize the Series' investments and derivative financial
instruments categorized in the disclosure hierarchy:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------
ASSETS:
INVESTMENTS:
Common Stocks:
Aerospace & Defense $ 8,961,538 $ - $ - $ 8,961,538
Alternative Energy 702,520 - - 702,520
Automobiles & Parts 10,849,157 - - 10,849,157
Banks 37,857,005 - - 37,857,005
Beverages 567,685 - - 567,685
Chemicals 14,338,449 - - 14,338,449
Construction & Materials 14,211,043 - - 14,211,043
Electricity 9,261,139 - - 9,261,139
Electronic & Electrical Equipment 17,393,365 - - 17,393,365
Financial Services 22,790,882 - - 22,790,882
Fixed Line Telecommunications 1,708,001 - - 1,708,001
Food & Drug Retailers 4,523,460 - - 4,523,460
Food Producers 12,689,361 - - 12,689,361
Forestry & Paper 1,277,871 - - 1,277,871
Gas, Water & Multi-Utilities 11,294,909 - - 11,294,909
General Industrials 8,936,694 - - 8,936,694
General Retailers 24,439,214 - - 24,439,214
Health Care Equipment & Services 31,282,337 - - 31,282,337
Household Goods & Home Construction 9,352,840 - - 9,352,840
Industrial Engineering 15,854,956 - - 15,854,956
Industrial Metals & Mining 3,933,310 17,322 - 3,950,632
Industrial Transportation 6,970,072 - - 6,970,072
Leisure Goods 4,940,516 - - 4,940,516
Life Insurance 1,856,963 - - 1,856,963
Media 32,215,889 - - 32,215,889
Mining 2,916,873 - - 2,916,873
Mobile Telecommunications 5,661,436 - - 5,661,436
Nonlife Insurance 21,314,911 - - 21,314,911
Oil & Gas Producers 12,721,336 - - 12,721,336
Oil Equipment, Services & Distribution 8,124,361 - - 8,124,361
Personal Goods 7,071,050 - - 7,071,050
Pharmaceuticals & Biotechnology 30,182,708 - 24,265 30,206,973
Real Estate Investment & Services 10,386,893 - - 10,386,893
Real Estate Investment Trusts (REITs) 57,347,477 20,224 - 57,367,701
Software & Computer Services 43,266,775 - - 43,266,775
Support Services 27,861,452 - - 27,861,452
Technology Hardware & Equipment 23,561,156 - - 23,561,156
Tobacco 653,532 - - 653,532
Travel & Leisure 27,761,254 - - 27,761,254
Other Interests:
Technology Hardware & Equipment - - 45 45
Rights:
Technology Hardware & Equipment - - 28,099 28,099
Short-Term Securities:
Money Market Funds 17,711,861 10,184,473 - 27,896,334
-------------------------------------------------------------------------------------------------------------
Total $604,752,251 $10,222,019 $52,409 $615,026,679
=============================================================================================================
================================================================================
SCHEDULE OF INVESTMENTS | 73
================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS(1)
-------------------------------------------------------------------------------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Equity contracts $(409,366) - - $(409,366)
====================================================================================================================
(1) Derivative financial instruments are futures contracts, which are valued at
the unrealized appreciation (depreciation) on the instrument.
The Series may hold assets and/or liabilities in which the fair value
approximates the carrying amount for financial statement purposes. As of period
end, such assets and/or liabilities are categorized within the disclosure
hierarchy as follows:
-------------------------------------------------------------------------------------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash pledged for futures contracts $885,700 $ - - $ 885,700
LIABILITIES:
Collateral on securities loaned at value - (10,184,473) - (10,184,473)
-------------------------------------------------------------------------------------------------------------------
Total $885,700 $(10,184,473) - $ (9,298,773)
====================================================================================================================
During the six months ended June 30, 2016, there were no transfers between
levels.
================================================================================
74 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments at value - unaffiliated (including securities
loaned at value of $9,914,811) (cost - $418,281,979) $586,960,741
Investments at value - affiliated (cost - $28,121,017) 28,065,938
Cash pledged for futures contracts 885,700
Receivables:
Contributions from investors 37,630
Dividends 752,514
Investments sold 2,688,798
Variation margin on futures contracts 342,966
Income - affiliated 6,054
Securities lending income - affiliated 55,022
Prepaid expenses 1,041
------------
Total assets 619,796,404
------------
LIABILITIES
Collateral on securities loaned at value 10,184,473
Other affiliates 3,516
Payables:
Investment advisory fees 4,011
Officer's and Directors' fees 3,614
Other accrued expenses 143,252
------------
Total liabilities 10,338,866
------------
NET ASSETS $609,457,538
============
NET ASSETS CONSIST OF
Investors' capital $441,243,221
Net unrealized appreciation (depreciation) 168,214,317
------------
Net Assets $609,457,538
============
See notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 75
================================================================================
STATEMENT OF OPERATIONS
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends - unaffiliated $ 5,006,837
Securities lending - affiliated - net 445,409
Dividends - affiliated 31,029
Foreign taxes withheld (2,761)
------------
Total income 5,480,514
------------
EXPENSES
Investment advisory 29,113
Accounting services 66,881
Professional 38,734
Custodian 29,160
Pricing fees 22,908
Directors 12,188
Printing 11,819
Miscellaneous 4,106
------------
Total expenses 214,909
Less fees waived by the Manager (4,640)
Less fees paid indirectly (158)
------------
Total expenses after fees waived and paid indirectly 210,111
------------
NET INVESTMENT INCOME 5,270,403
------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) from:
Investments - unaffiliated 23,000,570
Futures contracts 283,392
------------
23,283,962
------------
Net change in unrealized appreciation (depreciation) on:
Investments - unaffiliated (14,643,023)
Investments - affiliated 10,137
Futures contracts (344,329)
------------
(14,977,215)
------------
Net realized and unrealized gain 8,306,747
------------
Net Increase in Net Assets Resulting from Operations $ 13,577,150
============
See notes to financial statements.
================================================================================
76 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
Six-month period ended June 30, 2016 (unaudited), and year ended
December 31, 2015
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS: (UNAUDITED) 2015
---------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 5,270,403 $ 8,433,717
Net realized gain 23,283,962 41,451,801
Net change in unrealized appreciation (depreciation) (14,977,215) (71,694,731)
--------------------------------
Net increase (decrease) in net assets resulting
from operations 13,577,150 (21,809,213)
--------------------------------
CAPITAL TRANSACTIONS
Proceeds from contributions 24,221,202 74,606,931
Value of withdrawals (48,090,606) (94,072,983)
--------------------------------
Net decrease in net assets derived from
capital transactions (23,869,404) (19,466,052)
--------------------------------
NET ASSETS
Total decrease in net assets (10,292,254) (41,275,265)
Beginning of period 619,749,792 661,025,057
--------------------------------
End of period $609,457,538 $619,749,792
================================
See notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 77
================================================================================
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
2016 -----------------------------------------------------------------
(UNAUDITED) 2015 2014 2013 2012 2011
---------------------------------------------------------------------------------
TOTAL RETURN
Total Return 2.48%(1) (3.32)% 7.66% 37.98% 18.04% (3.55)%
---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Total expenses 0.07%(2) 0.07% 0.07%(3) 0.07% 0.10% 0.08%
---------------------------------------------------------------------------------
Total expenses after fees waived
and/or reimbursed 0.07%(2) 0.06% 0.07%(3) 0.06% 0.09% 0.08%
---------------------------------------------------------------------------------
Net investment income 1.81%(2) 1.27% 1.35%(3) 1.32% 1.83% 1.29%
---------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000) $609,458 $619,750 $661,025 $615,867 $398,305 $439,752
=================================================================================
Portfolio turnover rate 5% 14% 10% 18% 12% 12%
---------------------------------------------------------------------------------
1 Aggregate total return.
2 Annualized.
3 Ratios do not include expenses incurred indirectly as a result of investments
in underlying funds of approximately 0.01%.
See notes to financial statements.
================================================================================
78 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
NOTES TO FINANCIAL
STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) ORGANIZATION
Quantitative Master Series LLC (the "Master LLC") is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Master Extended Market Index Series (the
"Series") is a series of the Master LLC. The Series is classified as
diversified. The Master LLC is organized as a Delaware limited liability
company. The Master LLC's Limited Liability Company Agreement permits the Board
of Directors of the Master LLC (the "Board") to issue non-transferable
interests, subject to certain limitations.
The Series, together with certain other registered investment companies advised
by BlackRock Advisors, LLC (the "Manager") or its affiliates, is included in a
complex of open-end funds referred to as the Equity-Liquidity Complex.
(2) SIGNIFICANT ACCOUNTING POLICIES
The financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), which may
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
The Series is considered an investment company under U.S. GAAP and follows the
accounting and reporting guidance applicable to investment companies. Below is a
summary of significant accounting policies:
SEGREGATION AND COLLATERALIZATION - In cases where the Series enters into
certain investments (e.g., futures contracts) that would be treated as "senior
================================================================================
NOTES TO FINANCIAL STATEMENTS | 79
================================================================================
securities" for 1940 Act purposes, the Series may segregate or designate on its
books and records cash or liquid assets having a market value at least equal to
the amount of its future obligations under such investments. Doing so allows the
investment to be excluded from treatment as a "senior security." Furthermore,
if required by an exchange or counterparty agreement, the Series may be required
to deliver/deposit cash and/or securities to/with an exchange, or broker-dealer
or custodian as collateral for certain investments or obligations.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME - For financial reporting
purposes, investment transactions are recorded on the dates the transactions are
entered into (the trade dates). Realized gains and losses on investment
transactions are determined on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Upon notification from issuers, some of the
dividend income received from a real estate investment trust may be redesignated
as a reduction of cost of the related investment and/or realized gain.
INDEMNIFICATIONS - In the normal course of business, the Series enters into
contracts that contain a variety of representations that provide general
indemnification. The Series' maximum exposure under these arrangements is
unknown because it involves future potential claims against the Series, which
cannot be predicted with any certainty.
OTHER - Expenses directly related to the Series are charged to the Series.
Other operating expenses shared by several funds, including other funds managed
by the Manager, are prorated among those funds on the basis of relative net
assets or other appropriate methods.
The Series has an arrangement with its custodian whereby fees may be reduced by
credits earned on uninvested cash balances, which, if applicable, are shown as
fees paid indirectly in the Statement of Operations. The custodian imposes fees
on overdrawn cash balances, which can be offset by accumulated credits earned or
may result in additional custody charges. Effective October 2015, the custodian
is imposing fees on certain uninvested cash balances.
================================================================================
80 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
(3) INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS
INVESTMENT VALUATION POLICIES - The Series' investments are valued at fair value
(also referred to as "market value" within the financial statements) as of the
close of trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m.,
Eastern time). U.S. GAAP defines fair value as the price the Series would
receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants at the measurement date. The Series
determines the fair values of its financial instruments using various
independent dealers or pricing services under policies approved by the Board.
The BlackRock Global Valuation Methodologies Committee (the "Global Valuation
Committee") is the committee formed by management to develop global pricing
policies and procedures and to oversee the pricing function for all financial
instruments.
FAIR VALUE INPUTS AND METHODOLOGIES - The following methods (or "techniques")
and inputs are used to establish the fair value of the Series' assets and
liabilities:
o Equity investments traded on a recognized securities exchange are valued at
the official closing price each day, if available. For equity investments
traded on more than one exchange, the official close price on the exchange
where the stock is primarily traded is used. Equity investments traded on a
recognized exchange for which there were no sales on that day may be valued
at the last available bid (long positions) or ask (short positions) price.
o Investments in open-end U.S. mutual funds are valued at net asset value
("NAV") each business day.
o The Series values its investment in BlackRock Liquidity Series, LLC, Money
Market Series (the "Money Market Series") at fair value, which is ordinarily
based upon its pro rata ownership in the underlying fund's net assets. The
Money Market Series seeks current income consistent with maintaining
liquidity and preserving capital. Although the Money Market Series is not
registered under the 1940 Act, its investments may follow the parameters of
investments by a money market fund that is
================================================================================
NOTES TO FINANCIAL STATEMENTS | 81
================================================================================
subject to Rule 2a-7 under the 1940 Act. The Series may withdraw up to 25%
of its investment daily, although the manager of the Money Market Series, in
its sole discretion, may permit an investor to withdraw more than 25% on any
one day.
o Futures contracts traded on exchanges are valued at their last sale price.
If events (e.g., a company announcement, market volatility or a natural
disaster) occur that are expected to materially affect the value of such
instruments, or in the event that the application of these methods of valuation
results in a price for an investment that is deemed not to be representative of
the market value of such investment, or if a price is not available, the
investment will be valued by the Global Valuation Committee, or its delegate, in
accordance with a policy approved by the Board as reflecting fair value ("Fair
Valued Investments"). When determining the price for Fair Valued Investments,
the Global Valuation Committee, or its delegate, seeks to determine the price
that the Series might reasonably expect to receive or pay from the current sale
or purchase of that asset or liability in an arm's-length transaction. Fair
value determinations shall be based upon all available factors that the Global
Valuation Committee, or its delegate, deems relevant consistent with the
principles of fair value measurement, which include the market approach, income
approach and/or in the case of recent investments, the cost approach, as
appropriate. The market approach generally consists of using comparable market
transactions. The income approach generally is used to discount future cash
flows to present value and is adjusted for liquidity as appropriate. These
factors include but are not limited to: (i) attributes specific to the
investment or asset; (ii) the principal market for the investment or asset;
(iii) the customary participants in the principal market for the investment or
asset; (iv) data assumptions by market participants for the investment or asset,
if reasonably available; (v) quoted prices for similar investments or assets in
active markets; and (vi) other factors, such as future cash flows, interest
rates, yield curves, volatilities, prepayment speeds, loss severities, credit
risks, recovery rates, liquidation amounts and/or default rates. Due to the
inherent uncertainty of valuations of such investments, the fair values may
differ from the values that would have been used had an active market existed.
The Global Valuation
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82 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
Committee, or its delegate, employs various methods for calibrating valuation
approaches for investments where an active market does not exist, including
regular due diligence of the Series pricing vendors, regular reviews of key
inputs and assumptions, transactional back-testing or disposition analysis to
compare unrealized gains and losses to realized gains and losses, reviews of
missing or stale prices and large movements in market values and reviews of any
market related activity. The pricing of all Fair Valued Investments is
subsequently reported to the Board or a committee thereof on a quarterly basis.
FAIR VALUE HIERARCHY - Various inputs are used in determining the fair value of
investments and derivative financial instruments. These inputs to valuation
techniques are categorized into a fair value hierarchy consisting of three broad
levels for financial statement purposes as follows:
o Level 1 -- unadjusted price quotations in active markets/exchanges for
identical assets or liabilities that the Series has the ability to access
o Level 2 -- other observable inputs (including, but not limited to, quoted
prices for similar assets or liabilities in markets that are active, quoted
prices for identical or similar assets or liabilities in markets that are
not active, inputs other than quoted prices that are observable for the
assets or liabilities (such as interest rates, yield curves, volatilities,
prepayment speeds, loss severities, credit risks and default rates) or other
market-corroborated inputs)
o Level 3 -- unobservable inputs based on the best information available in
the circumstances, to the extent observable inputs are not available
(including the Series' own assumptions used in determining the fair value
of investments and derivative financial instruments)
The hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the
degree of judgment exercised in determining fair value is greatest for
instruments categorized in Level 3. The inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the fair value hierarchy classification is determined
================================================================================
NOTES TO FINANCIAL STATEMENTS | 83
================================================================================
based on the lowest level input that is significant to the fair value
measurement in its entirety. The significant unobservable inputs used by the
Global Valuation Committee in determining the price for Fair Valued Investments
are typically categorized as Level 3. The fair value hierarchy for the Series'
investments and derivative financial instruments has been included in the
Schedules of Investments.
Changes in valuation techniques may result in transfers into or out of an
assigned level within the hierarchy. In accordance with the Series' policy,
transfers between different levels of the fair value hierarchy are deemed to
have occurred as of the beginning of the reporting period. The categorization of
a value determined for investments and derivative financial instruments is based
on the pricing transparency of the investments and derivative financial
instruments and is not necessarily an indication of the risks associated with
investing in those securities.
(4) SECURITIES AND OTHER INVESTMENTS
SECURITIES LENDING - The Series may lend its securities to approved borrowers,
such as brokers, dealers and other financial institutions. The borrower pledges
and maintains with the Series collateral consisting of cash, an irrevocable
letter of credit issued by a bank or securities issued or guaranteed by the U.S.
Government. The initial collateral received by the Series is required to have a
value of at least 102% of the current value of the loaned securities for
securities traded on U.S. exchanges and a value of at least 105% for all other
securities. The collateral is maintained thereafter at a value equal to at least
100% of the current market value of the securities on loan. The market value of
the loaned securities is determined at the close of each business day of the
Series and any additional required collateral is delivered to the Series, or
excess collateral returned by the Series, on the next business day. During the
term of the loan, the Series is entitled to all distributions made on or in
respect of the loaned securities. Loans of securities are terminable at any time
and the borrower, after notice, is required to return borrowed securities within
the standard time period for settlement of securities transactions.
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84 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
The market value of any securities on loan, all of which were classified as
common stocks in the Series' Schedule of Investments, and the value of any
related collateral are shown separately in the Statement of Assets and
Liabilities as a component of investments at value-unaffiliated, and collateral
on securities loaned at value, respectively. As of period end, any securities on
loan were collateralized by cash. The cash collateral invested by the securities
lending agent, BlackRock Investment Management, LLC ("BIM") if any, is disclosed
in the Schedule of Investments.
Securities lending transactions are entered into by the Series under Master
Securities Lending Agreements (each, an "MSLA"), which provide the right, in the
event of default (including bankruptcy or insolvency), for the non-defaulting
party to liquidate the collateral and calculate a net exposure to the defaulting
party or request additional collateral. In the event that a borrower defaults,
the Series, as lender, would offset the market value of the collateral received
against the market value of the securities loaned. When the value of the
collateral is greater than that of the market value of the securities loaned,
the lender is left with a net amount payable to the defaulting party. However,
bankruptcy or insolvency laws of a particular jurisdiction may impose
restrictions on or prohibitions against such a right of offset in the event of
an MSLA counterparty's bankruptcy or insolvency. Under the MSLA, absent an event
of default the borrower can resell or re-pledge the loaned securities, and the
Series can reinvest cash collateral received in connection with loaned
securities. Upon an event of default, the parties' obligations to return the
securities or collateral to the other party are extinguished, and the parties
can resell or re-pledge the loaned securities or the collateral received in
connection with the loaned securities in order to satisfy the defaulting party's
net payment obligation for all transactions under the MSLA. The defaulting party
remains liable for any deficiency.
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NOTES TO FINANCIAL STATEMENTS | 85
================================================================================
As of period end, the following table is a summary of the Series' securities
lending agreements by counterparty, which are subject to offset under an MSLA:
SECURITIES CASH
LOANED AT COLLATERAL NET
COUNTERPARTY VALUE RECEIVED(1) AMOUNT(2)
-----------------------------------------------------------------------------------------------------
Barclays Capital, Inc. $ 2,480 $ (2,480) -
BNP Paribas S.A. 591,096 (586,892) $4,204
Citigroup Global Markets, Inc. 623,671 (623,671) -
Credit Suisse Securities (USA) LLC 834,769 (834,769) -
Deutsche Bank Securities, Inc. 420,850 (420,850) -
Goldman Sachs & Co. 299,241 (299,241) -
JP Morgan Securities LLC 3,383,918 (3,383,918) -
Merrill Lynch, Pierce, Fenner & Smith, Inc. 139,983 (139,983) -
Morgan Stanley 2,238,637 (2,238,637) -
National Financial Services LLC 947,392 (947,392) -
SG Americas Securities LLC 232,288 (232,288) -
UBS Securities LLC 200,486 (200,486) -
-------------------------------------------------
TOTAL $9,914,811 $(9,910,607) $4,204
=================================================
(1) Collateral with a value of $10,184,473 has been received in connection with
securities lending agreements. Collateral received in excess of the value of
securities loaned from the individual counterparty is not shown for
financial reporting purposes.
(2) The market value of the loaned securities is determined as of June 30, 2016.
Additional collateral is delivered to the Fund on the next business day in
accordance with the MSLA. The net amount would be subject to the borrower
default indemnity in the event of default by the counterparty.
The risks of securities lending include the risk that the borrower may not
provide additional collateral when required or may not return the securities
when due. To mitigate these risks, the Series benefits from a borrower default
indemnity provided by BIM. BIM's indemnity allows for full replacement of the
securities loaned if the collateral received does not cover the value on the
securities loaned in the event of borrower default. The Series could suffer a
loss if the value of an investment purchased with cash collateral falls below
the market value of loaned securities or if the value of an investment purchased
with cash collateral falls below the value of the original cash collateral
received.
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86 | MASTER EXTENDED MARKET INDEX SERIES
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(5) DERIVATIVE FINANCIAL INSTRUMENTS
The Series engages in various portfolio investment strategies using derivative
contracts both to increase the returns of the Series and/or to manage its
exposure to certain risks such as credit risk, equity risk, interest rate risk,
foreign currency exchange rate risk, commodity price risk or other risks (e.g.,
inflation risk). Derivative financial instruments categorized by risk exposure
are included in the Schedule of Investments. These contracts may be transacted
on an exchange or over the counter ("OTC").
FUTURES CONTRACTS - The Series invests in long and/or short positions in
futures and options on futures contracts to gain exposure to, or manage
exposure to changes in the value of equity securities (equity risk) or foreign
currencies (foreign currency exchange rate risk).
Futures contracts are agreements between the Series and a counterparty to buy or
sell a specific quantity of an underlying instrument at a specified price and on
a specified date. Depending on the terms of a contract, it is settled either
through physical delivery of the underlying instrument on the settlement date or
by payment of a cash amount on the settlement date. Upon entering into a futures
contract, the Series is required to deposit initial margin with the broker in
the form of cash or securities in an amount that varies depending on a
contract's size and risk profile. The initial margin deposit must then be
maintained at an established level over the life of the contract.
Securities deposited as initial margin are designated in the Schedule of
Investments and cash deposited, if any, is shown as cash pledged for futures
contracts in the Statement of Assets and Liabilities. Pursuant to the contract,
the Series agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in market value of the contract ("variation margin").
Variation margin is recorded as unrealized appreciation (depreciation) and, if
any, shown as variation margin receivable (or payable) on futures contracts in
the Statement of Assets and Liabilities. When the contract is closed, a realized
gain or loss is recorded in the Statement of Operations equal to the difference
between the value of the contract at the time it was opened and the value at the
time it was closed. The use of futures contracts involves the risk of an
imperfect correlation in the movements in the price of futures contracts and
interest, foreign currency exchange rates or underlying assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 87
================================================================================
(6) INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
The PNC Financial Services Group, Inc. is the largest stockholder and an
affiliate of BlackRock, Inc. ("BlackRock") for 1940 Act purposes.
INVESTMENT ADVISORY
The Master LLC, on behalf of the Series, entered into an Investment Advisory
Agreement with the Manager, the Series' investment adviser, an indirect, wholly
owned subsidiary of BlackRock, to provide investment advisory services. The
Manager is responsible for the management of the Series' portfolio and provides
the personnel, facilities, equipment and certain other services necessary to the
operations of the Series.
For such services, the Series pays the Manager a monthly fee which is determined
by calculating a percentage of the Series' average daily net assets based on an
annual rate of 0.01%.
EXPENSE WAIVERS AND REIMBURSEMENTS
The Manager contractually agreed to waive and/or reimburse fees or expenses in
order to limit expenses, excluding interest expense, dividend expense, tax
expense, acquired fund fees and expenses, and certain other fund expenses, which
constitute extraordinary expenses not incurred in the ordinary course of the
Series' business. The expense limitation as a percentage of average daily net
assets is 0.12%.
The Manager has agreed not to reduce or discontinue this contractual expense
limitation prior to May 1, 2017, unless approved by the Board, including a
majority of the Independent Directors or by a majority of the outstanding voting
securities of the Series.
The Manager voluntarily agreed to waive its investment advisory fees by the
amount of investment advisory fees the Series pays to the Manager indirectly
through its investment in affiliated money market funds. This amount is shown as
fees waived by the Manager in the Statement of Operations. However, the Manager
does not waive its investment advisory fees by the amount of investment advisory
fees paid in connection with the Series'
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88 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
investments in other affiliated investment companies, if any. For the six months
ended June 30, 2016, the amount waived was $4,640.
For the six months ended June 30, 2016 the Series reimbursed the Manager $3,510
for certain accounting services, which is included in accounting services in the
Statement of Operations.
SECURITIES LENDING
The U.S. Securities and Exchange Commission has issued an exemptive order which
permits BIM, an affiliate of the Manager, to serve as securities lending agent
for the Series, subject to applicable conditions. As securities lending agent,
BIM bears all operational costs directly related to securities lending. The
Series is responsible for expenses in connection with the investment of cash
collateral received for securities on loan (the "collateral investment
expenses"). The cash collateral is invested in a private investment company
managed by the Manager or its affiliates. However, BIM has agreed to cap the
collateral investment expenses of the private investment company to an annual
rate of 0.04%. The investment adviser to the private investment company will not
charge any advisory fees with respect to shares purchased by the Series.
Securities lending income is equal to the total of income earned from the
reinvestment of cash collateral, net of fees and other payments to and from
borrowers of securities, and less the collateral investment expenses. The Series
retains a portion of securities lending income and remits a remaining portion to
BIM as compensation for its services as securities lending agent. Pursuant to a
securities lending agreement, BIM may lend securities only when the difference
between the borrower rebate rate and the risk free rate exceeds a certain level
(such securities, the "specials only securities").
Pursuant to such agreement, the Series retains 80% of securities lending income.
In addition, commencing the business day following the date that the aggregate
securities lending income earned across certain funds in the Equity-Liquidity
Complex in a calendar year exceeds a specified threshold, the Series, pursuant
to the securities lending agreement, will retain for the remainder of the
calendar year securities lending income in an amount equal to 85% of securities
lending income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 89
================================================================================
The share of securities lending income earned by the Series is shown as
securities lending -- affiliated - net in the Statement of Operations. For the
six months ended June 30, 2016, the Series paid BIM $111,354 for securities
lending agent services.
OFFICERS AND DIRECTORS
Certain officers and/or directors of the Master LLC are officers and/or
directors of BlackRock or its affiliates.
(7) PURCHASES AND SALES
For the six months ended June 30, 2016, purchases and sales of investments
excluding short-term securities, were $29,215,805 and $50,922,692 respectively.
(8) INCOME TAX INFORMATION
The Series is classified as a partnership for federal income tax purposes. As
such, each investor in the Series is treated as the owner of its proportionate
share of net assets, income, expenses and realized and unrealized gains and
losses of the Series. Therefore, no federal income tax provision is required. It
is intended that the Series' assets will be managed so an investor in the Series
can satisfy the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended.
The Series files U.S. federal and various state and local tax returns. No income
tax returns are currently under examination. The statute of limitations on the
Series' U.S. federal tax returns generally remains open for each of the four
years ended December 31, 2015. The statutes of limitations on the Series' state
and local tax returns may remain open for an additional year depending upon the
jurisdiction.
Management has analyzed tax laws and regulations and their application to the
Series as of June 30, 2016, inclusive of the open tax return years, and does not
believe there are any uncertain tax positions that require recognition of a tax
liability in the Series' financial statements.
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90 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
As of June 30, 2016 gross unrealized appreciation and depreciation based on cost
for federal income tax purposes were as follows:
Tax cost $449,618,976
------------
Gross unrealized appreciation $225,744,903
Gross unrealized depreciation (60,337,200)
------------
Net unrealized appreciation $165,407,703
------------
(9) BANK BORROWINGS
The Master LLC, on behalf of the Series, along with certain other funds managed
by the Manager and its affiliates ("Participating Funds"), is a party to a
364-day, $2.1 billion credit agreement with a group of lenders. Under this
agreement, the Series may borrow to fund shareholder redemptions. Excluding
commitments designated for certain individual funds, the Participating Funds,
including the Series, can borrow up to an aggregate commitment amount of $1.6
billion at any time outstanding, subject to asset coverage and other limitations
as specified in the agreement. The credit agreement has the following terms: a
fee of 0.12% per annum on unused commitment amounts and interest at a rate equal
to the higher of (a) one-month LIBOR (but, in any event, not less than 0.00%)
on the date the loan is made plus 0.80% per annum or (b) the Fed Funds rate
(but, in any event, not less than 0.00%) in effect from time to time plus 0.80%
per annum on amounts borrowed. The agreement expires in April 2017 unless
extended or renewed. Prior to April 21, 2016, the credit agreement had a fee per
annum of 0.06% on unused commitment amounts and interest at a rate equal to the
higher of (a) one-month LIBOR (but, in any event, not less than 0.00%) on the
date the loan is made plus 0.80% per annum or (b) the Fed Funds rate (but, in
any event, not less than 0.00%) in effect from time to time plus 0.80% per annum
on amounts borrowed. Participating Funds paid administration, legal and
arrangement fees, which, if applicable, are included in miscellaneous expenses
in the Statement of Operations. These fees were allocated among such funds based
upon portions of the aggregate commitment available to them and relative net
assets of Participating Funds. During the six months ended June 30, 2016, the
Series did not borrow under the credit agreement.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 91
================================================================================
(10) PRINCIPAL RISKS
In the normal course of business, the Series invests in securities and enters
into transactions where risks exist due to fluctuations in the market (market
risk) or failure of the issuer to meet all its obligations, including the
ability to pay principal and interest when due (issuer credit risk). The value
of securities held by the Series may decline in response to certain events,
including those directly involving the issuers of securities owned by the
Series. Changes arising from the general economy, the overall market and local,
regional or global political and/or social instability, as well as currency,
interest rate and price fluctuations, may also affect the securities' value.
COUNTERPARTY CREDIT RISK - Similar to issuer credit risk, the Series may be
exposed to counterparty credit risk, or the risk that an entity may fail to or
be unable to perform on its commitments related to unsettled or open
transactions. The Series manages counterparty credit risk by entering into
transactions only with counterparties that the Manager believes have the
financial resources to honor their obligations and by monitoring the financial
stability of those counterparties. Financial assets, which potentially expose
the Series to market, issuer and counterparty credit risks, consist principally
of financial instruments and receivables due from counterparties. The extent of
the Series' exposure to market, issuer and counterparty credit risks with
respect to these financial assets is approximately their value recorded in the
Statement of Assets and Liabilities, less any collateral held by the Series.
A derivative contract may suffer a mark-to-market loss if the value of the
contract decreases due to an unfavorable change in the market rates or values of
the underlying instrument. Losses can also occur if the counterparty does not
perform under the contract.
With exchange-traded futures, there is less counterparty credit risk to the
Series since the exchange or clearinghouse, as counterparty to such instruments,
guarantees against a possible default. The clearinghouse stands between the
buyer and the seller of the contract; therefore, credit risk is limited to
failure of the clearinghouse. While offset rights may exist under applicable
law, the Series does not have a contractual right of offset against a clearing
broker or clearinghouse in the event of a default (including the bankruptcy or
insolvency). Additionally, credit risk exists in exchange-traded
================================================================================
92 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
futures with respect to initial and variation margin that is held in a clearing
broker's customer accounts. While clearing brokers are required to segregate
customer margin from their own assets, in the event that a clearing broker
becomes insolvent or goes into bankruptcy and at that time there is a shortfall
in the aggregate amount of margin held by the clearing broker for all its
clients, typically the shortfall would be allocated on a pro rata basis across
all the clearing broker's customers, potentially resulting in losses to the
Series.
CONCENTRATION RISK - As of period end, the Series invested a significant portion
of its assets in securities in the financials sector. Changes in economic
conditions affecting such sector would have a greater impact on the Series and
could affect the value, income and/or liquidity of positions in such securities.
(11) SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Series
through the date the financial statements were issued and has determined that
there were no subsequent events requiring adjustment or additional disclosure in
the financial statements.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 93
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
The Board of Directors (the "Board," and the members of which are referred to as
"Board Members") of Quantitative Master Series LLC (the "Master LLC") met in
person on April 21, 2016 (the "April Meeting") and May 18-20, 2016 (the "May
Meeting") to consider the approval of the investment advisory agreement (the
"Agreement") between the Master LLC, on behalf of Master Extended Market Index
Series (the "Portfolio"), a series of the Master LLC, and BlackRock Advisors,
LLC (the "Manager" or "BlackRock"), the Master LLC's investment advisor.
ACTIVITIES AND COMPOSITION OF THE BOARD
On the date of the May Meeting, the Board consisted of fifteen individuals,
thirteen of whom were not "interested persons" of the Master LLC as defined in
the Investment Company Act of 1940, as amended (the "1940 Act") (the
"Independent Board Members"). The Board Members are responsible for the
oversight of the operations of the Master LLC and perform the various duties
imposed on the directors of investment companies by the 1940 Act. The
Independent Board Members have retained independent legal counsel to assist them
in connection with their duties. The Chair of the Board is an Independent Board
Member. The Board has established five standing committees: an Audit Committee,
a Governance and Nominating Committee, a Compliance Committee, a Performance
Oversight and Contract Committee and an Executive Committee, each of which is
chaired by an Independent Board Member and composed of Independent Board Members
(except for the Executive Committee, which also has one interested Board
Member).
THE AGREEMENT
Pursuant to the 1940 Act, the Board is required to consider the continuation of
the Agreement on an annual basis. The Board has four quarterly meetings per
year, each extending over two days, a fifth one-day meeting to consider
================================================================================
94 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
specific information surrounding the consideration of renewing the Agreement and
additional in-person and telephonic meetings as needed. In connection with this
year-long deliberative process, the Board assessed, among other things, the
nature, extent and quality of the services provided to the Portfolio by
BlackRock, BlackRock's personnel and affiliates, including (as applicable):
investment management; administrative and shareholder services; the oversight of
fund service providers; marketing; risk oversight; compliance; and ability to
meet applicable legal and regulatory requirements.
The Board, acting directly and through its committees, considers at each of its
meetings, and from time to time as appropriate, factors that are relevant to its
annual consideration of the renewal of the Agreement, including the services and
support provided by BlackRock to the Portfolio and its interest holders.
BlackRock also furnished additional information to the Board in response to
specific questions from the Board. This additional information is discussed
further below in the section titled "Board Considerations in Approving the
Agreement." Among the matters the Board considered were: (a) investment
performance for one-year, three-year, five-year, ten-year, and/or since
inception periods, as applicable, against peer funds, applicable benchmark, and
performance metrics, as applicable, as well as senior management's and portfolio
managers' analysis of the reasons for any over-performance or underperformance
relative to its peers, benchmarks, and other performance metrics, as applicable;
(b) fees, including advisory, administration, if applicable, and other amounts
paid to BlackRock and its affiliates by the Portfolio for services; (c)
Portfolio operating expenses and how BlackRock allocates expenses to the
Portfolio; (d) the resources devoted to, risk oversight of, and compliance
reports relating to, implementation of the Portfolio's investment objective(s),
policies and restrictions, and meeting regulatory requirements; (e) the Master
LLC's compliance with its compliance policies and procedures; (f) the nature,
cost and character of non-investment management services provided by BlackRock
and its affiliates; (g) BlackRock's and other service providers' internal
controls and risk and compliance oversight mechanisms; (h) BlackRock's
implementation of the proxy voting policies approved by the Board; (i) the use
of brokerage commissions and execution quality of portfolio transactions; (j)
BlackRock's implementation of the Master LLC's valuation and liquidity
procedures;
================================================================================
ADVISORY AGREEMENT(S) | 95
================================================================================
(k) an analysis of management fees for products with similar investment mandates
across the open-end fund, exchange-traded fund ("ETF"), closed-end fund and
institutional account product channels, as applicable, and the similarities and
differences between these products and the services provided as compared to the
Portfolio; (l) BlackRock's compensation methodology for its investment
professionals and the incentives and accountability it creates, along with
investment professionals' investments in the fund(s) they manage; and (m)
periodic updates on BlackRock's business.
BOARD CONSIDERATIONS IN APPROVING THE AGREEMENT
THE APPROVAL PROCESS - Prior to the April Meeting, the Board requested and
received materials specifically relating to the Agreement. The Board is
continuously engaged in a process with its independent legal counsel and
BlackRock to review the nature and scope of the information provided to better
assist its deliberations. The materials provided in connection with the April
Meeting included (a) information independently compiled and prepared by
Broadridge Financial Solutions, Inc. ("Broadridge") on Portfolio fees and
expenses as compared with a peer group of funds as determined by Broadridge
("Expense Peers") and the investment performance of the Portfolio as compared
with a peer group of funds as determined by Broadridge(1), as well as the
performance of the Portfolio as compared with its benchmark; (b) information on
the profits realized by BlackRock and its affiliates pursuant to the Agreement
and a discussion of fall-out benefits to BlackRock and its affiliates; (c) a
general analysis provided by BlackRock concerning investment management fees
charged to other clients, such as institutional clients, sub-advised mutual
funds, ETFs and closed-end funds, under similar investment mandates, as well as
the performance of such other clients, as applicable; (d) review of non-
management fees; (e) the existence, impact and sharing of potential economies of
scale; (f) a summary of aggregate amounts paid by the Portfolio to BlackRock;
and (g) sales and redemption data regarding the Portfolio's interests.
(1) Funds are ranked by Broadridge in quartiles, ranging from first to fourth,
where first is the most desirable quartile position and fourth is the least
desirable.
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96 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
At the April Meeting, the Board reviewed materials relating to its consideration
of the Agreement. As a result of the discussions that occurred during the April
Meeting, and as a culmination of the Board's year-long deliberative process, the
Board presented BlackRock with questions and requests for additional
information. BlackRock responded to these requests with additional written
information in advance of the May Meeting.
At the May Meeting, the Board, including the Independent Board Members, approved
the continuation of the Agreement between the Manager and the Master LLC with
respect to the Portfolio for a one-year term ending June 30, 2017. In approving
the continuation of the Agreement, the Board considered: (a) the nature, extent
and quality of the services provided by BlackRock; (b) the investment
performance of the Portfolio; (c) the advisory fee and the cost of the services
and profits to be realized by BlackRock and its affiliates from their
relationship with the Portfolio; (d) the Portfolio's costs to investors compared
to the costs of Expense Peers and performance compared to the relevant
performance metrics as previously discussed; (e) the sharing of potential
economies of scale; (f) fall-out benefits to BlackRock and its affiliates as a
result of its relationship with the Portfolio; and (g) other factors deemed
relevant by the Board Members.
The Board also considered other matters it deemed important to the approval
process, such as other payments made to BlackRock or its affiliates, securities
lending and cash management, services related to the valuation and pricing of
portfolio holdings of the Portfolio, and advice from independent legal counsel
with respect to the review process and materials submitted for the Board's
review. The Board noted the willingness of BlackRock personnel to engage in
open, candid discussions with the Board. The Board did not identify any
particular information as determinative, and each Board Member may have
attributed different weights to the various items considered.
A. NATURE, EXTENT AND QUALITY OF THE SERVICES PROVIDED BY BLACKROCK - The Board,
including the Independent Board Members, reviewed the nature, extent and quality
of services provided by BlackRock, including the investment advisory services
and the resulting performance of the Portfolio. Throughout the year, the Board
compared Portfolio performance to the performance of a comparable group of
mutual funds, relevant benchmark,
================================================================================
ADVISORY AGREEMENT(S) | 97
================================================================================
and performance metrics, as applicable. The Board met with BlackRock's senior
management personnel responsible for investment activities, including the senior
investment officers. The Board also reviewed the materials provided by the
Portfolio's portfolio management team discussing the Portfolio's performance and
the Portfolio's investment objective(s), strategies and outlook.
The Board considered, among other factors, with respect to BlackRock: the
number, education and experience of investment personnel generally and the
Portfolio's portfolio management team; BlackRock's research capabilities;
investments by portfolio managers in the funds they manage; portfolio trading
capabilities; use of technology; commitment to compliance; credit analysis
capabilities; risk analysis and oversight capabilities; and the approach to
training and retaining portfolio managers and other research, advisory and
management personnel. The Board engaged in a review of BlackRock's compensation
structure with respect to the Portfolio's portfolio management team and
BlackRock's ability to attract and retain high-quality talent and create
performance incentives.
In addition to investment advisory services, the Board considered the quality of
the administrative and other non-investment advisory services provided to the
Portfolio. BlackRock and its affiliates provide the Portfolio with certain
administrative, shareholder and other services (in addition to any such services
provided to the Portfolio by third parties) and officers and other personnel as
are necessary for the operations of the Portfolio. In particular, BlackRock and
its affiliates provide the Portfolio with administrative services including,
among others: (i) preparing disclosure documents, such as the prospectus, the
summary prospectus (as applicable), the statement of additional information and
periodic shareholder reports; (ii) oversight of daily accounting and pricing;
(iii) preparing periodic filings with regulators; (iv) overseeing and
coordinating the activities of other service providers; (v) organizing Board
meetings and preparing the materials for such Board meetings; (vi) providing
legal and compliance support; (vii) furnishing analytical and other support to
assist the Board in its consideration of strategic issues such as the merger,
consolidation or repurposing of certain open-end funds; and (viii) performing
other administrative functions
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98 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
necessary for the operation of the Portfolio, such as tax reporting, fulfilling
regulatory filing requirements and call center services. The Board reviewed the
structure and duties of BlackRock's fund administration, shareholder services,
and legal & compliance departments and considered BlackRock's policies and
procedures for assuring compliance with applicable laws and regulations.
B. THE INVESTMENT PERFORMANCE OF THE PORTFOLIO AND BLACKROCK - The Board,
including the Independent Board Members, also reviewed and considered the
performance history of the Portfolio. In preparation for the April Meeting, the
Board was provided with reports independently prepared by Broadridge, which
included a comprehensive analysis of the Portfolio's performance. The Board also
reviewed a narrative and statistical analysis of the Broadridge data that was
prepared by BlackRock. In connection with its review, the Board received and
reviewed information regarding the investment performance of the Portfolio as
compared to other funds in its applicable Broadridge category and the
performance of the Portfolio as compared with its benchmark. The Board was
provided with a description of the methodology used by Broadridge to select peer
funds and periodically meets with Broadridge representatives to review its
methodology. The Board was provided with information on the composition of the
Broadridge performance universes and expense universes. The Board and its
Performance Oversight and Contract Committee regularly review, and meet with
Portfolio management to discuss, the performance of the Portfolio throughout the
year.
In evaluating performance, the Board recognized that the performance data
reflects a snapshot of a period as of a particular date and that selecting a
different performance period could produce significantly different results.
Further, the Board recognized that it is possible that long-term performance can
be adversely affected by even one period of significant underperformance so that
a single investment decision or theme has the ability to affect long-term
performance disproportionately.
The Board noted that for the past five one-year periods reported, the
Portfolio's net performance was within the tolerance range of its benchmark for
four of the five periods. BlackRock believes that net performance relative to
the benchmark is an appropriate performance metric for the Portfolio.
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ADVISORY AGREEMENT(S) | 99
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C. CONSIDERATION OF THE ADVISORY/MANAGEMENT FEES AND THE COST OF THE SERVICES
AND PROFITS TO BE REALIZED BY BLACKROCK AND ITS AFFILIATES FROM THEIR
RELATIONSHIP WITH THE PORTFOLIO - The Board, including the Independent Board
Members, reviewed the Portfolio's contractual management fee rate compared with
the other funds in its Broadridge category. The contractual management fee rate
represents a combination of the advisory fee and any administration fees, before
taking into account any reimbursements or fee waivers. The Board also compared
the Portfolio's total expense ratio, as well as its actual management fee rate,
to those of other funds in its Broadridge category. The total expense ratio
represents a fund's total net operating expenses, including any 12b-1 or non
12b-1 service fees. The total expense ratio gives effect to any expense
reimbursements or fee waivers that benefit a fund, and the actual management fee
rate gives effect to any management fee reimbursements or waivers that benefit a
fund. The Board considered the services provided and the fees charged by
BlackRock and its affiliates to other types of clients with similar investment
mandates, as applicable, including institutional accounts and sub-advised mutual
funds (including mutual funds sponsored by third parties).
The Board received and reviewed statements relating to BlackRock's financial
condition. The Board reviewed BlackRock's profitability methodology and was also
provided with a profitability analysis that detailed the revenues earned and the
expenses incurred by BlackRock for services provided to the Portfolio. The Board
reviewed BlackRock's profitability with respect to the Portfolio and other funds
the Board currently oversees for the year ended December 31, 2015 compared to
available aggregate profitability data provided for the prior two years. The
Board reviewed BlackRock's profitability with respect to certain other U.S. fund
complexes managed by the Manager and/or its affiliates. The Board reviewed
BlackRock's assumptions and methodology of allocating expenses in the
profitability analysis, noting the inherent limitations in allocating costs
among various advisory products. The Board recognized that profitability may be
affected by numerous factors including, among other things, fee waivers and
expense reimbursements by the Manager, the types of funds managed, precision of
expense allocations and business mix. As a result, calculating and comparing
profitability at individual fund level is difficult.
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100 | MASTER EXTENDED MARKET INDEX SERIES
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The Board noted that, in general, individual fund or product line profitability
of other advisors is not publicly available. The Board reviewed BlackRock's
overall operating margin, in general, compared to that of certain other
publicly-traded asset management firms. The Board considered the differences
between BlackRock and these other firms, including the contribution of
technology at BlackRock, BlackRock's expense management, and the relative
product mix.
In addition, the Board considered the cost of the services provided to the
Portfolio by BlackRock, and BlackRock's and its affiliates' profits relating to
the management and distribution of the Portfolio and the other funds advised by
BlackRock and its affiliates. As part of its analysis, the Board reviewed
BlackRock's methodology in allocating its costs of managing the Portfolio, to
the Portfolio. The Board may receive and review information from independent
third parties as part of its annual evaluation. The Board considered whether
BlackRock has the financial resources necessary to attract and retain high
quality investment management personnel to perform its obligations under the
Agreement and to continue to provide the high quality of services that is
expected by the Board. The Board further considered factors including but not
limited to BlackRock's commitment of time, assumption of risk, and liability
profile in servicing the Portfolio in contrast to what is required of BlackRock
with respect to other products with similar investment mandates across the
open-end fund, ETF, closed-end fund, sub-advised mutual fund and institutional
account product channels, as applicable.
The Board noted that the Portfolio's contractual management fee rate ranked in
the first quartile, and that the actual management fee rate and the total
expense ratio ranked in the first and second quartiles, respectively, relative
to the Portfolio's Expense Peers. The Board also noted that BlackRock has
contractually agreed to a cap on the Portfolio's total expenses as a percentage
of the Portfolio's average daily net assets.
D. ECONOMIES OF SCALE - The Board, including the Independent Board Members,
considered the extent to which economies of scale might be realized as the
assets of the Portfolio increase, as well as the existence of expense caps, as
applicable. The Board also considered the extent to which
================================================================================
ADVISORY AGREEMENT(S) | 101
================================================================================
the Portfolio benefits from such economies in a variety of ways and whether
there should be changes in the advisory fee rate or breakpoint structure in
order to enable the Portfolio to more fully participate in these economies of
scale. The Board considered the Portfolio's asset levels and whether the current
fee schedule was appropriate. In its consideration, the Board Members took into
account the existence of any expense caps and further considered the
continuation and/or implementation, as applicable, of such caps.
E. OTHER FACTORS DEEMED RELEVANT BY THE BOARD MEMBERS - The Board, including the
Independent Board Members, also took into account other ancillary or "fall-out"
benefits that BlackRock or its affiliates may derive from their respective
relationships with the Portfolio, both tangible and intangible, such as
BlackRock's ability to leverage its investment professionals who manage other
portfolios and risk management personnel, an increase in BlackRock's profile in
the investment advisory community, and the engagement of BlackRock's affiliates
as service providers to the Portfolio, including for administrative,
distribution, securities lending and cash management services. The Board also
considered BlackRock's overall operations and its efforts to expand the scale
of, and improve the quality of, its operations. The Board also noted that
BlackRock may use and benefit from third party research obtained by soft dollars
generated by certain registered fund transactions to assist in managing all or a
number of its other client accounts. The Board further noted that it had
considered the investment by BlackRock's funds in affiliated ETFs without any
offset against the management fees payable by the funds to BlackRock.
In connection with its consideration of the Agreement, the Board also received
information regarding BlackRock's brokerage and soft dollar practices. The Board
received reports from BlackRock which included information on brokerage
commissions and trade execution practices throughout the year.
CONCLUSION
The Board, including the Independent Board Members, approved the continuation of
the Agreement between the Manager and the Master LLC with respect to the
Portfolio for a one-year term ending June 30, 2017. Based
================================================================================
102 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
upon its evaluation of all of the aforementioned factors in their totality, as
well as other information, the Board, including the Independent Board Members,
was satisfied that the terms of the Agreement were fair and reasonable and in
the best interest of the Portfolio and its interest holders. In arriving at its
decision to approve the Agreement, the Board did not identify any single factor
or group of factors as all-important or controlling, but considered all factors
together, and different Board Members may have attributed different weights to
the various factors considered. The Independent Board Members were also assisted
by the advice of independent legal counsel in making this determination. The
contractual fee arrangements for the Portfolio reflect the results of several
years of review by the Board Members and predecessor Board Members, and
discussions between such Board Members (and predecessor Board Members) and
BlackRock. As a result, the Board Members' conclusions may be based in part on
their consideration of these arrangements in prior years.
================================================================================
ADVISORY AGREEMENT(S) | 103
================================================================================
OFFICERS AND DIRECTORS
--------------------------------------------------------------------------------
Rodney D. Johnson, Chair of the Board and Director
David O. Beim, Director
Susan J. Carter, Director
Collette Chilton, Director
Neil A. Cotty, Director
Barbara G. Novick, Director
Dr. Matina S. Horner, Director
Cynthia A. Montgomery, Director
Joseph P. Platt, Director
Robert C. Robb, Jr., Director
Mark Stalnecker, Director
Kenneth L. Urish, Director
Claire A. Walton, Director
Frederick W. Winter, Director
John M. Perlowski, Director, President and Chief Executive Officer
Richard Hoerner, CFA, Vice President
Jennifer McGovern, Vice President
Neal J. Andrews, Chief Financial Officer
Jay M. Fife, Treasurer
Charles Park, Chief Compliance Officer
Fernanda Piedra, Anti-Money Laundering Compliance Officer
Benjamin Archibald, Secretary
Effective February 5, 2016, Frank J. Fabozzi resigned as a Director of the
Master LLC.
Effective February 8, 2016, Susan J. Carter, Neil A. Cotty and Claire A. Walton
were elected to serve as Directors of the Master LLC.
INVESTMENT ADVISOR ACCOUNTING AGENT AND LEGAL COUNSEL
BlackRock Advisors, LLC CUSTODIAN Sidley Austin LLP
Wilmington, DE 19809 State Street Bank and New York, NY 10019
Trust Company
Boston, MA 02110
INDEPENDENT REGISTERED ADDRESS OF THE SERIES
PUBLIC ACCOUNTING FIRM 100 Bellevue Parkway
Deloitte & Touche LLP Wilmington, DE 19809
Boston, MA 02116
================================================================================
104 | MASTER EXTENDED MARKET INDEX SERIES
================================================================================
ADDITIONAL INFORMATION
AVAILABILITY OF QUARTERLY SCHEDULE OF INVESTMENTS
The Series files its complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. The Series' Forms
N-Q are available on the SEC's website at http://www.sec.gov and may also be
reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on how to access documents on the SEC's website without charge may
be obtained by calling (800) SEC-0330. The Series' Forms N-Q may also be
obtained upon request and without charge by calling (800) 441-7762.
PROXY RESULTS
A Special Meeting of Shareholders was held on February 8, 2016, for shareholders
of record on December 11, 2015, to elect a Board of Directors of the Master LLC.
Approved the Directors* as follows:
VOTES VOTES
FOR WITHHELD
------------------------------------------------------------------------------
David O. Beim 3,989,764,463 5,534,952
Susan J. Carter 3,990,219,529 5,079,886
Collette Chilton 3,990,220,586 5,078,829
Neil A. Cotty 3,990,219,046 5,080,369
Matina S. Horner 3,989,764,463 5,534,952
Rodney D. Johnson 3,990,217,824 5,081,591
Cynthia A. Montgomery 3,990,219,364 5,080,051
Joseph P. Platt 3,990,217,824 5,081,591
Robert C. Robb, Jr. 3,989,979,722 5,319,693
Mark Stalnecker 3,990,220,077 5,079,338
Kenneth L. Urish 3,989,980,180 5,319,235
Claire A. Walton 3,990,219,529 5,079,886
Frederick W. Winter 3,990,219,338 5,080,076
Barbara G. Novick 3,990,220,586 5,078,829
John M. Perlowski 3,990,130,625 5,168,790
------------------------------------------------------------------------------
*Denotes Master LLC-wide proposal and voting results.
AVAILABILITY OF PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Series uses to determine
how to vote proxies relating to portfolio securities is available upon request
and without charge (1) by calling (800) 441-7762; (2) at
HTTP://WWW.BLACKROCK.COM; and (3) on the SEC's website at HTTP://WWW.SEC.GOV.
AVAILABILITY OF PROXY VOTING RECORD
Information about how the Series voted proxies relating to securities held in
the Series' portfolio during the most recent 12-month period ended June 30 is
available upon request and without charge (1) at http://www.blackrock.com; or by
calling (800) 441-7762; and (2) on the SEC's website at http://www.sec.gov.
================================================================================
ADVISORY AGREEMENT(S) | 105
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT One Lincoln Street
Boston, Massachusetts 02111
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) in summary within the Statement of Additional
Information on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge (i) at
USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
37757-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA NASDAQ-100 INDEX FUND]
============================================================
SEMIANNUAL REPORT
USAA NASDAQ-100 INDEX FUND
JUNE 30, 2016
============================================================
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
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FUND OBJECTIVE 1
MANAGER'S COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 4
FINANCIAL INFORMATION
Portfolio of Investments 7
Notes to Portfolio of Investments 13
Financial Statements 14
Notes to Financial Statements 17
EXPENSE EXAMPLE 29
ADVISORY AGREEMENT(S) 31
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 ASSET 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)2016, USAA. All rights reserved.
208365-0816
================================================================================
================================================================================
FUND OBJECTIVE
THE USAA NASDAQ-100 INDEX FUND (THE FUND) SEEKS TO MATCH, BEFORE FEES AND
EXPENSES, THE PERFORMANCE OF THE STOCKS COMPOSING THE NASDAQ-100 INDEX. THE
NASDAQ-100 INDEX REPRESENTS 100 OF THE LARGEST NONFINANCIAL STOCKS TRADED ON THE
NASDAQ STOCK MARKET(R).
--------------------------------------------------------------------------------
TYPES OF INVESTMENTS
The Fund's principal investment strategy is, under normal market conditions, to
invest at least 80% of the Fund's assets in the common stocks of companies
composing the Nasdaq-100 Index. This strategy may be changed upon 60 days'
written notice to shareholders.
In seeking to track the performance of the Nasdaq-100 Index, the Fund's
subadviser, Northern Trust Investments, Inc. (NTI), will normally invest in all
the common stocks of companies in the Nasdaq-100 Index in roughly the same
proportions as their weightings in the index. While NTI attempts to replicate
the index, there may be times when the Fund and the index do not match exactly.
At times, NTI may purchase a stock not included in the Nasdaq-100 Index when it
believes doing so would be a cost-efficient way of approximating the index's
performance, for example, in anticipation of a stock being added to the index.
To the extent that the Nasdaq-100 Index concentrates in the securities of a
particular industry or group of industries, the Fund may similarly concentrate
its investments.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
================================================================================
FUND OBJECTIVE | 1
================================================================================
MANAGER'S COMMENTARY ON THE FUND
BRENT REEDER
Northern Trust Investments, Inc.
--------------------------------------------------------------------------------
o WHAT WERE THE MARKET CONDITIONS DURING THE REPORTING PERIOD?
U.S. equities ended the June 30, 2016 reporting period in positive territory
after periods of significant volatility, largely related to the United
Kingdom's (U.K.) referendum on leaving the European Union (E.U.) at the end
of June 2016. Slow growth continued to be a concern for U.S. and
international markets during the second quarter 2016, and this helped to
drive a continuation of accommodative monetary policy across global central
banks and further drops in global bond yields. While many investors had
anticipated a second Federal Reserve (the Fed) interest rate increase at its
June 2016 meeting, continued weak economic data helped push the Fed into
further delaying an increase. While this may have provided a slight boost
to U.S. equity markets, investors globally became more concerned about the
return outlook across asset classes as a longer duration sovereign bond yield
in several markets dipped into negative territory. Markets rose in
anticipation of the U.K. voting to remain in the E.U. in its June 23, 2016
referendum, but a surprise victory by the "leave" campaign significantly
increased volatility across asset classes and caused an immediate drop in
global equity markets. U.S. equities rallied from their lows in subsequent
days and finished the reporting period with positive returns.
o HOW DID THE USAA NASDAQ-100 INDEX FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
The Fund closely tracked its benchmark, the broad-based Nasdaq-100(R) Index
(the Index), during the reporting period ended June 30, 2016. The
================================================================================
2 | USAA NASDAQ-100 INDEX FUND
================================================================================
Fund posted a total return of -3.46% versus the Index, which returned -3.17%.
The Index represents 100 of the largest nonfinancial companies listed on The
Nasdaq Stock Market(R) and is not available for direct investment.
o PLEASE DESCRIBE SECTOR PERFORMANCE DURING THE REPORTING PERIOD.
In the second quarter of 2016, the Index returned -1.14%. U.S. large cap
equities underperformed mid cap equities, represented by the S&P 400 Index,
which returned 3.99% in the second quarter of 2016.
The top performing sectors over this time period were Telecommunication
Services and Consumer Staples, returning 8.91% and 7.53% respectively.
Industrials and Information Technology were the worst performing sectors for
this quarter, with returns of -10.22% and -3.62% respectively.
Thank you for the opportunity to help you with your investment needs.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. o Investing in securities
products involves risk, including possible loss of principal. o The USAA
Nasdaq-100 Index Fund may be subject to stock market risk and is
non-diversified, which means that it may invest a greater percentage of its
assets in a single issuer. Individual stocks will fluctuate in response to
the activities of individual companies, general market, and economic
conditions domestically and abroad. When redeemed or sold, may be worth more
or less than the original cost.
Refer to page 5 for the benchmark definition.
================================================================================
MANAGER'S COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
USAA NASDAQ-100 INDEX FUND (THE FUND)
(Ticker Symbol: USNQX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $945.0 Million $935.0 Million
Net Asset Value Per Share $12.54 $12.99
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS 10 YEARS
-3.46% 1.17% 14.42% 11.14%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.57%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This
return is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
4 | USAA NASDAQ-100 INDEX FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
NASDAQ-100 USAA NASDAQ-100
INDEX INDEX FUND
6/30/2006 $10,000.00 $10,000.00
7/31/2006 9,583.96 9,591.00
8/31/2006 10,039.64 10,041.00
9/30/2006 10,512.92 10,491.00
10/31/2006 11,012.49 11,002.00
11/30/2006 11,393.66 11,370.00
12/31/2006 11,181.69 11,145.00
1/31/2007 11,408.18 11,370.00
2/28/2007 11,222.71 11,186.00
3/31/2007 11,292.53 11,247.00
4/30/2007 11,902.31 11,840.00
5/31/2007 12,297.07 12,229.00
6/30/2007 12,335.64 12,249.00
7/31/2007 12,323.87 12,229.00
8/31/2007 12,697.20 12,597.00
9/30/2007 13,351.51 13,231.00
10/31/2007 14,296.88 14,172.00
11/30/2007 13,353.20 13,231.00
12/31/2007 13,332.73 13,190.00
1/31/2008 11,776.64 11,656.00
2/29/2008 11,172.55 11,043.00
3/31/2008 11,409.81 11,268.00
4/30/2008 12,280.16 12,127.00
5/31/2008 13,027.33 12,863.00
6/30/2008 11,775.32 11,616.00
7/31/2008 11,854.28 11,677.00
8/31/2008 12,014.84 11,840.00
9/30/2008 10,232.44 10,061.00
10/31/2008 8,566.64 8,425.00
11/30/2008 7,620.03 7,485.00
12/31/2008 7,789.85 7,648.00
1/31/2009 7,589.28 7,444.00
2/28/2009 7,194.09 7,055.00
3/31/2009 7,969.75 7,812.00
4/30/2009 8,985.69 8,814.00
5/31/2009 9,263.41 9,080.00
6/30/2009 9,534.49 9,325.00
7/31/2009 10,350.86 10,123.00
8/31/2009 10,503.33 10,266.00
9/30/2009 11,112.12 10,859.00
10/31/2009 10,779.42 10,511.00
11/30/2009 11,440.25 11,166.00
12/31/2009 12,044.15 11,738.00
1/31/2010 11,274.18 10,982.00
2/28/2010 11,791.16 11,472.00
3/31/2010 12,699.27 12,352.00
4/30/2010 12,978.62 12,618.00
5/31/2010 12,030.68 11,697.00
6/30/2010 11,300.67 10,961.00
7/31/2010 12,114.66 11,759.00
8/31/2010 11,500.55 11,145.00
9/30/2010 13,003.79 12,597.00
10/31/2010 13,830.24 13,395.00
11/30/2010 13,808.76 13,354.00
12/31/2010 14,470.33 13,984.00
1/31/2011 14,890.82 14,394.00
2/28/2011 15,356.96 14,824.00
3/31/2011 15,283.51 14,742.00
4/30/2011 15,713.08 15,152.00
5/31/2011 15,529.60 14,967.00
6/30/2011 15,227.03 14,660.00
7/31/2011 15,480.70 14,906.00
8/31/2011 14,708.54 14,148.00
9/30/2011 14,043.27 13,493.00
10/31/2011 15,501.05 14,885.00
11/30/2011 15,108.68 14,496.00
12/31/2011 14,999.84 14,391.00
1/31/2012 16,257.30 15,579.00
2/29/2012 17,309.62 16,591.00
3/31/2012 18,186.42 17,405.00
4/30/2012 17,986.79 17,207.00
5/31/2012 16,703.15 15,975.00
6/30/2012 17,315.57 16,547.00
7/31/2012 17,500.17 16,723.00
8/31/2012 18,399.82 17,559.00
9/30/2012 18,589.69 17,735.00
10/31/2012 17,595.73 16,767.00
11/30/2012 17,846.83 17,009.00
12/31/2012 17,752.40 16,903.00
1/31/2013 18,225.43 17,347.00
2/28/2013 18,314.66 17,414.00
3/31/2013 18,862.46 17,925.00
4/30/2013 19,195.47 18,369.00
5/31/2013 20,010.27 19,013.00
6/30/2013 19,525.35 18,547.00
7/31/2013 20,772.22 19,702.00
8/31/2013 20,712.92 19,635.00
9/30/2013 21,696.48 20,568.00
10/31/2013 22,783.93 21,590.00
11/30/2013 23,590.22 22,323.00
12/31/2013 24,306.02 22,988.00
1/31/2014 23,841.89 22,542.00
2/28/2014 25,073.67 23,700.00
3/31/2014 24,407.28 23,099.00
4/30/2014 24,325.50 22,965.00
5/31/2014 25,432.73 24,012.00
6/30/2014 26,217.92 24,725.00
7/31/2014 26,524.50 25,015.00
8/31/2014 27,876.77 26,262.00
9/30/2014 27,667.43 26,062.00
10/31/2014 28,418.42 26,752.00
11/30/2014 29,708.38 27,955.00
12/31/2014 29,022.26 27,299.00
1/31/2015 28,434.39 26,718.00
2/28/2015 30,494.19 28,638.00
3/31/2015 29,784.15 27,968.00
4/30/2015 30,346.22 28,482.00
5/31/2015 31,048.56 29,129.00
6/30/2015 30,303.89 28,415.00
7/31/2015 31,643.51 29,665.00
8/31/2015 29,535.30 27,656.00
9/30/2015 28,902.28 27,053.00
10/31/2015 32,151.73 30,089.00
11/30/2015 32,330.32 30,245.00
12/31/2015 31,852.16 29,780.00
1/31/2016 29,688.53 27,740.00
2/29/2016 29,214.31 27,281.00
3/31/2016 31,196.59 29,115.00
4/30/2016 30,222.61 28,198.00
5/31/2016 31,568.43 29,436.00
6/30/2016 30,841.23 28,749.00
[END CHART]
Data from 6/30/06 to 6/30/16.
The graph illustrates how a $10,000 hypothetical investment in the USAA
Nasdaq-100 Index Fund closely tracks the Nasdaq-100 Index, an unmanaged modified
capitalization-weighted index composed of 100 of the largest nonfinancial
domestic and international companies listed on The Nasdaq Stock Market(R) based
on market capitalization.
"Nasdaq-100(R)," "Nasdaq-100 Index(R)," and "Nasdaq(R)" are trademarks or
service marks of The Nasdaq Stock Market, Inc. (which with its affiliates are
the "Corporations") and have been licensed for our use. THE CORPORATIONS MAKE
NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE USAA NASDAQ-100 INDEX
FUND. The Fund is not sponsored, sold, or promoted by The Nasdaq Stock Market,
Inc., and The Nasdaq Stock Market, Inc. makes no representation regarding the
advisability of investing in the Fund. Index products incur fees and expenses
and may not always be invested in all securities of the index the Fund attempts
to mirror. Indexes are unmanaged and you cannot invest directly in an index. The
return information for the indexes does not reflect the deduction of any fees,
expenses, or taxes.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
o TOP 10 EQUITY HOLDINGS - 6/30/16 o
(% of Net Assets)
Apple, Inc. ................................................................ 10.1%
Microsoft Corp. ............................................................ 7.7%
Amazon.com, Inc. ........................................................... 6.5%
Facebook, Inc. "A" ......................................................... 5.1%
Alphabet, Inc. "C" ......................................................... 4.5%
Alphabet, Inc. "A" ......................................................... 3.9%
Comcast Corp. "A" .......................................................... 3.0%
Intel Corp. ................................................................ 3.0%
Cisco Systems, Inc. ........................................................ 2.8%
Amgen, Inc. ................................................................ 2.2%
You will find a complete list of securities that the Fund owns on pages 7-12.
o SECTOR ALLOCATION* - 6/30/16 o
[PIE CHART OF SECTOR ALLOCATION]
INFORMATION TECHNOLOGY 54.1%
CONSUMER DISCRETIONARY 21.5%
HEALTH CARE 12.2%
CONSUMER STAPLES 7.3%
INDUSTRIALS 1.8%
TELECOMMUNICATION SERVICES 1.2%
[END CHART]
*Excludes Money Market Instruments and Futures.
Percentages are of the net assets of the Fund, and may not equal 100%.
================================================================================
6 | USAA NASDAQ-100 INDEX FUND
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.1%)
COMMON STOCKS (98.1%)
CONSUMER DISCRETIONARY (21.5%)
------------------------------
APPAREL RETAIL (0.5%)
72,808 Ross Stores, Inc. $ 4,128
--------
AUTOMOBILE MANUFACTURERS (0.6%)
26,735 Tesla Motors, Inc.* 5,675
--------
AUTOMOTIVE RETAIL (0.5%)
17,478 O'Reilly Automotive, Inc.* 4,738
--------
BROADCASTING (0.2%)
27,298 Discovery Communications, Inc. "A"* 689
45,056 Discovery Communications, Inc. "C"* 1,074
--------
1,763
--------
CABLE & SATELLITE (5.3%)
48,997 Charter Communications, Inc. "A"* 11,203
438,106 Comcast Corp. "A" 28,560
41,001 DISH Network Corp. "A"* 2,148
51,613 Liberty Global plc "A"* 1,500
118,640 Liberty Global plc "C"* 3,399
65 Liberty Global plc LiLAC "A"* 2
153 Liberty Global plc LiLAC "C"* 5
898,466 Sirius XM Holdings, Inc.* 3,549
--------
50,366
--------
CATALOG RETAIL (0.2%)
81,809 Liberty Interactive Corp. "A"* 2,076
--------
GENERAL MERCHANDISE STORES (0.4%)
42,685 Dollar Tree, Inc.* 4,023
--------
HOMEFURNISHING RETAIL (0.1%)
27,968 Bed Bath & Beyond, Inc. 1,209
--------
HOTELS, RESORTS & CRUISE LINES (0.5%)
46,067 Marriott International, Inc. "A" 3,061
41,134 Norwegian Cruise Line Holdings Ltd.* 1,639
--------
4,700
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 7
================================================================================
------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------
INTERNET RETAIL (9.6%)
85,497 Amazon.com, Inc.*(a) $ 61,183
67,514 Ctrip.com International Ltd. ADR* 2,782
24,640 Expedia, Inc. 2,619
164,627 JD.com, Inc. ADR* 3,495
24,544 Liberty Ventures "A"* 910
77,609 Netflix, Inc.* 7,100
8,995 Priceline Group, Inc.* 11,229
24,070 TripAdvisor, Inc.* 1,548
--------
90,866
--------
LEISURE PRODUCTS (0.2%)
61,689 Mattel, Inc. 1,930
--------
MOVIES & ENTERTAINMENT (1.3%)
198,541 Twenty-First Century Fox, Inc. "A" 5,370
144,686 Twenty-First Century Fox, Inc. "B" 3,943
62,806 Viacom, Inc. "B" 2,605
--------
11,918
--------
RESTAURANTS (1.6%)
265,449 Starbucks Corp. 15,162
--------
SPECIALTY STORES (0.5%)
24,177 Tractor Supply Co. 2,205
11,349 Ulta Salon, Cosmetics & Fragrance, Inc.* 2,765
--------
4,970
--------
Total Consumer Discretionary 203,524
--------
CONSUMER STAPLES (7.3%)
-----------------------
DRUG RETAIL (1.7%)
195,744 Walgreens Boots Alliance, Inc. 16,300
--------
FOOD RETAIL (0.2%)
58,168 Whole Foods Market, Inc. 1,863
--------
HYPERMARKETS & SUPER CENTERS (1.3%)
79,555 Costco Wholesale Corp. 12,493
--------
PACKAGED FOODS & MEAT (3.4%)
220,335 Kraft Heinz Co. 19,495
281,239 Mondelez International, Inc. "A" 12,799
--------
32,294
--------
SOFT DRINKS (0.7%)
36,792 Monster Beverage Corp.* 5,913
--------
Total Consumer Staples 68,863
--------
================================================================================
8 | USAA NASDAQ-100 INDEX FUND
================================================================================
------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------
HEALTH CARE (12.2%)
-------------------
BIOTECHNOLOGY (8.9%)
40,592 Alexion Pharmaceuticals, Inc.* $ 4,739
136,123 Amgen, Inc. 20,711
39,693 Biogen, Inc.* 9,599
29,407 BioMarin Pharmaceutical, Inc.* 2,288
140,360 Celgene Corp.* 13,844
241,331 Gilead Sciences, Inc. 20,132
33,996 Incyte Corp.* 2,719
18,694 Regeneron Pharmaceuticals, Inc.* 6,528
44,820 Vertex Pharmaceuticals, Inc.* 3,855
--------
84,415
--------
HEALTH CARE DISTRIBUTORS (0.3%)
14,869 Henry Schein, Inc.* 2,629
--------
HEALTH CARE EQUIPMENT (0.5%)
6,897 Intuitive Surgical, Inc.* 4,562
--------
HEALTH CARE SERVICES (0.9%)
114,615 Express Scripts Holding Co.* 8,688
--------
HEALTH CARE SUPPLIES (0.3%)
42,440 Dentsply Sirona, Inc. 2,633
--------
HEALTH CARE TECHNOLOGY (0.4%)
61,260 Cerner Corp.* 3,590
--------
LIFE SCIENCES TOOLS & SERVICES (0.4%)
26,667 Illumina, Inc.* 3,743
--------
PHARMACEUTICALS (0.5%)
40,553 Endo International plc* 632
92,112 Mylan N.V.* 3,983
--------
4,615
--------
Total Health Care 114,875
--------
INDUSTRIALS (1.8%)
------------------
AIRLINES (0.3%)
104,762 American Airlines Group, Inc. 2,966
--------
CONSTRUCTION MACHINERY & HEAVY TRUCKS (0.3%)
63,504 PACCAR, Inc. 3,294
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.2%)
15,386 Stericycle, Inc.* 1,602
--------
RAILROADS (0.5%)
173,208 CSX Corp. 4,517
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 9
================================================================================
------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------
RESEARCH & CONSULTING SERVICES (0.3%)
30,473 Verisk Analytics, Inc.* $ 2,471
--------
TRADING COMPANIES & DISTRIBUTORS (0.2%)
52,348 Fastenal Co. 2,323
--------
Total Industrials 17,173
--------
INFORMATION TECHNOLOGY (54.1%)
------------------------------
APPLICATION SOFTWARE (1.9%)
90,644 Adobe Systems, Inc.* 8,683
40,697 Autodesk, Inc.* 2,203
28,099 Citrix Systems, Inc.* 2,251
46,367 Intuit, Inc. 5,175
--------
18,312
--------
COMMUNICATIONS EQUIPMENT (2.8%)
911,407 Cisco Systems, Inc. 26,148
--------
DATA PROCESSING & OUTSOURCED SERVICES (2.5%)
82,548 Automatic Data Processing, Inc. 7,584
40,289 Fiserv, Inc.* 4,381
65,259 Paychex, Inc. 3,883
219,624 PayPal Holdings, Inc.* 8,018
--------
23,866
--------
HOME ENTERTAINMENT SOFTWARE (1.0%)
133,770 Activision Blizzard, Inc. 5,301
54,653 Electronic Arts, Inc.* 4,141
--------
9,442
--------
INTERNET SOFTWARE & SERVICES (16.1%)
31,817 Akamai Technologies, Inc.* 1,780
53,215 Alphabet, Inc. "A"*(a) 37,438
62,233 Alphabet, Inc. "C"* 43,071
49,654 Baidu, Inc. ADR* 8,200
208,181 eBay, Inc.* 4,874
418,919 Facebook, Inc. "A"* 47,874
13,837 NetEase, Inc. ADR 2,674
172,125 Yahoo! Inc.* 6,465
--------
152,376
--------
IT CONSULTING & OTHER SERVICES (0.7%)
109,785 Cognizant Technology Solutions Corp. "A"* 6,284
--------
================================================================================
10 | USAA NASDAQ-100 INDEX FUND
================================================================================
------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT (0.7%)
197,357 Applied Materials, Inc. $ 4,731
28,919 Lam Research Corp. 2,431
--------
7,162
--------
SEMICONDUCTORS (9.3%)
55,695 Analog Devices, Inc. 3,154
70,751 Broadcom Ltd. 10,995
855,647 Intel Corp. 28,065
43,326 Linear Technology Corp. 2,016
51,520 Maxim Integrated Products, Inc. 1,839
187,911 Micron Technology, Inc.* 2,586
96,764 NVIDIA Corp. 4,549
62,070 NXP Semiconductors N.V.* 4,862
266,173 QUALCOMM, Inc.(a) 14,259
34,472 Skyworks Solutions, Inc. 2,181
181,973 Texas Instruments, Inc. 11,401
45,976 Xilinx, Inc. 2,121
--------
88,028
--------
SYSTEMS SOFTWARE (8.5%)
75,523 CA, Inc. 2,479
31,073 Check Point Software Technologies Ltd.* 2,476
1,424,349 Microsoft Corp.(a) 72,884
110,948 Symantec Corp. 2,279
--------
80,118
--------
TECHNOLOGY HARDWARE, STORAGE, & PERIPHERALS (10.6%)
992,532 Apple, Inc.(a) 94,886
52,386 NetApp, Inc. 1,288
53,998 Seagate Technology plc 1,315
51,012 Western Digital Corp. 2,411
--------
99,900
--------
Total Information Technology 511,636
--------
TELECOMMUNICATION SERVICES (1.2%)
---------------------------------
WIRELESS TELECOMMUNICATION SERVICES (1.2%)
22,745 SBA Communications Corp. "A"* 2,455
148,980 T-Mobile US, Inc.* 6,446
70,280 Vodafone Group plc ADR 2,171
--------
11,072
--------
Total Telecommunication Services 11,072
--------
Total Common Stocks 927,143
--------
Total Equity Securities (cost: $628,948) 927,143
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT MARKET
$(000)/ VALUE
SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.8%)
MONEY MARKET FUNDS (1.5%)
14,470,656 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(b) $ 14,471
--------
U.S. TREASURY BILLS (0.3%)
$ 2,310 0.31%, 9/15/2016(c),(d) $ 2,309
--------
Total Money Market Instruments (cost: $16,779) 16,780
--------
TOTAL INVESTMENTS (COST: $645,727) $943,923
========
-----------------------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF CONTRACT APPRECIATION/
CONTRACTS EXPIRATION VALUE (DEPRECIATION)
LONG/(SHORT) DATE (000) (000)
------------------------------------------------------------------------------------------------------------
FUTURES (1.8%)
198 Nasdaq 100 E-Mini Index 09/16/2016 $17,452 $167
======= ====
------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $927,143 $- $- $927,143
Money Market Instruments:
Money Market Funds 14,471 - - 14,471
U.S. Treasury Bills 2,309 - - 2,309
Futures(1) 167 - - 167
------------------------------------------------------------------------------------------------------------
Total $944,090 $- $- $944,090
------------------------------------------------------------------------------------------------------------
(1)Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
12 | USAA NASDAQ-100 INDEX FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
o SPECIFIC NOTES
(a) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at June 30, 2016.
(b) Rate represents the money market fund annualized seven-day yield at June
30, 2016.
(c) Securities with a value of $2,309,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(d) Rate represents an annualized yield at time of purchase, not coupon rate.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 13
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $645,727) $943,923
Receivables:
Capital shares sold 1,303
Dividends and interest 366
Securities sold 779
Other 8
Variation margin on futures contracts 175
--------
Total assets 946,554
--------
LIABILITIES
Payables:
Capital shares redeemed 581
Bank overdraft 740
Accrued management fees 155
Accrued transfer agent's fees 41
Other accrued expenses and payables 60
--------
Total liabilities 1,577
--------
Net assets applicable to capital shares outstanding $944,977
========
NET ASSETS CONSIST OF:
Paid-in capital $647,733
Accumulated undistributed net investment income 9,069
Accumulated net realized loss on investments and futures transactions (10,188)
Net unrealized appreciation of investments and futures contracts 298,363
--------
Net assets applicable to capital shares outstanding $944,977
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 75,350
========
Net asset value, redemption price, and offering price per share $ 12.54
========
See accompanying notes to financial statements.
================================================================================
14 | USAA NASDAQ-100 INDEX FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 6,163
Interest 50
--------
Total income 6,213
--------
EXPENSES
Management fees 905
Administration and servicing fees 679
Transfer agent's fees 576
Custody and accounting fees 59
Postage 26
Shareholder reporting fees 12
Trustees' fees 15
Registration fees 45
Professional fees 57
Other 105
--------
Total expenses 2,479
--------
NET INVESTMENT INCOME 3,734
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS
Net realized loss on:
Investments (1,743)
Futures transactions (676)
Change in net unrealized appreciation/(depreciation) of:
Investments (32,965)
Futures contracts 383
--------
Net realized and unrealized loss (35,001)
--------
Decrease in net assets resulting from operations $(31,267)
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
----------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
----------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 3,734 $ 5,163
Net realized gain (loss) on investments (1,743) 7,879
Net realized gain (loss) on futures transactions (676) 4,871
Change in net unrealized appreciation/(depreciation) of:
Investments (32,965) 52,425
Futures contracts 383 (78)
-------------------------
Increase (decrease) in net assets resulting from operations (31,267) 70,260
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - (5,666)
Net realized gains - (19,044)
-------------------------
Distributions to shareholders - (24,710)
-------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 165,362 329,154
Reinvested dividends - 24,318
Cost of shares redeemed (124,122) (170,627)
-------------------------
Increase in net assets from capital share transactions 41,240 182,845
-------------------------
Capital contribution from USAA Transfer Agency Company - 5
-------------------------
Net increase in net assets 9,973 228,400
NET ASSETS
Beginning of period 935,004 706,604
-------------------------
End of period $ 944,977 $ 935,004
=========================
Accumulated undistributed net investment income:
End of period $ 9,069 $ 5,335
=========================
CHANGE IN SHARES OUTSTANDING
Shares sold 13,449 25,772
Shares issued for dividends reinvested - 1,846
Shares redeemed (10,084) (13,425)
-------------------------
Increase in shares outstanding 3,365 14,193
=========================
See accompanying notes to financial statements.
================================================================================
16 | USAA NASDAQ-100 INDEX FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment
company organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Nasdaq-100 Index Fund (the Fund),
which is classified as nondiversified under the 1940 Act. The Fund seeks to
match, before fees and expenses, the performance of the stocks composing the
Nasdaq-100 Index. The Nasdaq-100 Index represents 100 of the largest
nonfinancial stocks traded on The Nasdaq Stock Market. USAA Asset Management
Company (the Manager), an affiliate of the Fund, has retained Northern Trust
Investments, Inc. (NTI) to serve as subadviser for the Fund. NTI is responsible
for investing the Fund's assets. Under normal market conditions, NTI attempts to
achieve the Fund's objective by investing at least 80% of the Fund's assets in
the common stocks of companies composing the Nasdaq-100 Index.
As a nondiversified fund, the Fund may invest a greater percentage of its assets
in a single issuer. Because a relatively high percentage of the Fund's total
assets may be invested in the securities of a single issuer or a limited number
of issuers, the securities of the Fund may be more sensitive to changes in the
market value of a single issuer, a limited number of issuers, or large companies
generally. Such a focused investment strategy may increase the volatility of the
Fund's investment results because this Fund may be more susceptible to risk
associated with a single economic, political, or regulatory event than a
diversified fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 17
================================================================================
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures which are approved by the Board. Among other things,
these policies and procedures allow the Fund to utilize independent pricing
services, quotations from securities dealers, and a wide variety of sources
and information to establish and adjust the fair value of securities as
events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used by
the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures during
the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and the Manager. Among other
things, these monthly meetings include a review and analysis of back testing
reports, pricing service quotation comparisons, illiquid securities and fair
value determinations, pricing movements, and daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or the
over-the-counter markets, are valued at the last sales price or official
closing price on the exchange or primary market on which they trade.
Equity securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sales price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and asked prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are
================================================================================
18 | USAA NASDAQ-100 INDEX FUND
================================================================================
categorized in Level 1 of the fair value hierarchy. Certain preferred and
equity securities traded in inactive markets generally are categorized in
Level 2 of the fair value hierarchy.
2. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized cost
represents the fair value of such securities.
3. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board. The
Service uses an evaluated mean between quoted bid and asked prices or the
last sales price to value a security when, in the Service's judgment,
these prices are readily available and are representative of the
security's market value. For many securities, such prices are not readily
available. The Service generally prices those securities based on methods
which include consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications as to values
from dealers in securities; and general market conditions. Generally, debt
securities are categorized in Level 2 of the fair value hierarchy;
however, to the extent the valuations include significant unobservable
inputs, the securities would be categorized in Level 3.
4. Investments in open-end investment companies, commingled, or other funds,
other than ETFs, are valued at their net asset value (NAV) at the end of
each business day and are categorized in Level 1 of the fair value
hierarchy.
5. Repurchase agreements are valued at cost.
6. Futures are valued at the last sale price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the last sale price on the prior trading date if it
is within the spread between the closing bid and asked prices closest to
the last reported sale price.
7. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event has
been recognized in relation to a security or class of securities, the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
securities are valued in good faith by the Committee in accordance with
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
the Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation systems.
General factors considered in determining the fair value of securities
include fundamental analytical data, the nature and duration of any
restrictions on disposition of the securities, evaluation of credit
quality, and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
================================================================================
20 | USAA NASDAQ-100 INDEX FUND
================================================================================
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Fund may buy, sell, and
enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio manager
to aid in achieving the Fund's investment objective. The Fund also may use
derivatives in circumstances where the portfolio manager believes they offer
an economical means of gaining exposure to a particular asset class or
securities market or to keep cash on hand to meet shareholder redemptions or
other needs while maintaining exposure to the market. With exchange-listed
futures contracts and options, counterparty credit risk to the Fund is
limited to the exchange's clearinghouse which, as counterparty to all
exchange-traded futures contracts and options, guarantees the transactions
against default from the actual counterparty to the transaction. The Fund's
derivative agreements held at June 30, 2016, did not include master netting
provisions.
FUTURES CONTRACTS - The Fund is subject to cash flow and tracking error risk
in the normal course of pursuing its investment objectives. The Fund may use
stock index futures contracts in an attempt to reduce any performance
discrepancies between the Fund and the Nasdaq-100 Index. A futures contract
represents a commitment for the future purchase or sale of an asset at a
specified price on a specified date. Upon entering into such contracts, the
Fund is required to deposit with the broker in either cash or securities an
initial margin in an amount equal to a certain percentage of the contract
amount. Subsequent payments (variation margin) are made or received by the
Fund each day, depending on the daily fluctuations in the value of the
contract, and are recorded for financial statement purposes as unrealized
gains or losses. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. Upon entering
into such contracts, the Fund bears the risk of interest or exchange rates or
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
securities prices moving unexpectedly in an unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2016*
(IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
----------------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ASSETS AND ASSETS AND
ACCOUNTED FOR AS LIABILITIES LIABILITIES
HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
----------------------------------------------------------------------------------------------------
Equity Contracts Net Unrealized 167** - $-
appreciation of
investments and
futures contracts
----------------------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2016, see the Portfolio of
Investments, which also is indicative of activity for the six-month period
ended June 30, 2016.
** Includes cumulative appreciation/(depreciation) of futures as reported on
the Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2016 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED GAIN APPRECIATION/
ACCOUNTED FOR AS STATEMENT OF (LOSS) ON (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION DERIVATIVES ON DERIVATIVES
----------------------------------------------------------------------------------------------------
Equity contracts Net realized loss on $(676) $383
Futures transactions /
Change in net unrealized
appreciation/(depreciation)
of Futures contracts
----------------------------------------------------------------------------------------------------
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated investment
companies and to distribute substantially all of its income to its
shareholders. Therefore, no federal income tax provision is required.
E. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are computed on the identified cost
================================================================================
22 | USAA NASDAQ-100 INDEX FUND
================================================================================
basis. Dividend income, less foreign taxes, if any, is recorded on the ex-
dividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Discounts and premiums on short-term
securities are amortized on a straight-line basis over the life of the
respective securities. Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are accrued as applicable,
as a reduction to such income and realized gains. These foreign taxes have
been provided for in accordance with the understanding of the applicable
countries' tax rules and rates.
F. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's custodian and
other banks utilized by the Fund for cash management purposes, realized
credits, if any, generated from cash balances in the Fund's bank accounts may
be used to directly reduce the Fund's expenses. For the six-month period
ended June 30, 2016, there were no custodian and other bank credits.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
require the untimely disposition of securities. Subject to availability, the
Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at an
interest rate based on the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of $3,000, which represents 1.3% of the total fees paid to CAPCO by the USAA
Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At December 31, 2015, the Fund had no capital loss carryforwards, for federal
income tax purposes.
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the
================================================================================
24 | USAA NASDAQ-100 INDEX FUND
================================================================================
three preceding fiscal reporting year ends and remain subject to examination by
the Internal Revenue Service and state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$92,303,000 and $22,146,000, respectively.
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $318,224,000 and $20,028,000, respectively, resulting in net
unrealized appreciation of $298,196,000.
(5) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Under this agreement, the Manager is
responsible for managing the business and affairs of the Fund. The Manager
also is authorized to select (with approval of the Board and without
shareholder approval) one or more subadvisers to manage the day-to-day
investment of a portion of the Fund's assets.
The Manager monitors each subadviser's performance through quantitative and
qualitative analysis and periodically reports to the Board as to whether each
subadviser's agreement should be renewed, terminated, or modified. The
Manager is also responsible for determining the asset allocation for the
subadviser(s). The allocation for each subadviser could range from 0% to 100%
of the Fund's assets, and the Manager could change the allocations without
shareholder approval.
The Fund's management fees are accrued daily and paid monthly at an
annualized rate of 0.20% of the Fund's average net assets. For the six-month
period ended June 30, 2016, the Fund incurred management fees, paid or
payable to the Manager, of $905,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
B. SUBADVISORY ARRANGEMENT(S) - The Manager entered into an Investment
Subadvisory Agreement with NTI under which NTI directs the investment and
reinvestment of the Fund's assets (as allocated from time to time by the
Manager).
The Manager (not the Fund) pays NTI a subadvisory fee equal to the greater of
a minimum annual fee of $50,000 or a fee at an annual rate equal to 0.06% of
the Fund's average net assets on amounts up to $100 million; 0.04% of net
assets for amounts over $100 million and up to $250 million; and 0.03% of net
assets for amounts over $250 million. For the six-month period ended June 30,
2016, the Manager incurred subadvisory fees with respect to the Fund, paid or
payable to NTI, of $158,000.
C. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and 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 fiscal year. For the
six-month period ended June 30, 2016, the Fund incurred administration and
servicing fees, paid or payable to the Manager, of $679,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For the
six-month period ended June 30, 2016, the Fund reimbursed the Manager $13,000
for these compliance and legal services. These expenses are included in the
professional fees on the Fund's Statement of Operations.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the Manager, provides transfer agent
services to the Fund based on an annual charge of $23 per shareholder account
plus out-of-pocket expenses. SAS pays a portion of these fees to certain
intermediaries for the administration and servicing
================================================================================
26 | USAA NASDAQ-100 INDEX FUND
================================================================================
of accounts that are held with such intermediaries. For the six-month period
ended June 30, 2016, the Fund incurred transfer agent's fees, paid or payable
to SAS, of $576,000.
E. UNDERWRITING SERVICES - USAA Investment Management Company provides exclusive
underwriting and distribution of the Fund's shares on a continuing
best-efforts basis and receives no fee or other compensation for these
services.
(6) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
(7) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-------------------------------------------------------------------
Net asset value at
beginning of period $ 12.99 $ 12.23 $ 10.32 $ 7.61 $ 6.54 $ 6.83
-------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .05 .08(d) .09 .06 .05 .01
Net realized and
unrealized gain (loss) (.50) 1.04(d) 1.85 2.68 1.09 .19
-------------------------------------------------------------------
Total from investment
operations (.45) 1.12(d) 1.94 2.74 1.14 .20
-------------------------------------------------------------------
Less distributions from:
Net investment income - (.08) (.03) (.03) (.06) -
Realized capital gains - (.28) - - (.01) (.49)
-------------------------------------------------------------------
Total distributions - (.36) (.03) (.03) (.07) (.49)
-------------------------------------------------------------------
Net asset value at
end of period $ 12.54 $ 12.99 $ 12.23 $ 10.32 $ 7.61 $ 6.54
===================================================================
Total return (%)* (3.46) 9.09 18.75 36.00 17.46 2.90
Net assets at
end of period (000) $944,977 $935,004 $706,604 $460,689 $309,634 $218,220
Ratios to average
net assets:**
Expenses (%)(c) .55(b) .57 .59 .64(a) .71 .78
Expenses, excluding
reimbursements (%)(c) .55(b) .57 .59 .64 .75 .95
Net investment income (%) .83(b) .62 1.04 .77 .80 .16
Portfolio turnover (%) 2 10 6 11 10 27
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$909,606,000.
(a) Prior to May 1, 2013, the Manager had voluntarily agreed to limit the annual
expenses of the Fund to 0.78% of the Fund's average net assets.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Fund before reductions of
any expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Calculated using average shares.
================================================================================
28 | USAA NASDAQ-100 INDEX FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through June
30, 2016.
ACTUAL EXPENSES
The line labeled "actual" in the table provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested at the beginning of the period, to estimate the
expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the "actual" line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" in the table provides information about
hypothetical account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which is not the Fund's actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account
================================================================================
EXPENSE EXAMPLE | 29
================================================================================
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
---------------------------------------------------------------
Actual $1,000.00 $ 965.40 $2.69
Hypothetical
(5% return before expenses) 1,000.00 1,022.13 2.77
*Expenses are equal to the Fund's annualized expense ratio of 0.55%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/366 days (to
reflect the one-half-year period). The Fund's actual ending account value is
based on its actual total return of (3.46)% for the six-month period of January
1, 2016, through June 30, 2016.
================================================================================
30 | USAA NASDAQ-100 INDEX FUND
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund and the Subadvisory Agreement between the Manager and the Subadviser with
respect to the Fund. In advance of the meeting, the Trustees received and
considered a variety of information relating to the Advisory Agreement and
Subadvisory Agreement and the Manager and the Subadviser, and were given the
opportunity to ask questions and request additional information from management.
The information provided to the Board included, among other things: (i) a
separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's and
Subadviser's operations and personnel. Prior to voting, the Independent Trustees
reviewed the proposed continuance of the Advisory Agreement and the Subadvisory
Agreement with management and with experienced counsel retained by the
Independent Trustees (Independent Counsel) and received materials from such
Independent Counsel discussing the legal standards for their consideration of
the proposed continuation of the Advisory Agreement and the Subadvisory
Agreement with respect to the Fund. The Independent Trustees also reviewed the
proposed continuation of the Advisory Agreement and the Subadvisory Agreement
with respect to the Fund in private sessions with Independent Counsel at which
no representatives of management were present. At each regularly scheduled
meeting of the Board and its committees, the Board receives and reviews, among
other things, information concerning the Fund's
================================================================================
ADVISORY AGREEMENT(S) | 31
================================================================================
performance and related services provided by the Manager and by the Subadviser.
At the meeting at which the renewal of the Advisory Agreement and Subadvisory
Agreement is considered, particular focus is given to information concerning
Fund performance, fees and total expenses as compared to comparable investment
companies, and the Manager's profitability with respect to the Fund. However,
the Board noted that the evaluation process with respect to the Manager and the
Subadviser is an ongoing one. In this regard, the Board's and its committees'
consideration of the Advisory Agreement and Subadvisory Agreement included
certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust.
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32 | USAA NASDAQ-100 INDEX FUND
================================================================================
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional experience and
qualifications of senior personnel, as well as current staffing levels. The
Board discussed the Manager's effectiveness in monitoring the performance of the
Subadviser and its timeliness in responding to performance issues. The
allocation of the Fund's brokerage, including the Manager's process for
monitoring "best execution," was also considered. The Manager's role in
coordinating the activities of the Fund's other service providers also was
considered. The Board also considered the Manager's risk management processes.
The Board considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high quality of
services under the Advisory Agreement. In reviewing the Advisory Agreement, the
Board focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager, including the Manager's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objectives and classifications,
sales load type (in this case, retail investment companies with front-end loads
and no sales loads), asset size, and expense components (the "expense group")
and (ii) a larger group of investment companies that includes all front-end and
no-load retail open-end investment companies with similar investment
classifications/objectives as the Fund regardless of asset size, excluding
outliers (the "expense universe").
================================================================================
ADVISORY AGREEMENT(S) | 33
================================================================================
Among other data, the Board noted that the Fund's management fee rate -- which
includes advisory and administrative services -- was below the median of its
expense group and its expense universe. The data indicated that the Fund's total
expenses were below the median of its expense group and its expense universe.
The Board took into account the various services provided to the Fund by the
Manager and its affiliates, including the nature and high quality of the
services provided by the Manager. The Board also considered the level of
correlation between the Nasdaq-100 Index and the Fund and the relatively low
tracking error between the Fund and the index and noted that it reviews such
information on a quarterly basis. The Board also noted the level and method of
computing the management fee. The Trustees also took into account that the
subadvisory fees under the Subadvisory Agreement are paid by the Manager. The
Board also considered and discussed information about the Subadviser's fees,
including the amount of management fees retained by the Manager after payment of
the subadvisory fee. In considering the Fund's performance, the Board noted that
it reviews at its regularly scheduled meetings information about the Fund's
performance results. The Trustees also reviewed various comparative data
provided to them in connection with their consideration of the renewal of the
Advisory Agreement, including, among other information, a comparison of the
Fund's average annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The Fund's performance universe
consisted of the Fund and all retail and institutional open-end investment
companies with similar classifications/objectives as the Fund regardless of
asset size or primary channel of distribution. This comparison indicated that,
among other data, the Fund's performance was above the average of its
performance universe and its Lipper index for the one-, three-, five-, and
ten-year periods ended December 31, 2015. The Board also noted that the Fund's
percentile performance ranking was in the top 20% of its performance universe
for the one-year period ended December 31, 2015 and was in the top 2% of its
performance universe for the three-, five-, and ten-year periods ended December
31, 2015.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the management fee. The information considered
================================================================================
34 | USAA NASDAQ-100 INDEX FUND
================================================================================
by the Board included operating profit margin information for the Manager's
business as a whole. The Board also received and considered profitability
information related to the management revenues from the Fund. This information
included a review of the methodology used in the allocation of certain costs to
the Fund. In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager pays the Fund's subadvisory fees. The Trustees
reviewed the profitability of the Manager's relationship with the Fund before
tax expenses. In reviewing the overall profitability of the management fee to
the Manager, the Board also considered the fact that affiliates provide
shareholder servicing and administrative services to the Fund for which they
receive compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be able to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the Fund's current advisory fee structure. The Board also noted that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board also
considered the fact that the Manager pays the Fund's subadvisory fees. The Board
determined that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
================================================================================
ADVISORY AGREEMENT(S) | 35
================================================================================
provided by the Manager; and (v) the Manager's and its affiliates' level of
profitability from its relationship with the Fund, if any, is reasonable in
light of the nature and high quality of services provided by the Manager and the
type of fund. Based on its conclusions, the Board determined that continuation
of the Advisory Agreement would be in the best interests of the Fund and its
shareholders.
SUBADVISORY AGREEMENT
In approving the Fund's Subadvisory Agreement, the Board considered various
factors, among them: (i) the nature, extent, and quality of services provided to
the Fund, including the personnel providing services; (ii) the Subadviser's
compensation and any other benefits derived from the subadvisory relationship;
(iii) comparisons, to the extent applicable, of subadvisory fees and performance
to comparable investment companies; and (iv) the terms of the Subadvisory
Agreement. The Board's analysis of these factors is set forth below. After full
consideration of a variety of factors, the Board, including the Independent
Trustees, voted to approve the Subadvisory Agreement. In approving the
Subadvisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL - The
Trustees considered information provided to them regarding the services provided
by the Subadviser, including information presented periodically throughout the
previous year. The Board considered the Subadviser's level of knowledge and
investment style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment of
portfolio securities with respect to the Fund and the Subadviser's level of
staffing. The Trustees considered, based on the materials provided to them by
the Subadviser, whether the method of compensating portfolio managers is
reasonable and includes mechanisms to prevent a manager with underperformance
from taking undue risks. The Trustees also noted the Subadviser's brokerage
practices. The Board also considered the Subadviser's regulatory and compliance
history. The Board also took into account the Subadviser's risk management
processes. The Board noted that the Manager's
================================================================================
36 | USAA NASDAQ-100 INDEX FUND
================================================================================
monitoring processes of the Subadviser include: (i) regular telephonic meetings
to discuss, among other matters, investment strategies and to review portfolio
performance; (ii) monthly portfolio compliance checklists and quarterly
compliance certifications to the Board; and (iii) due diligence visits to the
Subadviser.
SUBADVISER COMPENSATION - The Board also took into consideration the financial
condition of the Subadviser. In considering the cost of services to be provided
by the Subadviser and the profitability to the Subadviser of its relationship
with the Fund, the Trustees noted that the fees under the Subadvisory Agreement
were paid by the Manager. The Trustees also relied on the ability of the Manager
to negotiate the Subadvisory Agreement and the fees thereunder at arm's length.
For the above reasons, the Board determined that the profitability of the
Subadviser from its relationship with the Fund was not a material factor in its
deliberations with respect to the consideration of the approval of the
Subadvisory Agreement. For similar reasons, the Board concluded that the
potential for economies of scale in the Subadviser's management of the Fund was
not a material factor in considering the Subadvisory Agreement, although the
Board noted that the Subadvisory Agreement contains breakpoints in its fee
schedule.
SUBADVISORY FEES AND FUND PERFORMANCE - The Board compared the subadvisory fees
for the Fund with the fees that the Subadviser charges to comparable clients, as
applicable. The Board considered that the Fund pays a management fee to the
Manager and that, in turn, the Manager pays a subadvisory fee to the Subadviser.
As noted above, the Board considered, among other data, the Fund's performance
during the one-, three-, five-, and ten-year periods ended December 31, 2015, as
compared to the Fund's respective peer group and noted that the Board reviews at
its regularly scheduled meetings information about the Fund's performance
results. The Board noted the Manager's experience and resources in monitoring
the performance, investment style, and risk-adjusted performance of the
Subadviser.
CONCLUSIONS - The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified to manage
the Fund's assets in accordance with its investment objectives and
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
policies; (ii) the Subadviser maintains an appropriate compliance program; (iii)
the performance of the Fund is reasonable in relation to the performance of
funds with similar investment objectives and to relevant indices; and (iv) the
Fund's advisory expenses are reasonable in relation to those of similar funds
and to the services to be provided by the Manager and the Subadviser. Based on
its conclusions, the Board determined that approval of the Subadvisory Agreement
with respect to the Fund would be in the best interests of the Fund and its
shareholders.
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38 | USAA NASDAQ-100 INDEX FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) in summary within the Statement of Additional
Information on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge (i) at
USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
37758-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA GLOBAL MANAGED VOLATILITY FUND]
============================================================
SEMIANNUAL REPORT
USAA GLOBAL MANAGED VOLATILITY FUND
FUND SHARES o INSTITUTIONAL SHARES
JUNE 30, 2016
============================================================
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FUND OBJECTIVE 1
MANAGERS' COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Portfolio of Investments 11
Notes to Portfolio of Investments 13
Financial Statements 14
Notes to Financial Statements 18
EXPENSE EXAMPLE 35
ADVISORY AGREEMENT(S) 37
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 ASSET 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)2016, USAA. All rights reserved.
208364-0816
================================================================================
================================================================================
FUND OBJECTIVE
THE USAA GLOBAL MANAGED VOLATILITY FUND (THE FUND) SEEKS TO ATTAIN LONG-TERM
CAPITAL APPRECIATION WHILE ATTEMPTING TO REDUCE VOLATILITY DURING UNFAVORABLE
MARKET CONDITIONS.
--------------------------------------------------------------------------------
TYPES OF INVESTMENTS
The Fund employs several strategies across multiple asset classes in seeking to
achieve its objective. The Fund's principal strategy is to combine a portfolio
of domestic and foreign equity and debt securities with the use of alternative
investment strategies to provide growth with greater downside risk controls. The
Fund may invest in multiple asset classes including U.S. stocks, non-U.S. stocks
in developed and emerging markets, and fixed-income securities. The Fund will
move its allocation between these asset classes to take advantage of
opportunities and to manage risk. The Fund may engage in active and frequent
trading when it reallocates between asset classes. Diversification in the Fund's
portfolio is designed to reduce volatility in the Fund's returns over a range of
market environments.
The Fund intends to primarily invest in stocks and exchange-traded funds (ETFs)
that invest primarily in stocks and may at times be fully invested in ETFs.
However, there are times when bond markets will provide opportunities for what
the Adviser believes to be stock-like returns with equal or less market risk.
These bond market opportunities (including opportunities in the high-yield bond
markets) will be considered along with stocks and ETFs in seeking to enhance the
performance of the Fund.
In an attempt to reduce the Fund's volatility over time, the Fund may implement
an option-based risk-management strategy. This strategy involves purchasing and
selling options on component indices or corresponding ETFs. This option strategy
may not fully protect the Fund against declines in the value of its portfolio,
and the Fund could experience a loss. The combination of the diversified stock
portfolio with the index call and put options is designed to provide the Fund
with fairly consistent returns over a wide range of equity market environments.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election, or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
================================================================================
FUND OBJECTIVE | 1
================================================================================
MANAGERS' COMMENTARY ON THE FUND
[PHOTO OF WASIF A. LATIF] [PHOTO OF LANCE HUMPHREY, CFA*]
WASIF A. LATIF LANCE HUMPHREY, CFA*
USAA Asset USAA Asset
Management Company Management Company
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE REPORTING PERIOD?
The investment backdrop for the reporting period ended June 30, 2016 proved
highly supportive for stocks. Concerns about global growth receded somewhat
due to an impressive recovery in commodity prices and signs of stabilizing
economic conditions in China. Global monetary policy, particularly the
decisions of the European Central Bank and the Bank of Japan to cut
interest rates, also was favorable. In addition, a series of U.S. Federal
Reserve statements gave investors confidence that interest rates would
remain low for an extended length of time. A decrease in global bond yields
was an additional positive in that it increased investors' willingness to
take on the higher risk of owning equities. Although the markets
experienced stretches of volatility--most notably in the wake of the United
Kingdom's vote to leave the European Union ("Brexit")--these factors
generally had a beneficial effect on stock prices.
Emerging markets performed particularly well, as the combination of an
increased investor appetite for risk, recovering commodity prices, and low
interest rates enabled the asset class to rebound from its weak performance
during the past two years. Domestic equities also generated a positive
return, thanks in part to the relative strength of the U.S.
*Effective May 1, 2016, Lance Humphrey began co-managing the Fund.
================================================================================
2 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
economy. However, developed international markets lost ground due to the
comparative weakness in Europe and Japan, as well as the late-June 2016
sell-off in European equities sparked by the "Brexit" vote.
o HOW DID THE USAA GLOBAL MANAGED VOLATILITY FUND (THE FUND) PERFORM DURING
THE REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. For
the reporting period ended June 30, 2016, the Fund Shares and Institutional
Shares had total returns of 1.40% and 1.50%, respectively. This compares
to total returns of 1.23% for the MSCI All-Country World Index and 1.23%
for the Global Managed Volatility Composite Index.
USAA Asset Management Company (the Manager) is the Fund's investment
adviser. The investment adviser provides day-to-day discretionary
management for the Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE DURING THE
REPORTING PERIOD.
In managing the Fund, we seek to construct a diversified portfolio of
exchange-traded funds (ETFs) that invest in both domestic and international
stocks. Rather than focusing entirely on broad-based ETFs, we have
established a substantial weighting in ETFs whose holdings are based on
specific "factors" that tend to drive performance over time, such as
momentum, quality, value, and low volatility. We believe that a portfolio
with the optimal combination of geographic and factor exposure can
outperform a traditional mix of investments over the long term.
The Fund's allocation in U.S. equities made a positive overall contribution
to performance, as did its weighting in emerging markets.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Refer to page 7 for benchmark definitions.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
However, this was counteracted to some extent by the relative weakness in
developed-market international stocks.
Within the domestic equity portfolio, the strongest gains came from our
allocation to the iShares MSCI USA Minimum Volatility ETF, which invests in
stocks that have exhibited above-average price stability. The fund tends to
have a heavier weighting in traditionally defensive sectors such as
utilities and consumer staples, which allowed it to capture the
outperformance of these groups. ETFs linked to fundamental and momentum
factors also delivered returns in excess of the broader market. However, we
lost some ground through a position in the iShares MSCI USA Value Factor
ETF. The fund's largest sector weightings are in technology, health care,
and financials, all of which lagged in the reporting period. It's important
to keep in mind that our goal isn't for our holdings to provide
across-the-board outperformance, since there will always be certain factors
that lag at a given time. Instead, we seek to establish an ideal balance of
factors to help the Fund fulfill its goal of positive risk-adjusted
performance over the long term.
The Fund's positions in the emerging markets generated strong gains during
the reporting period. The asset class underperformed considerably in 2015
on concerns about slowing growth, but stabilizing economic data from China
and improving sentiment in Brazil fueled outperformance over the reporting
period. In our view, this helps illustrate the potential benefits of using
a long-term strategy rather than overreacting to temporary shifts in
sentiment. While all four of the Fund investments rose in value,
PowerShares FTSE RAFI Emerging Markets Portfolio--which focuses on
fundamental factors--led the way.
Consistent with the larger backdrop, the Fund's allocation to the developed
international markets finished with a loss and detracted from performance.
iShares MSCI EAFE Minimum Volatility ETF was a standout performer, as
investors sought relatively safer stocks in reaction to the backdrop of
slower growth and the uncertainty surrounding the "Brexit" vote. However,
this was outweighed by negative returns for our other five investments in
the category. While international stocks continue to offer an attractive
valuation relative to the United States, we
================================================================================
4 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
are cautious given weakness in corporate earnings growth and the
uncertainty in the macroeconomic environment. We therefore reduced the
extent of our overweight in this category during the course of the
reporting period.
The Fund's hedging program, which is designed to help cushion the effect of
large stock market sell-offs, had mixed results. Although this strategy
helped offset some of the volatility that occurred at various points
throughout the reporting period, it was a slight overall detractor given
equities' positive performance.
We made few changes to the portfolio in the reporting period, which
reflects our confidence in the Fund's current positioning. We believe the
Fund's extensive diversification, together with its allocations to ETFs
tied to factors that have outperformed the broader market over time, offers
investors a unique vehicle for gaining stock-market exposure in their
portfolios.
Thank you for allowing us to help you manage your investments.
Exchange-traded funds (ETFs) are subject to risks similar to those of
stocks. Investment returns may fluctuate and are subject to market
volatility, so that an investor's shares, when redeemed or sold, may be
worth more or less than their original cost. o Diversification is a
technique intended to help reduce risk and does not guarantee a profit or
prevent a loss. o Foreign investing is subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability.
Emerging market countries are most volatile. Emerging market countries are
less diverse and mature than other countries and tend to be politically
less stable. o As interest rates rise, existing bond prices generally fall;
given the historically low interest rate environment, risks associated with
rising interest rates may be heightened.
================================================================================
MANAGERS' COMMENTARY ON THE FUND | 5
================================================================================
INVESTMENT OVERVIEW
USAA GLOBAL MANAGED VOLATILITY FUND SHARES
(FUND SHARES) (Ticker Symbol: UGMVX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $14.1 Million $15.9 Million
Net Asset Value Per Share $8.71 $8.59
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
1.40% -4.17% 0.82%
--------------------------------------------------------------------------------
EXPENSE RATIOS AS OF 12/31/15**
--------------------------------------------------------------------------------
BEFORE REIMBURSEMENT 1.51% AFTER REIMBURSEMENT 1.26%
(Includes acquired fund fees and expenses of 0.36%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Fund Shares (exclusive of
commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.90% of
the Fund Shares' average net assets. This reimbursement arrangement may not be
changed or terminated during this time period without approval of the Fund's
Board of Trustees and may be changed or terminated by the Manager at any time
after May 1, 2017. If the total annual operating expense ratio of the Fund
Shares is lower than 0.90%, the Fund Shares will operate at the lower expense
ratio. These expense ratios may differ from the expense ratios disclosed in the
Financial Highlights, which excludes acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
6 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
GLOBAL MANAGED USAA GLOBAL
MSCI ALL-COUNTRY VOLATILITY MANAGED VOLATILITY
WORLD INDEX COMPOSITE INDEX FUND SHARES
7/31/2013 $10,000.00 $10,000.00 $10,000.00
8/31/2013 9,791.66 9,857.22 9,808.80
9/30/2013 10,297.41 10,216.32 10,181.64
10/31/2013 10,711.29 10,505.37 10,439.77
11/30/2013 10,862.98 10,612.77 10,544.93
12/31/2013 11,050.39 10,743.63 10,660.87
1/31/2014 10,608.37 10,444.58 10,316.35
2/28/2014 11,120.83 10,801.49 10,660.87
3/31/2014 11,170.28 10,839.31 10,699.15
4/30/2014 11,276.62 10,915.65 10,756.57
5/31/2014 11,516.46 11,084.79 10,861.84
6/30/2014 11,733.29 11,234.35 10,947.97
7/31/2014 11,590.98 11,141.46 10,766.14
8/31/2014 11,847.04 11,316.98 10,919.26
9/30/2014 11,462.86 11,063.20 10,613.02
10/31/2014 11,543.56 11,119.56 10,651.30
11/30/2014 11,736.64 11,253.10 10,727.86
12/31/2014 11,510.17 11,104.38 10,445.83
1/31/2015 11,330.21 10,984.69 10,341.02
2/28/2015 11,960.98 11,416.28 10,853.41
3/31/2015 11,775.65 11,297.24 10,678.73
4/30/2015 12,117.31 11,530.67 10,934.93
5/31/2015 12,101.50 11,526.42 10,911.64
6/30/2015 11,816.61 11,340.04 10,690.38
7/31/2015 11,919.23 11,411.81 10,725.31
8/31/2015 11,102.15 10,867.68 10,038.24
9/30/2015 10,699.93 10,595.50 9,723.82
10/31/2015 11,539.72 11,179.53 10,375.95
11/30/2015 11,444.43 11,118.48 10,329.37
12/31/2015 11,238.04 10,981.84 10,103.68
1/31/2016 10,560.26 10,520.05 9,598.00
2/29/2016 10,487.62 10,473.76 9,480.00
3/31/2016 11,264.83 11,023.63 10,127.00
4/30/2016 11,431.12 11,142.69 10,268.00
5/31/2016 11,445.52 11,159.40 10,233.00
6/30/2016 11,376.24 11,117.00 10,245.00
[END CHART]
Data from 7/31/13 to 6/30/16.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Global Managed Volatility Fund Shares to the following benchmarks:
o The unmanaged MSCI All-Country World Index is a free float-adjusted
market capitalization weighted index that is designed to measure the equity
market performance of developed and emerging markets.
o The Global Managed Volatility Composite Index is a combination of
unmanaged indexes representing the Fund's model allocation, and consists of
the MSCI All-Country World Index (70%) and the Barclays U.S. Treasury -
Bills (1-3M) (30%).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the MSCI All-Country World Index and the Global Managed
Volatility Composite Index is calculated from the end of the month, July 31,
2013, while the Fund Shares initially invested in securities on July 15, 2013.
There may be a slight variation of performance numbers because of this
difference.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
USAA GLOBAL MANAGED VOLATILITY FUND
INSTITUTIONAL SHARES (INSTITUTIONAL SHARES)
(Ticker Symbol: UGOFX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $196.1 Million $189.1 Million
Net Asset Value Per Share $8.82 $8.69
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 7/31/08
1.50% -4.05% 2.21% 2.52%
--------------------------------------------------------------------------------
EXPENSE RATIOS AS OF 12/31/15**
--------------------------------------------------------------------------------
BEFORE REIMBURSEMENT 1.24% AFTER REIMBURSEMENT 1.16%
(Includes acquired fund fees and expenses of 0.36%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Institutional Shares (exclusive
of commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.80% of
the Institutional Shares' average net assets. This reimbursement arrangement may
not be changed or terminated during this time period without approval of the
Fund's Board of Trustees and may be changed or terminated by the Manager at any
time after May 1, 2017. If the total annual operating expense ratio of the
Institutional Shares is lower than 0.80%, the Institutional Shares will operate
at the lower expense ratio. These expense ratios may differ from the expense
ratios disclosed in the Financial Highlights, which excludes acquired fund fees
and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
The Institutional Shares are available for investment through a USAA
discretionary managed account program, and certain advisory programs sponsored
by financial intermediaries, such as brokerage firms, investment advisors,
financial planners, third-party administrators, and insurance companies.
Institutional Shares also are available to institutional investors, which
include retirement plans, endowments, foundations, and bank trusts, as well as
other persons or legal entities that the Fund may approve from time to time, or
for purchase by a USAA fund participating in a fund-of-funds investment strategy
(USAA fund-of-funds).
================================================================================
8 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
GLOBAL MANAGED USAA GLOBAL MANAGED
MSCI ALL-COUNTRY VOLATILITY VOLATILITY FUND
WORLD INDEX COMPOSITE INDEX INSTITUTIONAL SHARES
7/31/2008 $10,000.00 $10,000.00 $10,000.00
8/31/2008 9,784.46 9,856.35 10,100.00
9/30/2008 8,561.59 9,002.54 9,260.00
10/31/2008 6,865.11 7,758.62 8,820.00
11/30/2008 6,414.09 7,406.76 8,450.00
12/31/2008 6,646.55 7,597.33 8,671.84
1/31/2009 6,078.68 7,144.48 8,097.08
2/28/2009 5,483.51 6,658.30 7,542.48
3/31/2009 5,935.18 7,045.21 7,865.16
4/30/2009 6,635.81 7,632.45 8,389.50
5/31/2009 7,296.99 8,171.30 8,853.34
6/30/2009 7,256.08 8,141.74 8,934.01
7/31/2009 7,894.81 8,645.85 9,407.94
8/31/2009 8,177.17 8,865.34 9,599.52
9/30/2009 8,552.32 9,152.51 9,932.28
10/31/2009 8,420.15 9,055.06 9,821.36
11/30/2009 8,766.46 9,318.70 10,133.95
12/31/2009 8,948.00 9,455.73 10,310.56
1/31/2010 8,561.29 9,171.16 10,020.12
2/28/2010 8,670.35 9,255.38 10,175.71
3/31/2010 9,228.14 9,675.53 10,528.38
4/30/2010 9,243.67 9,690.81 10,600.99
5/31/2010 8,367.32 9,054.07 10,123.85
6/30/2010 8,109.54 8,861.37 9,729.68
7/31/2010 8,769.40 9,368.49 10,082.35
8/31/2010 8,462.83 9,142.25 9,688.19
9/30/2010 9,272.44 9,757.00 10,227.57
10/31/2010 9,607.56 10,005.58 10,331.30
11/30/2010 9,393.79 9,852.89 10,227.57
12/31/2010 10,081.68 10,360.55 10,555.03
1/31/2011 10,239.89 10,476.21 10,607.34
2/28/2011 10,538.07 10,693.22 10,806.09
3/31/2011 10,527.55 10,689.41 10,858.40
4/30/2011 10,958.25 11,000.20 11,067.62
5/31/2011 10,722.70 10,841.96 11,004.85
6/30/2011 10,553.74 10,725.50 10,921.16
7/31/2011 10,381.92 10,605.52 10,858.40
8/31/2011 9,623.53 10,066.67 10,178.44
9/30/2011 8,714.94 9,403.97 9,676.32
10/31/2011 9,648.69 10,111.06 10,251.67
11/30/2011 9,359.86 9,902.74 10,324.89
12/31/2011 9,340.95 9,891.11 10,196.48
1/31/2012 9,884.10 10,295.62 10,569.39
2/29/2012 10,381.40 10,661.94 10,867.72
3/31/2012 10,450.33 10,715.47 10,878.37
4/30/2012 10,330.85 10,634.67 10,771.83
5/31/2012 9,404.61 9,974.26 10,164.51
6/30/2012 9,869.09 10,322.72 10,462.84
7/31/2012 10,004.19 10,424.20 10,526.77
8/31/2012 10,221.72 10,586.73 10,707.90
9/30/2012 10,543.66 10,823.51 10,931.65
10/31/2012 10,473.39 10,775.15 10,889.03
11/30/2012 10,607.32 10,875.61 10,974.26
12/31/2012 10,847.58 11,051.98 11,218.62
1/31/2013 11,347.31 11,410.68 11,601.58
2/28/2013 11,345.54 11,413.12 11,432.63
3/31/2013 11,552.99 11,563.43 11,455.15
4/30/2013 11,883.03 11,800.38 11,657.90
5/31/2013 11,850.43 11,784.80 11,669.16
6/30/2013 11,504.05 11,547.14 11,466.42
7/31/2013 12,054.78 11,936.78 11,838.12
8/31/2013 11,803.62 11,766.35 11,567.79
9/30/2013 12,413.30 12,195.00 12,007.07
10/31/2013 12,912.22 12,540.03 12,311.19
11/30/2013 13,095.08 12,668.23 12,435.09
12/31/2013 13,321.00 12,824.44 12,583.66
1/31/2014 12,788.15 12,467.47 12,166.46
2/28/2014 13,405.91 12,893.50 12,583.66
3/31/2014 13,465.52 12,938.65 12,640.04
4/30/2014 13,593.71 13,029.77 12,696.42
5/31/2014 13,882.83 13,231.67 12,831.72
6/30/2014 14,144.22 13,410.20 12,933.20
7/31/2014 13,972.67 13,299.32 12,718.96
8/31/2014 14,281.34 13,508.83 12,899.37
9/30/2014 13,818.22 13,205.90 12,538.55
10/31/2014 13,915.51 13,273.18 12,628.76
11/30/2014 14,148.26 13,432.58 12,730.24
12/31/2014 13,875.25 13,255.06 12,408.68
1/31/2015 13,658.32 13,112.18 12,272.02
2/28/2015 14,418.70 13,627.36 12,886.99
3/31/2015 14,195.29 13,485.27 12,682.00
4/30/2015 14,607.15 13,763.91 12,982.65
5/31/2015 14,588.10 13,758.83 12,968.99
6/30/2015 14,244.66 13,536.36 12,695.67
7/31/2015 14,368.36 13,622.03 12,736.67
8/31/2015 13,383.40 12,972.51 11,930.38
9/30/2015 12,898.53 12,647.62 11,547.73
10/31/2015 13,910.87 13,344.76 12,326.69
11/30/2015 13,796.00 13,271.88 12,272.02
12/31/2015 13,547.20 13,108.78 12,002.51
1/31/2016 12,730.16 12,557.55 11,409.00
2/29/2016 12,642.59 12,502.30 11,270.00
3/31/2016 13,579.51 13,158.67 12,044.00
4/30/2016 13,779.96 13,300.78 12,196.00
5/31/2016 13,797.33 13,320.74 12,154.00
6/30/2016 13,713.80 13,270.12 12,182.00
[END CHART]
Data since Fund inception 7/31/08 to 6/30/16.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Global Managed Volatility Fund Institutional Shares to the benchmarks
listed above (see page 7 for benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o TOP 10 EQUITY HOLDINGS - 6/30/16 o
(% of Net Assets)
iShares MSCI USA Quality Factor ETF* ...................................... 14.8%
iShares Core MSCI EAFE ETF* .............................................. 14.2%
PowerShares FTSE RAFI U.S.1000 Portfolio .................................. 9.6%
iShares MSCI USA Momentum Factor ETF* ..................................... 8.0%
PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio ................. 7.6%
Schwab Fundamental International Large Co. Index ETF ...................... 7.5%
Schwab Fundamental U.S. Large Co. Index ETF ............................... 6.9%
iShares MSCI USA Minimum Volatility ETF* .................................. 5.0%
PowerShares FTSE RAFI Emerging Markets Portfolio .......................... 4.3%
Vanguard Total Stock Market ETF* .......................................... 4.3%
o ASSET ALLOCATION** - 6/30/16 o
(% of Net Assets)
[PIE CHART OF ASSET ALLOCATION]
EXCHANGE-TRADED FUNDS* 50.7%
INTERNATIONAL EXCHANGE-TRADED FUNDS* 48.2%
MONEY MARKET INSTRUMENTS 1.1%
COMMON STOCKS*** 0.0%
[END CHART]
* The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940, as amended, that would
otherwise be applicable.
** Excludes options.
*** Represents less than 0.1% of the Fund.
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 11-12.
================================================================================
10 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
-----------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (98.9%)
COMMON STOCKS (0.0%)
FINANCIALS (0.0%)
-----------------
DIVERSIFIED BANKS (0.0%)
198 Oversea-Chinese Banking Corp. Ltd.(a) (cost: $1) $ 1
--------
EXCHANGE-TRADED FUNDS (50.7%)
227,700 iShares MSCI USA Minimum Volatility ETF 10,522
219,200 iShares MSCI USA Momentum Factor ETF 16,747
471,500 iShares MSCI USA Quality Factor ETF 31,119
64,100 iShares MSCI USA Value Factor ETF 3,950
2,800 iShares Russell 1000 ETF 327
224,100 PowerShares FTSE RAFI U.S.1000 Portfolio 20,286
477,000 Schwab Fundamental U.S. Large Co. Index ETF 14,458
84,300 Vanguard Total Stock Market ETF 9,034
--------
Total Exchange-Traded Funds (cost: $103,581) 106,443
--------
INTERNATIONAL EXCHANGE-TRADED FUNDS (48.2%)
575,600 iShares Core MSCI EAFE ETF 29,868
176,500 iShares Core MSCI Emerging Markets ETF 7,383
173,700 iShares Currency Hedged MSCI EAFE ETF 4,165
94,800 iShares MSCI EAFE Minimum Volatility ETF 6,294
75,900 iShares MSCI Emerging Markets Minimum Volatility ETF 3,916
464,500 PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio 16,048
558,000 PowerShares FTSE RAFI Emerging Markets Portfolio 9,068
659,600 Schwab Fundamental International Large Co. Index ETF 15,659
131,700 Vanguard FTSE Developed Markets ETF 4,657
66,900 Vanguard FTSE Emerging Markets ETF 2,356
38,400 WisdomTree Europe Hedged Equity Fund 1,940
--------
Total International Exchange-Traded Funds (cost: $115,094) 101,354
--------
Total Equity Securities (cost: $218,676) 207,798
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
-----------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.1%)
MONEY MARKET FUNDS (1.1%)
2,335,575 State Street Institutional Liquid Reserves Fund Premier
Class, 0.47%(b) (cost: $2,336) $ 2,336
--------
TOTAL INVESTMENTS (COST: $221,012) $210,134
========
-----------------------------------------------------------------------------------------------------------------
NUMBER OF
CONTRACTS
-----------------------------------------------------------------------------------------------------------------
PURCHASED OPTIONS (0.2%)
400 Put - S&P 500 Index expiring September 30, 2016 at 1800 (cost: $921) $ 466
--------
-----------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
-----------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
-----------------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $ - $1 $- $ 1
Exchange-Traded Funds 106,443 - - 106,443
International Exchange-Traded Funds 101,354 - - 101,354
Money Market Instruments:
Money Market Funds 2,336 - - 2,336
Purchased Options 466 - - 466
-----------------------------------------------------------------------------------------------------------------
Total $210,599 $1 $- $210,600
-----------------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
12 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net
assets. Investments in foreign securities were 48.2% of net assets at
June 30, 2016.
The Fund may rely on certain Securities and Exchange Commission
(SEC) exemptive orders or rules that permit funds meeting various
conditions to invest in an exchange-traded fund (ETF) in amounts
exceeding limits set forth in the Investment Company Act of 1940, as
amended, that would otherwise be applicable.
o SPECIFIC NOTES
(a) Security with a value of $1,000 which represented less than 0.1% of
the Fund's net assets, was classified as Level 2 at June 30, 2016, due
to the price being adjusted to take into account significant market
movements following the close of local trading.
(b) Rate represents the money market fund annualized seven-day yield at
June 30, 2016.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 13
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $221,012) $210,134
Purchased options, at market value (cost of $921) 466
Cash 6
Cash denominated in foreign currencies (identified cost of $30) 28
Receivables:
Capital shares sold 3
USAA Asset Management Company (Note 6C) 11
Dividends and interest 91
Other 33
--------
Total assets 210,772
--------
LIABILITIES
Payables:
Securities purchased 409
Capital shares redeemed 14
Accrued management fees 103
Other accrued expenses and payables 51
--------
Total liabilities 577
--------
Net assets applicable to capital shares outstanding $210,195
========
NET ASSETS CONSIST OF:
Paid-in capital $223,640
Accumulated undistributed net investment income 1,494
Accumulated net realized loss on investments and options (3,603)
Net unrealized depreciation of investments and options (11,333)
Net unrealized depreciation of foreign currency translations (3)
--------
Net assets applicable to capital shares outstanding $210,195
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $14,137/1,622 shares outstanding) $ 8.71
========
Institutional Shares (net assets of $196,058/22,223 shares outstanding) $ 8.82
========
See accompanying notes to financial statements.
================================================================================
14 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 2,246
Interest 1
-------
Total income 2,247
-------
EXPENSES
Management fees 602
Administration and servicing fees:
Fund Shares 11
Institutional Shares 47
Transfer agent's fees:
Fund Shares 6
Institutional Shares 47
Custody and accounting fees:
Fund Shares 2
Institutional Shares 12
Postage:
Fund Shares 1
Shareholder reporting fees:
Fund Shares 3
Institutional Shares 1
Trustees' fees 14
Registration fees:
Fund Shares 7
Institutional Shares 7
Professional fees 50
Other 10
-------
Total expenses 820
Expenses reimbursed:
Fund Shares (17)
Institutional Shares (26)
-------
Net expenses 777
-------
NET INVESTMENT INCOME 1,470
-------
================================================================================
FINANCIAL STATEMENTS | 15
================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS, AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments $ 88
Options (1,824)
Change in net unrealized appreciation/(depreciation) of:
Investments 3,441
Foreign currency translations 2
Options 80
-------
Net realized and unrealized gain 1,787
-------
Increase in net assets resulting from operations $ 3,257
=======
See accompanying notes to financial statements.
================================================================================
16 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended
December 31, 2015
-------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
-------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 1,470 $ 2,157
Net realized gain (loss) on investments 88 (843)
Net realized gain on long-term capital gain distributions
from other investment companies - 118
Net realized loss on foreign currency transactions - (3)
Net realized loss on options (1,824) (567)
Change in net unrealized appreciation/(depreciation) of:
Investments 3,441 (12,010)
Foreign currency translations 2 2
Options 80 (528)
-----------------------
Increase (decrease) in net assets resulting from operations 3,257 (11,674)
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares - (163)
Institutional Shares - (1,967)
-----------------------
Distributions to shareholders - (2,130)
-----------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Fund Shares (1,966) (6,718)
Institutional Shares 3,915 144,273
-----------------------
Total net increase in net assets from capital share transactions 1,949 137,555
-----------------------
Net increase in net assets 5,206 123,751
NET ASSETS
Beginning of period 204,989 81,238
-----------------------
End of period $210,195 $204,989
=======================
Accumulated undistributed net investment income:
End of period $ 1,494 $ 24
=======================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 17
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Global Managed Volatility Fund (the
Fund), which is classified as diversified under the 1940 Act. The Fund's
investment objective is to seek to attain long-term capital appreciation while
attempting to reduce volatility during unfavorable market conditions.
The Fund consists of two classes of shares: Global Managed Volatility Fund
Shares (Fund Shares) and Global Managed Volatility Fund Institutional Shares
(Institutional Shares). Each class of shares has equal rights to assets and
earnings, except that each class bears certain class-related expenses specific
to the particular class. These expenses include administration and servicing
fees, transfer agent fees, postage, shareholder reporting fees, and certain
registration and custodian fees. Expenses not attributable to a specific class,
income, and realized gains or losses on investments are allocated to each class
of shares based on each class' relative net assets. Each class has exclusive
voting rights on matters related solely to that class and separate voting rights
on matters that relate to both classes. The Institutional Shares are available
for investment through a USAA discretionary managed account program, and certain
advisory programs sponsored by financial intermediaries, such as brokerage
firms, investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments, foundations, and bank
trusts, as well as other persons or legal entities that the Fund may approve
from
================================================================================
18 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
time to time, or for purchase by a USAA fund participating in a fund-of-funds
investment strategy (USAA fund-of-funds).
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures, which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of
securities as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures
during the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings
to review prior actions taken by the Committee and USAA Asset Management
Company (the Manager), an affiliate of the Fund. Among other things, these
monthly meetings include a review and analysis of back testing reports,
pricing service quotation comparisons, illiquid securities and fair value
determinations, pricing movements, and daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as
set forth below:
1. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Equity securities traded primarily on foreign securities
exchanges or markets are valued at the last quoted sales price, or the
most recently determined official closing price calculated according to
local market convention, available at the time the Fund is valued. If no
================================================================================
NOTES TO FINANCIAL STATEMENTS | 19
================================================================================
last sale or official closing price is reported or available, the
average of the bid and asked prices generally is used. Actively traded
equity securities listed on a domestic exchange generally are
categorized in Level 1 of the fair value hierarchy. Certain preferred
and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
2. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sales or official closing prices
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign securities and,
if necessary, the Committee will consider such available information
that it deems relevant and will determine a fair value for the affected
foreign securities in accordance with valuation procedures. In
addition, information from an external vendor or other sources may be
used to adjust the foreign market closing prices of foreign equity
securities to reflect what the Committee believes to be the fair value
of the securities as of the close of the NYSE. Fair valuation of
affected foreign equity securities may occur frequently based on events
that occur on a fairly regular basis (such as U.S. market movements)
are significant and are categorized in Level 2 of the fair value
hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
================================================================================
20 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
5. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board.
The Service uses an evaluated mean between quoted bid and asked prices
or the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which include consideration of yields or prices of
securities of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and general market
conditions. Generally, debt securities are categorized in Level 2 of
the fair value hierarchy; however, to the extent the valuations include
significant unobservable inputs, the securities would be categorized in
Level 3.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the last sale price at the close of market on
the principal exchange on which they are traded or, in the absence of
any transactions that day, the last sale price on the prior trading
date if it is within the spread between the closing bid and asked
prices closest to the last reported sale price.
8. Options are valued by a pricing service at the National Best
Bid/Offer (NBBO) composite price, which is derived from the best
available bid and asked prices in all participating options exchanges
determined to most closely reflect market value of the options at the
time of computation of the Fund's NAV.
9. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
================================================================================
NOTES TO FINANCIAL STATEMENTS | 21
================================================================================
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Fund may buy, sell,
and enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio
manager to aid in achieving the Fund's investment objective. The Fund also
may use derivatives in circumstances where the portfolio manager believes
they
================================================================================
22 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
offer an economical means of gaining exposure to a particular asset class or
securities market or to keep cash on hand to meet shareholder redemptions or
other needs while maintaining exposure to the market. With exchange-listed
futures contracts and options, counterparty credit risk to the Fund is
limited to the exchange's clearinghouse which, as counterparty to all
exchange-traded futures contracts and options, guarantees the transactions
against default from the actual counterparty to the transaction. The Fund's
derivative agreements held at June 30, 2016, did not include master netting
provisions.
OPTIONS TRANSACTIONS - The Fund is subject to equity price risk in the
normal course of pursuing its investment objectives. The Fund may use
options on underlying instruments, namely, equity securities, ETFs, and
equity indexes, to gain exposure to, or hedge against, changes in the value
of equity securities, ETFs, or equity indexes. A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying instrument at a specified price during a specified period.
Conversely, a put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying instrument at a specified
price during a specified period. The purchaser of the option pays a premium
to the writer of the option.
Premiums paid for purchased options are included in the Fund's Statement of
Assets and Liabilities as an investment. If a purchased option expires
unexercised, the premium paid is recognized as a realized loss. If a
purchased call option on a security is exercised, the cost of the security
acquired includes the exercise price and the premium paid. If a purchased
put option on a security is exercised, the realized gain or loss on the
security sold is determined from the exercise price, the original cost of
the security, and the premium paid. The risk associated with purchasing a
call or put option is limited to the premium paid.
Premiums received from writing options are included in the Fund's Statement
of Assets and Liabilities as a liability. If a written option expires
unexercised, the premium received is recognized as a realized gain. If a
written call option on a security is exercised, the realized gain or loss
on the security sold is determined from the exercise price, the original
cost of
================================================================================
NOTES TO FINANCIAL STATEMENTS | 23
================================================================================
the security, and the premium received. If a written put option on a
security is exercised, the cost of the security acquired is the exercise
price paid less the premium received. The Fund, as a writer of an option,
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
In an attempt to reduce the Fund's volatility over time, the Fund may
implement a strategy that involves purchasing and selling options on
indexes or ETFs that represent the Fund's exposure against a highly
correlated stock portfolio. The combination of the diversified stock
portfolio with index or ETF options is designed to provide the Fund with
consistent returns over a wide range of equity market environments. This
strategy may not fully protect the Fund against declines in the portfolio's
value, and the Fund could experience a loss. Options on ETFs are similar to
options on individual securities in that the holder of the ETF call (or
put) has the right to receive (or sell) shares of the underlying ETF at the
strike price on or before exercise date. Options on securities indexes are
different from options on individual securities in that the holder of the
index option has the right to receive an amount of cash equal to the
difference between the exercise price and the settlement value of the
underlying index as defined by the exchange. If an index option is
exercised, the realized gain or loss is determined by the exercise price,
the settlement value, and the premium amount paid or received.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2016*
(IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
----------------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ASSETS AND ASSETS AND
ACCOUNTED FOR AS LIABILITIES LIABILITIES
HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
----------------------------------------------------------------------------------------------------
Equity contracts Purchased options; $466 - $-
Net unrealized
depreciation of
investments and
options
----------------------------------------------------------------------------------------------------
*For open derivative instruments as of June 30, 2016, see the Portfolio of
Investments, which also is indicative of activity for the six-month period
ended June 30, 2016.
================================================================================
24 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2016 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED GAIN APPRECIATION/
ACCOUNTED FOR AS STATEMENT OF (LOSS) ON (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION DERIVATIVES ON DERIVATIVES
-------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) $(1,824) $80
on Options / Change in
net unrealized appreciation/
(depreciation) of Options
-------------------------------------------------------------------------------------
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
E. INVESTMENTS IN SECURITIES - Security transactions are accounted for on
the date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Discounts and premiums are amortized
over the life of the respective securities, using the effective yield
method for long-term securities and the straight-line method for short-term
securities.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on the
respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received.
At the end of the Fund's fiscal year, these net realized foreign currency
gains/losses are reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities, other than investments in
securities, resulting from changes in the exchange rate.
G. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's
custodian and other banks utilized by the Fund for cash management
purposes, realized credits, if any, generated from cash balances in the
Fund's bank accounts may be used to directly reduce the Fund's expenses.
For the six-month period ended June 30, 2016, there were no custodian and
other bank credits.
H. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that may affect the reported
amounts in the financial statements.
================================================================================
26 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of $1,000, which represents 0.3% of the total fees paid to CAPCO by the USAA
Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
At December 31, 2015, the Fund had net capital loss carryforwards of $1,888,000,
for federal income tax purposes as shown in the table below. It is unlikely that
the Board will authorize a distribution of capital gains realized in the future
until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
----------------------------------
TAX CHARACTER
----------------------------------
(NO EXPIRATION) BALANCE
Short-Term $1,410,000
Long-Term 478,000
----------
Total $1,888,000
==========
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the three preceding fiscal reporting
year ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$6,519,000 and $6,112,000, respectively.
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $3,560,000 and $14,893,000, respectively, resulting in net unrealized
depreciation of $11,333,000.
================================================================================
28 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
For the six-month period ended June 30, 2016, transactions in written call and
put options* were as follows:
PREMIUMS
NUMBER OF RECEIVED
CONTRACTS (000's)
------------------------------------------------
Outstanding at December 31, 2015 - $ -
Options written 450 917
Options terminated in closing
purchase transactions (450) (917)
Options expired - -
------------------------------------------------
Outstanding at June 30, 2016 - $ -
================================================
*Refer to Note 1C for a discussion of derivative instruments and how they are
accounted for in the Fund's financial statements.
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31, 2015
---------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
FUND SHARES:
Shares sold 42 $ 355 212 $ 1,928
Shares issued from reinvested dividends - - 15 128
Shares redeemed (273) (2,321) (970) (8,774)
----------------------------------------------------
Net decrease from capital
share transactions (231) $(1,966) (743) $ (6,718)
====================================================
INSTITUTIONAL SHARES:
Shares sold 593 $ 5,073 21,882 $206,119
Shares issued from reinvested dividends - - 230 1,967
Shares redeemed (130) (1,158) (6,734) (63,813)
----------------------------------------------------
Net increase from capital
share transactions 463 $ 3,915 15,378 $144,273
====================================================
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to
the Fund pursuant to an Advisory Agreement. Under this agreement, the
Manager is responsible for managing the business and affairs of the Fund,
and for directly managing the day-to-day investment of the Fund's assets,
subject to the authority of and supervision by the Board. The Manager also
is authorized to select (with approval of the Board and without shareholder
approval) one or more subadvisers to manage the day-to-day investment of a
portion of the Fund's assets. For the six-month period ended June 30, 2016,
the Fund had no subadviser(s).
The Fund's management fees are accrued daily and paid monthly at an
annualized rate of 0.60% of the Fund's average net assets. For the
six-month period ended June 30, 2016, the Fund incurred total management
fees, paid or payable to the Manager, of $602,000.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and 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 average net assets of the Fund Shares, and 0.05% of average net
assets of the Institutional Shares. For the six-month period ended June 30,
2016, the Fund Shares and Institutional Shares incurred administration and
servicing fees, paid or payable to the Manager, of $11,000 and $47,000,
respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For
the six-month period ended June 30, 2016, the Fund reimbursed the Manager
$3,000 for these compliance and legal services. These expenses are
included in the professional fees on the Fund's Statement of Operations.
C. EXPENSE LIMITATION - The Manager agreed, through May 1, 2017 to limit
the total annual operating expenses of the Fund Shares to 0.90% and
================================================================================
30 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
the Institutional Shares to 0.80% of its average net assets, excluding
extraordinary expenses, and before reductions of any expenses paid
indirectly, and to reimburse the Fund for all expenses in excess of that
amount. This expense limitation arrangement may not be changed or
terminated through May 1, 2017, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended June 30, 2016, the Fund incurred reimbursable
expenses from the Manager for the Fund Shares and Institutional Shares of
$17,000 and $26,000, respectively, of which $11,000 was receivable from the
Manager.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund Shares based on an annual charge of $23
per shareholder account plus out-of-pocket expenses. SAS pays a portion of
these fees to certain intermediaries for the administration and servicing
of accounts that are held with such intermediaries. Transfer agent's fees
for Institutional Shares are paid monthly based on a fee accrued daily at
an annualized rate of 0.05% of the Institutional Shares' average net assets
plus out-of-pocket expenses. For the six-month period ended June 30, 2016,
the Fund Shares and Institutional Shares incurred transfer agent's fees,
paid or payable to SAS, of $6,000 and $47,000, respectively.
E. UNDERWRITING SERVICES - USAA Investment Management Company provides
exclusive underwriting and distribution of the Fund's shares on a
continuing best-efforts basis and receives no fee or other compensation for
these services.
(7) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA funds and
is one of 20 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control. As of June 30, 2016, the
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
---------------------------------------------------------------------------------
Target Retirement Income 3.5
Target Retirement 2020 10.4
Target Retirement 2030 26.3
Target Retirement 2040 32.2
Target Retirement 2050 19.3
Target Retirement 2060 1.5
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At June 30, 2016,
USAA and its affiliates owned 478,000 shares, which represents 29.5% of the Fund
Shares outstanding and 2.0% of the Fund's outstanding shares.
Certain trustees and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Funds.
================================================================================
32 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
(8) FINANCIAL HIGHLIGHTS - FUND SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------------------------
2016 2015 2014 2013***
---------------------------------------------------------------
Net asset value at
beginning of period $ 8.59 $ 8.97 $ 11.14 $ 10.46
-------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income(a) .05 .10 .17 .07
Net realized and unrealized
gain (loss)(a) .07 (.40) (.37) .62
-------------------------------------------------------------
Total from investment operations(a) .12 (.30) (.20) .69
-------------------------------------------------------------
Less distributions from:
Net investment income - (.08) (.84) (.01)
Realized capital gains - - (1.13) -
-------------------------------------------------------------
Total distributions - (.08) (1.97) (.01)
-------------------------------------------------------------
Net asset value at end of period $ 8.71 $ 8.59 $ 8.97 $ 11.14
=============================================================
Total return (%)* 1.40 (3.28) (2.02) 6.61
Net assets at end of period (000) $14,137 $15,911 $23,300 $10,771
Ratios to average net assets:**
Expenses (%)(b) .87(c) .90 1.07(d) 1.10(c)
Expenses, excluding
reimbursements (%)(b) 1.10(c) 1.15 1.25 1.34(c)
Net investment income (%) 1.25(c) 1.14 1.60 1.29(c)
Portfolio turnover (%) 3 16(f) 147(e) 92
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$14,593,000.
*** Fund Shares commenced operations on July 12, 2013.
(a) Calculated using average shares. For the six-month period ended
June 30, 2016, average shares were 1,736,000.
(b) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratios by as follows:
- - - (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Effective November 24, 2014, the Manager voluntarily agreed to limit the
annual expenses of the Fund Shares to 1.10% of the Fund Shares' average net
assets.
(e) Reflects increased trading activity due to large shareholder redemptions.
(f) Reflects a return to normal trading levels after a prior year transition.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
(8) FINANCIAL HIGHLIGHTS (CONTINUED) - INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2016 2015 2014 2013*** 2012 2011
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 8.69 $ 9.08 $ 11.16 $ 9.96 $ 9.57 $ 10.09
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .06 .14(a) .20(a) .21 .22 .17
Net realized and
unrealized gain (loss) .07 (.44)(a) (.33)(a) 1.00 .73 (.51)
---------------------------------------------------------------------------
Total from investment
operations .13 (.30)(a) (.13)(a) 1.21 .95 (.34)
---------------------------------------------------------------------------
Less distributions from:
Net investment income - (.09) (.82) (.01) (.25) (.18)
Realized capital gains - - (1.13) - (.31) -
---------------------------------------------------------------------------
Total distributions - (.09) (1.95) (.01) (.56) (.18)
---------------------------------------------------------------------------
Net asset value at
end of period $ 8.82 $ 8.69 $ 9.08 $ 11.16 $ 9.96 $ 9.57
===========================================================================
Total return (%)* 1.50 (3.27) (1.39) 12.17 10.02 (3.40)
Net assets at
end of period (000) $196,058 $189,078 $57,938 $342,962 $380,888 $441,645
Ratios to average net assets:**
Expenses (%)(b) .77(c) .80 .87(e) .82 .80(d) .79
Expenses, excluding
reimbursements (%)(b) .80(c) .88 .87 .82 .80 .79
Net investment income (%) 1.48(c) 1.61 1.76 1.72 1.86 1.61
Portfolio turnover (%) 3 16(h) 147(g) 92 106(f) 144
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$187,233,000.
*** Effective July 12, 2013, the existing share class was designated "Global
Managed Volatility Fund Institutional Shares (Institutional Shares)".
(a) Calculated using average shares.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the annual
expenses of the Institutional Shares to 1.00% of the Institutional Shares'
average net assets.
(e) Effective November 24, 2014, the Manager voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.80% of the Institutional
Shares' average net assets.
(f) Reflects decreased trading activity due to changes in subadviser(s) and
asset allocation strategies.
(g) Reflects increased trading activity due to large shareholder redemptions.
(h) Reflects a return to normal trading levels after a prior year transition.
================================================================================
34 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through June
30, 2016.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to
================================================================================
EXPENSE EXAMPLE | 35
================================================================================
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
---------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,014.00 $4.36
Hypothetical
(5% return before expenses) 1,000.00 1,020.54 4.37
INSTITUTIONAL SHARES
Actual 1,000.00 1,015.00 3.86
Hypothetical
(5% return before expenses) 1,000.00 1,021.03 3.87
*Expenses are equal to the annualized expense ratio of 0.87% for Fund Shares
and 0.77% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 182 days/366 days (to reflect the one-half-year
period). The Fund's actual ending account values are based on its actual
total returns of 1.40% for Fund Shares and 1.50% for Institutional Shares for
the six-month period of January 1, 2016, through June 30, 2016.
================================================================================
36 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund. In advance of the meeting, the Trustees received and considered a variety
of information relating to the Advisory Agreement and the Manager, and were
given the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present. At each regularly scheduled meeting of the Board and its committees,
the Board receives and reviews, among other things, information concerning the
Fund's performance and related services provided by the Manager. At the meeting
at which the renewal of the Advisory Agreement is considered, particular focus
is given to information concerning Fund performance, fees and total expenses as
================================================================================
ADVISORY AGREEMENT(S) | 37
================================================================================
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included information
previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional experience and
qualifications of its senior and investment personnel, as well as current
staffing levels. The Board discussed the Manager's effectiveness in monitoring
the performance of each Subadviser and its timeliness in
================================================================================
38 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
responding to performance issues. The allocation of the Fund's brokerage,
including the Manager's process for monitoring "best execution," also was
considered. The Manager's role in coordinating the activities of the Fund's
other service providers was also considered. The Board also considered the
Manager's risk management processes. The Board considered the Manager's
financial condition and that it had the financial wherewithal to continue to
provide the same scope and high quality of services under the Advisory
Agreement. In reviewing the Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates in
managing the Fund, as well as the other funds in the Trust.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager, including the Manager's oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Trustees, guided
also by information obtained from their experiences as trustees of the Trust,
also focused on the quality of the Manager's compliance and administrative
staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the
Advisory Agreement, the Board evaluated the Fund's advisory fees and total
expense ratio as compared to other open-end investment companies deemed to
be comparable to the Fund as determined by the independent third party in
its report. The Fund's expenses were compared to (i) a group of investment
companies chosen by the independent third party to be comparable to the Fund
based upon certain factors, including fund type, comparability of investment
objective and classification, sales load type (in this case, retail
investment companies with front-end loads and no sales loads), asset size,
and expense components (the expense group) and (ii) a larger group of
investment companies that includes all front-end load and no-load retail
open-end investment companies with the same investment
classification/objective as the Fund regardless of asset size, excluding
outliers (the expense universe). Among other data, the Board noted that the
Fund's management fee rate -- which includes advisory and administrative
services as well as any fee waivers and reimbursements -- was below the
median of its expense group and its expense universe. The data indicated
that the Fund's total expenses, including underlying expenses and after any
reimbursements, were below the median
================================================================================
ADVISORY AGREEMENT(S) | 39
================================================================================
of its expense group and its expense universe. The Board took into account the
various services provided to the Fund by the Manager and its affiliates,
including the high quality of services received by the Fund from the Manager.
The Board also noted the level and method of computing the management fee. In
considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total returns with its Lipper index and with that of other mutual funds deemed
to be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was below the average of its performance universe and lower than its
Lipper index for the one-year period ended December 31, 2015. The Board also
noted that the Fund's percentile performance ranking was in the top 45% of its
performance universe for the one-year period ended December 31, 2015.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the management fee. The information considered by the Board
included operating profit margin information for the Manager's business as a
whole. The Board also received and considered profitability information related
to the management revenues from the Fund. This information included a review of
the methodology used in the allocation of certain costs to the Fund. In
considering the profitability data with respect to the Fund, the Trustees noted
that the Manager reimbursed a portion of its management fees to the Fund. The
Trustees reviewed the profitability of the Manager's relationship with the Fund
before tax expenses. In reviewing the overall profitability of the management
fee to the Manager, the Board also considered the fact that affiliates provide
shareholder servicing and administrative services to the Fund for which they
receive compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive
================================================================================
40 | USAA GLOBAL MANAGED VOLATILITY FUND
================================================================================
reputational and other benefits from its association with the Fund. The Trustees
recognized that the Manager should be entitled to earn a reasonable level of
profits in exchange for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the Fund's current advisory fee structure. The Board also considered the effect
of the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to be
provided by the Manager; and (v) the Manager's and its affiliates' level of
profitability from their relationship with the Fund is reasonable in light of
the nature and high quality of services provided by the Manager and the type of
fund. Based on its conclusions, the Board determined that continuation of the
Advisory Agreement would be in the best interests of the Fund and its
shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 41
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) in summary within the Statement of Additional
Information on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge (i) at
USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
88395-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA TARGET RETIREMENT FUNDS]
============================================================
SEMIANNUAL REPORT
USAA TARGET RETIREMENT FUNDS
JUNE 30, 2016
============================================================
TARGET RETIREMENT INCOME FUND
TARGET RETIREMENT 2020 FUND
TARGET RETIREMENT 2030 FUND
TARGET RETIREMENT 2040 FUND
TARGET RETIREMENT 2050 FUND
TARGET RETIREMENT 2060 FUND
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general, non-U.S.
stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FUNDS' OBJECTIVE 1
MANAGERS' COMMENTARY ON THE FUNDS 2
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Portfolios of Investments 25
Notes to Portfolios of Investments 37
Financial Statements 38
Notes to Financial Statements 46
EXPENSE EXAMPLE 66
ADVISORY AGREEMENT(S) 68
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 ASSET 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)2016, USAA. All rights reserved.
208368-0816
================================================================================
================================================================================
FUNDS' OBJECTIVE
EACH USAA TARGET RETIREMENT FUND PROVIDES CAPITAL APPRECIATION AND CURRENT
INCOME CONSISTENT WITH ITS CURRENT INVESTMENT ALLOCATION.
--------------------------------------------------------------------------------
TYPES OF INVESTMENTS
Each Target Retirement Fund invests in a selection of USAA mutual funds
(underlying USAA Funds) in a manner consistent with its current asset allocation
as depicted in the lifestyle transition path.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
================================================================================
FUNDS' OBJECTIVE | 1
================================================================================
MANAGERS' COMMENTARY ON THE FUNDS
--------------------------------------------------------------------------------
[PHOTO OF JOHN P. TOOHEY] [PHOTO OF WASIF A. LATIF]
JOHN P. TOOHEY, CFA WASIF A. LATIF
USAA Asset USAA Asset
Management Company Management Company
--------------------------------------------------------------------------------
o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE REPORTING PERIOD?
Financial assets produced robust returns during the reporting period ended
June 30, 2016, with gains for stocks and bonds alike.
The investment backdrop for the reporting period proved highly supportive
for stocks. Concerns about global growth receded due to an impressive
recovery in commodity prices and signs of stabilizing economic conditions
in China. Global monetary policy particularly the decisions of the European
Central Bank and the Bank of Japan to cut interest rates also was
favorable. In addition, a series of Federal Reserve (the Fed) statements
gave investors confidence that interest rates would remain low for an
extended length of time. A drop in global bond yields was an additional
positive in that it increased investors' willingness to take on the higher
risk of owning equities. Although the markets experienced stretches of
volatility--most notably in the wake of the United Kingdom's vote to leave
the European Union ("Brexit")--these factors generally had a beneficial
effect on stock prices.
Emerging markets performed particularly well, as the combination of an
increased investor appetite for risk, recovering commodity prices, and low
interest rates enabled the asset class to rebound from its weak performance
during the past two years. Domestic equities also generated a gain, thanks
in part to the relative strength of the U.S. economy. However, developed
international markets lost ground due to the comparative weakness in Europe
and Japan, as well as the late-June 2016 sell-off in European equities
sparked by the "Brexit" vote.
================================================================================
2 | USAA TARGET RETIREMENT FUNDS
================================================================================
Accommodative monetary policies also provided a boost to bonds by driving
down yields across the major world markets. (Prices and yields move in
opposite directions). Longer-term bonds delivered noteworthy gains, as
investors saw little threat from inflation or a more aggressive Fed policy.
The drop in yields fueled increased demand for investment-grade corporate
and high-yield bonds, allowing these categories to outpace the return of
government debt.
o HOW DID THE USAA TARGET RETIREMENT FUNDS (THE FUNDS) PERFORM DURING THE
REPORTING PERIOD?
The total returns for the S&P 500 Index(R), Barclay's U.S. Aggregate Bond
Index, Barclays U.S. Universal Index, and MSCI All-Country World Index the
benchmarks of the Funds, were 3.84%, 5.31%, 5.68% and 1.23%, respectively.
The total returns during the reporting period for each of the Funds are
shown below, along with the return of the relevant Lipper Mixed-Asset
Target Allocation Funds Index:
USAA FUND LIPPER INDEX
USAA Target Retirement Income Fund* 4.23% 4.07%
USAA Target Retirement 2020 Fund* 3.80% 3.25%
USAA Target Retirement 2030 Fund* 3.48% 2.82%
USAA Target Retirement 2040 Fund** 2.70% 2.24%
USAA Target Retirement 2050 Fund** 2.46% 2.06%
USAA Target Retirement 2060 Fund** 2.58% 1.98%
USAA Asset Management Company (the Manager) is the Funds' investment
adviser. The investment adviser provides day-to-day discretionary
management for the Funds' assets.
Refer to page 8 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the S&P
500(R) Index as the Funds' broad-based securities market index as it more
closely represents the securities held by the Funds.
**As of May 1, 2016, the MSCI All-Country World Index replaced the S&P
500(R) Index as the Funds' broad-based securities market index as it more
closely represents the securities held by the Funds.
================================================================================
MANAGERS' COMMENTARY ON THE FUNDS | 3
================================================================================
o WHAT FACTORS HELPED AND HURT THE FUNDS' PERFORMANCE?
The Funds employ a diversified, long-term approach that favors undervalued
market segments and avoids those segments that appear more richly priced.
The difference in the returns of the various Target Retirement Funds
reflects their unique asset allocations: the further away the target
retirement date, the higher each Fund's weighting in equities. We structure
the Funds in this way because longer-term investors have a higher tolerance
to withstand short-term volatility and more time to benefit from stocks'
superior longer-term return potential.
The Funds' domestic equity allocations, which are invested in five
underlying USAA funds that represent a variety of investment styles,
finished with a net gain. The Funds' investments in underlying USAA funds
linked to income-producing stocks, value stocks, and the S&P 500 all gained
ground, outweighing the weaker returns of their holdings in underlying USAA
funds that employ the growth style. Growth stocks generally lagged, as the
low yields on global government bonds sparked revived interest in the type
of income-producing investments typically found in value-style investments.
The Funds were underweight in small-cap stocks, which detracted modestly
given that the group finished slightly ahead of large-cap stocks.
On the international side, the Funds' allocations to the emerging markets
generated a strong gain during the reporting period. The Funds maintained
their exposure to the asset class when it was underperforming in 2015,
which put them in a position to benefit from its subsequent recovery. In
our view, this helps illustrate the potential benefits of using a long-term
strategy rather than overreacting to temporary shifts in sentiment.
The Funds' positions in developed-market international equities detracted
from results. While the asset class continues to offer an attractive
valuation relative to the United States, we are cautious given weakness in
corporate earnings growth and the uncertainty in the macroeconomic
environment. We therefore reduced the extent of the Funds' overweight
positions in this category during the course of the reporting period.
The Funds' allocations to bonds made a positive contribution to
performance. The Funds are invested in six USAA underlying funds
================================================================================
4 | USAA TARGET RETIREMENT FUNDS
================================================================================
that focus primarily on investment-grade bonds, which generated healthy
returns in an environment of falling yields. The Funds allocations to
high-yield bonds, which bounced back from last year's disappointing returns
amid the recovery in commodity prices and investors' rising appetite for
higher-yielding market segments, also made a positive contribution to
performance. We maintained the Funds' positions in high-yield bonds through
its downturn of late 2015 based on its attractive income, and this patient
approach paid off in the reporting period.
The Funds' exposure to alternative strategies via a basket of underlying
USAA funds contributed to the Funds' performance on a relative basis.
We continue to hold a cautious view regarding the overall outlook for the
financial markets. Although the investment environment remains generally
favorable--highlighted by a stable U.S. economy and supportive central bank
policies globally--the likelihood of negative developments is high. China's
growth prospects, volatility in commodity prices, geopolitical headlines,
and the approaching U.S. elections are all factors that could lead to
unstable short-term market performance in the months ahead. Amid this
uncertain outlook, our approach is to remain true to our longstanding
strategy of using fundamentals and valuations to construct portfolios that
can capitalize on a wide range of possible outcomes. We believe this steady
approach is appropriate at a time in which risks and opportunities appear
to be in roughly equal balance.
Thank you for allowing us to help you manage your investments.
THE RISKS OF THE TARGET RETIREMENT FUNDS REFLECT THE RISKS OF THE UNDERLYING
FUNDS IN WHICH THE FUNDS INVEST. THE TARGET DATE IS THE APPROXIMATE DATE WHEN
INVESTORS PLAN TO START WITHDRAWING THEIR MONEY FOR RETIREMENT PURPOSES. IN
GENERAL, THE TARGET RETIREMENT FUNDS' INVESTMENT PROGRAM ASSUMES FUNDS WILL
START BEING WITHDRAWN FOR RETIREMENT PURPOSES AT AGE 65. THE PRINCIPAL VALUE OF
THE TARGET RETIREMENT FUNDS IS NOT GUARANTEED AT ANY TIME, INCLUDING AT THE
TARGET DATE. THE FUNDS' OBJECTIVES DO NOT CHANGE OVER TIME. AS YOU NEAR YOUR
TARGET RETIREMENT DATE, THE FUND GETS PROGRESSIVELY MORE CONSERVATIVE BY
SHIFTING THE ASSET MIX FROM STOCKS TO BONDS. THERE IS NO ASSURANCE THAT THE
FUNDS' OBJECTIVES WILL BE ACHIEVED. EACH FUND IS ACTIVELY MANAGED AND THE
INVESTMENT TECHNIQUES AND RISK ANALYSES USED BY THE FUNDS' MANAGER(S) MAY NOT
PRODUCE THE DESIRED RESULTS. O FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS,
SUCH AS CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
EMERGING MARKET COUNTRIES ARE MOST VOLATILE. EMERGING MARKET COUNTRIES ARE LESS
DIVERSE AND MATURE THAN OTHER COUNTRIES AND TEND TO BE POLITICALLY LESS STABLE.
O DIVERSIFICATION IS A TECHNIQUE TO HELP REDUCE RISK. THERE IS NO ABSOLUTE
GUARANTEE THAT DIVERSIFICATION WILL PROTECT AGAINST A LOSS OF INCOME. O AS
INTEREST RATES RISE, EXISTING BOND PRICES GENERALLY FALL; GIVEN THE HISTORICALLY
LOW INTEREST RATE ENVIRONMENT, RISKS ASSOCIATED WITH RISING INTEREST RATES MAY
BE HEIGHTENED.
================================================================================
MANAGERS' COMMENTARY ON THE FUNDS | 5
================================================================================
INVESTMENT OVERVIEW
USAA TARGET RETIREMENT INCOME FUND (THE FUND)
(Ticker Symbol: URINX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $326.2 Million $330.8 Million
Net Asset Value Per Share $11.45 $11.09
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 7/31/08
4.23% 1.32% 3.69% 5.21%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.71%
(Including acquired fund fees and expenses of 0.65%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
6 | USAA TARGET RETIREMENT FUNDS
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA TARGET BARCLAYS MSCI
RETIREMENT U.S. UNIVERSAL ALL-COUNTRY
S&P 500 INDEX INCOME FUND INDEX* WORLD INDEX
7/31/2008 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2008 10,144.65 10,000.00 10,088.31 9,784.46
9/30/2008 9,240.68 9,580.62 9,899.43 8,561.59
10/31/2008 7,688.73 8,617.54 9,543.42 6,865.11
11/30/2008 7,137.03 8,416.90 9,794.69 6,414.09
12/31/2008 7,212.97 8,598.81 10,168.82 6,646.55
1/31/2009 6,605.01 8,303.36 10,111.15 6,078.68
2/28/2009 5,901.73 7,997.71 10,057.39 5,483.51
3/31/2009 6,418.69 8,347.98 10,208.65 5,935.18
4/30/2009 7,033.02 8,768.46 10,313.95 6,635.81
5/31/2009 7,426.40 9,301.74 10,429.56 7,296.99
6/30/2009 7,441.13 9,397.12 10,509.23 7,256.08
7/31/2009 8,003.95 9,852.49 10,708.14 7,894.81
8/31/2009 8,292.93 10,090.52 10,832.66 8,177.17
9/30/2009 8,602.38 10,395.82 10,979.75 8,552.32
10/31/2009 8,442.58 10,427.13 11,042.98 8,420.15
11/30/2009 8,948.99 10,677.64 11,183.11 8,766.46
12/31/2009 9,121.84 10,752.00 11,043.54 8,948.00
1/31/2010 8,793.70 10,773.15 11,211.52 8,561.29
2/28/2010 9,066.10 10,889.44 11,253.87 8,670.35
3/31/2010 9,613.20 11,150.65 11,268.91 9,228.14
4/30/2010 9,764.97 11,299.60 11,393.99 9,243.67
5/31/2010 8,985.23 11,001.69 11,445.52 8,367.32
6/30/2010 8,514.86 10,949.60 11,622.98 8,109.54
7/31/2010 9,111.44 11,282.06 11,773.41 8,769.40
8/31/2010 8,700.11 11,239.16 11,920.77 8,462.83
9/30/2010 9,476.55 11,658.40 11,958.66 9,272.44
10/31/2010 9,837.13 11,852.89 12,019.67 9,607.56
11/30/2010 9,838.39 11,809.67 11,940.55 9,393.79
12/31/2010 10,495.90 12,004.53 11,834.69 10,081.68
1/31/2011 10,744.67 12,070.13 11,862.55 10,239.89
2/28/2011 11,112.77 12,223.19 11,900.44 10,538.07
3/31/2011 11,117.19 12,293.52 11,914.64 10,527.55
4/30/2011 11,446.43 12,557.66 12,069.25 10,958.25
5/31/2011 11,316.86 12,568.67 12,218.57 10,722.70
6/30/2011 11,128.22 12,470.03 12,179.01 10,553.74
7/31/2011 10,901.93 12,492.18 12,368.44 10,381.92
8/31/2011 10,309.72 12,237.46 12,493.80 9,623.53
9/30/2011 9,584.96 11,838.36 12,529.46 8,714.94
10/31/2011 10,632.53 12,295.83 12,601.05 9,648.69
11/30/2011 10,609.03 12,240.04 12,563.72 9,359.86
12/31/2011 10,717.55 12,240.64 12,710.53 9,340.95
1/31/2012 11,197.86 12,591.02 12,848.15 9,884.10
2/29/2012 11,682.08 12,783.16 12,878.23 10,381.40
3/31/2012 12,066.53 12,806.95 12,819.18 10,450.33
4/30/2012 11,990.79 12,806.95 12,958.46 10,330.85
5/31/2012 11,270.13 12,500.40 13,042.32 9,404.61
6/30/2012 11,734.49 12,686.14 13,075.19 9,869.09
7/31/2012 11,897.47 12,811.86 13,270.19 10,004.19
8/31/2012 12,165.43 12,994.72 13,298.05 10,221.72
9/30/2012 12,479.81 13,224.59 13,337.05 10,543.66
10/31/2012 12,249.38 13,247.59 13,379.39 10,473.39
11/30/2012 12,320.44 13,293.59 13,411.43 10,607.32
12/31/2012 12,432.73 13,401.94 13,413.93 10,847.58
1/31/2013 13,076.69 13,530.13 13,344.01 11,347.31
2/28/2013 13,254.20 13,565.10 13,408.08 11,345.54
3/31/2013 13,751.28 13,679.35 13,423.96 11,552.99
4/30/2013 14,016.22 13,749.56 13,571.33 11,883.03
5/31/2013 14,344.08 13,702.76 13,341.23 11,850.43
6/30/2013 14,151.46 13,374.93 13,106.39 11,504.05
7/31/2013 14,871.55 13,645.73 13,149.01 12,054.78
8/31/2013 14,440.84 13,516.22 13,074.07 11,803.62
9/30/2013 14,893.70 13,770.69 13,204.17 12,413.30
10/31/2013 15,578.33 13,995.66 13,334.82 12,912.22
11/30/2013 16,053.06 14,078.55 13,291.64 13,095.08
12/31/2013 16,459.46 14,150.14 13,233.42 13,321.00
1/31/2014 15,890.39 14,054.53 13,408.92 12,788.15
2/28/2014 16,617.28 14,329.40 13,504.47 13,405.91
3/31/2014 16,756.96 14,368.08 13,491.94 13,465.52
4/30/2014 16,880.83 14,440.47 13,603.64 13,593.71
5/31/2014 17,277.09 14,609.36 13,767.45 13,882.83
6/30/2014 17,633.99 14,751.31 13,788.34 14,144.22
7/31/2014 17,390.80 14,630.00 13,745.44 13,972.67
8/31/2014 18,086.52 14,811.96 13,894.48 14,281.34
9/30/2014 17,832.89 14,575.77 13,784.16 13,818.22
10/31/2014 18,268.46 14,648.95 13,919.27 13,915.51
11/30/2014 18,759.78 14,770.92 13,993.09 14,148.26
12/31/2014 18,712.52 14,625.46 13,969.13 13,875.25
1/31/2015 18,150.79 14,625.46 14,234.89 13,658.32
2/28/2015 19,193.94 14,897.67 14,151.88 14,418.70
3/31/2015 18,890.40 14,815.37 14,210.38 14,195.29
4/30/2015 19,071.62 14,939.56 14,193.94 14,607.15
5/31/2015 19,316.87 14,964.40 14,169.15 14,588.10
6/30/2015 18,942.93 14,752.35 14,010.92 14,244.66
7/31/2015 19,339.81 14,777.31 14,092.54 14,368.36
8/31/2015 18,172.96 14,402.89 14,051.03 13,383.40
9/30/2015 17,723.30 14,258.93 14,105.91 12,898.53
10/31/2015 19,218.33 14,572.72 14,151.04 13,910.87
11/30/2015 19,275.48 14,509.96 14,099.51 13,796.00
12/31/2015 18,971.47 14,340.47 14,029.03 13,547.20
1/31/2016 18,030.03 14,159.00 14,183.92 12,730.16
2/29/2016 18,005.70 14,172.00 14,284.76 12,642.59
3/31/2016 19,227.18 14,578.00 14,459.70 13,579.51
4/30/2016 19,301.72 14,760.00 14,558.32 13,779.96
5/31/2016 19,648.34 14,812.00 14,569.74 13,797.33
6/30/2016 19,699.25 14,948.00 14,826.03 13,713.80
[END CHART]
Data since Fund inception 7/31/08 to 6/30/16.
See next page for benchmark definitions.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
The graph on page 7 illustrates the comparison of a $10,000 hypothetical
investment in the USAA Target Retirement Income Fund to the following
benchmarks:
o The unmanaged S&P 500 Index represents the weighted average performance of a
group of 500 widely held, publicly traded U.S. stocks.
o The Barclays U.S. Universal Index is an index that represents the union
of the U.S. Aggregate Index, U.S. Corporate High-Yield, Investment Grade
144A Index, Eurodollar Index, U.S. Emerging Markets Index, and the
non-ERISA eligible portion of the CMBS Index. The index covers USD
denominated, taxable bonds that are rated either investment-grade or below
investment-grade.
o The unmanaged MSCI All-Country World Index is a free float-adjusted
market capitalization weighted index that is designed to measure the equity
market performance of developed and emerging markets.
================================================================================
8 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2020 FUND (THE FUND)
(Ticker Symbol: URTNX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $570.9 Million $583.9 Million
Net Asset Value Per Share $12.30 $11.85
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 7/31/08
3.80% 0.11% 4.17% 5.94%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.75%
(Including acquired fund fees and expenses of 0.71%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA TARGET BARCLAYS MSCI
RETIREMENT U.S. UNIVERSAL ALL-COUNTRY
S&P 500 INDEX 2020 FUND INDEX* WORLD INDEX
7/31/2008 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2008 10,144.65 10,000.00 10,088.31 9,784.46
9/30/2008 9,240.68 9,490.00 9,899.43 8,561.59
10/31/2008 7,688.73 8,360.00 9,543.42 6,865.11
11/30/2008 7,137.03 8,210.00 9,794.69 6,414.09
12/31/2008 7,212.97 8,505.09 10,168.82 6,646.55
1/31/2009 6,605.01 8,077.29 10,111.15 6,078.68
2/28/2009 5,901.73 7,618.93 10,057.39 5,483.51
3/31/2009 6,418.69 8,067.10 10,208.65 5,935.18
4/30/2009 7,033.02 8,637.50 10,313.95 6,635.81
5/31/2009 7,426.40 9,228.27 10,429.56 7,296.99
6/30/2009 7,441.13 9,309.76 10,509.23 7,256.08
7/31/2009 8,003.95 9,849.60 10,708.14 7,894.81
8/31/2009 8,292.93 10,094.06 10,832.66 8,177.17
9/30/2009 8,602.38 10,470.93 10,979.75 8,552.32
10/31/2009 8,442.58 10,470.93 11,042.98 8,420.15
11/30/2009 8,948.99 10,776.50 11,183.11 8,766.46
12/31/2009 9,121.84 10,896.68 11,043.54 8,948.00
1/31/2010 8,793.70 10,844.19 11,211.52 8,561.29
2/28/2010 9,066.10 10,991.16 11,253.87 8,670.35
3/31/2010 9,613.20 11,337.59 11,268.91 9,228.14
4/30/2010 9,764.97 11,516.05 11,393.99 9,243.67
5/31/2010 8,985.23 11,075.14 11,445.52 8,367.32
6/30/2010 8,514.86 10,970.17 11,622.98 8,109.54
7/31/2010 9,111.44 11,379.58 11,773.41 8,769.40
8/31/2010 8,700.11 11,274.60 11,920.77 8,462.83
9/30/2010 9,476.55 11,820.48 11,958.66 9,272.44
10/31/2010 9,837.13 12,072.43 12,019.67 9,607.56
11/30/2010 9,838.39 12,019.94 11,940.55 9,393.79
12/31/2010 10,495.90 12,343.67 11,834.69 10,081.68
1/31/2011 10,744.67 12,419.27 11,862.55 10,239.89
2/28/2011 11,112.77 12,624.46 11,900.44 10,538.07
3/31/2011 11,117.19 12,710.85 11,914.64 10,527.55
4/30/2011 11,446.43 13,034.83 12,069.25 10,958.25
5/31/2011 11,316.86 12,991.64 12,218.57 10,722.70
6/30/2011 11,128.22 12,872.84 12,179.01 10,553.74
7/31/2011 10,901.93 12,851.24 12,368.44 10,381.92
8/31/2011 10,309.72 12,440.87 12,493.80 9,623.53
9/30/2011 9,584.96 11,836.10 12,529.46 8,714.94
10/31/2011 10,632.53 12,516.46 12,601.05 9,648.69
11/30/2011 10,609.03 12,419.27 12,563.72 9,359.86
12/31/2011 10,717.55 12,407.50 12,710.53 9,340.95
1/31/2012 11,197.86 12,853.81 12,848.15 9,884.10
2/29/2012 11,682.08 13,121.60 12,878.23 10,381.40
3/31/2012 12,066.53 13,177.39 12,819.18 10,450.33
4/30/2012 11,990.79 13,155.07 12,958.46 10,330.85
5/31/2012 11,270.13 12,697.60 13,042.32 9,404.61
6/30/2012 11,734.49 12,954.23 13,075.19 9,869.09
7/31/2012 11,897.47 13,076.97 13,270.19 10,004.19
8/31/2012 12,165.43 13,288.97 13,298.05 10,221.72
9/30/2012 12,479.81 13,579.07 13,337.05 10,543.66
10/31/2012 12,249.38 13,567.91 13,379.39 10,473.39
11/30/2012 12,320.44 13,646.02 13,411.43 10,607.32
12/31/2012 12,432.73 13,804.38 13,413.93 10,847.58
1/31/2013 13,076.69 14,022.95 13,344.01 11,347.31
2/28/2013 13,254.20 14,068.96 13,408.08 11,345.54
3/31/2013 13,751.28 14,218.51 13,423.96 11,552.99
4/30/2013 14,016.22 14,322.04 13,571.33 11,883.03
5/31/2013 14,344.08 14,322.04 13,341.23 11,850.43
6/30/2013 14,151.46 13,988.43 13,106.39 11,504.05
7/31/2013 14,871.55 14,356.55 13,149.01 12,054.78
8/31/2013 14,440.84 14,172.49 13,074.07 11,803.62
9/30/2013 14,893.70 14,529.10 13,204.17 12,413.30
10/31/2013 15,578.33 14,839.70 13,334.82 12,912.22
11/30/2013 16,053.06 14,954.74 13,291.64 13,095.08
12/31/2013 16,459.46 15,068.77 13,233.42 13,321.00
1/31/2014 15,890.39 14,854.02 13,408.92 12,788.15
2/28/2014 16,617.28 15,247.74 13,504.47 13,405.91
3/31/2014 16,756.96 15,295.47 13,491.94 13,465.52
4/30/2014 16,880.83 15,378.98 13,603.64 13,593.71
5/31/2014 17,277.09 15,581.81 13,767.45 13,882.83
6/30/2014 17,633.99 15,772.70 13,788.34 14,144.22
7/31/2014 17,390.80 15,593.74 13,745.44 13,972.67
8/31/2014 18,086.52 15,832.35 13,894.48 14,281.34
9/30/2014 17,832.89 15,510.22 13,784.16 13,818.22
10/31/2014 18,268.46 15,617.60 13,919.27 13,915.51
11/30/2014 18,759.78 15,772.70 13,993.09 14,148.26
12/31/2014 18,712.52 15,589.12 13,969.13 13,875.25
1/31/2015 18,150.79 15,551.89 14,234.89 13,658.32
2/28/2015 19,193.94 15,936.65 14,151.88 14,418.70
3/31/2015 18,890.40 15,812.53 14,210.38 14,195.29
4/30/2015 19,071.62 15,998.71 14,193.94 14,607.15
5/31/2015 19,316.87 16,023.53 14,169.15 14,588.10
6/30/2015 18,942.93 15,775.30 14,010.92 14,244.66
7/31/2015 19,339.81 15,800.12 14,092.54 14,368.36
8/31/2015 18,172.96 15,216.77 14,051.03 13,383.40
9/30/2015 17,723.30 14,968.53 14,105.91 12,898.53
10/31/2015 19,218.33 15,527.06 14,151.04 13,910.87
11/30/2015 19,275.48 15,452.59 14,099.51 13,796.00
12/31/2015 18,971.47 15,214.27 14,029.03 13,547.20
1/31/2016 18,030.03 14,829.00 14,183.92 12,730.16
2/29/2016 18,005.70 14,816.00 14,284.76 12,642.59
3/31/2016 19,227.18 15,407.00 14,459.70 13,579.51
4/30/2016 19,301.72 15,612.00 14,558.32 13,779.96
5/31/2016 19,648.34 15,689.00 14,569.74 13,797.33
6/30/2016 19,699.25 15,792.00 14,826.03 13,713.80
[END CHART]
Data since Fund inception 7/31/08 to 6/30/16.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Target Retirement 2020 Fund to the benchmarks listed above (see page 8 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
================================================================================
10 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2030 FUND (THE FUND)
(Ticker Symbol: URTRX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $1.1 Billion $1.1 Billion
Net Asset Value Per Share $12.77 $12.34
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 7/31/08
3.48% -1.01% 4.77% 6.17%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.81%
(Including acquired fund fees and expenses of 0.78%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
INVESTMENT OVERVIEW | 11
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA TARGET BARCLAYS MSCI
RETIREMENT U.S. UNIVERSAL ALL-COUNTRY
S&P 500 INDEX 2030 FUND INDEX* WORLD INDEX
7/31/2008 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2008 10,144.65 9,990.00 10,088.31 9,784.46
9/30/2008 9,240.68 9,250.00 9,899.43 8,561.59
10/31/2008 7,688.73 7,970.00 9,543.42 6,865.11
11/30/2008 7,137.03 7,690.00 9,794.69 6,414.09
12/31/2008 7,212.97 7,993.85 10,168.82 6,646.55
1/31/2009 6,605.01 7,555.97 10,111.15 6,078.68
2/28/2009 5,901.73 7,097.72 10,057.39 5,483.51
3/31/2009 6,418.69 7,525.42 10,208.65 5,935.18
4/30/2009 7,033.02 8,105.86 10,313.95 6,635.81
5/31/2009 7,426.40 8,696.49 10,429.56 7,296.99
6/30/2009 7,441.13 8,757.59 10,509.23 7,256.08
7/31/2009 8,003.95 9,348.22 10,708.14 7,894.81
8/31/2009 8,292.93 9,612.98 10,832.66 8,177.17
9/30/2009 8,602.38 10,030.50 10,979.75 8,552.32
10/31/2009 8,442.58 9,969.40 11,042.98 8,420.15
11/30/2009 8,948.99 10,335.99 11,183.11 8,766.46
12/31/2009 9,121.84 10,526.60 11,043.54 8,948.00
1/31/2010 8,793.70 10,349.42 11,211.52 8,561.29
2/28/2010 9,066.10 10,526.60 11,253.87 8,670.35
3/31/2010 9,613.20 10,995.61 11,268.91 9,228.14
4/30/2010 9,764.97 11,172.79 11,393.99 9,243.67
5/31/2010 8,985.23 10,557.87 11,445.52 8,367.32
6/30/2010 8,514.86 10,370.27 11,622.98 8,109.54
7/31/2010 9,111.44 10,891.39 11,773.41 8,769.40
8/31/2010 8,700.11 10,682.94 11,920.77 8,462.83
9/30/2010 9,476.55 11,422.93 11,958.66 9,272.44
10/31/2010 9,837.13 11,735.60 12,019.67 9,607.56
11/30/2010 9,838.39 11,673.06 11,940.55 9,393.79
12/31/2010 10,495.90 12,141.60 11,834.69 10,081.68
1/31/2011 10,744.67 12,216.35 11,862.55 10,239.89
2/28/2011 11,112.77 12,472.64 11,900.44 10,538.07
3/31/2011 11,117.19 12,579.43 11,914.64 10,527.55
4/30/2011 11,446.43 12,995.89 12,069.25 10,958.25
5/31/2011 11,316.86 12,878.43 12,218.57 10,722.70
6/30/2011 11,128.22 12,728.93 12,179.01 10,553.74
7/31/2011 10,901.93 12,643.50 12,368.44 10,381.92
8/31/2011 10,309.72 12,077.53 12,493.80 9,623.53
9/30/2011 9,584.96 11,265.95 12,529.46 8,714.94
10/31/2011 10,632.53 12,152.28 12,601.05 9,648.69
11/30/2011 10,609.03 12,034.82 12,563.72 9,359.86
12/31/2011 10,717.55 12,000.42 12,710.53 9,340.95
1/31/2012 11,197.86 12,549.39 12,848.15 9,884.10
2/29/2012 11,682.08 12,911.70 12,878.23 10,381.40
3/31/2012 12,066.53 13,010.52 12,819.18 10,450.33
4/30/2012 11,990.79 12,933.66 12,958.46 10,330.85
5/31/2012 11,270.13 12,274.90 13,042.32 9,404.61
6/30/2012 11,734.49 12,626.24 13,075.19 9,869.09
7/31/2012 11,897.47 12,736.03 13,270.19 10,004.19
8/31/2012 12,165.43 12,988.56 13,298.05 10,221.72
9/30/2012 12,479.81 13,317.94 13,337.05 10,543.66
10/31/2012 12,249.38 13,263.04 13,379.39 10,473.39
11/30/2012 12,320.44 13,361.86 13,411.43 10,607.32
12/31/2012 12,432.73 13,579.66 13,413.93 10,847.58
1/31/2013 13,076.69 13,918.30 13,344.01 11,347.31
2/28/2013 13,254.20 13,952.17 13,408.08 11,345.54
3/31/2013 13,751.28 14,144.06 13,423.96 11,552.99
4/30/2013 14,016.22 14,256.95 13,571.33 11,883.03
5/31/2013 14,344.08 14,324.68 13,341.23 11,850.43
6/30/2013 14,151.46 13,974.74 13,106.39 11,504.05
7/31/2013 14,871.55 14,471.42 13,149.01 12,054.78
8/31/2013 14,440.84 14,223.08 13,074.07 11,803.62
9/30/2013 14,893.70 14,697.18 13,204.17 12,413.30
10/31/2013 15,578.33 15,103.55 13,334.82 12,912.22
11/30/2013 16,053.06 15,272.88 13,291.64 13,095.08
12/31/2013 16,459.46 15,442.03 13,233.42 13,321.00
1/31/2014 15,890.39 15,065.67 13,408.92 12,788.15
2/28/2014 16,617.28 15,583.15 13,504.47 13,405.91
3/31/2014 16,756.96 15,641.96 13,491.94 13,465.52
4/30/2014 16,880.83 15,712.52 13,603.64 13,593.71
5/31/2014 17,277.09 15,971.26 13,767.45 13,882.83
6/30/2014 17,633.99 16,230.00 13,788.34 14,144.22
7/31/2014 17,390.80 15,959.50 13,745.44 13,972.67
8/31/2014 18,086.52 16,277.05 13,894.48 14,281.34
9/30/2014 17,832.89 15,841.90 13,784.16 13,818.22
10/31/2014 18,268.46 15,971.26 13,919.27 13,915.51
11/30/2014 18,759.78 16,206.48 13,993.09 14,148.26
12/31/2014 18,712.52 15,972.45 13,969.13 13,875.25
1/31/2015 18,150.79 15,862.30 14,234.89 13,658.32
2/28/2015 19,193.94 16,425.32 14,151.88 14,418.70
3/31/2015 18,890.40 16,241.72 14,210.38 14,195.29
4/30/2015 19,071.62 16,510.99 14,193.94 14,607.15
5/31/2015 19,316.87 16,559.95 14,169.15 14,588.10
6/30/2015 18,942.93 16,229.48 14,010.92 14,244.66
7/31/2015 19,339.81 16,278.44 14,092.54 14,368.36
8/31/2015 18,172.96 15,495.12 14,051.03 13,383.40
9/30/2015 17,723.30 15,152.41 14,105.91 12,898.53
10/31/2015 19,218.33 15,886.78 14,151.04 13,910.87
11/30/2015 19,275.48 15,813.34 14,099.51 13,796.00
12/31/2015 18,971.47 15,524.32 14,029.03 13,547.20
1/31/2016 18,030.03 14,958.00 14,183.92 12,730.16
2/29/2016 18,005.70 14,920.00 14,284.76 12,642.59
3/31/2016 19,227.18 15,675.00 14,459.70 13,579.51
4/30/2016 19,301.72 15,902.00 14,558.32 13,779.96
5/31/2016 19,648.34 15,977.00 14,569.74 13,797.33
6/30/2016 19,699.25 16,065.00 14,826.03 13,713.80
[END CHART]
Data since Fund inception 7/31/08 to 6/30/16.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Target Retirement 2030 Fund to the benchmarks listed above (see page 8 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
================================================================================
12 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2040 FUND (THE FUND)
(Ticker Symbol: URFRX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $1.1 Billion $1.1 Billion
Net Asset Value Per Share $12.56 $12.23
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 7/31/08
2.70% -2.06% 4.86% 5.62%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.85%
(Including acquired fund fees and expenses of 0.82%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
INVESTMENT OVERVIEW | 13
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA TARGET BARCLAYS MSCI
RETIREMENT U.S. UNIVERSAL ALL-COUNTRY
S&P 500 INDEX 2040 FUND INDEX WORLD INDEX*
7/31/2008 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2008 10,144.65 9,990.00 10,088.31 9,784.46
9/30/2008 9,240.68 9,110.00 9,899.43 8,561.59
10/31/2008 7,688.73 7,610.00 9,543.42 6,865.11
11/30/2008 7,137.03 7,160.00 9,794.69 6,414.09
12/31/2008 7,212.97 7,494.90 10,168.82 6,646.55
1/31/2009 6,605.01 7,016.93 10,111.15 6,078.68
2/28/2009 5,901.73 6,508.46 10,057.39 5,483.51
3/31/2009 6,418.69 6,966.09 10,208.65 5,935.18
4/30/2009 7,033.02 7,545.75 10,313.95 6,635.81
5/31/2009 7,426.40 8,115.24 10,429.56 7,296.99
6/30/2009 7,441.13 8,115.24 10,509.23 7,256.08
7/31/2009 8,003.95 8,755.91 10,708.14 7,894.81
8/31/2009 8,292.93 8,999.98 10,832.66 8,177.17
9/30/2009 8,602.38 9,437.27 10,979.75 8,552.32
10/31/2009 8,442.58 9,294.89 11,042.98 8,420.15
11/30/2009 8,948.99 9,722.01 11,183.11 8,766.46
12/31/2009 9,121.84 9,946.22 11,043.54 8,948.00
1/31/2010 8,793.70 9,656.12 11,211.52 8,561.29
2/28/2010 9,066.10 9,863.34 11,253.87 8,670.35
3/31/2010 9,613.20 10,402.09 11,268.91 9,228.14
4/30/2010 9,764.97 10,567.86 11,393.99 9,243.67
5/31/2010 8,985.23 9,821.89 11,445.52 8,367.32
6/30/2010 8,514.86 9,552.52 11,622.98 8,109.54
7/31/2010 9,111.44 10,143.07 11,773.41 8,769.40
8/31/2010 8,700.11 9,832.25 11,920.77 8,462.83
9/30/2010 9,476.55 10,702.55 11,958.66 9,272.44
10/31/2010 9,837.13 11,054.81 12,019.67 9,607.56
11/30/2010 9,838.39 10,982.29 11,940.55 9,393.79
12/31/2010 10,495.90 11,596.80 11,834.69 10,081.68
1/31/2011 10,744.67 11,638.94 11,862.55 10,239.89
2/28/2011 11,112.77 11,944.39 11,900.44 10,538.07
3/31/2011 11,117.19 12,060.25 11,914.64 10,527.55
4/30/2011 11,446.43 12,523.70 12,069.25 10,958.25
5/31/2011 11,316.86 12,344.64 12,218.57 10,722.70
6/30/2011 11,128.22 12,165.58 12,179.01 10,553.74
7/31/2011 10,901.93 11,997.06 12,368.44 10,381.92
8/31/2011 10,309.72 11,291.35 12,493.80 9,623.53
9/30/2011 9,584.96 10,343.38 12,529.46 8,714.94
10/31/2011 10,632.53 11,365.08 12,601.05 9,648.69
11/30/2011 10,609.03 11,238.68 12,563.72 9,359.86
12/31/2011 10,717.55 11,162.02 12,710.53 9,340.95
1/31/2012 11,197.86 11,764.21 12,848.15 9,884.10
2/29/2012 11,682.08 12,172.84 12,878.23 10,381.40
3/31/2012 12,066.53 12,301.88 12,819.18 10,450.33
4/30/2012 11,990.79 12,183.60 12,958.46 10,330.85
5/31/2012 11,270.13 11,387.84 13,042.32 9,404.61
6/30/2012 11,734.49 11,774.97 13,075.19 9,869.09
7/31/2012 11,897.47 11,850.24 13,270.19 10,004.19
8/31/2012 12,165.43 12,119.08 13,298.05 10,221.72
9/30/2012 12,479.81 12,473.94 13,337.05 10,543.66
10/31/2012 12,249.38 12,366.40 13,379.39 10,473.39
11/30/2012 12,320.44 12,484.69 13,411.43 10,607.32
12/31/2012 12,432.73 12,749.61 13,413.93 10,847.58
1/31/2013 13,076.69 13,156.63 13,344.01 11,347.31
2/28/2013 13,254.20 13,189.64 13,408.08 11,345.54
3/31/2013 13,751.28 13,409.65 13,423.96 11,552.99
4/30/2013 14,016.22 13,530.65 13,571.33 11,883.03
5/31/2013 14,344.08 13,651.66 13,341.23 11,850.43
6/30/2013 14,151.46 13,299.64 13,106.39 11,504.05
7/31/2013 14,871.55 13,871.67 13,149.01 12,054.78
8/31/2013 14,440.84 13,596.65 13,074.07 11,803.62
9/30/2013 14,893.70 14,135.68 13,204.17 12,413.30
10/31/2013 15,578.33 14,575.70 13,334.82 12,912.22
11/30/2013 16,053.06 14,762.71 13,291.64 13,095.08
12/31/2013 16,459.46 14,963.92 13,233.42 13,321.00
1/31/2014 15,890.39 14,491.62 13,408.92 12,788.15
2/28/2014 16,617.28 15,067.60 13,504.47 13,405.91
3/31/2014 16,756.96 15,125.20 13,491.94 13,465.52
4/30/2014 16,880.83 15,182.79 13,603.64 13,593.71
5/31/2014 17,277.09 15,447.74 13,767.45 13,882.83
6/30/2014 17,633.99 15,735.73 13,788.34 14,144.22
7/31/2014 17,390.80 15,424.71 13,745.44 13,972.67
8/31/2014 18,086.52 15,781.81 13,894.48 14,281.34
9/30/2014 17,832.89 15,286.47 13,784.16 13,818.22
10/31/2014 18,268.46 15,413.19 13,919.27 13,915.51
11/30/2014 18,759.78 15,678.14 13,993.09 14,148.26
12/31/2014 18,712.52 15,435.88 13,969.13 13,875.25
1/31/2015 18,150.79 15,268.23 14,234.89 13,658.32
2/28/2015 19,193.94 15,926.86 14,151.88 14,418.70
3/31/2015 18,890.40 15,711.30 14,210.38 14,195.29
4/30/2015 19,071.62 16,010.68 14,193.94 14,607.15
5/31/2015 19,316.87 16,070.56 14,169.15 14,588.10
6/30/2015 18,942.93 15,747.23 14,010.92 14,244.66
7/31/2015 19,339.81 15,795.13 14,092.54 14,368.36
8/31/2015 18,172.96 14,932.93 14,051.03 13,383.40
9/30/2015 17,723.30 14,537.75 14,105.91 12,898.53
10/31/2015 19,218.33 15,376.00 14,151.04 13,910.87
11/30/2015 19,275.48 15,328.10 14,099.51 13,796.00
12/31/2015 18,971.47 15,017.88 14,029.03 13,547.20
1/31/2016 18,030.03 14,355.00 14,183.92 12,730.16
2/29/2016 18,005.70 14,293.00 14,284.76 12,642.59
3/31/2016 19,227.18 15,092.00 14,459.70 13,579.51
4/30/2016 19,301.72 15,300.00 14,558.32 13,779.96
5/31/2016 19,648.34 15,399.00 14,569.74 13,797.33
6/30/2016 19,699.25 15,423.00 14,826.03 13,713.80
[END CHART]
Data since Fund inception 7/31/08 to 6/30/16.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Target Retirement 2040 Fund to the benchmarks listed above (see page 8 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the MSCI All-Country World Index replaced the S&P 500(R)
Index as the Fund's broad-based securities market index as it more closely
represents the securities held by the Fund.
================================================================================
14 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2050 FUND (THE FUND)
(Ticker Symbol: URFFX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $624.0 Million $603.3 Million
Net Asset Value Per Share $12.48 $12.18
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 7/31/08
2.46% -2.29% 4.92% 5.00%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.88%
(Including acquired fund fees and expenses of 0.84%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
INVESTMENT OVERVIEW | 15
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS USAA TARGET MSCI
U.S. UNIVERSAL RETIREMENT ALL-COUNTRY
S&P 500 INDEX INDEX 2050 FUND WORLD INDEX*
7/31/2008 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2008 10,144.65 10,088.31 9,960.00 9,784.46
9/30/2008 9,240.68 9,899.43 8,970.00 8,561.59
10/31/2008 7,688.73 9,543.42 7,330.00 6,865.11
11/30/2008 7,137.03 9,794.69 6,810.00 6,414.09
12/31/2008 7,212.97 10,168.82 7,180.05 6,646.55
1/31/2009 6,605.01 10,111.15 6,611.33 6,078.68
2/28/2009 5,901.73 10,057.39 6,042.61 5,483.51
3/31/2009 6,418.69 10,208.65 6,550.40 5,935.18
4/30/2009 7,033.02 10,313.95 7,129.27 6,635.81
5/31/2009 7,426.40 10,429.56 7,677.67 7,296.99
6/30/2009 7,441.13 10,509.23 7,616.74 7,256.08
7/31/2009 8,003.95 10,708.14 8,276.86 7,894.81
8/31/2009 8,292.93 10,832.66 8,510.44 8,177.17
9/30/2009 8,602.38 10,979.75 8,936.98 8,552.32
10/31/2009 8,442.58 11,042.98 8,733.86 8,420.15
11/30/2009 8,948.99 11,183.11 9,211.18 8,766.46
12/31/2009 9,121.84 11,043.54 9,466.36 8,948.00
1/31/2010 8,793.70 11,211.52 9,065.51 8,561.29
2/28/2010 9,066.10 11,253.87 9,301.91 8,670.35
3/31/2010 9,613.20 11,268.91 9,877.50 9,228.14
4/30/2010 9,764.97 11,393.99 10,021.39 9,243.67
5/31/2010 8,985.23 11,445.52 9,209.40 8,367.32
6/30/2010 8,514.86 11,622.98 8,880.50 8,109.54
7/31/2010 9,111.44 11,773.41 9,507.48 8,769.40
8/31/2010 8,700.11 11,920.77 9,137.46 8,462.83
9/30/2010 9,476.55 11,958.66 10,083.06 9,272.44
10/31/2010 9,837.13 12,019.67 10,442.81 9,607.56
11/30/2010 9,838.39 11,940.55 10,381.14 9,393.79
12/31/2010 10,495.90 11,834.69 11,047.20 10,081.68
1/31/2011 10,744.67 11,862.55 11,078.32 10,239.89
2/28/2011 11,112.77 11,900.44 11,379.13 10,538.07
3/31/2011 11,117.19 11,914.64 11,503.61 10,527.55
4/30/2011 11,446.43 12,069.25 11,980.77 10,958.25
5/31/2011 11,316.86 12,218.57 11,762.93 10,722.70
6/30/2011 11,128.22 12,179.01 11,576.22 10,553.74
7/31/2011 10,901.93 12,368.44 11,368.76 10,381.92
8/31/2011 10,309.72 12,493.80 10,621.91 9,623.53
9/30/2011 9,584.96 12,529.46 9,646.85 8,714.94
10/31/2011 10,632.53 12,601.05 10,715.27 9,648.69
11/30/2011 10,609.03 12,563.72 10,580.42 9,359.86
12/31/2011 10,717.55 12,710.53 10,465.04 9,340.95
1/31/2012 11,197.86 12,848.15 11,095.46 9,884.10
2/29/2012 11,682.08 12,878.23 11,536.76 10,381.40
3/31/2012 12,066.53 12,819.18 11,694.37 10,450.33
4/30/2012 11,990.79 12,958.46 11,536.76 10,330.85
5/31/2012 11,270.13 13,042.32 10,633.15 9,404.61
6/30/2012 11,734.49 13,075.19 11,063.94 9,869.09
7/31/2012 11,897.47 13,270.19 11,105.97 10,004.19
8/31/2012 12,165.43 13,298.05 11,379.15 10,221.72
9/30/2012 12,479.81 13,337.05 11,757.41 10,543.66
10/31/2012 12,249.38 13,379.39 11,641.83 10,473.39
11/30/2012 12,320.44 13,411.43 11,767.92 10,607.32
12/31/2012 12,432.73 13,413.93 12,031.81 10,847.58
1/31/2013 13,076.69 13,344.01 12,438.22 11,347.31
2/28/2013 13,254.20 13,408.08 12,470.30 11,345.54
3/31/2013 13,751.28 13,423.96 12,684.20 11,552.99
4/30/2013 14,016.22 13,571.33 12,801.84 11,883.03
5/31/2013 14,344.08 13,341.23 12,930.18 11,850.43
6/30/2013 14,151.46 13,106.39 12,587.94 11,504.05
7/31/2013 14,871.55 13,149.01 13,154.78 12,054.78
8/31/2013 14,440.84 13,074.07 12,876.71 11,803.62
9/30/2013 14,893.70 13,204.17 13,443.54 12,413.30
10/31/2013 15,578.33 13,334.82 13,882.03 12,912.22
11/30/2013 16,053.06 13,291.64 14,085.24 13,095.08
12/31/2013 16,459.46 13,233.42 14,295.56 13,321.00
1/31/2014 15,890.39 13,408.92 13,761.98 12,788.15
2/28/2014 16,617.28 13,504.47 14,362.26 13,405.91
3/31/2014 16,756.96 13,491.94 14,417.84 13,465.52
4/30/2014 16,880.83 13,603.64 14,462.31 13,593.71
5/31/2014 17,277.09 13,767.45 14,729.10 13,882.83
6/30/2014 17,633.99 13,788.34 15,029.23 14,144.22
7/31/2014 17,390.80 13,745.44 14,695.74 13,972.67
8/31/2014 18,086.52 13,894.48 15,062.58 14,281.34
9/30/2014 17,832.89 13,784.16 14,551.23 13,818.22
10/31/2014 18,268.46 13,919.27 14,706.86 13,915.51
11/30/2014 18,759.78 13,993.09 14,984.77 14,148.26
12/31/2014 18,712.52 13,969.13 14,726.57 13,875.25
1/31/2015 18,150.79 14,234.89 14,531.13 13,658.32
2/28/2015 19,193.94 14,151.88 15,220.90 14,418.70
3/31/2015 18,890.40 14,210.38 15,002.48 14,195.29
4/30/2015 19,071.62 14,193.94 15,312.87 14,607.15
5/31/2015 19,316.87 14,169.15 15,381.85 14,588.10
6/30/2015 18,942.93 14,010.92 15,059.96 14,244.66
7/31/2015 19,339.81 14,092.54 15,117.44 14,368.36
8/31/2015 18,172.96 14,051.03 14,266.73 13,383.40
9/30/2015 17,723.30 14,105.91 13,875.86 12,898.53
10/31/2015 19,218.33 14,151.04 14,703.58 13,910.87
11/30/2015 19,275.48 14,099.51 14,657.60 13,796.00
12/31/2015 18,971.47 14,029.03 14,361.21 13,547.20
1/31/2016 18,030.03 14,183.92 13,701.00 12,730.16
2/29/2016 18,005.70 14,284.76 13,642.00 12,642.59
3/31/2016 19,227.18 14,459.70 14,420.00 13,579.51
4/30/2016 19,301.72 14,558.32 14,609.00 13,779.96
5/31/2016 19,648.34 14,569.74 14,691.00 13,797.33
6/30/2016 19,699.25 14,826.03 14,715.00 13,713.80
[END CHART]
Data since Fund inception 7/31/08 to 6/30/16.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Target Retirement 2050 Fund to the benchmarks listed above (see page 8 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the MSCI All-Country World Index replaced the S&P 500 Index
as the Fund's broad-based securities market index as it more closely represents
the securities held by the Fund.
================================================================================
16 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2060 FUND (THE FUND)
(Ticker Symbol: URSIX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $47.0 Million $38.0 Million
Net Asset Value Per Share $10.75 $10.48
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
2.58% -2.28% 4.18%
--------------------------------------------------------------------------------
EXPENSE RATIOS AS OF 12/31/15**
--------------------------------------------------------------------------------
BEFORE REIMBURSEMENT 1.35% AFTER REIMBURSEMENT 0.94%
(Including acquired fund fees and expenses of 0.84%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses (exclusive of commission recapture,
expense offset arrangements, acquired fund fees and expenses, and extraordinary
expenses) do not exceed an annual rate of 0.10% of the Fund's average net
assets. This reimbursement arrangement may not be changed or terminated during
this time period without approval of the Fund's Board of Trustees and may be
changed or terminated by the Manager at any time after May 1, 2017. If the total
annual operating expense ratio of the Fund is lower than 0.10%, the Fund will
operate at that lower expense ratio. These expense ratios may differ from the
expense ratios disclosed in the Financial Highlights, which excludes acquired
fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
INVESTMENT OVERVIEW | 17
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
MSCI USAA TARGET BARCLAYS
ALL-COUNTRY RETIREMENT U.S. UNIVERSAL
S&P 500 INDEX WORLD INDEX* 2060 FUND INDEX
7/31/2013 $10,000.00 $10,000.00 $10,000.00 $10,000.00
8/31/2013 9,710.38 9,791.66 9,830.00 9,943.01
9/30/2013 10,014.90 10,297.41 10,290.00 10,041.95
10/31/2013 10,475.26 10,711.29 10,640.00 10,141.31
11/30/2013 10,794.48 10,862.98 10,800.00 10,108.47
12/31/2013 11,067.76 11,050.39 10,969.48 10,064.19
1/31/2014 10,685.10 10,608.37 10,534.75 10,197.67
2/28/2014 11,173.88 11,120.83 11,009.92 10,270.33
3/31/2014 11,267.80 11,170.28 11,060.47 10,260.80
4/30/2014 11,351.09 11,276.62 11,080.69 10,345.76
5/31/2014 11,617.55 11,516.46 11,293.00 10,470.33
6/30/2014 11,857.54 11,733.29 11,515.43 10,486.22
7/31/2014 11,694.01 11,590.98 11,242.45 10,453.59
8/31/2014 12,161.83 11,847.04 11,525.54 10,566.94
9/30/2014 11,991.28 11,462.86 11,141.35 10,483.04
10/31/2014 12,284.17 11,543.56 11,272.78 10,585.79
11/30/2014 12,614.55 11,736.64 11,485.10 10,641.94
12/31/2014 12,582.77 11,510.17 11,288.40 10,623.72
1/31/2015 12,205.04 11,330.21 11,123.16 10,825.83
2/28/2015 12,906.49 11,960.98 11,670.54 10,762.70
3/31/2015 12,702.38 11,775.65 11,505.29 10,807.19
4/30/2015 12,824.23 12,117.31 11,742.83 10,794.69
5/31/2015 12,989.14 12,101.50 11,794.47 10,775.83
6/30/2015 12,737.70 11,816.61 11,556.93 10,655.49
7/31/2015 13,004.57 11,919.23 11,598.24 10,717.57
8/31/2015 12,219.95 11,102.15 10,926.93 10,686.00
9/30/2015 11,917.59 10,699.93 10,637.75 10,727.74
10/31/2015 12,922.89 11,539.72 11,267.75 10,762.06
11/30/2015 12,961.32 11,444.43 11,236.76 10,722.87
12/31/2015 12,756.89 11,238.04 11,009.70 10,669.27
1/31/2016 12,123.85 10,560.26 10,505.00 10,787.06
2/29/2016 12,107.49 10,487.62 10,453.00 10,863.75
3/31/2016 12,928.84 11,264.83 11,052.00 10,996.80
4/30/2016 12,978.96 11,431.12 11,199.00 11,071.80
5/31/2016 13,212.03 11,445.52 11,262.00 11,080.49
6/30/2016 13,246.27 11,376.24 11,293.00 11,275.40
[END CHART]
Data since Fund inception 7/31/13 to 6/30/16.**
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Target Retirement 2060 Fund to the benchmarks listed above (see page 8 for
benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the MSCI All-Country World Index replaced the S&P 500 Index
as the Fund's broad-based securities market index as it more closely represents
the securities held by the Fund.
**The performance of the S&P 500 Index, MSCI All-Country World Index, and the
Barclays U.S. Universal Index is calculated from the end of the month, July 31,
2013, while the inception date of the Fund is July 12, 2013. There may be a
slight variation of performance numbers because of this difference.
================================================================================
18 | USAA TARGET RETIREMENT FUNDS
================================================================================
o TARGET RETIREMENT INCOME FUND o
ASSET ALLOCATION - 6/30/16
INVESTMENT ALLOCATION
--------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ................................................ 1.6%
Emerging Markets ................................................. 1.1%
Flexible Income .................................................. 1.7%
Global Managed Volatility ........................................ 2.2%
Growth ........................................................... 2.4%
Income Stock ..................................................... 2.9%
International .................................................... 7.1%
Precious Metals and Minerals ..................................... 0.3%
Real Return ...................................................... 2.2%
S&P 500 Index .................................................... 4.9%
Small Cap Stock .................................................. 0.1%
Target Managed Allocation ........................................ 2.8%
Total Return Strategy ............................................ 0.6%
Value ............................................................ 4.4%
TOTAL EQUITY & ALTERNATIVE ..................................... 34.3%
Government Securities ............................................ 13.2%
High Income ...................................................... 7.2%
Income ........................................................... 12.9%
Intermediate-Term Bond ........................................... 6.7%
Short-Term Bond .................................................. 24.9%
TOTAL FIXED-INCOME ............................................. 64.9%
Ultra Short-Term Bond ............................................ 0.3%
TOTAL ULTRA-SHORT .............................................. 0.3%
Money Market Instruments ......................................... 0.5%
TOTAL MONEY MARKET INSTRUMENTS ................................. 0.5%
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 19
================================================================================
o TARGET RETIREMENT 2020 FUND o
ASSET ALLOCATION - 6/30/16
INVESTMENT ALLOCATION
--------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ................................................ 2.4%
Emerging Markets ................................................. 1.9%
Flexible Income .................................................. 1.2%
Global Managed Volatility ........................................ 3.8%
Growth ........................................................... 3.8%
Income Stock ..................................................... 4.7%
International .................................................... 11.2%
Precious Metals and Minerals ..................................... 0.3%
Real Return ...................................................... 1.6%
S&P 500 Index .................................................... 7.9%
Small Cap Stock .................................................. 1.5%
Target Managed Allocation ........................................ 6.0%
Total Return Strategy ............................................ 0.7%
Value ............................................................ 7.0%
TOTAL EQUITY & ALTERNATIVE ..................................... 54.0%
Government Securities ............................................ 7.1%
High Income ...................................................... 6.4%
Income ........................................................... 9.9%
Intermediate-Term Bond ........................................... 8.2%
Short-Term Bond .................................................. 13.4%
TOTAL FIXED-INCOME ............................................. 45.0%
Ultra Short-Term Bond ............................................ 0.3%
TOTAL ULTRA-SHORT .............................................. 0.3%
Money Market Instruments ......................................... 0.7%
TOTAL MONEY MARKET INSTRUMENTS ................................. 0.7%
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
20 | USAA TARGET RETIREMENT FUNDS
================================================================================
o TARGET RETIREMENT 2030 FUND O
ASSET ALLOCATION - 6/30/16
INVESTMENT ALLOCATION
--------------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ....................................................... 3.3%
Emerging Markets ........................................................ 2.8%
Flexible Income ......................................................... 0.7%
Global Managed Volatility ............................................... 5.2%
Growth .................................................................. 5.2%
Income Stock ............................................................ 6.3%
International ........................................................... 14.7%
Precious Metals and Minerals ............................................ 0.4%
Real Return ............................................................. 1.1%
S&P 500 Index ........................................................... 10.4%
Small Cap Stock ......................................................... 2.7%
Target Managed Allocation ............................................... 10.6%
Total Return Strategy ................................................... 0.6%
Value ................................................................... 9.3%
TOTAL EQUITY & ALTERNATIVE ............................................ 73.3%
Government Securities ................................................... 1.2%
High Income ............................................................. 5.9%
Income .................................................................. 6.8%
Intermediate-Term Bond .................................................. 9.8%
Short-Term Bond ......................................................... 2.1%
TOTAL FIXED-INCOME .................................................... 25.8%
Ultra Short-Term Bond ................................................... 0.4%
TOTAL ULTRA-SHORT ..................................................... 0.4%
Money Market Instruments ................................................ 0.2%
TOTAL MONEY MARKET INSTRUMENTS ........................................ 0.2%
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 21
================================================================================
o TARGET RETIREMENT 2040 FUND o
ASSET ALLOCATION - 6/30/16
INVESTMENT ALLOCATION
--------------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ......................................................... 3.8%
Emerging Markets .......................................................... 3.5%
Flexible Income ........................................................... 0.3%
Global Managed Volatility ................................................. 5.9%
Growth .................................................................... 6.1%
Income Stock .............................................................. 7.2%
International ............................................................. 17.4%
Precious Metals and Minerals .............................................. 0.4%
Real Return ............................................................... 0.5%
S&P 500 Index ............................................................. 12.0%
Small Cap Stock ........................................................... 4.1%
Target Managed Allocation ................................................. 13.9%
Total Return Strategy ..................................................... 0.4%
Value ..................................................................... 10.7%
TOTAL EQUITY & ALTERNATIVE .............................................. 86.2%
High Income ............................................................... 4.1%
Income .................................................................... 3.5%
Intermediate-Term Bond .................................................... 5.4%
Short-Term Bond ........................................................... -*
TOTAL FIXED-INCOME ...................................................... 13.0%
Ultra Short-Term Bond ..................................................... 0.5%
TOTAL ULTRA-SHORT ....................................................... 0.5%
Money Market Instruments .................................................. 0.3%
TOTAL MONEY MARKET INSTRUMENTS .......................................... 0.3%
Percentages are of the net assets of the Fund and may not equal 100%.
*Represents less than 0.1%
================================================================================
22 | USAA TARGET RETIREMENT FUNDS
================================================================================
o TARGET RETIREMENT 2050 FUND o
ASSET ALLOCATION - 6/30/16
INVESTMENT ALLOCATION
--------------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ........................................................ 3.9%
Emerging Markets ......................................................... 3.9%
Flexible Income .......................................................... 0.2%
Global Managed Volatility ................................................ 6.5%
Growth ................................................................... 6.0%
Income Stock ............................................................. 7.5%
International ............................................................ 18.3%
Precious Metals and Minerals ............................................. 0.3%
Real Return .............................................................. 0.3%
S&P 500 Index ............................................................ 12.4%
Small Cap Stock .......................................................... 4.3%
Target Managed Allocation ................................................ 15.3%
Total Return Strategy .................................................... 0.7%
Value .................................................................... 11.1%
TOTAL EQUITY & ALTERNATIVE ............................................. 90.7%
High Income .............................................................. 3.3%
Income ................................................................... 2.1%
Intermediate-Term Bond ................................................... 3.0%
TOTAL FIXED-INCOME ..................................................... 8.4%
Ultra Short-Term Bond .................................................... 0.5%
TOTAL ULTRA-SHORT ...................................................... 0.5%
Money Market Instruments ................................................. 0.4%
TOTAL MONEY MARKET INSTRUMENTS ......................................... 0.4%
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 23
================================================================================
o TARGET RETIREMENT 2060 FUND o
ASSET ALLOCATION - 6/30/16
INVESTMENT ALLOCATION
--------------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ........................................................ 4.2%
Emerging Markets ......................................................... 4.3%
Flexible Income .......................................................... 0.2%
Global Managed Volatility ................................................ 6.5%
Growth ................................................................... 6.2%
Income Stock ............................................................. 7.7%
International ............................................................ 16.9%
Precious Metals and Minerals ............................................. 0.3%
Real Return .............................................................. 0.3%
S&P 500 Index ............................................................ 12.6%
Small Cap Stock .......................................................... 3.1%
Target Managed Allocation ................................................ 17.5%
Total Return Strategy .................................................... 0.6%
Value .................................................................... 11.3%
TOTAL EQUITY & ALTERNATIVE ............................................. 91.7%
High Income .............................................................. 2.4%
Income ................................................................... 1.8%
Intermediate-Term Bond ................................................... 2.6%
Short-Term Bond .......................................................... -*
TOTAL FIXED-INCOME ..................................................... 6.8%
Ultra Short-Term Bond .................................................... 0.5%
TOTAL ULTRA-SHORT ...................................................... 0.5%
Money Market Instruments ................................................. 1.0%
TOTAL MONEY MARKET INSTRUMENTS ......................................... 1.0%
Percentages are of the net assets of the Fund and may not equal 100%.
*Represents less than 0.1%
================================================================================
24 | USAA TARGET RETIREMENT FUNDS
================================================================================
PORTFOLIOS OF INVESTMENTS
USAA TARGET RETIREMENT INCOME FUND
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY & ALTERNATIVE FUNDS (34.3%)
132,247 USAA Aggressive Growth Fund $ 5,102
254,421 USAA Emerging Markets Fund 3,771
602,808 USAA Flexible Income Fund 5,648
827,241 USAA Global Managed Volatility Fund 7,296
322,919 USAA Growth Fund 7,795
539,394 USAA Income Stock Fund 9,596
904,059 USAA International Fund 23,035
50,685 USAA Precious Metals and Minerals Fund* 859
743,909 USAA Real Return Fund 7,335
529,604 USAA S&P 500 Index Fund 15,856
32,029 USAA Small Cap Stock Fund 492
909,641 USAA Target Managed Allocation Fund 8,996
230,403 USAA Total Return Strategy Fund 2,104
760,006 USAA Value Fund 14,220
--------
Total Equity & Alternative Funds (cost: $90,498) 112,105
--------
FIXED-INCOME FUNDS (64.9%)
4,257,290 USAA Government Securities Fund* 42,956
3,055,632 USAA High Income Fund 23,590
3,173,253 USAA Income Fund 42,046
2,063,623 USAA Intermediate-Term Bond Fund 21,895
8,870,477 USAA Short-Term Bond Fund 81,342
--------
Total Fixed-Income Funds (cost: $204,846) 211,829
--------
ULTRA-SHORT FUNDS (0.3%)
82,105 USAA Ultra Short-Term Bond Fund (cost: $827) 821
--------
MONEY MARKET INSTRUMENTS (0.5%)
MONEY MARKET FUNDS (0.5%)
1,743,302 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(a)
(cost: $1,743) 1,743
--------
TOTAL INVESTMENTS (COST: $297,914) $326,498
========
================================================================================
PORTFOLIOS OF INVESTMENTS | 25
================================================================================
--------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------
Equity & Alternative Funds $112,105 $- $- $112,105
Fixed-Income Funds 211,829 - - 211,829
Ultra-Short Funds 821 - - 821
Money Market Instruments:
Money Market Funds 1,743 - - 1,743
--------------------------------------------------------------------------------
Total $326,498 $- $- $326,498
--------------------------------------------------------------------------------
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
26 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2020 FUND
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY & ALTERNATIVE FUNDS (54.0%)
349,292 USAA Aggressive Growth Fund $ 13,476
729,882 USAA Emerging Markets Fund 10,817
730,878 USAA Flexible Income Fund 6,848
2,480,776 USAA Global Managed Volatility Fund 21,880
905,839 USAA Growth Fund 21,867
1,503,025 USAA Income Stock Fund 26,739
2,503,949 USAA International Fund 63,801
97,482 USAA Precious Metals and Minerals Fund* 1,651
954,763 USAA Real Return Fund 9,414
1,514,930 USAA S&P 500 Index Fund 45,357
544,250 USAA Small Cap Stock Fund 8,354
3,437,689 USAA Target Managed Allocation Fund 33,999
437,752 USAA Total Return Strategy Fund 3,997
2,144,384 USAA Value Fund 40,121
--------
Total Equity & Alternative Funds (cost: $248,715) 308,321
--------
FIXED-INCOME FUNDS (45.0%)
3,990,361 USAA Government Securities Fund* 40,263
4,735,481 USAA High Income Fund 36,558
4,285,478 USAA Income Fund 56,782
4,395,453 USAA Intermediate-Term Bond Fund 46,636
8,326,748 USAA Short-Term Bond Fund 76,356
--------
Total Fixed-Income Funds (cost: $239,678) 256,595
--------
ULTRA-SHORT FUNDS (0.3%)
197,289 USAA Ultra Short-Term Bond Fund (cost: $1,987) 1,973
--------
MONEY MARKET INSTRUMENTS (0.7%)
MONEY MARKET FUNDS (0.7%)
4,147,452 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(a)
(cost: $4,148) 4,148
--------
TOTAL INVESTMENTS (COST: $494,528) $571,037
========
================================================================================
PORTFOLIOS OF INVESTMENTS | 27
================================================================================
--------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------
Equity & Alternative Funds $308,321 $- $- $308,321
Fixed-Income Funds 256,595 - - 256,595
Ultra-Short Funds 1,973 - - 1,973
Money Market Instruments:
Money Market Funds 4,148 - - 4,148
--------------------------------------------------------------------------------
Total $571,037 $- $- $571,037
--------------------------------------------------------------------------------
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
28 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2030 FUND
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY & ALTERNATIVE FUNDS (73.3%)
928,433 USAA Aggressive Growth Fund $ 35,819
2,030,077 USAA Emerging Markets Fund 30,086
768,004 USAA Flexible Income Fund 7,196
6,275,674 USAA Global Managed Volatility Fund 55,351
2,332,412 USAA Growth Fund 56,304
3,833,851 USAA Income Stock Fund 68,204
6,189,265 USAA International Fund 157,702
246,325 USAA Precious Metals and Minerals Fund* 4,173
1,154,358 USAA Real Return Fund 11,382
3,732,420 USAA S&P 500 Index Fund 111,749
1,872,561 USAA Small Cap Stock Fund 28,744
11,501,786 USAA Target Managed Allocation Fund 113,753
759,855 USAA Total Return Strategy Fund 6,938
5,352,052 USAA Value Fund 100,137
----------
Total Equity & Alternative Funds (cost: $647,296) 787,538
----------
FIXED-INCOME FUNDS (25.8%)
1,221,355 USAA Government Securities Fund* 12,324
8,270,392 USAA High Income Fund 63,848
5,538,673 USAA Income Fund 73,387
9,901,814 USAA Intermediate-Term Bond Fund 105,058
2,448,243 USAA Short-Term Bond Fund 22,450
----------
Total Fixed-Income Funds (cost: $258,602) 277,067
----------
ULTRA-SHORT FUNDS (0.4%)
461,839 USAA Ultra Short-Term Bond Fund (cost: $4,659) 4,618
----------
MONEY MARKET INSTRUMENTS (0.2%)
MONEY MARKET FUNDS (0.2%)
1,660,533 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(a)
(cost: $1,661) 1,661
----------
TOTAL INVESTMENTS (COST: $912,218) $1,070,884
==========
================================================================================
PORTFOLIOS OF INVESTMENTS | 29
================================================================================
--------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------
Equity & Alternative Funds $ 787,538 $- $- $ 787,538
Fixed-Income Funds 277,067 - - 277,067
Ultra-Short Funds 4,618 - - 4,618
Money Market Instruments:
Money Market Funds 1,661 - - 1,661
--------------------------------------------------------------------------------
Total $1,070,884 $- $- $1,070,884
--------------------------------------------------------------------------------
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
30 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2040 FUND
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY & ALTERNATIVE FUNDS (86.2%)
1,123,775 USAA Aggressive Growth Fund $ 43,355
2,729,565 USAA Emerging Markets Fund 40,452
418,608 USAA Flexible Income Fund 3,922
7,677,586 USAA Global Managed Volatility Fund 67,716
2,902,569 USAA Growth Fund 70,068
4,678,680 USAA Income Stock Fund 83,234
7,871,143 USAA International Fund 200,557
273,498 USAA Precious Metals and Minerals Fund* 4,633
559,559 USAA Real Return Fund 5,517
4,622,057 USAA S&P 500 Index Fund 138,385
3,040,073 USAA Small Cap Stock Fund 46,665
16,104,338 USAA Target Managed Allocation Fund 159,272
515,927 USAA Total Return Strategy Fund 4,711
6,568,043 USAA Value Fund 122,888
----------
Total Equity & Alternative Funds (cost: $816,037) 991,375
----------
FIXED-INCOME FUNDS (13.0%)
6,107,584 USAA High Income Fund 47,150
3,016,822 USAA Income Fund 39,973
5,836,628 USAA Intermediate-Term Bond Fund 61,927
53,204 USAA Short-Term Bond Fund 488
----------
Total Fixed-Income Funds (cost: $145,256) 149,538
----------
ULTRA-SHORT FUNDS (0.5%)
577,616 USAA Ultra Short-Term Bond Fund (cost: $5,824) 5,776
----------
MONEY MARKET INSTRUMENTS (0.3%)
MONEY MARKET FUNDS (0.3%)
3,336,645 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(a)
(cost: $3,336) 3,336
----------
TOTAL INVESTMENTS (COST: $970,453) $1,150,025
==========
================================================================================
PORTFOLIOS OF INVESTMENTS | 31
================================================================================
--------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------
Equity & Alternative Funds $ 991,375 $- $- $ 991,375
Fixed-Income Funds 149,538 - - 149,538
Ultra-Short Funds 5,776 - - 5,776
Money Market Instruments:
Money Market Funds 3,336 - - 3,336
--------------------------------------------------------------------------------
Total $1,150,025 $- $- $1,150,025
--------------------------------------------------------------------------------
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
32 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2050 FUND
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY & ALTERNATIVE FUNDS (90.7%)
633,361 USAA Aggressive Growth Fund $ 24,435
1,617,710 USAA Emerging Markets Fund 23,974
150,570 USAA Flexible Income Fund 1,411
4,607,432 USAA Global Managed Volatility Fund 40,638
1,543,933 USAA Growth Fund 37,270
2,642,435 USAA Income Stock Fund 47,009
4,474,594 USAA International Fund 114,013
103,003 USAA Precious Metals and Minerals Fund* 1,745
199,582 USAA Real Return Fund 1,968
2,588,823 USAA S&P 500 Index Fund 77,509
1,764,048 USAA Small Cap Stock Fund 27,078
9,642,528 USAA Target Managed Allocation Fund 95,365
479,775 USAA Total Return Strategy Fund 4,380
3,708,376 USAA Value Fund 69,384
--------
Total Equity & Alternative Funds (cost: $475,348) 566,179
--------
FIXED-INCOME FUNDS (8.4%)
2,718,198 USAA High Income Fund 20,985
985,205 USAA Income Fund 13,054
1,768,083 USAA Intermediate-Term Bond Fund 18,759
--------
Total Fixed-Income Funds (cost: $53,247) 52,798
--------
ULTRA-SHORT FUNDS (0.5%)
289,945 USAA Ultra Short-Term Bond Fund (cost: $2,925) 2,899
--------
MONEY MARKET INSTRUMENTS (0.4%)
MONEY MARKET FUNDS (0.4%)
2,259,721 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(a)
(cost: $2,260) 2,260
--------
TOTAL INVESTMENTS (COST: $533,780) $624,136
========
================================================================================
PORTFOLIOS OF INVESTMENTS | 33
================================================================================
--------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------
Equity & Alternative Funds $566,179 $- $- $566,179
Fixed-Income Funds 52,798 - - 52,798
Ultra-Short Funds 2,899 - - 2,899
Money Market Instruments:
Money Market Funds 2,260 - - 2,260
--------------------------------------------------------------------------------
Total $624,136 $- $- $624,136
--------------------------------------------------------------------------------
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
34 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT 2060 FUND
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------------------------------
EQUITY & ALTERNATIVE FUNDS (91.7%)
51,090 USAA Aggressive Growth Fund $ 1,971
137,217 USAA Emerging Markets Fund 2,034
11,896 USAA Flexible Income Fund 111
346,973 USAA Global Managed Volatility Fund 3,060
120,267 USAA Growth Fund 2,903
202,818 USAA Income Stock Fund 3,608
311,218 USAA International Fund 7,930
8,835 USAA Precious Metals and Minerals Fund* 150
14,149 USAA Real Return Fund 140
197,707 USAA S&P 500 Index Fund 5,919
95,251 USAA Small Cap Stock Fund 1,462
830,451 USAA Target Managed Allocation Fund 8,213
30,131 USAA Total Return Strategy Fund 275
282,508 USAA Value Fund 5,286
-------
Total Equity & Alternative Funds (cost: $43,401) 43,062
-------
FIXED-INCOME FUNDS (6.8%)
144,916 USAA High Income Fund 1,119
62,791 USAA Income Fund 832
116,181 USAA Intermediate-Term Bond Fund 1,232
410 USAA Short-Term Bond Fund 4
-------
Total Fixed-Income Funds (cost: $3,183) 3,187
-------
ULTRA-SHORT FUNDS (0.5%)
22,063 USAA Ultra Short-Term Bond Fund (cost: $223) 221
-------
MONEY MARKET INSTRUMENTS (1.0%)
MONEY MARKET FUNDS (1.0%)
470,908 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(a)
(cost: $471) 471
-------
TOTAL INVESTMENTS (COST: $47,278) $46,941
=======
================================================================================
PORTFOLIOS OF INVESTMENTS | 35
================================================================================
--------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
--------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
--------------------------------------------------------------------------------
Equity & Alternative Funds $43,062 $- $- $43,062
Fixed-Income Funds 3,187 - - 3,187
Ultra-Short Funds 221 - - 221
Money Market Instruments:
Money Market Funds 471 - - 471
--------------------------------------------------------------------------------
Total $46,941 $- $- $46,941
--------------------------------------------------------------------------------
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
36 | USAA TARGET RETIREMENT FUNDS
================================================================================
NOTES TO PORTFOLIOS OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
The underlying funds in which the Funds invest are managed by USAA Asset
Management Company, an affiliate of the Funds. The USAA Target Retirement
Funds invest in the Reward Shares of the USAA S&P 500 Index Fund and the
Institutional Shares of the other USAA mutual funds.
o SPECIFIC NOTES
(a) Rate represents the money market fund annualized seven-day yield at
June 30, 2016.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIOS OF INVESTMENTS | 37
================================================================================
STATEMENTS OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
USAA TARGET RETIREMENT
------------------------------------------------------------------------------------------------------------
INCOME FUND
------------------------------------------------------------------------------------------------------------
ASSETS
Investments in affiliated underlying funds, at value (cost of $296,171,
$490,380, $910,557, $967,117, $531,520, and $46,807, respectively) $324,755
Investments in other securities, at value (cost of $1,743, $4,148, $1,661,
$3,336, $2,260, $471, respectively) 1,743
Receivables:
Capital shares sold 27
USAA Asset Management Company (Note 5C) -
Dividends from affiliated underlying funds 284
Interest 1
Securities sold -
--------
Total assets 326,810
--------
LIABILITIES
Payables:
Securities purchased 284
Capital shares redeemed 270
Other accrued expenses and payables 38
--------
Total liabilities 592
--------
Net assets applicable to capital shares outstanding $326,218
========
NET ASSETS CONSIST OF:
Paid-in capital $298,177
Accumulated undistributed net investment income 402
Accumulated net realized gain (loss) on investments (945)
Net unrealized appreciation/(depreciation) of investments 28,584
--------
Net assets applicable to capital shares outstanding $326,218
========
Capital shares outstanding, unlimited number of shares authorized, no par value 28,490
========
Net asset value, redemption price, and offering price per share $ 11.45
========
See accompanying notes to financial statements.
================================================================================
38 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT
--------------------------------------------------------------------------------
2020 FUND 2030 FUND 2040 FUND 2050 FUND 2060 FUND
--------------------------------------------------------------------------------
$566,889 $1,069,223 $1,146,689 $621,876 $46,470
4,148 1,661 3,336 2,260 471
174 211 237 238 53
- - - - 25
354 413 211 65 4
1 1 2 1 -
- 3,192 - - -
---------------------------------------------------------------------------------
571,566 1,074,701 1,150,475 624,440 47,023
---------------------------------------------------------------------------------
355 413 209 64 4
260 372 488 325 32
49 59 61 51 33
---------------------------------------------------------------------------------
664 844 758 440 69
---------------------------------------------------------------------------------
$570,902 $1,073,857 $1,149,717 $624,000 $46,954
=================================================================================
$489,396 $ 898,397 $ 951,571 $523,392 $46,560
9,407 24,673 26,819 12,446 705
(4,410) (7,879) (8,245) (2,194) 26
76,509 158,666 179,572 90,356 (337)
-------------------------------------------------------------------------------
$570,902 $1,073,857 $1,149,717 $624,000 $46,954
===============================================================================
46,404 84,116 91,509 49,988 4,369
===============================================================================
$ 12.30 $ 12.77 $ 12.56 $ 12.48 $ 10.75
===============================================================================
================================================================================
FINANCIAL STATEMENTS | 39
================================================================================
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
USAA TARGET RETIREMENT
------------------------------------------------------------------------------------------------------------
INCOME FUND
------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Income distributions from affiliated underlying funds $ 3,499
Interest 3
-------
Total income 3,502
-------
EXPENSES
Custody and accounting fees 23
Postage 9
Shareholder reporting fees 5
Trustees' fees 14
Registration fees 25
Professional fees 33
Other 8
-------
Total expenses 117
-------
Expenses reimbursed -
-------
Net expenses 117
-------
NET INVESTMENT INCOME 3,385
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on sales of affiliated underlying funds (1,334)
Change in net unrealized appreciation/(depreciation) of affiliated underlying funds 11,395
-------
Net realized and unrealized gain 10,061
-------
Increase in net assets resulting from operations $13,446
=======
See accompanying notes to financial statements.
================================================================================
40 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT
--------------------------------------------------------------------------------
2020 FUND 2030 FUND 2040 FUND 2050 FUND 2060 FUND
--------------------------------------------------------------------------------
$ 5,194 $ 7,869 $ 6,108 $ 2,748 $ 176
6 9 10 8 1
------------------------------------------------------------------------------
5,200 7,878 6,118 2,756 177
------------------------------------------------------------------------------
23 25 25 23 21
16 34 44 28 3
7 16 21 13 2
14 15 14 14 14
25 33 32 25 13
37 43 43 36 29
11 13 13 10 8
------------------------------------------------------------------------------
133 179 192 149 90
------------------------------------------------------------------------------
- - - - (69)
------------------------------------------------------------------------------
133 179 192 149 21
------------------------------------------------------------------------------
5,067 7,699 5,926 2,607 156
------------------------------------------------------------------------------
(2,160) (2,663) (428) (205) -
17,977 30,927 25,265 13,199 1,203
------------------------------------------------------------------------------
15,817 28,264 24,837 12,994 1,203
------------------------------------------------------------------------------
$20,884 $35,963 $30,763 $15,601 $1,359
==============================================================================
================================================================================
FINANCIAL STATEMENTS | 41
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
USAA TARGET RETIREMENT
-------------------------
INCOME FUND
-------------------------
6/30/2016 12/31/2015
------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 3,385 $ 8,386
Net realized gain (loss) on investments on sales of
affiliated underlying funds (1,334) 3,262
Net realized gain on capital gain distributions from
affiliated underlying funds - 2,570
Change in net unrealized appreciation/(depreciation) of
affiliated underlying funds 11,395 (20,892)
------------------------
Increase (decrease) in net assets resulting from operations 13,446 (6,674)
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,085) (8,285)
Net realized gains - (6,626)
------------------------
Distributions to shareholders (3,085) (14,911)
------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 17,070 45,991
Reinvested dividends 3,043 14,718
Cost of shares redeemed (35,065) (75,622)
------------------------
Decrease in net assets from capital share transactions (14,952) (14,913)
------------------------
Capital contribution from USAA Transfer Agency Company - -
------------------------
Net decrease in net assets (4,591) (36,498)
NET ASSETS
Beginning of period 330,809 367,307
------------------------
End of period $326,218 $330,809
========================
Accumulated undistributed net investment income:
End of period $ 402 $ 102
========================
CHANGE IN SHARES OUTSTANDING
Shares sold 1,523 3,886
Shares issued for dividends reinvested 270 1,296
Shares redeemed (3,139) (6,423)
------------------------
Decrease in shares outstanding (1,346) (1,241)
========================
See accompanying notes to financial statements.
================================================================================
42 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT
--------------------------------------------------------------------------------
2020 FUND 2030 FUND
--------------------------------------------------------------------------------
6/30/2016 12/31/2015 6/30/2016 12/31/2015
--------------------------------------------------------------------------------
$ 5,067 $ 14,453 $ 7,699 $ 23,351
(2,160) (3,080) (2,663) (15,863)
- 7,999 - 19,962
17,977 (33,599) 30,927 (57,953)
-------------------------------------------------------------------------------
20,884 (14,227) 35,963 (30,503)
-------------------------------------------------------------------------------
- (10,159) - (6,421)
- (9,601) - (22,699)
-------------------------------------------------------------------------------
- (19,760) - (29,120)
-------------------------------------------------------------------------------
26,872 64,651 55,354 132,295
- 19,709 - 29,080
(60,780) (116,809) (78,431) (176,129)
-------------------------------------------------------------------------------
(33,908) (32,449) (23,077) (14,754)
-------------------------------------------------------------------------------
- - - 1
-------------------------------------------------------------------------------
(13,024) (66,436) 12,886 (74,376)
583,926 650,362 1,060,971 1,135,347
-------------------------------------------------------------------------------
$570,902 $ 583,926 $1,073,857 $1,060,971
===============================================================================
$ 9,407 $ 4,340 $ 24,673 $ 16,974
===============================================================================
2,264 5,127 4,518 10,074
- 1,639 - 2,332
(5,133) (9,273) (6,387) (13,430)
-------------------------------------------------------------------------------
(2,869) (2,507) (1,869) (1,024)
===============================================================================
================================================================================
FINANCIAL STATEMENTS | 43
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS) (CONTINUED)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
USAA TARGET RETIREMENT
-------------------------
2040 FUND
-------------------------
6/30/2016 12/31/2015
------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 5,926 $ 20,893
Net realized loss on investments on sales of affiliated underlying funds (428) (23,466)
Net realized gain on capital gain distributions from affiliated
underlying funds - 25,551
Change in net unrealized appreciation/(depreciation) of affiliated
underlying funds 25,265 (54,136)
--------------------------
Increase (decrease) in net assets resulting from operations 30,763 (31,158)
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - (19)
Net realized gains - (28,059)
--------------------------
Distributions to shareholders - (28,078)
--------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 67,706 153,230
Reinvested dividends 1 28,070
Cost of shares redeemed (77,022) (167,005)
--------------------------
Increase (decrease) in net assets from capital share transactions (9,315) 14,295
--------------------------
Net increase (decrease) in net assets 21,448 (44,941)
NET ASSETS
Beginning of period 1,128,269 1,173,210
--------------------------
End of period $1,149,717 $1,128,269
==========================
Accumulated undistributed net investment income:
End of period $ 26,819 $ 20,893
==========================
CHANGE IN SHARES OUTSTANDING
Shares sold 5,616 11,812
Shares issued for dividends reinvested - 2,286
Shares redeemed (6,381) (12,876)
--------------------------
Increase (decrease) in shares outstanding (765) 1,222
==========================
See accompanying notes to financial statements.
================================================================================
44 | USAA TARGET RETIREMENT FUNDS
================================================================================
USAA TARGET RETIREMENT
--------------------------------------------------------------------------------
2050 FUND 2060 FUND
--------------------------------------------------------------------------------
6/30/2016 12/31/2015 6/30/2016 12/31/2015
--------------------------------------------------------------------------------
$ 2,607 $ 9,840 $ 156 $ 549
(205) (7,885) - (743)
- 14,135 - 855
13,199 (31,611) 1,203 (1,688)
-------------------------------------------------------------------------------
15,601 (15,521) 1,359 (1,027)
-------------------------------------------------------------------------------
- (3) - (36)
- (15,132) - (602)
-------------------------------------------------------------------------------
- (15,135) - (638)
-------------------------------------------------------------------------------
50,991 109,525 10,528 19,684
- 15,133 - 547
(45,873) (98,617) (2,896) (6,411)
-------------------------------------------------------------------------------
5,118 26,041 7,632 13,820
-------------------------------------------------------------------------------
20,719 (4,615) 8,991 12,155
603,281 607,896 37,963 25,808
-------------------------------------------------------------------------------
$624,000 $603,281 $46,954 $37,963
===============================================================================
$ 12,446 $ 9,839 $ 705 $ 549
===============================================================================
4,263 8,478 1,029 1,787
- 1,238 - 52
(3,821) (7,637) (281) (579)
-------------------------------------------------------------------------------
442 2,079 748 1,260
===============================================================================
================================================================================
FINANCIAL STATEMENTS | 45
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Funds qualify as registered investment companies under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Target Retirement Income Fund
(Target Income), the USAA Target Retirement 2020 Fund (Target 2020), the USAA
Target Retirement 2030 Fund (Target 2030), the USAA Target Retirement 2040 Fund
(Target 2040), the USAA Target Retirement 2050 Fund (Target 2050), and the USAA
Target Retirement 2060 Fund (Target 2060) (collectively, the Funds), which are
classified as diversified under the 1940 Act. Each Fund's investment objective
is to provide capital appreciation and current income consistent with its
current investment allocation.
Each Fund is a "fund of funds" in that it invests in a portfolio of underlying
USAA equity and alternative, fixed-income, and ultra-short mutual funds
(underlying USAA Funds) managed by USAA Asset Management Company (the Manager),
an affiliate of the Funds, according to an asset allocation strategy designed
for investors planning to start withdrawing funds for retirement in or within a
few years of each Fund's specific year (target date) included in its name.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Funds' valuation
policies and procedures, which are approved by the Board. Among other
things, these policies and procedures allow the Funds to utilize independent
pricing services, quotations from securities dealers,
================================================================================
46 | USAA TARGET RETIREMENT FUNDS
================================================================================
and a wide variety of sources and information to establish and adjust the
fair value of securities as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Funds and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures during
the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and the Manager, an affiliate of
the Funds. Among other things, these monthly meetings include a review and
analysis of back testing reports, pricing service quotation comparisons,
illiquid securities and fair value determinations, pricing movements, and
daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Investments in the underlying USAA Funds and other open-end investment
companies, other than exchange-traded funds (ETFs) are valued at their
net asset value (NAV) at the end of each business day and are
categorized in Level 1 of the fair value hierarchy.
2. The underlying USAA Funds have specific valuation procedures. In the
event that price quotations or valuations are not readily available, are
not reflective of market value, or a significant event has been
recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
a fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
================================================================================
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. FEDERAL TAXES - The Funds' policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
D. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are computed on the identified cost basis.
Dividend income and capital gain distributions from the underlying USAA
Funds are recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Discounts and premiums on short-term
================================================================================
48 | USAA TARGET RETIREMENT FUNDS
================================================================================
securities are amortized on a straight-line basis over the life of the
respective securities.
E. EXPENSES PAID INDIRECTLY - Through arrangements with the Funds' custodian
and other banks utilized by the Funds for cash management purposes, realized
credits, if any, generated from cash balances in the Funds' bank accounts
may be used to directly reduce the Funds' expenses. For the six-month period
ended June 30, 2016, there were no custodian and other bank credits.
F. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
G. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Funds participate in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, each Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
================================================================================
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the facility fees paid (in
thousands) to CAPCO by the Funds and the related percent of those fees to the
total fees paid to CAPCO by all USAA Funds are as follows:
TARGET TARGET TARGET TARGET TARGET TARGET
INCOME 2020 2030 2040 2050 2060
--------------------------------------------------------------------------------
Fees paid $ 1 $ 2 $ 3 $ 4 $ 2 -*
% of total fees 0.5% 0.8% 1.5% 1.6% 0.9% 0.1%
*Represents less than $500.
The Funds had no borrowings under this agreement during the six-month period
ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Funds' tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income are made quarterly by Target Income and
annually by each of the other Funds or as otherwise required to avoid the
payment of federal taxes. Distributions of realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At December 31, 2015, the Funds had no capital loss carryforwards for federal
income tax purposes.
For the six-month period ended June 30, 2016, the Funds did not incur any income
tax, interest, or penalties, and have recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Funds' tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Funds' tax
return filings generally remain open for the three preceding fiscal reporting
year-ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
================================================================================
50 | USAA TARGET RETIREMENT FUNDS
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, was as
follows (in thousands):
TARGET TARGET TARGET TARGET TARGET TARGET
INCOME 2020 2030 2040 2050 2060
--------------------------------------------------------------------------------
Cost of purchases $23,981 $27,082 $22,393 $26,012 $26,180 $7,837
Proceeds from
sales/maturities 39,541 57,723 39,327 26,858 16,607 0
As of June 30, 2016, the cost of securities, for federal income tax purposes,
was approximately the same as that reported in the financial statements.
As of June 30, 2016, gross unrealized appreciation and depreciation of
investments and resulting net appreciation/(depreciation) were as follows (in
thousands):
TARGET TARGET TARGET TARGET TARGET TARGET
INCOME 2020 2030 2040 2050 2060
--------------------------------------------------------------------------------
Unrealized
appreciation $31,329 $78,440 $163,036 $184,922 $94,189 $ 948
Unrealized
depreciation 2,745 1,931 4,370 5,350 3,833 1,285
-------------------------------------------------------------------------------
Net $28,584 $76,509 $158,666 $179,572 $90,356 $ (337)
-------------------------------------------------------------------------------
(5) AGREEMENTS WITH MANAGER
A. ADVISORY AGREEMENT - The Manager carries out the Funds' investment policies
and manages the Funds' portfolios pursuant to an Advisory Agreement. The
Manager does not receive any management fees from the Funds for these
services.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and servicing functions for the Funds. The Manager does not
receive any fees from the Funds for these services.
In addition to the services provided under its Administration and Servicing
Agreement with the Funds, the Manager also provides certain compliance and
legal services for the benefit of the Funds. The Board has approved the
billing of these expenses to the Funds. These expenses
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
================================================================================
are included in the professional fees on the Funds' Statements of Operations
and, for the six-month period ended June 30, 2016, were as follows (in
thousands):
TARGET TARGET TARGET TARGET TARGET TARGET
INCOME 2020 2030 2040 2050 2060
--------------------------------------------------------------------------------
Compliance and
legal services $5 $8 $15 $16 $9 $9
C. EXPENSE LIMITATION - The Manager agreed, through May 1, 2017, to limit the
total annual operating expenses of Target 2060 to 0.10% of its average net
assets, excluding extraordinary expenses and before reductions of any
expenses paid indirectly, and to reimburse Target 2060 for all expenses in
excess of that amount. This expense limitation arrangement may not be
changed or terminated through May 1, 2017, without approval of the Board,
and may be changed or terminated by the Manager at any time after that date.
For the six-month period ended June 30, 2016, Target 2060 incurred
reimbursable expenses of $69,000, of which $25,000 was receivable from the
Manager.
D. TRANSFER AGENCY AGREEMENT - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Funds. SAS does not receive any fees from the
Funds for these services.
E. UNDERWRITING SERVICES - USAA Investment Management Company provides
exclusive underwriting and distribution of the Funds' shares on a continuing
best-efforts basis and receives no fee or other compensation for these
services.
(6) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Funds are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Funds officers
received any compensation from the Funds.
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At June 30, 2016,
USAA and its affiliates owned 500,000 shares of the USAA Target 2060 Fund, which
represents 11.4% of the Fund.
================================================================================
52 | USAA TARGET RETIREMENT FUNDS
================================================================================
(7) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP - The Funds do not invest in the underlying USAA Funds
for the purpose of exercising management or control; however, investments
by the Funds may represent a significant portion of the underlying USAA
Funds' net assets. At June 30, 2016, the Funds owned the following
percentages of the total outstanding shares of each of the underlying USAA
Funds:
TARGET TARGET TARGET TARGET TARGET TARGET
AFFILIATED USAA FUND INCOME 2020 2030 2040 2050 2060
----------------------------------------------------------------------------------------
Aggressive Growth 0.4% 1.0% 2.7% 3.3% 1.9% 0.2%
Emerging Markets 0.4 1.2 3.2 4.3 2.6 0.2
Flexible Income 6.7 8.1 8.5 4.6 1.7 0.1
Global Managed
Volatility 3.5 10.4 26.3 32.2 19.3 1.5
Government
Securities 7.8 7.3 2.2 - - -
Growth 0.4 1.1 2.7 3.4 1.8 0.1
High Income 1.2 1.8 3.1 2.3 1.0 0.1
Income 0.6 0.9 1.1 0.6 0.2 -*
Income Stock 0.4 1.0 2.5 3.1 1.8 0.1
Intermediate-Term
Bond 0.6 1.3 2.9 1.7 0.5 -*
International 0.7 1.9 4.8 6.0 3.4 0.2
Precious Metals and
Minerals 0.1 0.2 0.5 0.6 0.2 -*
Real Return 6.8 8.7 10.5 5.1 1.8 0.1
S&P 500 Index 0.3 0.8 2.0 2.5 1.4 0.1
Short-Term Bond 2.4 2.3 0.7 -* - -*
Small Cap Stock -* 0.6 2.0 3.3 1.9 0.1
Target Managed
Allocation 2.1 8.1 27.1 38.0 22.7 2.0
Total Return
Strategy 2.0 3.8 6.5 4.4 4.1 0.3
Ultra Short-Term
Bond 0.2 0.5 1.1 1.4 0.7 0.1
Value 1.1 3.1 7.7 9.5 5.4 0.4
*Represents less than 0.1%.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
================================================================================
B. TRANSACTIONS WITH AFFILIATED FUNDS - The following tables provide
details related to each Fund's investment in the underlying USAA funds as
of June 30, 2016 (in thousands):
TARGET INCOME:
PURCHASE SALES DIVIDEND REALIZED MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME GAIN (LOSS)(b) 12/31/2015 06/30/2016
---------------------------------------------------------------------------------------------------------
Aggressive Growth $ - $ - $ - $ - $ 5,227 $ 5,102
Emerging Markets 977 - - - 2,501 3,771
Flexible Income 121 817 121 (80) 5,653 5,648
Global Managed
Volatility - - - - 7,189 7,296
Government
Securities 1,422 2,881 444 (10) 43,472 42,956
Growth - - - - 7,757 7,795
High Income 1,978 654 704 (104) 20,892 23,590
Income 2,181 5,678 717 (25) 43,408 42,046
Income Stock 122 651 122 121 9,454 9,596
Intermediate-Term
Bond 758 1,594 422 94 21,802 21,895
International 4,854 3,251 - 6 22,334 23,035
Precious Metals
and Minerals - 581 - (383) 867 859
Real Return 10 650 10 (40) 7,416 7,335
S&P 500 Index 1,803 1,955 180 (49) 15,610 15,856
Short-Term Bond 1,597 8,306 766 (154) 86,812 81,342
Small Cap Stock - - - - 486 492
Target Managed
Allocation 6,683 9,515 - (630) 11,270 8,996
Total Return
Strategy 657 1,463 7 (22) 2,563 2,104
Ultra Short-Term
Bond 6 894 6 (15) 1,707 821
Value 812 651 - (43) 13,834 14,220
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
================================================================================
54 | USAA TARGET RETIREMENT FUNDS
================================================================================
TARGET 2020:
PURCHASE SALES DIVIDEND REALIZED MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME GAIN (LOSS)(b) 12/31/2015 06/30/2016
---------------------------------------------------------------------------------------------------------
Aggressive Growth $ - $ 1,402 $ - $ (197) $ 15,329 $ 13,476
Emerging Markets - - - - 9,897 10,817
Flexible Income 138 401 138 (32) 6,319 6,848
Global Managed
Volatility - 867 - (53) 22,396 21,880
Government
Securities 418 1,107 418 1 40,064 40,263
Growth - 572 - (21) 22,339 21,867
High Income 2,204 2,746 1,060 (434) 35,257 36,558
Income 1,000 7,495 1,000 76 60,292 56,782
Income Stock 339 2,818 339 247 27,414 26,739
Intermediate-Term
Bond 1,035 8,339 1,011 112 51,739 46,636
International 4,256 3,159 - (76) 65,490 63,801
Precious Metals
and Minerals - 1,333 - (1,124) 1,733 1,651
Real Return 12 - 12 - 8,724 9,414
S&P 500 Index 1,921 1,976 502 (148) 44,370 45,357
Short-Term Bond 3,511 7,193 690 (140) 78,925 76,356
Small Cap Stock 1,419 2,270 - 669 9,122 8,354
Target Managed
Allocation 9,386 12,946 - (930) 35,735 33,999
Total Return
Strategy 11 - 11 - 3,479 3,997
Ultra Short-Term
Bond 13 1,378 13 (24) 3,331 1,973
Value 1,419 1,721 - (86) 39,758 40,121
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
================================================================================
TARGET 2030:
PURCHASE SALES DIVIDEND REALIZED MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME GAIN (LOSS)(b) 12/31/2015 06/30/2016
---------------------------------------------------------------------------------------------------------
Aggressive Growth $ - $ - $ - $ - $ 36,692 $ 35,819
Emerging Markets - - - - 27,528 30,086
Flexible Income 139 - 139 - 6,265 7,196
Global Managed
Volatility 1,068 - - - 53,482 55,351
Government
Securities 128 993 128 (4) 12,914 12,324
Growth - - - - 56,025 56,304
High Income 2,861 - 1,868 - 57,414 63,848
Income 1,222 3,139 1,222 (79) 71,664 73,387
Income Stock 869 4,591 869 278 67,094 68,204
Intermediate-Term
Bond 2,138 7,619 2,089 (413) 105,864 105,058
International 5,697 - - - 158,996 157,702
Precious Metals
and Minerals - 2,197 - (1,974) 3,755 4,173
Real Return 15 - 14 - 10,548 11,382
S&P 500 Index 1,274 3,204 1,274 (122) 110,870 111,749
Short-Term Bond 217 3,821 217 (97) 25,713 22,450
Small Cap Stock 1,073 2,682 - 203 30,013 28,744
Target Managed
Allocation - 6,411 - (233) 115,030 113,753
Total Return
Strategy 22 4,670 22 (222) 10,473 6,938
Ultra Short-Term
Bond 27 - 27 - 4,564 4,618
Value 5,643 - - - 92,990 100,137
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
================================================================================
56 | USAA TARGET RETIREMENT FUNDS
================================================================================
TARGET 2040:
PURCHASE SALES DIVIDEND REALIZED MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME GAIN (LOSS)(b) 12/31/2015 06/30/2016
---------------------------------------------------------------------------------------------------------
Aggressive Growth $ - $ - $ - $ - $ 44,412 $ 43,355
Emerging Markets - - - - 37,013 40,452
Flexible Income 76 - 76 - 3,415 3,922
Global Managed
Volatility 1,720 - - - 65,023 67,716
Growth - - - - 69,720 70,068
High Income 2,428 - 1,380 - 42,075 47,150
Income 668 4,308 668 (188) 41,620 39,973
Income Stock 1,080 7,096 1,080 577 83,336 83,234
Intermediate-Term
Bond 1,260 4,957 1,261 (297) 62,893 61,927
International 10,760 - - - 198,690 200,557
Precious Metals
and Minerals - - - - 2,385 4,633
Real Return 7 - 7 - 5,113 5,517
S&P 500 Index 1,585 5,123 1,585 (186) 138,430 138,385
Short-Term Bond 5 - 5 - 476 488
Small Cap Stock - - - - 46,148 46,665
Target Managed
Allocation 3,854 2,294 - (115) 150,704 159,272
Total Return
Strategy 13 - 13 - 4,100 4,711
Ultra Short-Term
Bond 33 - 33 - 5,708 5,776
Value 2,523 3,080 - (219) 121,437 122,888
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
================================================================================
TARGET 2050:
PURCHASE SALES DIVIDEND REALIZED MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME GAIN (LOSS)(b) 12/31/2015 06/30/2016
---------------------------------------------------------------------------------------------------------
Aggressive Growth $ 619 $ - $ - $ - $ 24,395 $ 24,435
Emerging Markets 1,218 - - - 20,775 23,974
Flexible Income 27 - 27 - 1,228 1,411
Global Managed
Volatility 1,407 - - - 38,529 40,638
Growth - - - - 37,085 37,270
High Income 2,832 - 574 - 17,045 20,985
Income 522 2,176 240 (31) 14,007 13,054
Income Stock 615 5,393 615 277 48,474 47,009
Intermediate-Term
Bond 382 5,938 383 (425) 23,527 18,759
International 8,301 - - - 110,567 114,013
Precious Metals
and Minerals - 311 - 38 1,075 1,745
Real Return 2 - 2 - 1,824 1,968
S&P 500 Index 872 619 873 (23) 75,312 77,509
Small Cap Stock - - - - 26,778 27,078
Target Managed
Allocation 6,060 - - - 84,985 95,365
Total Return
Strategy 14 1,551 14 (33) 5,247 4,380
Ultra Short-Term
Bond 20 619 20 (8) 3,479 2,899
Value 3,289 - - - 64,977 69,384
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
================================================================================
58 | USAA TARGET RETIREMENT FUNDS
================================================================================
TARGET 2060:
PURCHASE SALES DIVIDEND REALIZED MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME GAIN (LOSS)(b) 12/31/2015 06/30/2016
---------------------------------------------------------------------------------------------------------
Aggressive Growth $ 395 $ - $ - $ - $ 1,603 $ 1,971
Emerging Markets 392 - - - 1,456 2,034
Flexible Income 22 - 2 - 78 111
Global Managed
Volatility 593 - - - 2,412 3,060
Growth 501 - - - 2,370 2,903
High Income 295 - 28 - 768 1,119
Income 132 - 13 - 659 832
Income Stock 512 - 43 - 2,839 3,608
Intermediate-Term
Bond 98 - 24 - 1,082 1,232
International 1,402 - - - 6,793 7,930
Precious Metals
and Minerals - - - - 77 150
Real Return -* - -* - 129 140
S&P 500 Index 920 - 64 - 4,817 5,919
Short-Term Bond -* - -* - 4 4
Small Cap Stock 87 - - - 1,358 1,462
Target Managed
Allocation 1,712 - - - 6,129 8,213
Total Return
Strategy 1 - 1 - 240 275
Ultra Short-Term
Bond 1 - 1 - 218 221
Value 774 - - - 4,398 5,286
(a) Includes reinvestment of distributions from dividend income and realized
gains.
(b) Includes capital gain distributions received, if any.
*Represents less than $500.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
================================================================================
(8) FINANCIAL HIGHLIGHTS - TARGET INCOME
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 11.09 $ 11.82 $ 11.84 $ 11.50 $ 10.83 $ 10.98
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .12 .28 .34 .32 .32 .35
Net realized and
unrealized gain (loss) .35 (.50) .05 .31 .70 (.14)
------------------------------------------------------------------------
Total from investment
operations .47 (.22) .39 .63 1.02 .21
------------------------------------------------------------------------
Less distributions from:
Net investment income (.11) (.28) (.40) (.25) (.32) (.35)
Realized capital gains - (.23) (.01) (.04) (.03) (.01)
------------------------------------------------------------------------
Total distributions (.11) (.51) (.41) (.29) (.35) (.36)
------------------------------------------------------------------------
Net asset value at
end of period $ 11.45 $ 11.09 $ 11.82 $ 11.84 $ 11.50 $ 10.83
========================================================================
Total return (%)* 4.23 (1.95) 3.36 5.58 9.49 1.97
Net assets at end of
period (000) $326,218 $330,809 $367,307 $359,488 $335,019 $257,347
Ratios to average
net assets:**,(a)
Expenses (%)(b) .07(d) .06 .05 .05 .06(c) .04(c)
Expenses, excluding
reimbursements (%)(b) .07(d) .06 .05 .05 .06 .07
Net investment income (%) 2.10(d) 2.36 2.80 2.71 2.93 3.28
Portfolio turnover (%) 7 35 11 31 9 11
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$324,360,000.
(a) Calculated excluding the Fund's pro-rata share of expenses of the underlying
USAA Funds.
(b) Reflects total annual operating expenses of the Fund before reductions of
any expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the annual
expenses of the Fund to 0.05% of the Fund's average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
60 | USAA TARGET RETIREMENT FUNDS
================================================================================
(8) FINANCIAL HIGHLIGHTS - TARGET 2020
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 11.85 $ 12.56 $ 12.63 $ 12.00 $ 11.12 $ 11.43
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .11 .30 .37 .33 .34 .34
Net realized and
unrealized gain (loss) .34 (.60) .07 .77 .91 (.28)
------------------------------------------------------------------------
Total from investment
operations .45 (.30) .44 1.10 1.25 .06
------------------------------------------------------------------------
Less distributions from:
Net investment income - (.21) (.37) (.34) (.33) (.34)
Realized capital gains - (.20) (.14) (.13) (.04) (.03)
------------------------------------------------------------------------
Total distributions - (.41) (.51) (.47) (.37) (.37)
------------------------------------------------------------------------
Net asset value at
end of period $ 12.30 $ 11.85 $ 12.56 $ 12.63 $ 12.00 $ 11.12
========================================================================
Total return (%)* 3.80 (2.40) 3.45 9.16 11.26 .52
Net assets at end of
period (000) $570,902 $583,926 $650,362 $632,564 $558,821 $463,660
Ratios to average
net assets:**,(a)
Expenses (%)(b) .05(d) .04 .03 .04 .04(c) .03(c)
Expenses, excluding
reimbursements (%)(b) .05(d) .04 .03 .04 .04 .05
Net investment income (%) 1.80(d) 2.31 2.82 2.73 2.90 3.16
Portfolio turnover (%) 5 30 15 20 12 17
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$566,276,000.
(a) Calculated excluding the Fund's pro-rata share of expenses of the
underlying USAA Funds.
(b) Reflects total annual operating expenses of the Fund before reductions
of any expenses paid indirectly. The Fund's expenses paid indirectly
decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the
annual expenses of the Fund to 0.05% of the Fund's average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 61
================================================================================
(8) FINANCIAL HIGHLIGHTS - TARGET 2030
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.34 $ 13.05 $ 13.13 $ 12.03 $ 10.93 $ 11.37
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .10 .27 .35 .30 .29 .28
Net realized and
unrealized gain (loss) .33 (.63) .11 1.35 1.15 (.41)
--------------------------------------------------------------------------
Total from investment
operations .43 (.36) .46 1.65 1.44 (.13)
--------------------------------------------------------------------------
Less distributions from:
Net investment income - (.08) (.35) (.30) (.29) (.28)
Realized capital gains - (.27) (.19) (.25) (.05) (.03)
--------------------------------------------------------------------------
Total distributions - (.35) (.54) (.55) (.34) (.31)
--------------------------------------------------------------------------
Net asset value at
end of period $ 12.77 $ 12.34 $ 13.05 $ 13.13 $ 12.03 $ 10.93
==========================================================================
Total return (%)* 3.48 (2.81) 3.43 13.71 13.16 (1.16)
Net assets at end of
period (000) $1,073,857 $1,060,971 $1,135,347 $1,074,149 $884,192 $705,298
Ratios to average
net assets:**,(a)
Expenses (%)(b) .03(d) .03 .03 .03 .04(c) .03(c)
Expenses, excluding
reimbursements (%)(b) .03(d) .03 .03 .03 .04 .04
Net investment income (%) 1.48(d) 2.08 2.63 2.43 2.55 2.68
Portfolio turnover (%) 2 32 15 17 20 16
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$1,045,947,000.
(a) Calculated excluding the Fund's pro-rata share of expenses of the
underlying USAA Funds.
(b) Reflects total annual operating expenses of the Fund before reductions
of any expenses paid indirectly. The Fund's expenses paid indirectly
decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the
annual expenses of the Fund to 0.05% of the Fund's average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
62 | USAA TARGET RETIREMENT FUNDS
================================================================================
(8) FINANCIAL HIGHLIGHTS - TARGET 2040
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
--------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.23 $ 12.89 $ 12.99 $ 11.59 $ 10.38 $ 11.01
--------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .07 .23 .30 .25 .22 .19
Net realized and
unrealized gain (loss) .26 (.58) .11 1.75 1.25 (.60)
--------------------------------------------------------------------------
Total from investment
operations .33 (.35) .41 2.00 1.47 (.41)
--------------------------------------------------------------------------
Less distributions from:
Net investment income - (.00)(a) (.30) (.25) (.22) (.19)
Realized capital gains - (.31) (.21) (.35) (.04) (.03)
--------------------------------------------------------------------------
Total distributions - (.31) (.51) (.60) (.26) (.22)
--------------------------------------------------------------------------
Net asset value at
end of period $ 12.56 $ 12.23 $ 12.89 $ 12.99 $ 11.59 $ 10.38
==========================================================================
Total return (%)* 2.70 (2.71) 3.15 17.37 14.22 (3.75)
Net assets at end of
period (000) $1,149,717 $1,128,269 $1,173,210 $1,101,663 $872,183 $682,057
Ratios to average
net assets:**,(b)
Expenses (%)(c) .03(e) .03 .03 .03 .04(d) .03(d)
Expenses, excluding
reimbursements (%)(c) .03(e) .03 .03 .03 .04 .05
Net investment income (%) 1.07(e) 1.78 2.33 2.09 2.06 1.92
Portfolio turnover (%) 2 35 16 17 18 14
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$1,111,770,000.
(a) Represents less than $0.01 per share.
(b) Calculated excluding the Fund's pro-rata share of expenses of the
underlying USAA Funds.
(c) Reflects total annual operating expenses of the Fund before reductions
of any expenses paid indirectly. The Fund's expenses paid indirectly
decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the
annual expenses of the Fund to 0.05% of the Fund's average net assets.
(e) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 63
================================================================================
(8) FINANCIAL HIGHLIGHTS - TARGET 2050
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 12.18 $ 12.81 $ 12.86 $ 11.25 $ 9.96 $ 10.65
-------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .05 .20 .26 .21 .15 .10
Net realized and
unrealized gain (loss) .25 (.52) .13 1.90 1.34 (.66)
-------------------------------------------------------------------------
Total from investment
operations .30 (.32) .39 2.11 1.49 (.56)
-------------------------------------------------------------------------
Less distributions from:
Net investment income - (.00)(a) (.26) (.21) (.15) (.10)
Realized capital gains - (.31) (.18) (.29) (.05) (.03)
-------------------------------------------------------------------------
Total distributions - (.31) (.44) (.50) (.20) (.13)
-------------------------------------------------------------------------
Net asset value at
end of period $ 12.48 $ 12.18 $ 12.81 $ 12.86 $ 11.25 $ 9.96
=========================================================================
Total return (%)* 2.46 (2.48) 3.02 18.81 14.97 (5.27)
Net assets at end of
period (000) $ 624,000 $ 603,281 $ 607,896 $ 541,452 $400,958 $ 297,470
Ratios to average
net assets:**,(b)
Expenses (%)(c) .05(e) .04 .04 .05 .05(d) .04(d)
Expenses, excluding
reimbursements (%)(c) .05(e) .04 .04 .05 .06 .08
Net investment income (%) .87(e) 1.58 2.09 1.83 1.45 1.10
Portfolio turnover (%) 3 39 16 19 17 14
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$600,992,000.
(a) Represents less than $0.01 per share.
(b) Calculated excluding the Fund's pro-rata share of expenses of the
underlying USAA Funds.
(c) Reflects total annual operating expenses of the Fund before reductions
of any expenses paid indirectly. The Fund's expenses paid indirectly
decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the
annual expenses of the Fund to 0.05% of the Fund's average net assets.
(e) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
64 | USAA TARGET RETIREMENT FUNDS
================================================================================
(8) FINANCIAL HIGHLIGHTS - TARGET 2060
Per share operating performance for a share outstanding throughout each
period is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------
2016 2015 2014 2013***
----------------------------------------------------------------
Net asset value at
beginning of period $ 10.48 $ 10.93 $ 10.85 $ 10.00
----------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .01 .18(a) .25(a) .18(a)
Net realized and unrealized
gain (loss) .26 (.45)(a) .07(a) .79(a)
----------------------------------------------------------------
Total from investment operations .27 (.27)(a) .32(a) .97(a)
----------------------------------------------------------------
Less distributions from:
Net investment income - (.01) (.18) (.12)
Realized capital gains - (.17) (.06) -
----------------------------------------------------------------
Total distributions - (.18) (.24) (.12)
----------------------------------------------------------------
Net asset value at end of period $ 10.75 $ 10.48 $ 10.93 $ 10.85
================================================================
Total return (%)* 2.58 (2.47) 2.91 9.69
Net assets at end of period (000) $ 46,954 $ 37,963 $ 25,808 $ 11,777
Ratios to average net assets:**,(b)
Expenses (%)(c) .10(d) .10 .10 .10(d)
Expenses, excluding
reimbursements (%)(c) .43(d) .51 .78 1.72(d)
Net investment income (%) .74(d) 1.64 2.25 3.36(d)
Portfolio turnover (%) 0 35 16 0
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$42,304,000.
*** Fund commenced operations on July 12, 2013.
(a) Calculated using average shares.
(b) Calculated excluding the Fund's pro-rata share of expenses of the
underlying USAA Funds.
(c) Reflects total annual operating expenses of the Fund before reductions
of any expenses paid indirectly. The Fund's expenses paid indirectly
decreased the expense ratios as follows:
- - - (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 65
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Funds, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including Fund operating expenses. This example is intended to help you
understand your indirect costs, also referred to as "ongoing costs" (in
dollars), of investing in the Funds and to compare these costs with the ongoing
costs of investing in other mutual funds. Each Fund also indirectly bears its
pro-rata share of the expenses of the underlying USAA funds in which it invests
(acquired funds). These acquired fund fees and expenses are not included in the
Funds' annualized expense ratios used to calculate the expense estimates in the
table on the next page.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through
June 30, 2016.
ACTUAL EXPENSES
The line labeled "actual" in the table provides information about actual
account values and actual expenses. You may use the information in this line,
together with the amount you invested at the beginning of the period, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the "actual" line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period. The actual expenses of each Fund, net of reimbursements,
are zero.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" in the table provides information about
hypothetical account values and hypothetical expenses based on the Funds'
actual expense ratios and an assumed rate of return of 5% per year before
expenses, which is not the Funds' actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
================================================================================
66 | USAA TARGET RETIREMENT FUNDS
================================================================================
compare the ongoing costs of investing in the Funds and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled
"hypothetical" is useful in comparing ongoing costs only, and will not help you
determine the relative total costs of owning different funds. If these direct
costs were included, your costs would have been higher. Acquired fund fees and
expenses are not included in the Funds' annualized expense ratio used to
calculate the expenses paid in the table below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD**
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
----------------------------------------------------------------
TARGET INCOME
Actual $1,000.00 $1,042.30 $0.36
Hypothetical* 1,000.00 1,024.52 0.35
TARGET 2020
Actual 1,000.00 1,038.00 0.25
Hypothetical* 1,000.00 1,024.61 0.25
TARGET 2030
Actual 1,000.00 1,034.80 0.15
Hypothetical* 1,000.00 1,024.71 0.15
TARGET 2040
Actual 1,000.00 1,027.00 0.15
Hypothetical* 1,000.00 1,024.71 0.15
TARGET 2050
Actual 1,000.00 1,024.60 0.25
Hypothetical* 1,000.00 1,024.61 0.25
TARGET 2060
Actual 1,000.00 1,025.80 0.50
Hypothetical* 1,000.00 1,024.37 0.50
*5% return per year before expenses
**Expenses equal each Fund's annualized expense ratio of 0.07% for Target
Income, 0.05% for Target 2020, 0.03% for Target 2030, 0.03% for Target 2040,
0.05% for Target 2050, 0.10% for Target 2060, which is net of any
reimbursements and expenses paid indirectly and excludes expenses of the
acquired funds, multiplied by 182 days/366 days (to reflect the one-half year
period). Each Funds' actual ending account value is based on its actual total
return for the current period of January 1, 2016, through June 30, 2016. These
total returns equaled 4.23%, 3.80%, 3.48%, 2.70%, 2.46%, and 2.58% for the
Target Income, Target 2020, Target 2030, Target 2040, Target 2050, Target 2060
Funds, respectively.
================================================================================
EXPENSE EXAMPLE | 67
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to
each of the Funds.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Funds' investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Funds, as well as information regarding the Manager's
revenues and costs of providing services to the Funds and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for
their consideration of the proposed continuance of the Advisory Agreement with
respect to the Funds. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Funds in private
sessions with their counsel at which no representatives of management were
present. At each regularly scheduled meeting of the Board and its committees,
the Board receives and reviews, among other things, information concerning the
Funds' performance and related services provided by the Manager. At the meeting
at which the renewal of the Advisory Agreement is considered,
================================================================================
68 | USAA TARGET RETIREMENT FUNDS
================================================================================
particular focus is given to information concerning Fund performance, fees and
total expenses as compared to comparable investment companies, and the
Manager's profitability with respect to the Fund. However, the Board noted that
the evaluation process with respect to the Manager is an ongoing one. In this
regard, the Board's and its committees' consideration of the Advisory Agreement
included certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge of
the Manager's management and the quality of the performance of the Manager's
duties through Board meetings, discussions, and reports during the preceding
year. The Board considered the services provided to the Funds by the Manager
under the Advisory Agreement, as well as other services provided by the Manager
and its affiliates under other agreements, and the personnel who provide these
services. In addition to the investment advisory services provided to the
Funds, the Manager and its affiliates provide administrative services,
stockholder services, oversight of the Funds' accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Funds and the Trust.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional experience
and qualifications of its senior and investment personnel, as well
================================================================================
ADVISORY AGREEMENT(S) | 69
================================================================================
as current staffing levels. The Manager's role in coordinating the activities
of the Funds' other service providers also was considered. The Board also
considered the Manager's risk management processes. The Board considered the
Manager's financial condition and that it had the financial wherewithal to
continue to provide the same scope and high quality of services under the
Advisory Agreement. In reviewing the Advisory Agreement, the Board focused on
the experience, resources, and strengths of the Manager and its affiliates in
managing the Funds, as well as the other funds in the Trust. The Board also
reviewed the compliance and administrative services provided to the Funds by
the Manager, including the Manager's oversight of the Funds' day-to-day
operations and oversight of Fund accounting. The Trustees, guided also by
information obtained from their experiences as trustees of the Trust, also
focused on the quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Funds' advisory fees and total expense
ratios as compared to other open-end investment companies deemed to be
comparable to the Funds as determined by the independent third party in its
report. The Funds' expenses were compared to (i) a group of investment
companies chosen by the independent third party to be comparable to the Funds
based upon certain factors, including fund type, comparability of investment
objective and classification, sales load type (in this case, retail investment
companies with front-end loads and no sales loads), asset size, and expense
components (the "expense group") and (ii) a larger group of investment
companies that includes all front-end load and no-load retail open end
investment companies with the same investment classifications/objectives as
the Funds regardless of asset size, excluding outliers (the "expense
universe"). The Board noted that the Manager does not receive a management fee
from the Funds. The data indicated that the total expense ratio for each Fund,
which included underlying fund expenses and any reimbursements, was below the
median of its respective expense group and its respective expense universe. The
Board took into account the various services provided to the Funds by the
Manager and its affiliates. The Board also took into account the high quality
of services provided by the Manager.
================================================================================
70 | USAA TARGET RETIREMENT FUNDS
================================================================================
In considering the Funds' performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Funds' performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Funds' average annual
total returns with their Lipper indexes and with that of other mutual funds
deemed to be in their peer group by the independent third party in its report
(the "performance universe"). Each Fund's performance universe consisted of the
Fund and all retail and institutional open-end investment companies with the
same classification/objective as the Fund regardless of asset size or primary
channel of distribution. This comparison indicated that, among other data, the
performance of the Target Retirement Income Fund was lower than the average of
its performance universe and its Lipper index for the one- and three-year
periods ended December 31, 2015 and was above the average of its performance
universe and lower than its Lipper index for the five-year period ended
December 31, 2015; the performance of each of the Target Retirement 2020 Fund,
Target Retirement 2030 Fund, Target Retirement 2040 Fund, and Target Retirement
2050 Fund, was lower than the average of its performance universe and its
Lipper index for the one-, three-, and five year periods ended December 31,
2015; and the performance of the Target Retirement 2060 Fund was lower than the
average of its performance universe and its Lipper index for the one-year
period ended December 31, 2015. The Board also noted that the Target Retirement
Income Fund's percentile performance ranking was in the bottom 50% of its
performance universe for the one- and three-year periods ended December 31,
2015 and was in the top 50% of its performance universe for the five-year
period ended December 31, 2015; the Target Retirement 2020 Fund's, Target
Retirement 2030 Fund's, Target Retirement 2040 Fund's, and Target Retirement
2050 Fund's percentile performance ranking were each in the bottom 50% of their
performance universes for the one-, three-, and five-year periods ended
December 31, 2015; and the Target Retirement 2060 Fund's percentile performance
rankings was in the bottom 50% of its performance universe for the one-year
period ended December 31, 2015. The Board took into account management's
discussion of the Funds' performance, including the Funds' investment
approaches and the impact of market conditions on the Funds' performance
relative to their peers.
================================================================================
ADVISORY AGREEMENT(S) | 71
================================================================================
COMPENSATION AND PROFITABILITY - The Board took into consideration that the
Manager does not collect a management fee from the Funds. The information
considered by the Board included operating profit margin information for the
Manager's business as a whole. This information included a review of the
methodology used in the allocation of certain costs to the Funds. The Trustees
reviewed the profitability of the Manager's relationship with the Funds before
tax expenses. The Board also considered the fact that affiliates provide
shareholder servicing and administrative services to the Funds for which they
receive no compensation. The Board also took into account the Manager's receipt
of fees from the underlying funds. The Board also noted that the manager
reimburses certain expenses for each Fund. The Board also considered the
possible direct and indirect benefits to the Manager from its relationship with
the Trust, including that the Manager may derive reputational and other
benefits from its association with the Funds. The Board also took into account
the high quality of services received by the Funds from the Manager. The
Trustees recognized that the Manager should be entitled to earn a reasonable
level of profits in exchange for the level of services it provides to the Funds
and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - With respect to the consideration of any economies of
scale to be realized by the Funds, the Board took into account that the Manager
does not receive any advisory fees under the Advisory Agreement. The Board took
into account management's discussion of the Fund's current advisory fee
structure. The Board also considered the effects of the Funds' growth and size
on the Funds' performance and fees, noting that if the Funds' assets increase
over time, the Funds may realize other economies of scale if assets increase
proportionally more than some expenses. The Board determined that the current
fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the
Advisory Agreement with the Manager with respect to each Fund, among others:
(i) the Manager has demonstrated that it possesses the capability and resources
to perform the duties required of it under the Advisory Agreement; (ii) the
Manager maintains an appropriate compliance program; (iii) the performance of
each of the Funds is reasonable in relation to the performance of funds with
similar investment objectives and to relevant
================================================================================
72 | USAA TARGET RETIREMENT FUNDS
================================================================================
indexes in view of the Fund's investment approach and management is
appropriately monitoring the Fund's performance; (iv) each Fund's advisory
expenses are reasonable in relation to those of similar funds and to the
services to be provided by the Manager; and (v) the Manager's and its
affiliates level of profitability from their relationship with each Fund, if
any, is reasonable in light of the nature and high quality of services provided
by the Manager and the type of Funds. Based on its conclusions, the Board
determined that the continuation of the Advisory Agreement would be in the best
interests of the Funds and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 73
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210)
531-8722; (ii) at USAA.COM; and (iii) in summary within the Statement of
Additional Information on the SEC's website at HTTP://WWW.SEC.GOV. Information
regarding how the Fund voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30 is available without charge (i)
at USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
88219-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA ULTRA SHORT-TERM BOND FUND]
============================================================
SEMIANNUAL REPORT
USAA ULTRA SHORT-TERM BOND FUND
FUND SHARES o INSTITUTIONAL SHARES
JUNE 30, 2016
============================================================
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FUND'S OBJECTIVE 1
MANAGER'S COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 4
FINANCIAL INFORMATION
Portfolio of Investments 10
Notes to Portfolio of Investments 22
Financial Statements 26
Notes to Financial Statements 29
EXPENSE EXAMPLE 41
ADVISORY AGREEMENT(S) 43
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 ASSET 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)2016, USAA. All rights reserved.
208370-0816
================================================================================
================================================================================
FUND OBJECTIVE
THE USAA ULTRA SHORT-TERM BOND FUND (THE FUND) SEEKS TO PROVIDE HIGH CURRENT
INCOME CONSISTENT WITH PRESERVATION OF PRINCIPAL.
--------------------------------------------------------------------------------
TYPES OF INVESTMENTS
The Fund's principal investment strategy is normally to invest at least 80% of
the Fund's assets in investment-grade debt securities that have a
dollar-weighted average portfolio maturity of 18 months (one and a half years)
or less. These securities consist primarily of U.S. dollar-denominated debt
securities that may include, but are not limited to, obligations of U.S., state,
and local governments, their agencies and instrumentalities; mortgage- and
asset-backed securities; corporate debt securities; repurchase agreements; and
other securities believed to have debt-like characteristics, including synthetic
securities. This 80% policy may be changed upon at least 60 days' written notice
to shareholders.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election, or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
================================================================================
FUND OBJECTIVE | 1
================================================================================
MANAGER'S COMMENTARY ON THE FUND
ANTHONY M. ERA [PHOTO OF ANTHONY M. ERA]
USAA Asset Management Company
--------------------------------------------------------------------------------
o WHAT WERE THE MARKET CONDITIONS DURING THE REPORTING PERIOD?
Although the Federal Reserve (the Fed) raised the federal funds target rate
in December 2015 and anticipated four increases during 2016, U.S. Treasury
yields between two years and 30 years fell during the first half of the
reporting period. The drop was in response to the Fed holding firm on
interest rates at both its January and March 2016 meetings, largely due to
concerns about U.S. and global economic growth. In late March of 2016,
cautious statements by Fed chair Janet Yellen raised doubts about the number
of potential interest rate increases in 2016. Indeed, the Fed chose not to
raise interest rates at its April 2016 meeting. In early June of 2016, a
surprisingly weak May 2016 jobs report suggested that U.S. economic growth
could be slowing. This fueled speculation--ultimately proven correct--that
Fed governors would keep interest rates unchanged at their June 2016
meeting. In late June of 2016, the United Kingdom's vote to exit the
European Union ("Brexit") caught financial markets off guard, driving a
safe-haven flight into U.S. Treasuries and pushing down yields along the
curve. At the end of the reporting period, the market was anticipating that
the Fed would not raise interest rates at all in 2016.
During the reporting period overall, long-term yields fell more than short-
term yields. Accordingly, longer-duration securities outperformed shorter-
duration securities. (Bond prices and yields move in opposite directions.)
Refer to page 5 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
================================================================================
2 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
o HOW DID THE USAA ULTRA SHORT-TERM BOND FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. For
the reporting period ended June 30, 2016, the Fund Shares and Institutional
Shares had total returns of 1.14% and 1.21%, respectively. This compares to
total returns of 0.12% for the Citigroup 3-Month U.S. Treasury Bill Index
and 0.83% for the Lipper Ultra Short Obligations Funds Index.
USAA Asset Management Company is the Fund's investment adviser. The
investment adviser provides day-to-day discretionary management for the
Fund's assets.
o WHAT WERE YOUR STRATEGIES FOR THE FUND DURING THE REPORTING PERIOD?
Throughout the reporting period, we selectively sought relative value
opportunities among various sectors in the front end of the yield curve. We
strived to invest opportunistically during periods of market volatility by
maintaining a disciplined approach in liquidity management. As always, we
worked closely with our in-house team of analysts, who use independent
research to identify and evaluate potential investments. Our analysts also
continuously monitored every bond in the portfolio.
At the end of the reporting period, the Fund had a weighted average maturity
(WAM) of close to one year at 0.96. The portfolio's duration, which is a
measure of its sensitivity to changes in interest rates, was one year.
Thank for the opportunity to help you with your investment needs.
As interest rates rise, existing bond prices generally fall; given the
historically low interest rate environment, risks associated with rising
interest rates may be heightened.
================================================================================
MANAGER'S COMMENTARY ON THE FUND | 3
================================================================================
INVESTMENT OVERVIEW
USAA ULTRA SHORT-TERM BOND FUND SHARES (FUND SHARES)
(Ticker Symbol: UUSTX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $391.7 Million $427.0 Million
Net Asset Value Per Share $9.99 $9.94
Dollar-Weighted Average
Portfolio Maturity 1.0 Year 1.0 Year
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 10/18/10
1.14% 0.48% 1.36% 1.41%
--------------------------------------------------------------------------------
30-DAY SEC YIELD** AS OF 6/30/16 EXPENSE RATIO AS OF 12/31/15***
--------------------------------------------------------------------------------
1.24% 0.59%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**Calculated as prescribed by the Securities and Exchange Commission.
***The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
4 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA ULTRA LIPPER ULTRA SHORT CITIGROUP 3-MONTH
SHORT-TERM BOND OBLIGATIONS FUNDS U.S. TREASURY
FUND SHARES INDEX BILL INDEX
10/31/2010 $10,000.00 $10,000.00 $10,000.00
11/30/2010 9,990.51 9,999.63 10,001.18
12/31/2010 9,990.55 10,001.43 10,002.47
1/31/2011 10,010.25 10,010.36 10,003.67
2/28/2011 10,032.31 10,022.47 10,004.81
3/31/2011 10,043.36 10,028.04 10,006.00
4/30/2011 10,075.82 10,046.48 10,007.05
5/31/2011 10,117.41 10,055.32 10,007.83
6/30/2011 10,119.72 10,057.04 10,008.33
7/31/2011 10,141.41 10,063.96 10,008.65
8/31/2011 10,133.47 10,054.67 10,009.13
9/30/2011 10,117.83 10,041.28 10,009.51
10/31/2011 10,149.84 10,055.48 10,009.88
11/30/2011 10,142.00 10,053.10 10,009.99
12/31/2011 10,150.41 10,058.88 10,010.08
1/31/2012 10,203.58 10,092.30 10,010.18
2/29/2012 10,238.65 10,111.50 10,010.40
3/31/2012 10,253.20 10,127.40 10,010.84
4/30/2012 10,287.80 10,141.92 10,011.41
5/31/2012 10,291.26 10,147.98 10,012.11
6/30/2012 10,316.42 10,158.77 10,012.73
7/31/2012 10,350.23 10,185.09 10,013.41
8/31/2012 10,385.83 10,204.92 10,014.13
9/30/2012 10,418.79 10,224.24 10,014.91
10/31/2012 10,443.70 10,232.20 10,015.75
11/30/2012 10,457.57 10,234.96 10,016.52
12/31/2012 10,467.85 10,238.23 10,017.27
1/31/2013 10,491.97 10,248.67 10,017.85
2/28/2013 10,516.22 10,255.22 10,018.30
3/31/2013 10,530.56 10,260.54 10,018.91
4/30/2013 10,544.03 10,271.15 10,019.57
5/31/2013 10,535.72 10,266.32 10,020.21
6/30/2013 10,506.12 10,245.46 10,020.62
7/31/2013 10,527.78 10,253.75 10,020.97
8/31/2013 10,527.64 10,254.22 10,021.29
9/30/2013 10,558.36 10,266.89 10,021.57
10/31/2013 10,579.36 10,277.35 10,021.79
11/30/2013 10,600.08 10,287.15 10,021.98
12/31/2013 10,606.44 10,289.73 10,022.29
1/31/2014 10,626.27 10,300.80 10,022.77
2/28/2014 10,647.48 10,308.34 10,023.19
3/31/2014 10,647.52 10,313.97 10,023.54
4/30/2014 10,669.02 10,322.00 10,023.83
5/31/2014 10,689.79 10,332.41 10,024.15
6/30/2014 10,700.29 10,337.75 10,024.41
7/31/2014 10,694.39 10,341.86 10,024.66
8/31/2014 10,715.90 10,346.94 10,024.92
9/30/2014 10,699.18 10,346.74 10,025.15
10/31/2014 10,721.12 10,349.11 10,025.36
11/30/2014 10,732.26 10,350.04 10,025.51
12/31/2014 10,707.23 10,339.79 10,025.63
1/31/2015 10,740.60 10,348.80 10,025.80
2/28/2015 10,752.27 10,358.29 10,025.98
3/31/2015 10,763.98 10,365.85 10,026.18
4/30/2015 10,775.52 10,372.57 10,026.34
5/31/2015 10,787.70 10,378.24 10,026.48
6/30/2015 10,779.05 10,376.65 10,026.59
7/31/2015 10,779.32 10,378.45 10,026.68
8/31/2015 10,758.98 10,374.04 10,026.93
9/30/2015 10,737.81 10,372.65 10,027.19
10/31/2015 10,758.91 10,378.24 10,027.43
11/30/2015 10,747.23 10,377.42 10,027.71
12/31/2015 10,709.61 10,370.30 10,028.48
1/31/2016 10,688.00 10,375.49 10,029.73
2/29/2016 10,687.00 10,372.93 10,031.54
3/31/2016 10,741.00 10,398.67 10,033.87
4/30/2016 10,785.00 10,425.76 10,036.24
5/31/2016 10,797.00 10,439.47 10,038.38
6/30/2016 10,830.00 10,456.44 10,040.38
[END CHART]
Data from 10/31/10 to 6/30/16.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Ultra Short-Term Bond Fund Shares to the following benchmarks:
o The unmanaged Lipper Ultra Short Obligations Funds Index tracks the total
return performance of the 30 largest funds within the Lipper Ultra Short
Obligations Funds category.
o The unmanaged Citigroup 3-Month U.S. Treasury Bill Index represents the
total return received by investors of 3-month U.S. Treasury securities.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Ultra Short Obligations Funds Index reflects the fees and
expenses of the underlying funds included in the index.
*The performance of the Lipper Ultra Short Obligations Funds Index and Citigroup
3-Month U.S. Treasury Bill Index is calculated from the end of the month,
October 31, 2010, while the Fund Shares commenced operations on October 18,
2010. There may be a slight variation of performance numbers because of this
difference.
================================================================================
INVESTMENT OVERVIEW | 5
================================================================================
USAA ULTRA SHORT-TERM BOND FUND INSTITUTIONAL SHARES (INSTITUTIONAL SHARES)
(Ticker Symbol: UUSIX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $20.3 Million $22.5 Million
Net Asset Value Per Share $10.00 $9.94
Dollar-Weighted Average
Portfolio Maturity 1.0 Year 1.0 Year
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
1.21% 0.55% 1.06%
--------------------------------------------------------------------------------
30-DAY SEC YIELD** AS OF 6/30/16 EXPENSE RATIO AS OF 12/31/15***
--------------------------------------------------------------------------------
1.14% 0.57%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**Calculated as prescribed by the Securities and Exchange Commission.
***The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. This expense ratio may differ
from the expense ratio disclosed in the Financial Highlights, which excludes
acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
The Institutional Shares are available for investment through a USAA
discretionary managed account program, and certain advisory programs sponsored
by financial intermediaries, such as brokerage firms, investment advisors,
financial planners, third-party administrators, and insurance companies.
Institutional Shares also are available to institutional investors, which
include retirement plans, endowments, foundations, and bank trusts, as well as
other persons or legal entities that the Fund may approve from time to time, or
for purchase by a USAA fund participating in a fund-of-funds investment strategy
(USAA fund-of-funds).
================================================================================
6 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA ULTRA SHORT-TERM LIPPER ULTRA SHORT CITIGROUP 3-MONTH
BOND FUND INSTITUTIONAL OBLIGATIONS FUNDS U.S. TREASURY BILL
SHARES INDEX INDEX
7/31/2013 $10,000.00 $10,000.00 $10,000.00
8/31/2013 10,015.38 10,000.46 10,000.32
9/30/2013 10,045.24 10,012.81 10,000.60
10/31/2013 10,075.96 10,023.02 10,000.82
11/30/2013 10,085.99 10,032.58 10,001.01
12/31/2013 10,091.20 10,035.09 10,001.32
1/31/2014 10,110.37 10,045.89 10,001.80
2/28/2014 10,130.87 10,053.24 10,002.22
3/31/2014 10,131.33 10,058.74 10,002.57
4/30/2014 10,152.38 10,066.56 10,002.85
5/31/2014 10,172.81 10,076.72 10,003.17
6/30/2014 10,183.49 10,081.92 10,003.43
7/31/2014 10,178.39 10,085.93 10,003.69
8/31/2014 10,199.21 10,090.89 10,003.95
9/30/2014 10,193.49 10,090.70 10,004.17
10/31/2014 10,204.34 10,093.00 10,004.38
11/30/2014 10,215.19 10,093.91 10,004.53
12/31/2014 10,192.05 10,083.91 10,004.65
1/31/2015 10,224.09 10,092.70 10,004.83
2/28/2015 10,235.49 10,101.95 10,005.00
3/31/2015 10,246.99 10,109.33 10,005.20
4/30/2015 10,268.49 10,115.89 10,005.36
5/31/2015 10,280.27 10,121.41 10,005.50
6/30/2015 10,262.06 10,119.86 10,005.61
7/31/2015 10,262.34 10,121.62 10,005.70
8/31/2015 10,242.81 10,117.31 10,005.95
9/30/2015 10,221.78 10,115.96 10,006.21
10/31/2015 10,251.35 10,121.41 10,006.45
11/30/2015 10,239.44 10,120.61 10,006.73
12/31/2015 10,196.96 10,113.67 10,007.50
1/31/2016 10,186.00 10,118.73 10,008.74
2/29/2016 10,185.00 10,116.23 10,010.54
3/31/2016 10,226.00 10,141.33 10,012.88
4/30/2016 10,267.00 10,167.76 10,015.24
5/31/2016 10,277.00 10,181.12 10,017.37
6/30/2016 10,319.00 10,197.68 10,019.37
[END CHART]
Data from 7/31/13 to 6/30/16.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Ultra Short-Term Bond Fund Institutional Shares to the Fund's benchmarks
listed above (see page 5 for benchmark definitions).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes, except
that the Lipper Ultra Short Obligations Funds Index reflects the fees and
expenses of the underlying funds included in the index.
*The performance of the Lipper Ultra Short Obligations Funds Index and Citigroup
3-Month U.S. Treasury Bill Index is calculated from the end of the month, July
31, 2013, while the Institutional Shares initially invested in securities on
July 15, 2013. There may be a slight variation of performance numbers because of
this difference.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
o ASSET ALLOCATION - 6/30/16 o
[PIE CHART OF ASSET ALLOCATION]
CORPORATE OBLIGATIONS 41.4%
EURODOLLAR AND YANKEE OBLIGATIONS 16.7%
ASSET-BACKED SECURITIES 13.3%
COMMERCIAL MORTGAGE SECURITIES 11.2%
VARIABLE-RATE DEMAND NOTES 8.4%
COMMERCIAL PAPER 4.1%
MONEY MARKET FUNDS 3.2%
MUNICIPAL BONDS 0.9%
[END CHART]
Percentages are of the net assets of the Fund, and may not equal 100%.
================================================================================
8 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
o PORTFOLIO RATINGS MIX - 6/30/16 o
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 17.0%
AA 15.8%
A 29.9%
BBB 34.2%
BELOW INVESTMENT-GRADE 1.7%
UNRATED 1.4%
[END CHART]
This chart reflects the highest long-term rating from a Nationally Recognized
Statistical Rating Organization (NRSRO), with the four highest long-term credit
ratings labeled, in descending order of credit quality, AAA, AA, A, and BBB.
These categories represent investment-grade quality. NRSRO ratings are shown
because they provide independent analysis of the credit quality of the Fund's
investments. USAA Asset Management Company (the Manager) also performs its own
fundamental credit analysis of each security. As part of its fundamental credit
analysis, the Manager considers various criteria, including industry specific
actions, peer comparisons, payment ranking, and structure specific
characteristics. Any of the Fund's securities that are not rated by an NRSRO
appear in the chart above as "Unrated," but these securities are analyzed and
monitored by the Manager on an ongoing basis. Government securities that are
issued or guaranteed as to principal and interest by the U.S. government and
pre-refunded and escrowed-to-maturity municipal bonds that are not rated but are
treated as AAA for credit quality purposes.
Percentages are of the total market value of the Fund's investments.
You will find a complete list of securities that the Fund owns on pages 10-21.
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
BONDS (83.5%)
CORPORATE OBLIGATIONS (41.4%)
CONSUMER DISCRETIONARY (2.6%)
-----------------------------
CABLE & SATELLITE (1.0%)
$ 4,000 Charter Communications Operating, LLC(a) 3.58% 7/23/2020 $ 4,186
--------
GENERAL MERCHANDISE STORES (0.5%)
1,925 Dollar Tree, Inc.(b) 2.75 2/06/2020 1,926
--------
RESTAURANTS (0.6%)
2,705 ARAMARK Services, Inc.(b) 3.25 9/07/2019 2,712
--------
SPECIALTY STORES (0.5%)
1,900 Staples, Inc. 2.75 1/12/2018 1,909
--------
Total Consumer Discretionary 10,733
--------
CONSUMER STAPLES (1.0%)
-----------------------
DRUG RETAIL (0.5%)
2,000 CVS Health Corp. 2.25 12/05/2018 2,047
--------
PACKAGED FOODS & MEAT (0.5%)
2,000 Tyson Foods, Inc. 2.65 8/15/2019 2,056
--------
Total Consumer Staples 4,103
--------
ENERGY (4.6%)
-------------
OIL & GAS DRILLING (0.2%)
1,000 Nabors Industries, Inc. 2.35 9/15/2016 999
--------
OIL & GAS EQUIPMENT & SERVICES (0.4%)
1,580 Cameron International Co. 1.40 6/15/2017 1,581
--------
OIL & GAS EXPLORATION & PRODUCTION (0.8%)
1,650 EQT Corp. 5.15 3/01/2018 1,685
1,630 QEP Resources, Inc. 6.80 4/01/2018 1,632
--------
3,317
--------
OIL & GAS STORAGE & TRANSPORTATION (3.2%)
3,000 Boardwalk Pipelines, LLC 5.50 2/01/2017 3,046
1,000 Buckeye Partners, LP 2.65 11/15/2018 1,015
780 Columbia Pipeline Group 3.30 6/01/2020 807
================================================================================
10 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 3,000 DCP Midstream Operating, LP 2.50% 12/01/2017 $ 2,940
1,584 Plains All American Pipeline, LP 8.75 5/01/2019 1,812
1,000 Plains All American Pipeline, LP 2.60 12/15/2019 975
1,000 Sabine Pass LNG, LP(a) 7.50 11/30/2016 1,019
1,000 Sabine Pass LNG, LP 7.50 11/30/2016 1,020
500 Targa Resources Partners, LP 5.00 1/15/2018 511
--------
13,145
--------
Total Energy 19,042
--------
FINANCIALS (20.6%)
------------------
CONSUMER FINANCE (1.9%)
6,000 American Express Bank, FSB 0.75(c) 6/12/2017 5,988
2,000 Capital One Bank, N.A. 2.25 2/13/2019 2,027
--------
8,015
--------
DIVERSIFIED BANKS (3.6%)
3,250 Bank of America Corp. 0.96(c) 8/15/2016 3,250
2,000 Bank of America Corp. 0.89(c) 10/14/2016 1,998
1,000 Bank of America Corp. 1.67(c) 1/15/2019 1,005
1,000 Citigroup, Inc. 2.33(c) 5/15/2018 1,018
1,000 Citigroup, Inc. 2.50 7/29/2019 1,019
3,620 HSBC USA, Inc. 1.24(c) 11/13/2019 3,577
3,000 Wachovia Corp. 1.00(c) 10/15/2016 3,001
--------
14,868
--------
LIFE & HEALTH INSURANCE (0.8%)
2,000 MetLife Global Funding I(a) 1.88 6/22/2018 2,020
1,000 Protective Life Corp. 6.40 1/15/2018 1,064
--------
3,084
--------
MULTI-LINE INSURANCE (0.2%)
1,000 MassMutual Global Funding, LLC(a) 2.10 8/02/2018 1,020
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.9%)
1,737 AWAS Finance Luxembourg(b) 3.50 7/16/2018 1,739
1,000 International Lease Finance Corp. 3.88 4/15/2018 1,021
1,000 International Lease Finance Corp. 6.25 5/15/2019 1,074
--------
3,834
--------
PROPERTY & CASUALTY INSURANCE (0.5%)
2,000 Sirius International Group(a) 6.38 3/20/2017 2,045
--------
REGIONAL BANKS (9.4%)
1,500 Bank of Oklahoma, N.A. 1.32(c) 5/15/2017 1,497
6,000 Branch Banking & Trust Co. 0.98(c) 9/13/2016 6,003
2,000 Compass Bank 1.85 9/29/2017 1,995
================================================================================
PORTFOLIO OF INVESTMENTS | 11
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 4,000 Cullen/Frost Bankers, Inc. 1.16%(c) 2/15/2017 $ 3,987
2,200 Fifth Third Bancorp 1.07(c) 12/20/2016 2,199
1,000 Fifth Third Bank 1.14(c) 11/18/2016 1,001
1,000 Fulton Financial Corp. 5.75 5/01/2017 1,026
4,000 Huntington National Bank 1.35 8/02/2016 4,000
2,740 Huntington National Bank 2.40 4/01/2020 2,784
2,075 KeyCorp 2.90 9/15/2020 2,148
2,000 MUFG Union Bank, N.A. 1.50 9/26/2016 2,002
1,000 MUFG Union Bank, N.A. 2.63 9/26/2018 1,022
1,661 National City Bank 1.00(c) 12/15/2016 1,660
4,225 National City Bank 1.05(c) 6/07/2017 4,219
1,000 PNC Bank, N.A. 2.20 1/28/2019 1,021
2,000 Regions Bank of Birmingham 7.50 5/15/2018 2,194
--------
38,758
--------
REITs - HEALTH CARE (0.4%)
850 Senior Housing Properties Trust 3.25 5/01/2019 854
765 Ventas Realty, LP 2.70 4/01/2020 781
--------
1,635
--------
REITs - HOTEL & RESORT (0.3%)
1,000 Hospitality Properties Trust 5.63 3/15/2017 1,025
--------
REITs - INDUSTRIAL (0.2%)
600 Prologis, LP 4.00 1/15/2018 620
--------
REITs - OFFICE (0.6%)
2,552 Mack-Cali Realty, LP 2.50 12/15/2017 2,561
--------
REITs - RESIDENTIAL (0.3%)
1,350 UDR, Inc. 4.25 6/01/2018 1,418
--------
REITs - RETAIL (0.5%)
820 Equity One, Inc. 6.00 9/15/2017 860
500 Realty Income Corp. 5.38 9/15/2017 523
500 Regency Centers, LP 4.80 4/15/2021 549
--------
1,932
--------
THRIFTS & MORTGAGE FINANCE (1.0%)
4,000 Chittenden Corp. 1.31(c) 2/14/2017 3,990
--------
Total Financials 84,805
--------
HEALTH CARE (1.1%)
------------------
HEALTH CARE FACILITIES (0.4%)
1,911 HCA, Inc.(b) 1.96 6/10/2020 1,864
--------
HEALTH CARE SERVICES (0.7%)
768 Laboratory Corp. of America Holdings 2.20 8/23/2017 774
================================================================================
12 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 2,000 Quest Diagnostics, Inc. 2.70% 4/01/2019 $ 2,052
--------
2,826
--------
Total Health Care 4,690
--------
INDUSTRIALS (3.9%)
------------------
AIRLINES (1.4%)
5,125 Aviation Capital Group Corp.(a) 3.88 9/27/2016 5,139
800 Continental Airlines, Inc. Pass-Through Trust 6.25 10/11/2021 852
--------
5,991
--------
CONSTRUCTION MACHINERY & HEAVY TRUCKS (0.4%)
1,500 CNH Industrial Capital, LLC 3.25 2/01/2017 1,513
--------
INDUSTRIAL CONGLOMERATES (0.4%)
1,697 General Electric Capital Corp. 0.97(c) 12/20/2016 1,697
--------
TRADING COMPANIES & DISTRIBUTORS (0.5%)
1,089 International Lease Finance Corp.(a) 6.75 9/01/2016 1,095
1,000 International Lease Finance Corp.(a) 7.13 9/01/2018 1,100
--------
2,195
--------
TRUCKING (1.2%)
1,091 Avis Budget Car Rental, LLC(b) 3.00 3/15/2019 1,091
1,000 Penske Truck Leasing Co., LP / PTL Finance Corp.(a) 2.88 7/17/2018 1,019
640 Penske Truck Leasing Co., LP / PTL Finance Corp.(a) 3.20 7/15/2020 655
2,000 Ryder System, Inc. 2.50 5/11/2020 2,026
--------
4,791
--------
Total Industrials 16,187
--------
INFORMATION TECHNOLOGY (1.9%)
-----------------------------
ELECTRONIC COMPONENTS (0.5%)
2,000 Amphenol Corp. 2.55 1/30/2019 2,036
--------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.3%)
1,000 FLIR Systems, Inc. 3.13 6/15/2021 1,028
--------
SEMICONDUCTORS (1.1%)
1,975 NXP B.V.(b) 2.75 3/04/2017 1,976
2,588 NXP B.V.(b) 3.75 1/11/2020 2,590
--------
4,566
--------
Total Information Technology 7,630
--------
MATERIALS (3.7%)
----------------
ALUMINUM (1.0%)
1,000 Alcoa, Inc. 5.55 2/01/2017 1,024
2,793 Alcoa, Inc. 5.72 2/23/2019 3,011
--------
4,035
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
COMMODITY CHEMICALS (0.8%)
$ 3,000 Lyondellbasell Industries N.V. 5.00% 4/15/2019 $ 3,249
--------
CONSTRUCTION MATERIALS (1.7%)
7,000 Martin Marietta Materials, Inc. 1.73(c) 6/30/2017 6,979
--------
SPECIALTY CHEMICALS (0.2%)
1,000 Albemarle Corp. 3.00 12/01/2019 1,014
--------
Total Materials 15,277
--------
UTILITIES (2.0%)
----------------
ELECTRIC UTILITIES (1.8%)
2,000 FirstEnergy Corp. 2.75 3/15/2018 2,026
5,000 IPALCO Enterprises, Inc. 5.00 5/01/2018 5,250
--------
7,276
--------
MULTI-UTILITIES (0.2%)
1,000 Dominion Resources, Inc. 2.96 7/01/2019 1,019
--------
Total Utilities 8,295
--------
Total Corporate Obligations (cost: $169,483) 170,762
--------
EURODOLLAR AND YANKEE OBLIGATIONS (16.7%)
CONSUMER DISCRETIONARY (3.2%)
-----------------------------
AUTOMOBILE MANUFACTURERS (3.2%)
1,000 Daimler Finance, N.A., LLC(a) 1.32(c) 8/01/2016 1,000
3,306 Hyundai Capital Services, Inc.(a) 1.45(c) 3/18/2017 3,305
1,000 Nissan Motor Acceptance Corp.(a) 1.34(c) 9/26/2016 1,001
1,765 Nissan Motor Acceptance Corp.(a) 1.23(c) 3/03/2017 1,767
3,000 Nissan Motor Acceptance Corp.(a) 1.95 9/12/2017 3,024
1,000 Nissan Motor Acceptance Corp.(a) 2.35 3/04/2019 1,022
2,000 Volkswagen Group of America Finance, LLC(a) 1.02(c) 5/23/2017 1,990
--------
13,109
--------
Total Consumer Discretionary 13,109
--------
CONSUMER STAPLES (0.2%)
-----------------------
BREWERS (0.2%)
1,000 SABMiller Holdings, Inc.(a) 1.33(c) 8/01/2018 1,000
--------
ENERGY (2.5%)
-------------
INTEGRATED OIL & GAS (1.9%)
2,000 BP Capital Markets plc 1.05(c) 11/07/2016 2,002
3,495 BP Capital Markets plc 1.63 8/17/2017 3,511
2,300 Shell International Finance B.V. 1.08(c) 5/11/2020 2,271
--------
7,784
--------
================================================================================
14 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
OIL & GAS STORAGE & TRANSPORTATION (0.6%)
$ 1,000 Enbridge, Inc. 1.28%(c) 10/01/2016 $ 996
1,500 Enbridge, Inc. 1.14(c) 6/02/2017 1,474
--------
2,470
--------
Total Energy 10,254
--------
FINANCIALS (8.2%)
-----------------
DIVERSIFIED BANKS (5.9%)
2,000 ABN AMRO Bank N.V.(a) 1.43(c) 10/28/2016 2,004
2,000 Banco Santander Chile(a) 1.53(c) 4/11/2017 2,002
1,700 Bank of Nova Scotia 2.05 6/05/2019 1,727
2,000 Barclays Bank plc(a) 6.05 12/04/2017 2,096
3,000 Canadian Imperial Bank of Commerce 1.15(c) 7/18/2016 3,001
2,000 Commonwealth Bank of Australia(a) 1.15(c) 9/20/2016 2,002
1,000 ING Bank N.V.(a) 1.32(c) 10/01/2019 986
2,000 Santander UK plc 1.17(c) 3/13/2017 2,000
2,225 Standard Chartered Bank(a) 6.40 9/26/2017 2,343
2,000 Svenska Handelsbanken AB 1.11(c) 9/23/2016 2,002
2,000 Swedbank AB(a) 1.75 3/12/2018 2,015
2,000 Toronto Dominion Bank 2.63 9/10/2018 2,058
--------
24,236
--------
DIVERSIFIED CAPITAL MARKETS (0.5%)
2,000 Deutsche Bank AG 1.24(c) 2/13/2017 1,998
--------
DIVERSIFIED REAL ESTATE ACTIVITIES (0.4%)
1,500 Brookfield Asset Management, Inc. 5.80 4/25/2017 1,550
--------
PROPERTY & CASUALTY INSURANCE (1.2%)
2,000 QBE Insurance Group Ltd.(a) 2.40 5/01/2018 2,020
3,000 Suncorp-Metway Ltd.(a) 1.32(c) 3/28/2017 3,005
--------
5,025
--------
REITs - RETAIL (0.2%)
1,000 Scentre Group Trust(a) 2.38 11/05/2019 1,015
--------
Total Financials 33,824
--------
INDUSTRIALS (1.9%)
------------------
AEROSPACE & DEFENSE (0.4%)
1,400 BAE Systems Holdings, Inc.(a) 6.38 6/01/2019 1,575
--------
INDUSTRIAL CONGLOMERATES (1.2%)
5,000 Hutchison Whampoa International Ltd.(a) 2.00 11/08/2017 5,057
--------
MARINE (0.3%)
1,000 A.P. Moeller-Maersk A/S(a) 2.55 9/22/2019 1,020
--------
Total Industrials 7,652
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
MATERIALS (0.7%)
----------------
DIVERSIFIED METALS & MINING (0.5%)
$ 1,000 Glencore Funding, LLC(a) 1.99%(c) 1/15/2019 $ 947
1,000 Glencore Funding, LLC(a) 3.13 4/29/2019 980
--------
1,927
--------
STEEL (0.2%)
500 ArcelorMittal 6.13 6/01/2018 527
500 ArcelorMittal 5.13 6/01/2020 518
--------
1,045
--------
Total Materials 2,972
--------
Total Eurodollar and Yankee Obligations (cost: $68,519) 68,811
--------
ASSET-BACKED SECURITIES (13.3%)
FINANCIALS (13.3%)
------------------
ASSET-BACKED FINANCING (13.3%)
221 AmeriCredit Automobile Receivables Trust 2.42 5/08/2018 222
1,000 AmeriCredit Automobile Receivables Trust 1.57 1/08/2019 1,000
2,600 AmeriCredit Automobile Receivables Trust 3.13 10/08/2020 2,649
591 ARI Fleet Lease Trust(a) 0.81 11/15/2022 591
3,050 Avis Budget Rental Car Funding, LLC(a) 4.00 5/21/2018 3,073
3,000 Babson CLO Ltd.(a) 1.87(c) 5/15/2023 2,992
2,000 California Republic Auto Receivables Trust 1.57 12/16/2019 2,006
2,200 California Republic Auto Receivables Trust 2.30 12/16/2019 2,212
1,000 California Republic Auto Receivables Trust 2.34 4/15/2020 1,006
2,950 CarMax Auto Owner Trust 2.08 3/15/2018 2,951
1,350 CarMax Auto Owner Trust 2.17 10/15/2020 1,360
2,500 Chase Issuance Trust 0.90(c) 4/15/2019 2,494
2,000 CIT Equipment Collateral(a) 1.50 10/21/2019 2,002
1,295 CIT Equipment Collateral(a) 2.15 2/20/2020 1,306
1,000 CNH Equipment Trust 1.61 5/17/2021 1,007
1,500 Credit Acceptance Auto Loan Trust(a) 1.88 3/15/2022 1,503
1,334 Enterprise Fleet Financing, LLC(a) 0.87 9/20/2019 1,333
2,000 First Investors Auto Owner Trust(a) 2.26 3/15/2019 2,002
1,723 GE Equipment Small Ticket, LLC(a) 1.39 7/24/2020 1,722
1,000 Hertz Fleet Lease Funding, LP(a) 2.44(c) 12/10/2027 992
2,000 Hertz Fleet Lease Funding, LP(a) 1.55(c) 4/10/2030 2,004
1,500 Huntington Auto Trust "B" 1.95 6/15/2021 1,503
1,420 Huntington Auto Trust "C" 2.15 6/15/2021 1,424
1,045 M&T Bank Auto Receivables Trust(a) 2.16 3/15/2019 1,046
2,000 Marine Park CLO Ltd.(a) 1.91(c) 10/12/2023 1,992
922 MMAF Equipment Finance, LLC(a) 1.35 10/10/2018 924
================================================================================
16 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 15 Prestige Auto Receivables Trust(a) 0.97% 3/15/2018 $ 15
2,440 Prestige Auto Receivables Trust(a) 1.52 4/15/2020 2,441
1,723 Santander Drive Auto Receivables Trust 1.45 5/15/2019 1,725
2,526 Santander Drive Auto Receivables Trust 2.91 4/15/2020 2,563
353 TCF Auto Receivables Owner Trust(a) 1.02 8/15/2018 352
2,150 TCF Auto Receivables Owner Trust 1.49 12/16/2019 2,153
2,000 TCF Auto Receivables Owner Trust(a) 2.55 4/15/2021 2,028
--------
54,593
--------
Total Financials 54,593
--------
Total Asset-Backed Securities (cost: $54,471) 54,593
--------
COMMERCIAL MORTGAGE SECURITIES (11.2%)
FINANCIALS (11.2%)
------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (10.7%)
223 Banc of America Commercial Mortgage, Inc. 4.73 7/10/2043 223
1,657 Banc of America Commercial Mortgage, Inc. 5.68 7/10/2046 1,656
1,442 Banc of America Commercial Mortgage, Inc. 6.44 2/10/2051 1,518
2,000 Banc of America Commercial Mortgage, Inc. 6.48 2/10/2051 2,125
1,500 Banc of America Merrill Lynch Commercial
Mortgage Securities Trust(a) 1.24 6/15/2028 1,489
1,500 Banc of America Merrill Lynch Commercial
Mortgage Securities Trust(a) 1.54 6/15/2028 1,474
908 Barclays Commercial Mortgage Securities, LLC(a) 1.55 2/15/2028 900
2,000 Barclays Commercial Mortgage Securities, LLC(a) 2.04 2/15/2028 1,980
1,000 CGBAM Commercial Mortgage Trust 3.21 4/10/2028 1,017
3,000 CGWF Commercial Mortgage Trust(a) 1.39 11/15/2030 2,999
1,700 Commercial Mortgage Trust(a) 2.05 2/13/2032 1,680
1,490 Commercial Mortgage Trust 1.28 8/10/2046 1,494
1,080 Greenwich Capital Commercial Funding Corp. 6.06 7/10/2038 1,079
817 GS Mortgage Securities Trust 1.21 7/10/2046 818
1,428 GS Mortgage Securities Trust 1.51 9/10/2047 1,436
1,813 Hilton USA Trust(a) 1.96 11/05/2030 1,812
1,000 Hilton USA Trust(a) 3.37 11/05/2030 1,006
2,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp.(a) 1.34 10/15/2029 1,985
3,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp.(a) 1.84 10/15/2029 2,933
1,669 J.P. Morgan Chase Commercial Mortgage
Securities Corp.(a) 2.19 12/15/2030 1,657
69 J.P. Morgan Chase Commercial Mortgage
Securities Corp. 5.12 7/15/2041 69
1,300 J.P. Morgan Chase Commercial Mortgage
Securities Corp.(a) 3.62 11/15/2043 1,332
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 1,000 J.P. Morgan Chase Commercial Mortgage
Securities Corp.(a) 4.39% 2/15/2046 $ 1,045
62 LB-UBS Commercial Mortgage Trust 4.57 1/15/2031 62
2,135 Morgan Stanley-BAML Trust 1.55 8/15/2047 2,149
3,375 SCG Trust(a) 1.84 11/15/2026 3,372
500 TimberStar Trust(a) 6.21 10/15/2036 501
3,000 Wells Fargo Commercial Mortgage Trust(a) 1.47 2/15/2027 2,997
1,000 Wells Fargo Commercial Mortgage Trust(a) 1.79 2/15/2027 992
--------
43,800
--------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES(0.5%)
11,296 Fannie Mae(d) 2.24 12/25/2019 395
14,216 Freddie Mac(d) 1.62 4/25/2017 94
5,152 Freddie Mac(d) 3.26 1/25/2019 281
5,753 Freddie Mac(d) 1.48 11/25/2019 205
28,023 GS Mortgage Securities Trust(a),(e) 0.84 3/10/2044 722
11,618 JPMBB Commercial Mortgage Securities Trust(e) 1.40 4/15/2047 484
--------
2,181
--------
Total Financials 45,981
--------
Total Commercial Mortgage Securities (cost: $45,744) 45,981
--------
MUNICIPAL BONDS (0.9%)
ENVIRONMENTAL & FACILITIES SERVICES (0.2%)
1,000 South Carolina Jobs EDA 1.88 11/01/2016 1,004
--------
GENERAL OBLIGATION (0.3%)
1,250 Town of Stratford 2.49 8/15/2017 1,274
--------
SALES TAX (0.3%)
1,000 Arizona School Facilities Board 2.08 9/01/2018 1,019
--------
TOLL ROADS (0.1%)
500 Tampa-Hillsborough County Expressway Auth. 1.79 7/01/2017 503
--------
Total Municipal Bonds (cost: $3,750) 3,800
--------
Total Bonds (cost: $341,967) 343,947
--------
MONEY MARKET INSTRUMENTS (15.7%)
COMMERCIAL PAPER (4.1%)
CONSUMER DISCRETIONARY (1.8%)
-----------------------------
AUTOMOBILE MANUFACTURERS (1.2%)
1,000 Hyundai Capital America(a),(f) 0.70 7/01/2016 1,000
1,500 Hyundai Capital America(a),(f) 0.70 7/05/2016 1,500
================================================================================
18 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
$ 1,500 Hyundai Capital America(a),(f) 0.68% 7/07/2016 $ 1,500
1,000 Hyundai Capital America(a),(f) 0.73 7/13/2016 1,000
--------
5,000
--------
AUTOMOTIVE RETAIL (0.6%)
1,000 Autozone Inc.(a),(f) 0.68 7/15/2016 1,000
1,500 Autozone Inc.(a),(f) 0.70 7/18/2016 1,499
--------
2,499
--------
Total Consumer Discretionary 7,499
--------
FINANCIALS (1.0%)
-----------------
ASSET-BACKED FINANCING (1.0%)
4,000 Gotham Funding Corp.(a),(f) 0.40 7/08/2016 3,999
--------
MATERIALS (0.5%)
----------------
DIVERSIFIED CHEMICALS (0.5%)
2,000 Lyondellbasell Industries N.V.(a),(f) 0.71 7/06/2016 2,000
--------
UTILITIES (0.8%)
----------------
ELECTRIC UTILITIES (0.8%)
1,000 Pacific Gas & Electric(a),(f) 0.70 7/11/2016 1,000
1,500 Pacific Gas & Electric(a),(f) 0.68 7/12/2016 1,500
1,000 Pacific Gas & Electric(a),(f) 0.70 7/18/2016 999
--------
3,499
--------
Total Utilities 3,499
--------
Total Commercial Paper 16,997
--------
VARIABLE-RATE DEMAND NOTES (8.4%)
CONSUMER DISCRETIONARY (0.8%)
-----------------------------
AUTOMOTIVE RETAIL (0.8%)
3,360 Athens-Clarke County (LOC - SunTrust Bank) 0.50 12/01/2024 3,360
--------
ENERGY (1.3%)
-------------
OIL & GAS REFINING & MARKETING (1.3%)
1,700 Port of Port Arthur Navigation District 0.54 11/01/2040 1,700
3,800 Port of Port Arthur Navigation District 0.54 11/01/2040 3,800
--------
5,500
--------
Total Energy 5,500
--------
FINANCIALS (1.0%)
-----------------
REAL ESTATE OPERATING COMPANIES (1.0%)
3,950 MOBR-04, LLC (LOC - Compass Bank) 1.53 9/01/2024 3,950
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
INDUSTRIALS (1.1%)
------------------
AIRPORT SERVICES (1.1%)
$ 4,350 Metropolitan Nashville Airport Auth.
(LOC - Regions Bank) 2.12% 4/01/2030 $ 4,350
--------
MATERIALS (2.9%)
----------------
STEEL (2.9%)
2,700 Blytheville 0.70 6/01/2028 2,700
5,000 Illinois Finance Auth. (LOC - UniCredit Bank A.G.) 2.25 2/01/2037 5,000
4,325 Indiana Finance Auth. (LOC - Banco Bilbao
Vizcaya Argentaria S.A.) 0.76 8/01/2030 4,325
--------
12,025
--------
Total Materials 12,025
--------
MUNICIPAL BONDS (1.3%)
----------------------
APPROPRIATED DEBT (0.8%)
3,500 Sports & Exhibition Auth. of Pittsburgh &
Allegheny County (INS) (LIQ) 0.72 11/01/2039 3,500
--------
MULTIFAMILY HOUSING (0.5%)
995 Albany Housing Auth. (LOC - Citizens
Financial Group) 0.63 12/01/2025 995
965 Gwinnett County Housing Auth.
(LOC - SunTrust Bank) 0.60 3/01/2041 965
--------
1,960
--------
Total Municipal Bonds 5,460
--------
Total Variable-Rate Demand Notes 34,645
--------
------------------------------------------------------------------------------------------------------------------
NUMBER
OF SHARES
------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS (3.2%)
13,032,913 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(g) 13,033
--------
Total Money Market Instruments (cost: $64,675) 64,675
--------
TOTAL INVESTMENTS (COST: $406,642) $408,622
========
================================================================================
20 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
Bonds:
Corporate Obligations $ - $170,762 $- $170,762
Eurodollar and Yankee Obligations - 68,811 - 68,811
Asset-Backed Securities - 54,593 - 54,593
Commercial Mortgage Securities - 45,981 - 45,981
Municipal Bonds - 3,800 - 3,800
Money Market Instruments:
Commercial Paper - 16,997 - 16,997
Variable-Rate Demand Notes - 34,645 - 34,645
Money Market Funds 13,033 - - 13,033
------------------------------------------------------------------------------------------------------------------
Total $13,033 $395,589 $- $408,622
------------------------------------------------------------------------------------------------------------------
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
PORTFOLIO OF INVESTMENTS | 21
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
Investments in foreign securities were 18.5% of net assets at June 30, 2016.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee obligations
are dollar-denominated instruments that are issued by foreign issuers in the
U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable from,
a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal
================================================================================
22 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
to be repaid, which is calculated by assuming prepayment rates of the
underlying loans. The weighted average life is likely to be substantially
shorter than the stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments. Stated interest rates on
commercial mortgage-backed securities may change slightly over time as
underlying mortgages pay down.
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS IOs) - Represent
the right to receive only the interest payments on an underlying pool of
commercial mortgage loans. The purchase yield reflects an anticipated yield
based upon interest rates at the time of purchase and the estimated timing
and amount of future cash flows. Coupon rates after purchase vary from
period to period. The principal amount represents the notional amount of the
underlying pool on which current interest is calculated. CMBS IOs are backed
by loans that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment penalties.
This serves to moderate their prepayment risk. CMBS IOs are subject to
default-related prepayments that may have a negative impact on yield.
VARIABLE-RATE DEMAND NOTES (VRDNs) - Provide the right to sell the security
at face value on either that day or within the rate-reset period. The
interest rate is adjusted at a stipulated daily, weekly, monthly, quarterly,
or other specified time interval to reflect current market conditions.
VRDNs will normally trade as if the maturity is the earlier put date, even
though stated maturity is longer.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
CLO Collateralized Loan Obligation
EDA Economic Development Authority
REIT Real estate investment trust
CREDIT ENHANCEMENTS - Adds the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 23
================================================================================
trust. The enhancements do not guarantee the market values of the
securities.
(INS) Principal and interest payments are insured by Assured Guaranty
Municipal Corp. Although bond insurance reduces the risk of loss
due to default by an issuer, such bonds remain subject to the risk
that value may fluctuate for other reasons, and there is no
assurance that the insurance company will meet its obligations.
(LIQ) Liquidity enhancement that may, under certain circumstances,
provide for repayment of principal and interest upon demand from
PNC Bank, N.A.
(LOC) Principal and interest payments are guaranteed by a bank letter of
credit or other bank credit agreement.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur in
an exempt transaction to a qualified institutional buyer as defined
by Rule 144A, and as such has been deemed liquid by USAA Asset
Management Company (the Manager) under liquidity guidelines approved
by USAA Mutual Funds Trust's Board of Trustees (the Board), unless
otherwise noted as illiquid.
(b) Senior loan (loan) - is not registered under the Securities Act of
1933. The loan contains certain restrictions on resale and cannot be
sold publicly. The stated interest rate represents the weighted
average interest rate of all contracts within the senior loan
facility. The interest rate is adjusted periodically, and the rate
disclosed represents the current rate at June 30, 2016. The weighted
average life of the loan is likely to be shorter than the stated
final maturity date due to mandatory or optional prepayments. The
loan is deemed liquid by the Manager, under liquidity guidelines
approved by the Board, unless otherwise noted as illiquid.
================================================================================
24 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
(c) Variable-rate or floating-rate security - interest rate is adjusted
periodically. The interest rate disclosed represents the rate at June
30, 2016.
(d) Securities issued by government-sponsored enterprises are supported
only by the right of the government-sponsored enterprise to borrow
from the U.S. Treasury, the discretionary authority of the U.S.
government to purchase the government-sponsored enterprises'
obligations, or by the credit of the issuing agency, instrumentality,
or corporation, and are neither issued nor guaranteed by the U.S.
Treasury.
(e) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board. The aggregate market value of these securities
at June 30, 2016, was $1,206,000, which represented 0.3% of the
Fund's net assets.
(f) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(a)(2) of the
Securities Act of 1933, as amended (Section 4(2) Commercial Paper).
Unless this commercial paper is subsequently registered, a resale of
this commercial paper in the United States must be effected in a
transaction exempt from registration under the Securities Act of
1933. Section 4(2) commercial paper is normally resold to other
investors through or with the assistance of the issuer or an
investment dealer who makes a market in this security, and as such
has been deemed liquid by the Manager under liquidity guidelines
approved by the Board, unless otherwise noted as illiquid.
(g) Rate represents the money market fund annualized seven-day yield at
June 30, 2016.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 25
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $406,642) $408,622
Cash 81
Receivables:
Capital shares sold 198
Interest 1,665
Securities sold 1,960
--------
Total assets 412,526
--------
LIABILITIES
Payables:
Capital shares redeemed 389
Dividends on capital shares 20
Accrued management fees 99
Accrued transfer agent's fees 11
Other accrued expenses and payables 46
--------
Total liabilities 565
--------
Net assets applicable to capital shares outstanding $411,961
========
NET ASSETS CONSIST OF:
Paid-in capital $414,567
Undistributed net investment income 3
Accumulated net realized loss on investments (4,589)
Net unrealized appreciation of investments 1,980
--------
Net assets applicable to capital shares outstanding $411,961
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $391,707/39,192 shares outstanding) $ 9.99
========
Institutional Shares (net assets of $20,254/2,026 shares outstanding) $ 10.00
========
See accompanying notes to financial statements.
================================================================================
26 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $ 3,966
-------
EXPENSES
Management fees 599
Administration and servicing fees:
Fund Shares 304
Institutional Shares 10
Transfer agent's fees:
Fund Shares 176
Institutional Shares 10
Custody and accounting fees:
Fund Shares 61
Institutional Shares 3
Postage:
Fund Shares 8
Shareholder reporting fees:
Fund Shares 9
Trustees' fees 15
Registration fees:
Fund Shares 20
Institutional Shares 5
Professional fees 36
Other 10
-------
Total expenses 1,266
-------
NET INVESTMENT INCOME 2,700
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss (4,653)
Change in net unrealized appreciation/(depreciation) 6,884
-------
Net realized and unrealized gain 2,231
-------
Increase in net assets resulting from operations $ 4,931
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 27
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
-------------------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
-------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 2,700 $ 6,473
Net realized gain (loss) on investments (4,653) 190
Change in net unrealized appreciation/(depreciation)
of investments 6,884 (6,344)
-----------------------------------
Increase in net assets resulting from operations 4,931 319
-----------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares (2,573) (5,775)
Institutional Shares (124) (698)
-----------------------------------
Total distributions of net investment income (2,697) (6,473)
-----------------------------------
Net realized gains:
Fund Shares - (150)
Institutional Shares - (8)
-----------------------------------
Total distributions of net realized gains - (158)
-----------------------------------
Distributions to shareholders (2,697) (6,631)
-----------------------------------
NET DECREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Fund Shares (37,416) (38,097)
Institutional Shares (2,305) (46,373)
-----------------------------------
Total net decrease in net assets from
capital share transactions (39,721) (84,470)
-----------------------------------
Net decrease in net assets (37,487) (90,782)
NET ASSETS
Beginning of period 449,448 540,230
-----------------------------------
End of period $411,961 $449,448
===================================
Undistributed net investment income:
End of period $ 3 $ -
===================================
See accompanying notes to financial statements.
================================================================================
28 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Ultra Short-Term Bond Fund (the
Fund), which is classified as diversified under the 1940 Act. The Fund's
investment objective is to seek high current income consistent with preservation
of principal.
The Fund consists of two classes of shares: Ultra Short-Term Bond Fund Shares
(Fund Shares) and Ultra Short-Term Bond Fund Institutional Shares (Institutional
Shares). Each class of shares has equal rights to assets and earnings, except
that each class bears certain class-related expenses specific to the particular
class. These expenses include administration and servicing fees, transfer agent
fees, postage, shareholder reporting fees, and certain registration and
custodian fees. Expenses not attributable to a specific class, income, and
realized gains or losses on investments are allocated to each class of shares
based on each class's relative net assets. Each class has exclusive voting
rights on matters related solely to that class and separate voting rights on
matters that relate to both classes. The Institutional Shares are available for
investment through a USAA discretionary managed account program, and certain
advisory programs sponsored by financial intermediaries, such as brokerage
firms, investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments, foundations, and bank
trusts, as well as other persons or legal entities that the Fund may
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
approve from time to time, or for purchase by a USAA Fund participating in a
fund-of-funds investment strategy (USAA fund-of-funds).
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures, which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of securities
as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures during
the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and USAA Asset Management
Company (the Manager), an affiliate of the Fund. Among other things, these
monthly meetings include a review and analysis of back testing reports,
pricing service quotation comparisons, illiquid securities and fair value
determinations, pricing movements, and daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board.
The Service uses an evaluated mean between quoted bid and asked prices
or the last sales price to value a security when, in the Service's
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which include consideration of yields or prices of securities
================================================================================
30 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
of comparable quality, coupon, maturity, and type; indications as to
values from dealers in securities; and general market conditions.
Generally, debt securities are categorized in Level 2 of the fair value
hierarchy; however, to the extent the valuations include significant
unobservable inputs, the securities would be categorized in Level 3.
2. Investments in open-end investment companies, commingled, or other
funds, other than exchange-traded funds (ETFs), are valued at their net
asset value (NAV) at the end of each business day and are categorized in
Level 1 of the fair value hierarchy.
3. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
4. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
D. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are computed on the identified cost basis.
Interest income is recorded daily on the accrual basis. Premiums and
discounts 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.
E. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans 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.
================================================================================
32 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
The Fund receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
F. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management purposes, realized
credits, if any, generated from cash balances in the Fund's bank accounts
may be used to directly reduce the Fund's expenses. For the six-month
period ended June 30, 2016, there were no custodian and other bank credits.
G. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business, the Trust enters into contracts that contain a variety of
representations and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR).
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of $1,000, which represents 0.6% of the total fees paid to CAPCO by the USAA
Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At December 31, 2015, the Fund had no capital loss carryforwards, for federal
income tax purposes.
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the three preceding fiscal reporting
year ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
================================================================================
34 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$52,039,000 and $112,425,000, respectively.
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $2,459,000 and $479,000, respectively, resulting in net unrealized
appreciation of $1,980,000.
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31, 2015
-----------------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
FUND SHARES:
Shares sold 4,620 $ 45,903 15,241 $ 153,272
Shares issued from reinvested
dividends 252 2,501 575 5,776
Shares redeemed (8,636) (85,820) (19,616) (197,145)
----------------------------------------------------------------
Net decrease from capital
share transactions (3,764) $(37,416) (3,800) $ (38,097)
================================================================
INSTITUTIONAL SHARES:
Shares sold 394 $ 3,914 1,503 $ 15,132
Shares issued from reinvested
dividends 13 124 70 706
Shares redeemed (639) (6,343) (6,194) (62,211)
----------------------------------------------------------------
Net decrease from capital
share transactions (232) $ (2,305) (4,621) $ (46,373)
================================================================
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Under this agreement, the Manager is
responsible for managing the business and affairs of the Fund, and for
directly managing the day-to-day investment of the Fund's assets, subject to
the authority of and supervision by the Board. The Manager is authorized to
select (with approval of the Board and without shareholder approval) one or
more subadvisers to manage the day-to-day investment of the Fund's assets.
For the six-month period ended June 30, 2016, the Fund had no subadviser(s).
The investment management fee for the Fund is comprised of a base fee and a
performance adjustment. The Fund's base fee is accrued daily and paid
monthly at an annualized rate of 0.24% of the Fund's average net assets.
The performance adjustment is calculated separately for each share class on
a monthly basis by comparing each class' performance over the performance
period to that of the Lipper Ultra Short Obligations Funds Index. The Lipper
Ultra Short Obligations Funds Index tracks the total return performance of
the 30 largest funds in the Lipper Ultra Short Obligation Funds category.
For the Fund Shares, the performance period consists of the current month
plus the previous 35 months. The performance period for the Institutional
Shares includes the performance of the Fund Shares for periods prior to July
12, 2013. The following table is utilized to determine the extent of the
performance adjustment:
OVER/UNDER PERFORMANCE
RELATIVE TO INDEX ANNUAL ADJUSTMENT RATE
(IN BASIS POINTS)(1) (IN BASIS POINTS)(1)
------------------------------------------------------------------
+/- 20 to 50 +/- 4
+/- 51 to 100 +/- 5
+/- 101 and greater +/- 6
(1)Based on the difference between average annual performance of the
relevant share class of the Fund and its relevant index, rounded to the
nearest basis point. Average net assets are calculated over a rolling
36-month period.
Each class' annual performance adjustment rate is multiplied by the average
net assets of each respective class over the entire performance
================================================================================
36 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
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.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper Ultra Short Obligations Funds Index over that period,
even if the Fund had overall negative returns during the performance period.
For the six-month period ended June 30, 2016, the Fund incurred total
management fees, paid or payable to the Manager, of $599,000, which included
a performance adjustment for the Fund Shares and Institutional Shares of
$78,000 and $10,000, respectively. For the Fund Shares and Institutional
Shares, the performance adjustments were 0.04% and 0.10%, respectively.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and 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 average net assets of the Fund Shares and 0.10% of average net
assets of the Institutional Shares. For the six-month period ended June 30,
2016, the Fund Shares and Institutional Shares incurred administration and
servicing fees, paid or payable to the Manager, of $304,000 and $10,000,
respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For
the six-month period ended June 30, 2016, the Fund reimbursed the Manager
$6,000 for these compliance and legal services. These expenses are included
in the professional fees on the Fund's Statement of Operations.
C. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the Manager, provides
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
transfer agent services to the Fund Shares based on an annual charge of
$25.50 per shareholder account plus out-of-pocket expenses. SAS pays a
portion of these fees to certain intermediaries for the administration and
servicing of accounts that are held with such intermediaries. Transfer
agent's fees for Institutional Shares are paid monthly based on a fee
accrued daily at an annualized rate of 0.10% of the Institutional Shares'
average net assets, plus out-of-pocket expenses. For the six-month period
ended June 30, 2016, the Fund Shares and Institutional Shares incurred
transfer agent's fees, paid or payable to SAS, of $176,000 and $10,000,
respectively.
D. UNDERWRITING SERVICES - USAA Investment Management Company provides
exclusive underwriting and distribution of the Fund's shares on a continuing
best-efforts basis and receives no fee or other compensation for these
services.
(7) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA funds and
is one of 20 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control. As of June 30, 2016, the USAA
fund-of-funds owned the following percentages of the total outstanding shares of
the Fund:
AFFILIATED USAA FUND OWNERSHIP %
----------------------------------------------------------------------------------
Target Retirement Income 0.2
Target Retirement 2020 0.5
Target Retirement 2030 1.1
Target Retirement 2040 1.4
Target Retirement 2050 0.7
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
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.
================================================================================
38 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
(8) FINANCIAL HIGHLIGHTS - FUND SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-----------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.94 $ 10.07 $ 10.10 $ 10.12 $ 9.98 $ 9.97
-----------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .06 .13 .13 .14 .16 .14
Net realized and
unrealized gain (loss) .05 (.13) (.02) (.01) .15 .01
-----------------------------------------------------------------------------------------
Total from investment
operations .11 (.00)(a) .11 .13 .31 .15
-----------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.06) (.13) (.13) (.14) (.16) (.14)
Realized capital gains - (.00)(a) (.01) (.01) (.01) (.00)(a)
-----------------------------------------------------------------------------------------
Total distributions (.06) (.13) (.14) (.15) (.17) (.14)
-----------------------------------------------------------------------------------------
Net asset value at
end of period $ 9.99 $ 9.94 $ 10.07 $ 10.10 $ 10.12 $ 9.98
=========================================================================================
Total return (%)* 1.14 .01 1.05 1.22 3.13 1.60
Net assets at
end of period (000) $391,707 $426,994 $470,933 $492,875 $417,623 $245,819
Ratios to average
net assets:**
Expenses (%)(c) .59(d) .59 .58 .58 .58(b) .60
Expenses, excluding
reimbursements (%)(c) .59(d) .59 .58 .58 .59 .67
Net investment
income (%) 1.27(d) 1.28 1.27 1.34 1.62 1.46
Portfolio turnover (%) 14 20 31 39 28 26
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$407,237,000.
(a) Represents less than $0.01 per share.
(b) Prior to May 1, 2012, the Manager had voluntarily agreed to limit the annual
expenses of the Fund Shares to 0.60% of the Fund Shares' average net assets.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(8) FINANCIAL HIGHLIGHTS (CONTINUED) - INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------------
2016 2015 2014 2013***
--------------------------------------------------------------------
Net asset value at beginning of period $ 9.94 $ 10.07 $ 10.10 $ 10.08
---------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .06 .13 .13 .06
Net realized and unrealized gain (loss) .06 (.13) (.02) .03
---------------------------------------------------------------
Total from investment operations .12 .00(a) .11 .09
---------------------------------------------------------------
Less distributions from:
Net investment income (.06) (.13) (.13) (.06)
Realized capital gains - (.00)(a) (.01) (.01)
---------------------------------------------------------------
Total distributions (.06) (.13) (.14) (.07)
---------------------------------------------------------------
Net asset value at end of period $ 10.00 $ 9.94 $ 10.07 $ 10.10
===============================================================
Total return (%)* 1.21 .04 1.10 .81
Net assets at end of period (000) $20,254 $22,454 $69,297 $53,457
Ratios to average net assets:**
Expenses (%)(c) .65(b) .57 .53 .56(b)
Net investment income (%) 1.21(b) 1.32 1.33 1.19(b)
Portfolio turnover (%) 14 20 31 39
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$20,765,000.
*** Institutional Shares commenced operations on July 12, 2013.
(a) Represents less than $0.01 per share.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+)
(+) Represents less than 0.01% of average net assets.
================================================================================
40 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through
June 30, 2016.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual
================================================================================
EXPENSE EXAMPLE | 41
================================================================================
return. The hypothetical account values and expenses may not be used to estimate
the actual ending account balance or expenses you paid for the period. You may
use this information to compare the ongoing costs of investing in the Fund and
other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016-
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
-----------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,011.40 $2.95
Hypothetical
(5% return before expenses) 1,000.00 1,021.93 2.97
INSTITUTIONAL SHARES
Actual 1,000.00 1,012.10 3.25
Hypothetical
(5% return before expenses) 1,000.00 1,021.63 3.27
*Expenses are equal to the annualized expense ratio of 0.59% for Fund Shares and
0.65% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 182 days/366 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of 1.14% for Fund Shares and 1.21% for Institutional Shares for the six-month
period of January 1, 2016, through June 30, 2016.
================================================================================
42 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for
their consideration of the proposed continuance of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuance of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management
were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
meeting at which the renewal of the Advisory Agreement is considered,
particular focus is given to information concerning Fund performance, fees and
total expenses as compared to comparable investment companies, and the
Manager's profitability with respect to the Fund. However, the Board noted that
the evaluation process with respect to the Manager is an ongoing one. In this
regard, the Board and its committees' consideration of the Advisory Agreement
included certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its knowledge of
the Manager's management and the quality of the performance of the Manager's
duties through Board meetings, discussions, and reports during the preceding
year. The Board considered the fees paid to the Manager and the services
provided to the Fund by the Manager under the Advisory Agreement, as well as
other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and
the Trust.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional
================================================================================
44 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
experience and qualifications of its senior and investment personnel, as well
as current staffing levels. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution," was also considered.
The Manager's role in coordinating the activities of the Fund's other service
providers also was considered. The Board also considered the Manager's risk
management processes. The Board considered the Manager's financial condition
and that it had the financial wherewithal to continue to provide the same scope
and high quality of services under the Advisory Agreement. In reviewing the
Advisory Agreement, the Board focused on the experience, resources, and
strengths of the Manager and its affiliates in managing the Fund, as well as
the other funds in the Trust. The Board also reviewed the compliance and
administrative services provided to the Fund by the Manager, including
oversight of the Fund's day-to-day operations and oversight of Fund accounting.
The Trustees, guided also by information obtained from their experiences as
trustees of the Trust, also focused on the quality of the Manager's compliance
and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objective and
classification, sales load type (in this case, retail investment companies with
front-end loads and no sales loads), asset size, and expense components (the
"expense group") and (ii) a larger group of investment companies that includes
all front-end load and no-load retail open-end investment companies with the
same investment classification/objective as the Fund regardless of asset size,
excluding outliers (the "expense universe"). Among other data, the Board noted
that the Fund's management fee rate - which includes advisory and
administrative services and the effects of any performance adjustment - was
above the median of its expense group and its expense universe. The data
indicated that the Fund's total expenses were below the median of its expense
group and its expense universe. The Board took into account management's
discussion of the
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
Fund's expenses. The Board took into account the various services provided to
the Fund by the Manager and its affiliates, including the high quality of
services received by the Fund from the Manager. The Board also noted the level
and method of computing the management fee, including any performance
adjustment to such fee. In considering the Fund's performance, the Board noted
that it reviews at its regularly scheduled meetings information about the
Fund's performance results. The Trustees also reviewed various comparative data
provided to them in connection with their consideration of the renewal of the
Advisory Agreement, including, among other information, a comparison of the
Fund's average annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The Fund's performance universe
consisted of the Fund and all retail and institutional open-end investment
companies with the same classification/objective as the Fund regardless of
asset size or primary channel of distribution. This comparison indicated that,
among other data, the Fund's performance was lower than the average of its
performance universe and its Lipper index for the one-year period ended
December 31, 2015 and was above the average of its performance universe and its
Lipper index for the three- and five-year periods ended December 31, 2015. The
Board also noted that the Fund's percentile performance ranking was in the
bottom 50% of its performance universe for the one-year period ended December
31, 2015, in the top 15% of its performance universe for the three-year period
ended December 31, 2015, and was in the top 5% of its performance universe for
the five-year period ended December 31, 2015.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level
and method of computing the Fund's management fee. The information considered
by the Board included operating profit margin for the Manager's business as a
whole. The Board also considered profitability information related to the
management revenues from the Fund. This information included a review of the
methodology used in the allocation of certain costs to the Fund. The Trustees
reviewed the profitability of the Manager's relationship with the Fund before
tax expenses. In reviewing the overall profitability of the management fee to
the Manager, the Board also considered the fact that affiliates provide
shareholder servicing and
================================================================================
46 | USAA ULTRA SHORT-TERM BOND FUND
================================================================================
administrative services to the Fund for which they receive compensation. The
Board also considered the possible direct and indirect benefits to the Manager
from its relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund. The
Trustees recognized that the Manager should be entitled to earn a reasonable
level of profits in exchange for the level of services it provides to the Fund
and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to participate
in any economies of scale. The Board took into account management's discussions
of the Fund's current advisory fee structure. The Board also considered the
effect of the Fund's growth and size on its performance and fees, noting that
if the Fund's assets increase over time, the Fund may realize other economies
of scale if assets increase proportionally more than some expenses. The Board
determined that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
current Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the overall performance of the Fund is
reasonable in relation to the performance of funds with a similar investment
strategy and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to the services to be provided by the Manager; and (v)
the Manager and its affiliates' level of profitability from their relationship
with the Fund is reasonable in light of the nature and high quality of services
provided by the Manager and the type of fund. Based on its conclusions, the
Board determined that the continuation of the Advisory Agreement would be in
the best interests of the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
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INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
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MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
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Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210)
531-8722; (ii) at USAA.COM; and (iii) in summary within the Statement of
Additional Information on the SEC's website at HTTP://WWW.SEC.GOV. Information
regarding how the Fund voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30 is available without charge (i)
at USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling (800) 732-0330.
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--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
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94422-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA REAL RETURN FUND]
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SEMIANNUAL REPORT
USAA REAL RETURN FUND
FUND SHARES o INSTITUTIONAL SHARES
JUNE 30, 2016
============================================================
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PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
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TABLE OF CONTENTS
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FUND OBJECTIVE 1
MANAGERS' COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 6
FINANCIAL INFORMATION
Portfolio of Investments 13
Notes to Portfolio of Investments 18
Financial Statements 21
Notes to Financial Statements 24
EXPENSE EXAMPLE 41
ADVISORY AGREEMENT(S) 43
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 ASSET 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)2016, USAA. All rights reserved.
208366-0816
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FUND OBJECTIVE
THE USAA REAL RETURN FUND (THE FUND) SEEKS A TOTAL RETURN THAT EXCEEDS THE RATE
OF INFLATION OVER AN ECONOMIC CYCLE.
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TYPES OF INVESTMENTS
The Fund's principal investment strategy is to invest its assets principally in
a portfolio of investments that the Adviser believes will have a total return
that exceeds the rate of inflation over an economic cycle. In pursuing its
investment objective, the Fund will allocate its assets under normal market
conditions among the following asset classes: (1) inflation-linked securities,
including U.S. Treasury inflation-protected securities (TIPS), non-U.S. dollar
inflation-linked securities, and inflation-linked corporate and municipal
securities; (2) fixed-income securities, including bank loans, floating-rate
notes, short-duration bonds, investment-grade securities, high-yield bonds (also
known as "junk" bonds), and non-U.S. dollar instruments, including foreign
currencies; (3) equity securities, including real estate investment trusts
(REITs) and exchange-traded funds (ETFs), including those that the Adviser
believes have a high correlation to measures of inflation; and (4) commodity-
linked instruments, such as commodity ETFs, commodity-linked notes, and other
investment companies that concentrate their investments in commodity-linked
instruments and to a limited extent, certain types of derivative instruments. In
allocating the Fund's assets, the Adviser may invest all or a substantial
portion of the Fund's assets in one or a limited number of these asset classes.
Accordingly, the allocation of the Fund's assets among these classes may vary
substantially from time to time.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
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FUND OBJECTIVE | 1
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MANAGERS' COMMENTARY ON THE FUND
USAA Asset Management Company
JOHN P. TOOHEY, CFA WASIF A. LATIF
R. MATTHEW FREUND, CFA BRIAN W. SMITH, CFA, CPA
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o HOW DID THE GLOBAL FINANCIAL MARKETS PERFORM DURING THE REPORTING PERIOD?
The reporting period ended June 30, 2016 was characterized by a modest
revival of inflation expectations and strong performance across all segments
of the financial markets, which created a favorable backdrop for the Fund.
The inflation outlook was supported by two key factors. First, the U.S.
consumer price index (CPI)--which came in well below the historical average
in 2015--moved higher in the first five months of 2016. Second, the
increasingly accommodative nature of global central bank policies helped
support future inflation expectations. Japan cut short-term interest rates
into negative territory, while the European Central Bank further reduced
interest rates that were below zero already. In the United States, commentary
from Federal Reserve officials made it apparent that the central bank would
maintain its "lower for longer" interest rate policy for an extended period.
Together, these factors indicated that the market's previous concerns about
the potential for deflation may have been exaggerated - a tailwind for the
types of investments held in the Fund.
Favorable central bank action also led to improving market performance, with
both stocks and bonds gaining ground in the first half of 2016. In addition,
commodities, emerging-market stocks and other segments in which the Fund is
invested staged impressive recoveries after their poor showing in 2015.
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2 | USAA REAL RETURN FUND
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o HOW DID THE USAA REAL RETURN FUND (THE FUND) PERFORM DURING THE REPORTING
PERIOD?
The Fund has two share classes: Fund Shares and Institutional Shares. For
the reporting period ended June 30, 2016, the Fund Shares and Institutional
Shares had total returns of 7.91% and 7.90%, respectively. This compares to
a total return of 6.55% for the Barclays U.S. Government Inflation-Linked
Bond Index and 8.71% for the Real Return Composite Index.
USAA Asset Management Company (the Manager) is the Fund's investment adviser.
The investment adviser provides day-to-day discretionary management for the
Fund's assets.
o PLEASE DISCUSS THE FACTORS THAT HELPED AND HURT PERFORMANCE DURING THE
REPORTING PERIOD.
All segments of the portfolio generated positive returns, with the Fund's
allocation to commodities making the largest contribution. Commodities came
under significant pressure in 2015, but the Fund maintained the position on
the belief that this asset class can help offset the potential long-term
impact of inflation. This approach paid off, as commodity prices indeed
rebounded during the reporting period. The Fund's allocation to gold stocks,
which staged an impressive rally, was the top performing segment within both
the commodity portfolio and the Fund as a whole. The price of gold surged in
January and February 2016 behind the pullback in the U.S. dollar, and after a
three-month pause, rose again in June 2016 as investors sought shelter from
the fallout of the United Kingdom's vote to leave the European Union. After
lagging considerably in the prior two calendar years, gold stocks rebounded
strongly in conjunction with the recovery in commodities.
Refer to page 8 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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MANAGERS' COMMENTARY ON THE FUND | 3
================================================================================
The Fund's allocation to real estate investment trusts (REITs) also made a
significant contribution to its return. REITs performed well behind the
continued strength in the property market and investors' renewed thirst for
yield. REITs were a prime beneficiary of the latter trend, and they finished
the reporting period with healthy, mid-single digit returns.
The Fund's U.S. equity allocation made an additional positive contribution.
We emphasize companies with high growing dividends, which is consistent with
our goal of generating positive real returns over time. Dividend stocks were
driven by the same demand for yield that aided the REIT sector, so this
segment of the Fund generated a solid gain.
The Fund's allocation to emerging-market stocks, which it achieves through
investments in exchange-traded funds (ETFs), also delivered a healthy return.
The emerging markets sectors lagged in 2015 on concerns about slowing growth,
but stabilizing economic data from China and improving sentiment in Brazil
fueled outperformance during the reporting period. We believe this
illustrates the potential benefits of using a long-term strategy rather than
overreacting to temporary fears in the market.
The Fund's fixed-income allocation finished with a gain, and it provided a
measure of stability during times in which stocks experienced volatility.
The Fund's investment in an ETF linked to local currency emerging-market
bonds performed well, as improving sentiment prompted investors to take
advantage of the high yields and depressed valuations the sector offered at
the beginning of 2016. The Fund's investments in Treasury Inflation-
Protected Securities (TIPS), also gained ground at a time of falling yields
due to their above-average interest rate sensitivity. Similarly, the Fund's
actively-managed domestic bond portfolio benefited from its substantial
weighting in long-term U.S. Treasuries. This portion of the Fund also
provided a meaningful contribution, as longer-dated government debt was one
of the best performing segments of the fixed-income market during the
reporting period. The bond portfolio also has an allocation to
investment-grade corporate and high-yield bonds, which enabled the Fund to
capture the positive returns in these areas.
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4 | USAA REAL RETURN FUND
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o WHAT WERE YOUR STRATEGIES FOR THE FUND DURING THE REPORTING PERIOD?
We are encouraged by both the Fund's performance and the signs that inflation
may be starting to increase slowly. Inflation in Japan has been above zero in
each of the past four months, while the increase in the U.S. CPI represents
a meaningful shift from the near-zero levels which characterized 2015.
Inflation struggled to stay in positive territory in Europe, which bears
watching, but the European Central Bank continues to pursue extremely
aggressive policies designed to offset this trend. These developments, taken
together, indicate that inflation-sensitive investments could play an
increasingly important role for investors in the months and years ahead. We
believe the Fund, through its diversified approach, is well-positioned to
capitalize on this shift.
Thank you for allowing us to help you manage your investments.
The Real Return Fund may be subject to stock market risk and is
non-diversified, which means that it may invest a greater percentage of its
assets in a single issuer. Individual stocks will fluctuate in response to
the activities of individual companies, general market, and economic
conditions domestically and abroad. When redeemed or sold, shares of the Fund
may be worth more or less than the original cost. o Foreign investing is
subject to additional risks, such as currency fluctuations, market
illiquidity, and political instability. Emerging market countries are most
volatile. Emerging market countries are less diverse and mature than other
countries and tend to be politically less stable. o As interest rates rise,
existing bond prices generally fall; given the historically low interest rate
environment, risks associated with rising interest rates may be heightened.
o Precious metals and minerals is a volatile asset class and is subject to
additional risks, such as currency fluctuation, market illiquidity, political
instability, and increased volatility. It may be more volatile than other
asset classes that diversify across many industries and companies.
o Investing in REITs has some of the same risks associated with the direct
ownership of real estate. o ETFs are subject to risks similar to those of
stocks.
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MANAGERS' COMMENTARY ON THE FUND | 5
================================================================================
INVESTMENT OVERVIEW
USAA REAL RETURN FUND SHARES (FUND SHARES)
(Ticker Symbol: USRRX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $26.4 Million $69.4 Million
Net Asset Value Per Share $9.85 $9.14
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 10/18/10
7.91% 1.06% 1.67% 2.28%
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EXPENSE RATIOS AS OF 12/31/15 **
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BEFORE REIMBURSEMENT 1.19% AFTER REIMBURSEMENT 1.17%
(Includes acquired fund fees and expenses of 0.17%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This
return is cumulative.
**The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Fund Shares (exclusive of
commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 1.00% of
the Fund Shares' average net assets. This reimbursement arrangement may not be
changed or terminated during this time period without approval of the Fund's
Board of Trustees and may be changed or terminated by the Manager at any time
after May 1, 2017. If the total annual operating expense ratio of the Fund
Shares is lower than 1.00%, the Fund Shares will operate at the lower expense
ratio. These expense ratios may differ from the expense ratios disclosed in the
Financial Highlights, which excludes acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
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6 | USAA REAL RETURN FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
REAL RETURN BARCLAYS U.S. GOVERNMENT USAA REAL
COMPOSITE INFLATION-LINKED RETURN FUND
INDEX BOND INDEX SHARES
10/31/2010 $10,000.00 $10,000.00 $10,000.00
11/30/2010 9,859.05 9,826.89 9,960.00
12/31/2010 10,142.34 9,673.15 10,088.37
1/31/2011 10,188.18 9,687.15 10,088.37
2/28/2011 10,340.03 9,772.07 10,239.25
3/31/2011 10,485.37 9,872.03 10,320.65
4/30/2011 10,825.50 10,125.78 10,563.72
5/31/2011 10,742.58 10,153.88 10,563.72
6/30/2011 10,644.40 10,238.43 10,469.70
7/31/2011 10,877.69 10,652.60 10,561.72
8/31/2011 10,736.60 10,748.06 10,367.46
9/30/2011 10,143.43 10,730.33 9,920.52
10/31/2011 10,748.84 10,930.92 10,394.39
11/30/2011 10,663.68 11,018.86 10,322.28
12/31/2011 10,676.32 11,025.66 10,298.24
1/31/2012 11,064.75 11,284.56 10,654.07
2/29/2012 11,193.45 11,242.17 10,821.52
3/31/2012 11,110.69 11,114.59 10,801.34
4/30/2012 11,246.50 11,349.91 10,832.96
5/31/2012 10,946.65 11,559.45 10,580.05
6/30/2012 11,180.03 11,491.59 10,750.37
7/31/2012 11,478.00 11,723.83 10,899.09
8/31/2012 11,485.41 11,681.58 11,047.81
9/30/2012 11,631.45 11,742.40 11,279.95
10/31/2012 11,585.19 11,854.51 11,333.46
11/30/2012 11,612.81 11,912.35 11,312.05
12/31/2012 11,630.22 11,826.52 11,444.92
1/31/2013 11,789.16 11,736.66 11,521.07
2/28/2013 11,751.94 11,738.84 11,466.68
3/31/2013 11,868.56 11,768.72 11,565.79
4/30/2013 12,013.20 11,881.22 11,653.32
5/31/2013 11,598.17 11,325.88 11,412.60
6/30/2013 11,191.33 10,899.14 11,053.03
7/31/2013 11,347.45 10,973.23 11,317.25
8/31/2013 11,165.99 10,809.84 11,163.12
9/30/2013 11,357.40 10,968.86 11,329.02
10/31/2013 11,552.32 11,032.45 11,539.22
11/30/2013 11,430.84 10,897.41 11,406.46
12/31/2013 11,385.95 10,731.46 11,394.39
1/31/2014 11,425.36 10,964.59 11,294.04
2/28/2014 11,721.25 11,017.63 11,628.52
3/31/2014 11,787.72 10,968.53 11,690.41
4/30/2014 11,989.24 11,128.79 11,836.12
5/31/2014 12,166.21 11,379.12 11,959.42
6/30/2014 12,277.22 11,413.39 12,210.20
7/31/2014 12,179.82 11,425.39 12,097.46
8/31/2014 12,320.49 11,488.23 12,232.75
9/30/2014 11,851.27 11,179.32 11,734.58
10/31/2014 12,071.96 11,288.29 11,745.89
11/30/2014 12,061.80 11,322.44 11,678.00
12/31/2014 11,831.66 11,207.08 11,425.08
1/31/2015 11,989.40 11,577.72 11,493.70
2/28/2015 12,041.07 11,427.00 11,585.19
3/31/2015 11,885.55 11,371.44 11,367.90
4/30/2015 12,084.73 11,450.42 11,585.19
5/31/2015 11,936.27 11,345.28 11,470.83
6/30/2015 11,773.28 11,221.37 11,254.65
7/31/2015 11,619.98 11,255.91 11,059.61
8/31/2015 11,279.77 11,160.57 10,703.96
9/30/2015 11,158.87 11,084.49 10,554.82
10/31/2015 11,444.32 11,119.04 10,876.05
11/30/2015 11,266.58 11,109.39 10,703.96
12/31/2015 11,146.19 11,014.75 10,539.80
1/31/2016 11,048.03 11,184.14 10,378.00
2/29/2016 11,092.99 11,315.98 10,413.00
3/31/2016 11,632.27 11,528.76 10,935.00
4/30/2016 11,797.45 11,573.26 11,108.00
5/31/2016 11,757.34 11,485.92 11,050.00
6/30/2016 12,115.94 11,736.75 11,374.00
[END CHART]
Data from 10/31/10 to 6/30/16.*
See next page for benchmark definitions.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the index
does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Barclays U.S. Government Inflation-Linked Bond Index and
Real Return Composite Index is calculated from the end of the month of October
31, 2010, while the inception date of the Fund Shares is October 18, 2010. There
may be a slight variation of performance numbers because of this difference.
================================================================================
INVESTMENT OVERVIEW | 7
================================================================================
The graph on page 7 illustrates the comparison of a $10,000 hypothetical
investment in the USAA Real Return Fund Shares to the following benchmark:
o The Real Return Composite Index is a combination of unmanaged indexes
representing the Fund's model allocation, and consists of the Morningstar
Dividend Composite (15%), MSCI U.S. REIT Gross (10%), Barclays U.S.
Inflation-Linked Bond (50%), Bloomberg Commodity TR (15%), and the MSCI
Emerging Markets (10%).
o The unmanaged Barclays U.S. Government Inflation-Linked Bond Index measures
the performance of the U.S. Treasury Inflation-Protected Securities (TIPS)
market. The index includes TIPS with one or more years remaining maturity
with total outstanding issue size of $500 million or more.
================================================================================
8 | USAA REAL RETURN FUND
================================================================================
USAA REAL RETURN FUND INSTITUTIONAL SHARES (INSTITUTIONAL SHARES)
(Ticker Symbol: UIRRX)
--------------------------------------------------------------------------------
6/30/16 12/31/15
--------------------------------------------------------------------------------
Net Assets $81.5 Million $275.3 Million
Net Asset Value Per Share $9.86 $9.15
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
--------------------------------------------------------------------------------
12/31/15-6/30/16* 1 YEAR 5 YEARS SINCE INCEPTION 10/18/10
7.90% 1.15% 1.88% 2.49%
--------------------------------------------------------------------------------
EXPENSE RATIO AS OF 12/31/15**
--------------------------------------------------------------------------------
0.99%
(Includes acquired fund fees and expenses of 0.17%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This
return is cumulative.
**The expense ratio represents the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and is
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Institutional Shares (exclusive
of commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.90% of
the Institutional Shares' average net assets. This reimbursement arrangement may
not be changed or terminated during this time period without approval of the
Fund's Board of Trustees and may be changed or terminated by the Manager at any
time after May 1, 2017. If the total annual operating expense ratio of the
Institutional Shares is lower than 0.90%, the Institutional Shares will operate
at the lower expense ratio. The expense ratio may differ from the expense ratio
disclosed in the Financial Highlights, which excludes acquired fund fees and
expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
The Institutional Shares are available for investment through a USAA
discretionary managed account program, and certain advisory programs sponsored
by financial intermediaries, such as brokerage firms, investment advisors,
financial planners, third-party administrators, and insurance companies.
Institutional Shares also are available to institutional investors, which
include retirement plans, endowments, foundations, and bank trusts, as well as
other persons or legal entities that the Fund may approve from time to time, or
for purchase by a USAA fund participating in a fund-of-funds investment strategy
(USAA fund-of-funds).
================================================================================
INVESTMENT OVERVIEW | 9
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
REAL RETURN BARCLAYS U.S. GOVERNMENT USAA REAL
COMPOSITE INFLATION-LINKED RETURN FUND
INDEX BOND INDEX INSTITUTIONAL SHARES
10/31/2010 $10,000.00 $10,000.00 $10,000.00
11/30/2010 9,859.05 9,826.89 9,970.00
12/31/2010 10,142.34 9,673.15 10,091.00
1/31/2011 10,188.18 9,687.15 10,091.00
2/28/2011 10,340.03 9,772.07 10,241.91
3/31/2011 10,485.37 9,872.03 10,327.65
4/30/2011 10,825.50 10,125.78 10,581.02
5/31/2011 10,742.58 10,153.88 10,581.02
6/30/2011 10,644.40 10,238.43 10,481.44
7/31/2011 10,877.69 10,652.60 10,583.80
8/31/2011 10,736.60 10,748.06 10,389.32
9/30/2011 10,143.43 10,730.33 9,946.91
10/31/2011 10,748.84 10,930.92 10,421.56
11/30/2011 10,663.68 11,018.86 10,349.33
12/31/2011 10,676.32 11,025.66 10,330.72
1/31/2012 11,064.75 11,284.56 10,687.31
2/29/2012 11,193.45 11,242.17 10,855.12
3/31/2012 11,110.69 11,114.59 10,839.63
4/30/2012 11,246.50 11,349.91 10,871.32
5/31/2012 10,946.65 11,559.45 10,617.76
6/30/2012 11,180.03 11,491.59 10,793.65
7/31/2012 11,478.00 11,723.83 10,942.82
8/31/2012 11,485.41 11,681.58 11,091.99
9/30/2012 11,631.45 11,742.40 11,319.44
10/31/2012 11,585.19 11,854.51 11,383.88
11/30/2012 11,612.81 11,912.35 11,373.14
12/31/2012 11,630.22 11,826.52 11,506.28
1/31/2013 11,789.16 11,736.66 11,582.77
2/28/2013 11,751.94 11,738.84 11,528.14
3/31/2013 11,868.56 11,768.72 11,632.76
4/30/2013 12,013.20 11,881.22 11,720.72
5/31/2013 11,598.17 11,325.88 11,478.82
6/30/2013 11,191.33 10,899.14 11,123.54
7/31/2013 11,347.45 10,973.23 11,389.18
8/31/2013 11,165.99 10,809.84 11,245.29
9/30/2013 11,357.40 10,968.86 11,407.26
10/31/2013 11,552.32 11,032.45 11,607.58
11/30/2013 11,430.84 10,897.41 11,485.16
12/31/2013 11,385.95 10,731.46 11,478.47
1/31/2014 11,425.36 10,964.59 11,377.49
2/28/2014 11,721.25 11,017.63 11,714.10
3/31/2014 11,787.72 10,968.53 11,780.72
4/30/2014 11,989.24 11,128.79 11,927.42
5/31/2014 12,166.21 11,379.12 12,051.55
6/30/2014 12,277.22 11,413.39 12,310.92
7/31/2014 12,179.82 11,425.39 12,197.35
8/31/2014 12,320.49 11,488.23 12,333.63
9/30/2014 11,851.27 11,179.32 11,826.12
10/31/2014 12,071.96 11,288.29 11,848.93
11/30/2014 12,061.80 11,322.44 11,780.51
12/31/2014 11,831.66 11,207.08 11,531.41
1/31/2015 11,989.40 11,577.72 11,589.07
2/28/2015 12,041.07 11,427.00 11,692.85
3/31/2015 11,885.55 11,371.44 11,473.76
4/30/2015 12,084.73 11,450.42 11,704.38
5/31/2015 11,936.27 11,345.28 11,577.54
6/30/2015 11,773.28 11,221.37 11,371.00
7/31/2015 11,619.98 11,255.91 11,174.15
8/31/2015 11,279.77 11,160.57 10,815.19
9/30/2015 11,158.87 11,084.49 10,676.24
10/31/2015 11,444.32 11,119.04 10,988.88
11/30/2015 11,266.58 11,109.39 10,826.77
12/31/2015 11,146.19 11,014.75 10,659.76
1/31/2016 11,048.03 11,184.14 10,497.00
2/29/2016 11,092.99 11,315.98 10,532.00
3/31/2016 11,632.27 11,528.76 11,047.00
4/30/2016 11,797.45 11,573.26 11,222.00
5/31/2016 11,757.34 11,485.92 11,176.00
6/30/2016 12,115.94 11,736.75 11,502.00
[END CHART]
Data from 10/31/10 to 6/30/16.*
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Real Return Fund Institutional Shares to the benchmark listed above (see
page 8 for the benchmark definition).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the index
does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Barclays U.S. Government Inflation-Linked Bond Index and
Real Return Composite Index is calculated from the end of the month, October 31,
2010, while the inception date of the Institutional Shares is October 18, 2010.
There may be a slight variation of performance numbers because of this
difference.
================================================================================
10 | USAA REAL RETURN FUND
================================================================================
o TOP 10 EQUITY HOLDINGS - 6/30/16 o
(% of Net Assets)
iShares Core Dividend Growth ETF* ............................................ 10.1%
Vanguard REIT ETF* ........................................................... 9.8%
Powershares DB Optimum Yield ETF* ............................................ 6.2%
United States Commodity Index Fund ........................................... 5.5%
Proshares S&P 500 Aristocrats ETF ............................................ 5.4%
iShares TIPS Bond ETF* ....................................................... 5.3%
iShares Core MSCI Emerging Markets ETF* ...................................... 5.1%
First Trust Global Tactical Commodity
Strategy Fund ............................................................ 1.4%
PowerShares FTSE RAFI Emerging Markets
Portfolio ETF* ........................................................... 1.1%
WisdomTree India Earnings Fund* .............................................. 1.0%
*The Fund may rely on certain Securities and Exchange Commission (SEC) exemptive
orders or rules that permit funds meeting various conditions to invest in an
exchange-traded fund (ETF) in amounts exceeding limits set forth in the
Investment Company Act of 1940, as amended, that would otherwise be applicable.
================================================================================
INVESTMENT OVERVIEW | 11
================================================================================
o TOP 10 BOND HOLDINGS - 6/30/16 o
(% of Net Assets)
U.S. Treasury Inflation-Indexed Note 0.63%, 7/15/2021 ......................... 3.5%
U.S. Treasury Inflation-Indexed Note 0.13%, 1/15/2023 ......................... 3.4%
U.S. Treasury Inflation-Indexed Note 1.25%, 7/15/2020 ......................... 2.4%
U.S. Treasury Inflation-Indexed Note 2.50%, 1/15/2029 ......................... 2.2%
U.S. Treasury Inflation-Indexed Note 1.13%, 1/15/2021 ......................... 2.1%
U.S. Treasury Inflation-Indexed Note 0.13%, 1/15/2022 ......................... 2.0%
Enterprise Products Operating, LLC 7.03%, 1/15/2068 ........................... 2.09%
U.S. Treasury Inflation-Indexed Note 0.13%, 7/15/2022 ......................... 1.6%
U.S. Treasury Inflation-Indexed Note 2.13%, 2/15/2040 ......................... 1.5%
U.S. Treasury Inflation-Indexed Note 2.13%, 2/15/2041 ......................... 1.5%
o TOP 10 INDUSTRIES - 6/30/16 o
(% of Net Assets)
Oil & Gas Storage & Transportation ............................................ 3.1%
Property & Casualty Insurance ................................................. 1.9%
Asset-Backed Financing ........................................................ 1.0%
Metal & Glass Containers ...................................................... 0.9%
Specialty Stores .............................................................. 0.8%
Commercial Mortgage-Backed Securities ......................................... 0.7%
Trading Companies & Distributors .............................................. 0.7%
Oil & Gas Exploration & Production ............................................ 0.7%
Thrifts & Mortgage Finance .................................................... 0.6%
Health Care Facilities ........................................................ 0.5%
You will find a complete list of securities that the Fund owns on pages 13-17.
================================================================================
12 | USAA REAL RETURN FUND
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
U.S. EQUITY SECURITIES (21.0%)
EXCHANGE-TRADED FUNDS (15.7%)
3,600 Energy Select Sector SPDR ETF $ 246
399,600 iShares Core Dividend Growth ETF 10,897
107,600 Proshares S&P 500 Aristocrats ETF 5,855
--------
Total Exchange-Traded Funds (cost: $15,730) 16,998
--------
FIXED-INCOME EXCHANGE-TRADED FUNDS (5.3%)
48,600 iShares TIPS Bond ETF(a) (cost: $5,504) 5,670
--------
Total U.S. Equity Securities (cost: $21,234) 22,668
--------
INTERNATIONAL EQUITY SECURITIES (10.8%)
EXCHANGE-TRADED FUNDS (10.3%)
132,500 iShares Core MSCI Emerging Markets ETF 5,542
9,900 iShares MSCI Emerging Markets Minimum Volatility ETF 511
12,939 iShares MSCI Turkey ETF 513
70,600 PowerShares FTSE RAFI Emerging Markets Portfolio ETF 1,147
8,400 SPDR S&P China ETF 587
13,100 SPDR S&P Emerging Markets SmallCap ETF 516
18,004 WisdomTree Emerging Markets High Dividend Fund(a) 638
15,400 WisdomTree Emerging Markets SmallCap Dividend Fund 597
52,900 WisdomTree India Earnings Fund 1,068
--------
Total Exchange-Traded Funds (cost: $12,125) 11,119
--------
FIXED-INCOME EXCHANGE-TRADED FUNDS (0.5%)
14,900 WisdomTree Emerging Markets Local Debt Fund (cost: $697) 557
--------
Total International Equity Securities (cost: $12,822) 11,676
--------
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES (15.1%)
EXCHANGE-TRADED FUNDS (15.1%)
71,500 First Trust Global Tactical Commodity Strategy Fund* 1,548
24,500 iShares Gold Trust* 313
25,200 iShares Silver Trust* 450
372,900 Powershares DB Optimum Yield ETF* 6,653
27,000 SPDR S&P Oil & Gas Exploration & Production ETF 940
138,200 United States Commodity Index Fund* 5,969
================================================================================
PORTFOLIO OF INVESTMENTS | 13
================================================================================
------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------
10,700 VanEck Vectors Gold Miners ETF $ 296
3,500 VanEck Vectors Oil Services ETF 102
--------
Total Exchange-Traded Funds (cost: $15,115) 16,271
--------
Total Precious Metals and Commodity-Related Securities (cost: $15,115) 16,271
--------
GLOBAL REAL ESTATE EQUITY SECURITIES (9.8%)
EXCHANGE-TRADED FUNDS (9.8%)
119,400 Vanguard REIT ETF (cost: $8,595) 10,587
--------
------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
------------------------------------------------------------------------------------------------------------------
BONDS (42.5%)
CORPORATE OBLIGATIONS (10.7%)
CONSUMER DISCRETIONARY (0.8%)
-----------------------------
SPECIALTY STORES (0.8%)
$ 859 Harbor Freight Tools USA, Inc.(b) 4.75% 7/26/2019 861
--------
ENERGY (3.8%)
-------------
OIL & GAS EXPLORATION & PRODUCTION (0.7%)
755 QEP Resources, Inc. 6.80 3/01/2020 764
--------
OIL & GAS STORAGE & TRANSPORTATION (3.1%)
1,000 Energy Transfer Partners, LP 3.65(c) 11/01/2066 605
2,000 Enterprise Products Operating, LLC 7.03 1/15/2068 2,108
54 NGPL PipeCo, LLC(b) 6.75 9/15/2017 54
560 Targa Resources Partners, LP 6.88 2/01/2021 573
--------
3,340
--------
Total Energy 4,104
--------
FINANCIALS (2.8%)
-----------------
MULTI-LINE INSURANCE (0.3%)
1,000 Genworth Holdings, Inc. 6.15 11/15/2066 340
--------
PROPERTY & CASUALTY INSURANCE (1.9%)
1,000 Chubb Corp. 6.38 3/29/2067 872
1,564 Oil Insurance Ltd.(d) 3.61(c) -(e) 1,236
--------
2,108
--------
================================================================================
14 | USAA REAL RETURN FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE (0.6%)
$ 793 Walter Investment Management Corp.(b) 4.75% 12/19/2020 $ 638
--------
Total Financials 3,086
--------
HEALTH CARE (0.9%)
------------------
HEALTH CARE FACILITIES (0.5%)
500 HCA, Inc. 5.38 2/01/2025 513
--------
PHARMACEUTICALS (0.4%)
500 Valeant Pharmaceuticals International, Inc.(d) 6.75 8/15/2021 429
--------
Total Health Care 942
--------
INDUSTRIALS (0.7%)
------------------
TRADING COMPANIES & DISTRIBUTORS (0.7%)
1,000 ILFC E-Capital Trust I(d) 3.98(c) 12/21/2065 787
--------
MATERIALS (0.9%)
----------------
METAL & GLASS CONTAINERS (0.9%)
933 Anchor Glass Container Corp.(b) 4.75 7/01/2022 932
--------
TELECOMMUNICATION SERVICES (0.4%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.4%)
500 Frontier Communications Corp. 7.88 1/15/2027 418
--------
UTILITIES (0.4%)
----------------
MULTI-UTILITIES (0.4%)
500 Puget Sound Energy, Inc. 6.97 6/01/2067 426
--------
Total Corporate Obligations (cost: $12,935) 11,556
--------
EURODOLLAR AND YANKEE OBLIGATIONS (0.5%)
MATERIALS (0.5%)
----------------
GOLD (0.5%)
500 Eldorado Gold Corp.(d) (cost: $500) 6.13 12/15/2020 503
--------
ASSET-BACKED SECURITIES (1.0%)
FINANCIALS (1.0%)
-----------------
ASSET-BACKED FINANCING (1.0%)
1,081 Trip Rail Master Funding, LLC(d) (cost: $1,117) 2.94(c) 7/15/2041 1,087
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (0.7%)
FINANCIALS (0.7%)
-----------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (0.7%)
$ 403 Merrill Lynch Mortgage Trust 5.74% 5/12/2039 $ 400
396 Morgan Stanley Capital I Trust 5.59 3/12/2044 396
--------
796
--------
Total Financials 796
--------
Total Commercial Mortgage Securities (cost: $799) 796
--------
U.S. TREASURY SECURITIES (29.6%)
INFLATION-INDEXED NOTES (29.6%)
990 1.88%, 7/15/2019 1,072
1,483 1.38%, 1/15/2020 1,585
2,375 1.25%, 7/15/2020 2,554
2,103 1.13%, 1/15/2021 2,251
3,634 0.63%, 7/15/2021 3,829
2,107 0.13%, 1/15/2022 2,149
1,659 0.13%, 7/15/2022 1,699
3,644 0.13%, 1/15/2023 3,697
1,028 0.38%, 7/15/2023 1,064
1,047 0.63%, 1/15/2024 1,097
1,470 0.13%, 7/15/2024 1,486
1,909 2.50%, 1/15/2029 2,422
1,217 2.13%, 2/15/2040 1,595
1,202 2.13%, 2/15/2041 1,588
161 0.75%, 2/15/2042 162
1,582 0.63%, 2/15/2043 1,543
1,026 1.38%, 2/15/2044 1,189
1,016 0.75%, 2/15/2045 1,023
--------
32,005
--------
Total U.S. Treasury Securities (cost: $30,581) 32,005
--------
Total Bonds (cost: $45,932) 45,947
--------
------------------------------------------------------------------------------------------------------------------
NUMBER OF
SHARES
------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.3%)
MONEY MARKET FUNDS (1.3%)
1,375,027 State Street Institutional Liquid Reserves Fund
Premier Class, 0.47%(a),(f),(g) (cost: $1,375) 1,375
--------
TOTAL INVESTMENTS (COST: $105,073) $108,524
========
================================================================================
16 | USAA REAL RETURN FUND
================================================================================
------------------------------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF APPRECIATION/
CONTRACTS EXPIRATION CONTRACT (DEPRECIATION)
LONG/(SHORT) SECURITY DATE VALUE (000) (000)
------------------------------------------------------------------------------------------------------------------
FUTURES (2.4%)
15 U.S. Treasury Bond 09/21/2016 $2,585 $90
====== ===
------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------
ASSETS LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------
U.S. Equity Securities:
Exchange-Traded Funds $16,998 $ - $- $ 16,998
Fixed-Income Exchange-Traded Funds 5,670 - - 5,670
International Equity Securities:
Exchange-Traded Funds 11,119 - - 11,119
Fixed-Income Exchange-Traded Funds 557 - - 557
Precious Metals and Commodity-Related
Securities:
Exchange-Traded Funds 16,271 - - 16,271
Global Real Estate Equity Securities:
Exchange-Traded Funds 10,587 - - 10,587
Bonds:
Corporate Obligations - 11,556 - 11,556
Eurodollar and Yankee Obligations - 503 - 503
Asset-Backed Securities - 1,087 - 1,087
Commercial Mortgage Securities - 796 - 796
U.S. Treasury Securities 32,005 - - 32,005
Money Market Instruments:
Money Market Funds 1,375 - - 1,375
Futures(1) 90 - - 90
------------------------------------------------------------------------------------------------------------------
Total $94,672 $13,942 $- $108,614
------------------------------------------------------------------------------------------------------------------
(1)Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
For the period of January 1, 2016, through June 30, 2016, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers in and transfers out as of the beginning of the reporting period in
which the event or circumstance that caused the transfer occurred.
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net
assets. Investments in foreign securities were 12.3% of net assets at June
30, 2016.
The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940, as amended, that would
otherwise be applicable.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee
obligations are dollar-denominated instruments that are issued by foreign
issuers in the U.S. capital markets.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets. Commercial
================================================================================
18 | USAA REAL RETURN FUND
================================================================================
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates of
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages pay down.
U.S. TREASURY INFLATION-INDEXED NOTES - Designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
REIT Real estate investment trust
TIPS U.S. Treasury Inflation-Protected Securities
o SPECIFIC NOTES
(a) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at June 30, 2016.
(b) Senior loan (loan) - is not registered under the Securities Act of 1933.
The loan contains certain restrictions on resale and cannot be sold
publicly. The stated interest rate represents the weighted average
interest rate of all contracts within the senior loan facility. The
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 19
================================================================================
interest rate is adjusted periodically, and the rate disclosed
represents the current rate at June 30, 2016. The weighted average life
of the loan is likely to be shorter than the stated final maturity date
due to mandatory or optional prepayments. The loan is deemed liquid by
USAA Asset Management Company (the Manager), under liquidity guidelines
approved by the USAA Mutual Funds Trust's Board of Trustees (the
Board), unless otherwise noted as illiquid.
(c) Variable-rate or floating-rate security - interest rate is adjusted
periodically. The interest rate disclosed represents the rate at June
30, 2016.
(d) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by Rule
144A, and as such has been deemed liquid by the Manager under liquidity
guidelines approved by the Board, unless otherwise noted as illiquid.
(e) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(f) Rate represents the money market fund annualized seven-day yield at June
30, 2016.
(g) Security with a value of $491,000 is segregated as collateral for
initial margin requirements on open futures contracts.
* Non-income-producing security.
See accompanying notes to financial statements
================================================================================
20 | USAA REAL RETURN FUND
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $105,073) $108,524
Cash denominated in foreign currencies (identified cost of $47) 45
Receivables:
Capital shares sold 69
USAA Asset Management Company (Note 6C) 39
Interest 315
Securities sold 275
Other 1
Variation margin on futures contracts 90
--------
Total assets 109,358
--------
LIABILITIES
Payables:
Capital shares redeemed 1,291
Bank overdraft 7
Accrued management fees 44
Accrued transfer agent's fees 5
Other accrued expenses and payables 44
--------
Total liabilities 1,391
--------
Net assets applicable to capital shares outstanding $107,967
========
NET ASSETS CONSIST OF:
Paid-in capital $154,154
Accumulated undistributed net investment income 34
Accumulated net realized loss on investments and futures transactions (49,760)
Net unrealized appreciation of investments and futures contracts 3,541
Net unrealized depreciation of foreign currency translations (2)
--------
Net assets applicable to capital shares outstanding $107,967
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $26,433/2,682 shares outstanding) $ 9.85
========
Institutional Shares (net assets of $81,534/8,270 shares outstanding) $ 9.86
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 21
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 107
Interest 829
-------
Total income 936
-------
EXPENSES
Management fees 419
Administration and servicing fees:
Fund Shares 24
Institutional Shares 68
Transfer agent's fees:
Fund Shares 68
Institutional Shares 68
Custody and accounting fees:
Fund Shares 16
Institutional Shares 57
Postage:
Fund Shares 3
Shareholder reporting fees:
Fund Shares 5
Institutional Shares 4
Trustees' fees 14
Registration fees:
Fund Shares 8
Institutional Shares 24
Professional fees 39
Other 8
-------
Total expenses 825
-------
Expenses reimbursed:
Fund Shares (63)
Institutional Shares (26)
-------
Net expenses 736
-------
NET INVESTMENT INCOME 200
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions (30,581)
Affiliated transactions (Note 8) (56)
Foreign currency transactions (15)
Futures transactions 511
Change in net unrealized appreciation/(depreciation) of:
Investments 32,753
Foreign currency translations 2
Futures contracts 93
-------
Net realized and unrealized gain 2,707
-------
Increase in net assets resulting from operations $ 2,907
=======
See accompanying notes to financial statements.
================================================================================
22 | USAA REAL RETURN FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31,
2015
---------------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
---------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 200 $ 5,442
Net realized loss on investments (30,637) (21,573)
Net realized loss on foreign currency transactions (15) (317)
Net realized loss on options - (34)
Net realized gain on futures transactions 511 220
Change in net unrealized appreciation/(depreciation) of:
Investments 32,753 (17,779)
Foreign currency translations 2 78
Options - 1
Futures contracts 93 (3)
------------------------
Increase (decrease) in net assets resulting from operations 2,907 (33,965)
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares (35) (587)
Institutional Shares (106) (3,238)
------------------------
Distributions to shareholders (141) (3,825)
------------------------
NET DECREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Fund Shares (43,582) (2,921)
Institutional Shares (195,984) (75,323)
------------------------
Total net decrease in net assets from
capital share transactions (239,566) (78,244)
------------------------
Net decrease in net assets (236,800) (116,034)
NET ASSETS
Beginning of period 344,767 460,801
------------------------
End of period $ 107,967 $ 344,767
========================
Accumulated undistributed (overdistribution of)
net investment income:
End of period $ 34 $ (25)
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 23
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Real Return Fund (the Fund), which
is classified as nondiversified under the 1940 Act. The Fund's investment
objective is to seek a total return that exceeds the rate of inflation over an
economic cycle.
As a nondiversified fund, the Fund may invest a greater percentage of its assets
in a single issuer, such as a single stock or bond. Because a relatively high
percentage of the Fund's total assets may be invested in the securities of a
single issuer or a limited number of issuers, the securities of the Fund may be
more sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused investment
strategy may increase the volatility of the Fund's investment results because
the Fund may be more susceptible to risk associated with a single issuer or
economic, political, or regulatory event than a diversified fund.
The Fund consists of two classes of shares: Real Return Fund Shares (Fund
Shares) and Real Return Fund Institutional Shares (Institutional Shares). Each
class of shares has equal rights to assets and earnings, except that each class
bears certain class-related expenses specific to the particular class. These
expenses include administration and servicing fees, transfer agent fees,
postage, shareholder reporting fees, and certain registration and custodian
fees. Expenses not attributable to a specific class, income, and realized gains
or losses on investments are allocated to each class of shares based on each
================================================================================
24 | USAA REAL RETURN FUND
================================================================================
class' relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to both classes. The Institutional Shares are available for investment through a
USAA discretionary managed account program, and certain advisory programs
sponsored by financial intermediaries, such as brokerage firms, investment
advisors, financial planners, third-party administrators, and insurance
companies. Institutional Shares also are available to institutional investors,
which include retirement plans, endowments, foundations, and bank trusts, as
well as other persons or legal entities that the Fund may approve from time to
time, or for purchase by a USAA fund participating in a fund-of-funds investment
strategy (USAA fund-of-funds).
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures, which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of securities
as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used by
the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures during
the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and USAA Asset Management Company
(the Manager), an affiliate of the Fund. Among other things, these monthly
meetings include a review and analysis of back testing reports, pricing
service quotation comparisons, illiquid securities and fair value
determinations, pricing movements, and daily stale price monitoring.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 25
================================================================================
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as set
forth below:
1. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or the
over-the-counter markets, are valued at the last sales price or official
closing price on the exchange or primary market on which they trade.
Equity securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sales price, or the most recently
determined official closing price calculated according to local market
convention, available at the time the Fund is valued. If no last sale or
official closing price is reported or available, the average of the bid
and asked prices generally is used. Actively traded equity securities
listed on a domestic exchange generally are categorized in Level 1 of the
fair value hierarchy. Certain preferred and equity securities traded in
inactive markets generally are categorized in Level 2 of the fair value
hierarchy.
2. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the foreign
markets may be closed. Therefore, the calculation of the Fund's net asset
value (NAV) may not take place at the same time the prices of certain
foreign securities held by the Fund are determined. In many cases, events
affecting the values of foreign securities that occur between the time of
their last quoted sales or official closing prices and the close of normal
trading on the NYSE on a day the Fund's NAV is calculated will not need to
be reflected in the value of the Fund's foreign securities. However, the
Manager will monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Committee will
consider such available information that it deems relevant and will
determine a fair value for the affected foreign securities in accordance
with valuation procedures. In addition, information from an external
vendor or other sources may be used to adjust the foreign market closing
prices of foreign equity securities to reflect what the Committee believes
to be the fair value of the securities as of the close of the NYSE. Fair
valuation of
================================================================================
26 | USAA REAL RETURN FUND
================================================================================
affected foreign equity securities may occur frequently based on events
that occur on a fairly regular basis (such as U.S. market movements) are
significant and are categorized in Level 2 of the fair value hierarchy.
3. Investments in open-end investment companies, commingled, or other funds,
other than ETFs, are valued at their NAV at the end of each business day
and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized cost
represents the fair value of such securities.
5. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board. The
Service uses an evaluated mean between quoted bid and asked prices or the
last sales price to value a security when, in the Service's judgment,
these prices are readily available and are representative of the
security's market value. For many securities, such prices are not readily
available. The Service generally prices those securities based on methods
which include consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications as to values
from dealers in securities; and general market conditions. Generally, debt
securities are categorized in Level 2 of the fair value hierarchy;
however, to the extent the valuations include significant unobservable
inputs, the securities would be categorized in Level 3.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the last sale price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the last sale price on the prior trading date if it
is within the spread between the closing bid and asked prices closest to
the last reported sale price.
8. Options are valued by a pricing service at the National Best Bid/Offer
(NBBO) composite price, which is derived from the best available bid and
asked prices in all participating options exchanges
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
================================================================================
determined to most closely reflect market value of the options at the time
of computation of the Fund's NAV.
9. Forward foreign currency contracts are valued on a daily basis using
forward foreign currency exchange rates obtained from an independent
pricing service and are categorized in Level 2 of the fair value
hierarchy.
10. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event has
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance with
valuation procedures approved by the Board. The effect of fair value
pricing is that securities may not be priced on the basis of quotations
from the primary market in which they are traded and the actual price
realized from the sale of a security may differ materially from the fair
value price. Valuing these securities at fair value is intended to cause
the Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation systems.
General factors considered in determining the fair value of securities
include fundamental analytical data, the nature and duration of any
restrictions on disposition of the securities, evaluation of credit
quality, and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
in active markets for identical securities.
================================================================================
28 | USAA REAL RETURN FUND
================================================================================
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Fund may buy, sell, and
enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio manager
to aid in achieving the Fund's investment objective. The Fund also may use
derivatives in circumstances where the portfolio manager believes they offer
an economical means of gaining exposure to a particular asset class or
securities market or to keep cash on hand to meet shareholder redemptions or
other needs while maintaining exposure to the market. With exchange-listed
futures contracts and options, counterparty credit risk to the Fund is
limited to the exchange's clearinghouse which, as counterparty to all
exchange-traded futures contracts and options, guarantees the transactions
against default from the actual counterparty to the transaction. The Fund's
derivative agreements held at June 30, 2016, did not include master netting
provisions.
FUTURES CONTRACTS - The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts to
gain exposure to, or hedge against, changes in the value of equities,
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price
on a specified date. Upon entering into such contracts, the Fund is required
to deposit with the broker in either cash or securities an initial margin in
an amount equal to a certain percentage of the contract
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
amount. Subsequent payments (variation margin) are made or received by the
Fund each day, depending on the daily fluctuations in the value of the
contract, and are recorded for financial statement purposes as unrealized
gains or losses. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. Upon entering
into such contracts, the Fund bears the risk of interest or exchange rates or
securities prices moving unexpectedly in an unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2016*
(IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ASSETS AND ASSETS AND
ACCOUNTED FOR AS LIABILITIES LIABILITIES
HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
-------------------------------------------------------------------------------------------------
Interest rate contracts Net unrealized $90** - $-
appreciation of
investments and
futures contracts
-------------------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2016, see the Portfolio of
Investments, which also is indicative of activity for the six-month
period ended June 30, 2016.
** Includes cumulative appreciation/(depreciation) of futures as reported on
the Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2016 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED APPRECIATION/
ACCOUNTED FOR AS STATEMENT OF GAIN (LOSS) (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
-------------------------------------------------------------------------------------------------
Interest rate contracts Net realized gain (loss) on $511 $93
Futures transactions/
Change in net unrealized
appreciation/(depreciation)
of Futures contracts
-------------------------------------------------------------------------------------------------
================================================================================
30 | USAA REAL RETURN FUND
================================================================================
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated investment
companies and to distribute substantially all of its income to its
shareholders. Therefore, no federal income tax provision is required.
E. INVESTMENTS IN SECURITIES - Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are computed on the identified cost basis.
Dividend income, less foreign taxes, if any, is recorded on the ex-dividend
date. If the ex-dividend date has passed, certain dividends from foreign
securities are recorded upon notification. Interest income is recorded daily
on the accrual basis. Discounts and premiums are amortized over the life of
the respective securities, using the effective yield method for long-term
securities and the straight-line method for short-term securities. Foreign
income and capital gains on some foreign securities may be subject to foreign
taxes, which are accrued as applicable, as a reduction to such income and
realized gains. These foreign taxes have been provided for in accordance with
the understanding of the applicable countries' tax rules and rates.
F. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective dates
of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations
are included with the net realized and unrealized gain or loss from
investments.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts received. At the
end of the Fund's fiscal year, these net realized foreign currency
gains/losses are reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities, other than investments in
securities, resulting from changes in the exchange rate.
G. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans 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 receives a commitment fee for delayed draws on loans. The Fund
maintains segregated assets with a market value equal to or greater than the
amount of its purchase commitments. The purchase of securities on a
delayed-delivery or when-issued basis and delayed-draw loan commitments may
increase the volatility of the Fund's NAV to the extent that the Fund makes
such purchases and commitments while remaining substantially fully invested.
H. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's custodian and
other banks utilized by the Fund for cash management purposes, realized
credits, if any, generated from cash balances in the Fund's bank accounts may
be used to directly reduce the Fund's expenses. For the six-month period
ended June 30, 2016, there were no custodian and other bank credits.
I. INDEMNIFICATIONS - Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out
================================================================================
32 | USAA REAL RETURN FUND
================================================================================
of the performance of their duties to the Trust. In addition, in the normal
course of business, the Trust enters into contracts that contain a variety
of representations and warranties that provide general indemnifications.
The Trust's maximum exposure under these arrangements is unknown, as this
would involve future claims that may be made against the Trust that have
not yet occurred. However, the Trust expects the risk of loss to be remote.
J. USE OF ESTIMATES - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of less than $500, which represents 0.2% of the total fees paid to CAPCO by the
USAA Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the succeeding
fiscal year or as otherwise required to avoid the payment of federal taxes.
At December 31, 2015, the Fund had net capital loss carryforwards of
$28,625,000, for federal income tax purposes as shown in the table below. It is
unlikely that the Board will authorize a distribution of capital gains realized
in the future until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
---------------------------------
TAX CHARACTER
---------------------------------
(NO EXPIRATION) BALANCE
--------------- -----------
Short-Term $ 9,652,000
Long-Term 18,973,000
-----------
Total $28,625,000
===========
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the three preceding fiscal reporting
year ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$199,882,000 and $429,159,000, respectively.
================================================================================
34 | USAA REAL RETURN FUND
================================================================================
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $6,904,000 and $3,453,000, respectively, resulting in net unrealized
appreciation of $3,451,000.
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share
transactions for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31, 2015
-----------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------
FUND SHARES:
Shares sold 308 $ 2,821 2,132 $ 20,753
Shares issued from reinvested
dividends 4 34 62 580
Shares redeemed (5,227) (46,437) (2,487) (24,254)
-----------------------------------------------
Net decrease from capital share
transactions (4,915) $ (43,582) (293) $ (2,921)
===============================================
INSTITUTIONAL SHARES:
Shares sold 5,567 $ 49,458 5,692 $ 55,635
Shares issued from reinvested
dividends 11 106 343 3,238
Shares redeemed (27,410) (245,548) (14,137) (134,196)
-----------------------------------------------
Net decrease from capital share
transactions (21,832) $(195,984) (8,102) $ (75,323)
===============================================
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to the
Fund pursuant to an Advisory Agreement. Under this agreement, the Manager is
responsible for managing the business and affairs of the Fund and for
directly managing the day-to-day investment of the Fund's assets, subject to
the authority of and supervision by the Board. The Manager also is authorized
to select (with approval of the Board and without shareholder approval) one
or more subadvisers to manage the day-to-day investment of a portion of the
Fund's assets. For the six-month period ended June 30, 2016, the Fund had no
subadviser(s).
The Fund's management fees are accrued daily and paid monthly at an
annualized rate of 0.50% of the Fund's average net assets. For the six-month
period ended June 30, 2016, the Fund incurred management fees, paid or
payable to the Manager, of $419,000.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and 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 average net assets of the Fund Shares and 0.10% of average net
assets of the Institutional Shares. For the six-month period ended June 30,
2016, the Fund Shares and Institutional Shares incurred administration and
servicing fees, paid or payable to the Manager, of $24,000 and $68,000,
respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For the
six-month period ended June 30, 2016, the Fund reimbursed the Manager $2,000
for these compliance and legal services. These expenses are included in the
professional fees on the Fund's Statement of Operations.
C. EXPENSE LIMITATION - Effective January 1, 2016, the Manager agreed, through
May 1, 2017, to limit the total annual operating expenses of
================================================================================
36 | USAA REAL RETURN FUND
================================================================================
the Fund Shares and the Institutional Shares to 1.00% and 0.90%,
respectively, of their average net assets, excluding extraordinary expenses
and before reductions of any expenses paid indirectly, and will reimburse
the Fund Shares and Institutional Shares for all expenses in excess of
those amounts. This expense limitation arrangement may not be changed or
terminated through May 1, 2017, without approval of the Board, and may be
changed or terminated by the Manager at any time after that date. For the
six-month period ended June 30, 2016, the Fund incurred reimbursable
expenses from the Manager for the Fund Shares and the Institutional Shares
of $63,000 and $26,000, respectively, of which $39,000 was receivable from
the Manager.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the Manager, provides transfer agent
services to the Fund Shares based on an annual charge of $23 per shareholder
account plus out-of-pocket expenses. SAS pays a portion of these fees to
certain intermediaries for the administration and servicing of accounts that
are held with such intermediaries. Transfer agent's fees for Institutional
Shares are paid monthly based on a fee accrued daily at an annualized rate of
0.10% of the Institutional Shares' average net assets, plus out-of-pocket
expenses. For the six-month period ended June 30, 2016, the Fund Shares and
Institutional Shares incurred transfer agent's fees, paid or payable to SAS,
of $68,000 each.
E. UNDERWRITING SERVICES - USAA Investment Management Company provides exclusive
underwriting and distribution of the Fund's shares on a continuing
best-efforts basis and receives no fee or other compensation for these
services.
(7) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA funds and
is one of 20 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control. As of June 30, 2016,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
the USAA fund-of-funds owned the following percentages of the total outstanding
shares of the Fund:
AFFILIATED USAA FUND OWNERSHIP %
--------------------------------------------------------------------------------
Target Retirement Income 6.8
Target Retirement 2020 8.7
Target Retirement 2030 10.5
Target Retirement 2040 5.1
Target Retirement 2050 1.8
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
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 six-month period ended June 30, 2016, in accordance with affiliated
transaction procedures approved by the Board, purchases and sales of security
transactions were executed between the Fund and the following affiliated USAA
funds at the then-current market price with no brokerage commissions incurred.
NET REALIZED
COST TO GAIN (LOSS) TO
SELLER PURCHASER PURCHASER SELLER
----------------------------------------------------------------------------------
Real Return Managed Allocation $478,000 $ (8,000)
Real Return Cornerstone Aggressive 93,000 (48,000)
================================================================================
38 | USAA REAL RETURN FUND
================================================================================
(9) FINANCIAL HIGHLIGHTS - FUND SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
-------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.14 $ 9.99 $ 10.22 $ 10.52 $ 9.84 $ 10.02
------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .01(a) .07 .20 .22 .38 .34
Net realized and
unrealized gain (loss) .71(a) (.84) (.17) (.27) .71 (.12)
------------------------------------------------------------------------
Total from investment
operations .72(a) (.77) .03 (.05) 1.09 .22
------------------------------------------------------------------------
Less distributions from:
Net investment income (.01) (.08) (.20) (.22) (.32) (.34)
Realized capital gains - - (.06) (.03) (.09) (.06)
------------------------------------------------------------------------
Total distributions (.01) (.08) (.26) (.25) (.41) (.40)
------------------------------------------------------------------------
Net asset value at
end of period $ 9.85 $ 9.14 $ 9.99 $ 10.22 $ 10.52 $ 9.84
========================================================================
Total return (%)* 7.91 (7.75) .27 (.44) 11.13 2.18
Net assets at end
of period (000) $26,433 $69,435 $78,826 $77,567 $70,209 $167,716
Ratios to average
net assets:**
Expenses (%)(c) 1.00(b),(e) 1.02 .94(d) .85 .85 .85
Expenses, excluding
reimbursements (%)(c) 1.40(b) 1.02 .99 1.22 1.51 1.48
Net investment income (%) .27(b) 1.10 1.84 2.24 3.14 3.50
Portfolio turnover (%) 119 35 24 41 24 24
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$31,876,000.
(a) Calculated using average shares. For the six-month period ended June 30,
2016, average shares were 3,494,000.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Prior to May 1, 2014, the Manager had voluntarily agreed to limit the annual
expenses of the Fund Shares to 0.85% of the Fund Shares' average net assets.
(e) Effective January 1, 2016, the Manager voluntarily agreed to limit the
annual expenses of the Fund Shares to 1.00% of the Fund Shares' average net
assets.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(9) FINANCIAL HIGHLIGHTS (CONTINUED) -
INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2016 2015 2014 2013 2012 2011
---------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.15 $ 10.00 $ 10.23 $ 10.53 $ 9.85 $ 10.03
---------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .01(a) .10 .22 .25 .32 .36
Net realized and
unrealized gain (loss) .71(a) (.85) (.17) (.28) .79 (.12)
---------------------------------------------------------------------------
Total from investment
operations .72(a) (.75) .05 (.03) 1.11 .24
---------------------------------------------------------------------------
Less distributions from:
Net investment income (.01) (.10) (.22) (.24) (.34) (.36)
Realized capital gains - - (.06) (.03) (.09) (.06)
---------------------------------------------------------------------------
Total distributions (.01) (.10) (.28) (.27) (.43) (.42)
---------------------------------------------------------------------------
Net asset value at
end of period $ 9.86 $ 9.15 $ 10.00 $ 10.23 $ 10.53 $ 9.85
===========================================================================
Total return (%)* 7.90 (7.56) .46 (.24) 11.38 2.38
Net assets at end
of period (000) $81,534 $275,332 $381,975 $334,673 $228,760 $46,694
Ratios to average
net assets:**
Expenses (%)(b) .86(c),(d) .82 .75(e) .65 .65 .65
Expenses, excluding
reimbursements (%)(b) .90(c) .82 .80 .81 .81 .76
Net investment income (%) .24(c) 1.33 2.02 2.43 3.58 3.71
Portfolio turnover (%) 119 35 24 41 24 24
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$134,527,000.
(a) Calculated using average shares. For the six-month period ended June 30,
2016, average shares were 15,227,000.
(b) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+) (.00%)(+) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Effective January 1, 2016, the Manager voluntarily agreed to limit the
annual expenses of the Institutional Shares to 0.90% of the Institutional
Shares' average net assets.
(e) Prior to May 1, 2014, the Manager had voluntarily agreed to limit the annual
expenses of the Institutional Shares to 0.65% of the Institutional Shares'
average net assets.
================================================================================
40 | USAA REAL RETURN FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through
June 30, 2016.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate
================================================================================
EXPENSE EXAMPLE | 41
================================================================================
of return of 5% per year before expenses, which is not the Fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
---------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,079.10 $5.17
Hypothetical
(5% return before expenses) 1,000.00 1,019.89 5.02
INSTITUTIONAL SHARES
Actual 1,000.00 1,079.00 4.45
Hypothetical
(5% return before expenses) 1,000.00 1,020.59 4.32
*Expenses are equal to the annualized expense ratio of 1.00% for Fund Shares and
0.86% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 182 days/366 days (to reflect the one-half-year period).
The Fund's actual ending account values are based on its actual total returns
of 7.91% for Fund Shares and 7.90% for Institutional Shares for the six-month
period of January 1, 2016, through June 30, 2016.
================================================================================
42 | USAA REAL RETURN FUND
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuance of the Advisory Agreement with respect
to the Fund. The Independent Trustees also reviewed the proposed continuance of
the Advisory Agreement with respect to the Fund in private sessions with
Independent Counsel at which no representatives of management were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered,
================================================================================
ADVISORY AGREEMENT(S) | 43
================================================================================
particular focus is given to information concerning Fund performance, fees and
total expenses as compared to comparable investment companies, and the Manager's
profitability with respect to the Fund. However, the Board noted that the
evaluation process with respect to the Manager is an ongoing one. In this
regard, the Board's and its committees' consideration of the Advisory Agreement
included certain information previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust.
The Board considered the Manager's management style and the performance of the
Manager's duties under the Advisory Agreement. The Board considered the level
and depth of knowledge of the Manager, including the professional experience and
qualifications of its senior and investment personnel, as well
================================================================================
44 | USAA REAL RETURN FUND
================================================================================
as current staffing levels. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution" was also considered. The
Manager's role in coordinating the activities of the Fund's other service
providers also was considered. The Board also considered the Manager's risk
management processes. The Board considered the Manager's financial condition and
that it had the financial wherewithal to continue to provide the same scope and
a high quality of services under the Advisory Agreement. In reviewing the
Advisory Agreement, the Board focused on the experience, resources, and
strengths of the Manager and its affiliates in managing the Fund, as well as the
other funds in the Trust. The Board also reviewed the compliance and
administrative services provided to the Fund by the Manager, including oversight
of the Fund's day-to-day operations and oversight of Fund accounting. The
Trustees, guided also by information obtained from their experiences as trustees
of the Trust, also focused on the quality of the Manager's compliance and
administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with front-end loads
and no sales loads), asset size, and expense components (the "expense group")
and (ii) a larger group of investment companies that includes all front-end load
and no-load retail open-end investment companies with the same investment
classification/objective as the Fund regardless of asset size, excluding
outliers (the "expense universe"). Among other data, the Board noted that the
Fund's management fee rate - which includes advisory and administrative services
- was below the median of its expense group and its expense universe. The data
indicated that the Fund's total expenses were below the median of its expense
group and its expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates, including the high
================================================================================
ADVISORY AGREEMENT(S) | 45
================================================================================
quality of services received by the Fund from the Manager. The Board also noted
the level and method of computing the management fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total returns with its Lipper index and with that of other mutual funds deemed
to be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was lower than the average of its performance universe and its
Lipper index for the one-, three-, and five-year periods ended December 31,
2015. The Board also noted that the Fund's percentile performance ranking was in
the bottom 50% of its performance universe for the one-, three-, and five-year
periods ended December 31, 2015. The Board took into account management's
discussion of the Fund's performance, including the impact of market conditions
on the Fund's performance relative to its peers.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the management fee. The information considered by the Board
included operating profit information for the Manager's business as a whole. The
Board also received and considered profitability information related to the
management revenues from the Fund. This information included a review of the
methodology used in the allocation of certain costs to the Fund. The Trustees
reviewed the profitability of the Manager's relationship with the Fund before
tax expenses. In reviewing the overall profitability of the management fee to
the Manager, the Board also considered the fact that affiliates provide
shareholder servicing and administrative services to the Fund for which they
receive compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other
================================================================================
46 | USAA REAL RETURN FUND
================================================================================
benefits from its association with the Fund. The Trustees recognized that the
Manager should be entitled to earn a reasonable level of profits in exchange for
the level of services it provides to the Fund and the entrepreneurial risk that
it assumes as Manager.
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussions of
the Fund's current advisory fee structure. The Board also considered the effect
of the Fund's growth and size on its performance and fees, noting that if the
Fund's assets increase over time, the Fund may realize other economies of scale
if assets increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
current Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is being
addressed; (iv) the Fund's current advisory expenses are reasonable in relation
to the services to be provided by the Manager; and (v) the Manager and its
affiliates' anticipated level of profitability from their relationship with the
Fund is reasonable in light of the nature and high quality of services provided
by the Manager and the type of fund. Based on its conclusions, the Board
determined that the continuation of the Advisory Agreement would be in the best
interests of the Fund and its shareholders.
================================================================================
ADVISORY AGREEMENT(S) | 47
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) in summary within the Statement of Additional
Information on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge (i) at
USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
94423-0816 (C)2016, USAA. All rights reserved.
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA FLEXIBLE INCOME FUND]
============================================================
SEMIANNUAL REPORT
USAA FLEXIBLE INCOME FUND
FUND SHARES o INSTITUTIONAL SHARES o ADVISER SHARES
JUNE 30, 2016
============================================================
================================================================================
================================================================================
PRESIDENT'S MESSAGE
"WE BELIEVE HOWEVER, THAT IT'S IMPORTANT FOR
INVESTORS TO STAY FOCUSED ON THEIR LONG-TERM [PHOTO OF BROOKS ENGLEHARDT]
OBJECTIVES, USING AN INVESTMENT PLAN THAT IS
BASED ON THEIR TIME HORIZON AND RISK TOLERANCE."
--------------------------------------------------------------------------------
AUGUST 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United Kingdom's
unexpected vote to exit the European Union ("Brexit") rattled the financial
markets. When all was said and done, the broad U.S. stock market finished in
positive territory--near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world's other large economies. That
said, the U.S. economy has yet to achieve "escape velocity," which is the
ability to grow at a sufficiently fast rate to escape a recession and return to
a normal rate of economic growth. Slower spending by households that are seeking
to reduce their debt has impeded the recovery. Also, while the American consumer
was expected to benefit from the huge drop in the price of oil, savings at the
pump were offset by higher costs in other parts of the economy, including
housing and health care. As a result, consumer spending has been lower than
expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed "sizable" economic uncertainties, the Fed backed off
its earlier guidance and did not raise interest rates during the reporting
period. Fed policymakers have indicated their desire to increase interest rates
to what they consider "normal levels," if only to have more policy tools at
their disposal in case of a recession. In our view, the Fed will likely remain
on a "lower for longer" track to avoid derailing U.S. economic growth.
Furthermore, the market volatility that was unleashed by the "Brexit" vote may
lead the Fed to scale back further its plans for interest rate increases this
year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500(R) Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
================================================================================
================================================================================
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted most
of what they can using these methods. Given the lack of revenue and earnings
growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors
generally favored safe-haven assets, such as gold and U.S. Treasuries. In
mid-June 2016, for example, strong demand drove 10-year U.S. Treasury
yields--which move in the opposite direction of prices--to their lowest level
since 2012. On July 5th, just two trading days after the end of the reporting
period, 10-year Treasury yields sank to a record low of 1.37% amid ongoing
uncertainty about the impact of "Brexit". Government bond yields around the
world also fell, reflecting persistent worries about weak global growth and
limits to what central banks can do to support their economies through monetary
stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it
is difficult to find investments that provide adequate compensation relative to
the risks assumed. We believe however, that it's important for investors to stay
focused on their long-term objectives, using an investment plan that is based on
their time horizon and risk tolerance. Market conditions are always in
fluctuation and time horizon matters--even price movements like those seen
during the reporting period have historically smoothed out in the long term. A
plan can also keep you from making hasty portfolio decisions based on market
turmoil, while giving you flexibility to take advantage of attractive
opportunities when they arise. If you are uneasy about the markets in general or
are concerned about having too much exposure to specific asset classes, please
give one of our financial advisors a call. They will help with your investment
allocations and discuss whether you are properly aligned with your long-term
goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
/S/ BROOKS ENGLEHARDT
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial
Advisors Inc., both registered broker-dealers, and affiliates. o Financial
planning services and financial advice provided by USAA Financial Planning
Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in
California, License # 0E36312), a registered investment adviser and insurance
agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a
registered broker dealer. o Standard & Poor's 500 Index and S&P are registered
trademarks. The S&P 500 Index is an unmanaged index of 500 stocks. The S&P 500
focuses on the large cap segment of the market, covering 75% of the U.S.
equities market. S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
================================================================================
================================================================================
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FUNDS' OBJECTIVE 1
MANAGERS' COMMENTARY ON THE FUND 2
INVESTMENT OVERVIEW 5
FINANCIAL INFORMATION
Portfolio of Investments 14
Notes to Portfolio of Investments 20
Financial Statements 24
Notes to Financial Statements 29
EXPENSE EXAMPLE 47
ADVISORY AGREEMENT(S) 50
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 ASSET 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)2016, USAA. All rights reserved.
208359-0816
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FUND OBJECTIVE
THE USAA FLEXIBLE INCOME FUND (THE FUND) SEEKS TOTAL RETURN THROUGH A
COMBINATION OF INCOME AND CAPITAL APPRECIATION.
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TYPES OF INVESTMENTS
Under normal market conditions, the Fund will invest in income-producing
securities that carry the most attractive opportunity for total return,
regardless of maturity or credit rating. The Fund may invest to a significant
extent in investment-grade U.S. bonds, high-yield bonds (commonly referred to as
"junk" bonds), bank loans, non-dollar-denominated bonds, and equity securities.
In addition, the Fund may invest up to 40% of its assets in foreign non-dollar-
denominated securities traded outside the United States, and may invest without
limitation in dollar-denominated securities of foreign issuers. Investments in
the securities of foreign issuers may include securities issued in emerging
markets as well as securities issued in established markets. The Fund also may
use various techniques, including, among others, entering into derivatives
transactions (such as futures and options), currency exchange contracts, and
swap agreements, to increase or decrease its exposure to changing security
prices, interest rates, commodity prices, or other factors that affect security
values.
For the purposes of this Fund, "bonds" may include corporate debt securities,
obligations of U.S., state, and local governments, their agencies and
instrumentalities, and mortgage- and asset-backed securities. For the purposes
of this Fund, "equity securities" may include common stock (which represents an
ownership interest in a corporation), preferred stock, trust or limited
partnership interests, rights and warrants to subscribe to or purchase such
securities, sponsored or unsponsored American depositary receipts (ADRs),
European depositary receipts (EDRs), global depositary receipts (GDRs),
exchange-traded funds (ETFs), and convertible securities.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's tax rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. Any
withholding election that you make will apply to any subsequent distribution
unless and until you change or revoke the election. If you wish to make a
withholding election or change or revoke a prior withholding election, call
(800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a
distribution, federal income tax will be withheld from the taxable portion of
your distribution at a rate of 10%. If you must pay estimated taxes, you may be
subject to estimated tax penalties if your estimated tax payments are not
sufficient and sufficient tax is not withheld from your distribution.
For more specific information, please consult your tax adviser.
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FUND OBJECTIVE | 1
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MANAGERS' COMMENTARY ON THE FUND
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[PHOTO OF ARNOLD J. ESPE] [PHOTO OF BRIAN W. SMITH]
ARNOLD J. ESPE, CFA BRIAN W. SMITH, CFA
USAA Asset USAA Asset
Management Company Management Company
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o WHAT WERE THE MARKET CONDITIONS DURING THE REPORTING PERIOD?
During the first six weeks of the reporting period ended June 30, 2016,
U.S. stock and corporate bond markets sold off as global growth concerns
triggered a rush to the perceived safety of longer-term U.S. Treasury
securities. As U.S. Treasury prices rose, interest rates (which move in the
opposite direction) fell. Investor risk aversion eased in mid-February
2016 and stocks and corporate bonds rallied, retracting earlier losses. The
rally continued into the second quarter of 2016, but wavered in early June
2016 as a weaker-than-expected U.S. jobs report raised questions about the
outlook for U.S. economic growth. In the final week of the reporting
period, the United Kingdom voted to exit the European Union ("Brexit"),
which disturbed the markets and drove a safe-haven flight to U.S.
Treasuries.
Riskier asset classes performed well during the reporting period overall.
Within the corporate bond market, high-yield bonds and lower-rated
investment-grade bonds outperformed higher-quality investment-grade issues.
U.S. stocks, while volatile, generated positive returns. Oil and commodity
prices improved, benefiting energy and metals and mining companies. Gold
prices, in particular, experienced a strong rally. Global currencies were
volatile, especially in the wake of the "Brexit" vote.
The Federal Reserve (the Fed) left interest rates unchanged during the
reporting period, largely due to concerns about global market volatility
Refer to page 7 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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2 | USAA FLEXIBLE INCOME FUND
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and U.S. economic conditions. Interest rates along the U.S. Treasury yield
curve decreased as investors began to anticipate fewer interest rate cuts
in 2016 and then, potentially, no interest rate cuts at all. The yield on a
30-year U.S. Treasury dropped from 3.02% on December 31, 2015, to 2.29% on
June 30, 2016.
o HOW DID THE USAA FLEXIBLE INCOME FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
The Fund has three share classes: Fund Shares, Institutional Shares, and
Adviser Shares. At the end of the reporting period, the Fund Shares,
Institutional Shares, and Adviser Shares had total returns of 14.73%,
14.86%, and 14.69%, respectively. This compares to a total return of 5.31%
for the Barclays U.S. Aggregate Bond Index (Index), and 5.68% for the
Barclays U.S. Universal Index*.
USAA Asset Management Company (the Manager) is the Fund's investment
adviser. The investment adviser provides day-to-day discretionary
management for the Fund's assets.
o WHAT KEY FACTORS AFFECTED THE FUND'S PERFORMANCE DURING THE REPORTING
PERIOD?
The Fund significantly outperformed its index, primarily on the strength
of its holdings of gold-mining stocks. Gold-mining stocks generally
doubled in price during the reporting period as gold prices rose from
$1,061 an ounce on December 31, 2015, to $1,322 on June 30, 2016. The
Fund's portfolio also benefited during the reporting period from its
investments in higher-yielding mortgage real estate investment trusts
(REITs), which performed well as interest rates fell. In addition, the
Fund's allocation to long-duration U.S. Treasuries bolstered results as
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the Barclays
U.S. Aggregate Bond Index as the Fund's broad-based securities market index
as it more closely represents the securities held by the Fund.
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MANAGERS' COMMENTARY ON THE FUND | 3
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the prices of these securities rose. Positions in high-yield corporate
bonds and lower-rated investment-grade corporate bonds added further to
performance. The Fund's gains were limited slightly by a short position in
Japanese yen currency futures; the Japanese yen appreciated versus the U.S.
dollar during the reporting period.
In managing the Fund, we maintained our income focus, concentrating our
purchases on income-producing securities that we believe may have the most
attractive opportunity for total return, regardless of maturity or credit
rating. We relied on our analysts, who use independent research, to help us
identify opportunities throughout the fixed-income universe.
Thank you for the opportunity to help you with your investment needs.
o As interest rates rise, existing bond prices generally fall; given the
historically low interest rate environment, risks associated with rising
interest rates may be heightened. o Gold is a volatile asset class and is
subject to additional risks, such as currency fluctuation, market
liquidity, political instability and increased price volatility. It may be
more volatile than other asset classes that diversify across many
industries and companies. o Non-investment grade securities are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as junk bonds since they represent a greater risk of default
than more credit worthy investment-grade securities. o Foreign investing is
subject to additional risks, such as currency fluctuations, market
illiquidity, and political instability.
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4 | USAA FLEXIBLE INCOME FUND
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INVESTMENT OVERVIEW
USAA FLEXIBLE INCOME FUND SHARES (FUND SHARES)
(Ticker Symbol: USFIX)
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6/30/16 12/31/15
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Net Assets $50.1 Million $55.8 Million
Net Asset Value Per Share $9.35 $8.31
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
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12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
14.73% 6.52% 3.53%
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EXPENSE RATIOS AS OF 12/31/15**
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BEFORE REIMBURSEMENT 1.00% AFTER REIMBURSEMENT 0.93%
(Includes acquired fund fees and expenses of 0.03%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
* Total returns for periods of less than one year are not annualized. This
return is cumulative.
** The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Fund Shares (exclusive of
commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.90% of
the Fund Shares' average net assets. This reimbursement arrangement may not be
changed or terminated during this time period without approval of the Fund's
Board of Trustees and may be changed or terminated by the Manager at any time
after May 1, 2017. If the total annual operating expense ratio of the Fund
Shares is lower than 0.90%, the Fund Shares will operate at the lower expense
ratio. These expense ratios may differ from the expense ratios disclosed in the
Financial Highlights, which excludes acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
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INVESTMENT OVERVIEW | 5
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS BARCLAYS U.S. USAA
U.S. UNIVERSAL AGGREGATE BOND FLEXIBLE INCOME
INDEX* INDEX FUND SHARES
7/31/2013 $10,000.00 $10,000.00 $10,000.00
8/31/2013 9,943.01 9,948.88 9,935.00
9/30/2013 10,041.95 10,043.07 9,977.00
10/31/2013 10,141.31 10,124.27 10,152.00
11/30/2013 10,108.47 10,086.36 10,111.00
12/31/2013 10,064.19 10,029.36 10,202.00
1/31/2014 10,197.67 10,177.55 10,384.00
2/28/2014 10,270.33 10,231.66 10,576.00
3/31/2014 10,260.80 10,214.23 10,589.00
4/30/2014 10,345.76 10,300.43 10,700.00
5/31/2014 10,470.33 10,417.70 10,838.00
6/30/2014 10,486.22 10,423.08 11,056.00
7/31/2014 10,453.59 10,396.94 11,046.00
8/31/2014 10,566.94 10,511.72 11,097.00
9/30/2014 10,483.04 10,440.34 10,961.00
10/31/2014 10,585.79 10,542.97 10,680.00
11/30/2014 10,641.94 10,617.76 10,754.00
12/31/2014 10,623.72 10,627.72 10,578.00
1/31/2015 10,825.83 10,850.55 10,738.00
2/28/2015 10,762.70 10,748.54 10,731.00
3/31/2015 10,807.19 10,798.44 10,591.00
4/30/2015 10,794.69 10,759.70 10,724.00
5/31/2015 10,775.83 10,733.78 10,715.00
6/30/2015 10,655.49 10,616.73 10,407.00
7/31/2015 10,717.57 10,690.54 10,336.00
8/31/2015 10,686.00 10,675.17 10,215.00
9/30/2015 10,727.74 10,747.38 10,031.00
10/31/2015 10,762.06 10,749.21 10,040.00
11/30/2015 10,722.87 10,720.79 9,905.00
12/31/2015 10,669.27 10,686.16 9,662.00
1/31/2016 10,787.06 10,833.18 9,746.00
2/29/2016 10,863.75 10,910.05 10,028.00
3/31/2016 10,996.80 11,010.12 10,273.00
4/30/2016 11,071.80 11,052.41 10,713.00
5/31/2016 11,080.49 11,055.24 10,642.00
6/30/2016 11,275.40 11,253.88 11,085.00
[END CHART]
Data from 7/31/13 to 6/30/16.**
See next page for benchmark definitions.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the Barclays U.S.
Aggregate Bond Index as the Fund's broad-based securities market index as it
more closely represents the securities held by the Fund.
**The performance of the Barclays U.S. Universal Index and Barclays U.S.
Aggregate Bond Index is calculated from the end of the month, July 31, 2013,
while the inception date of the Fund Shares is July 12, 2013. There may be a
slight variation of performance numbers because of this difference.
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6 | USAA FLEXIBLE INCOME FUND
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The graph on page 6 illustrates the comparison of a $10,000 hypothetical
investment in the USAA Flexible Income Fund Shares to the following benchmark:
o The Barclays U.S. Universal Index is an index that represents the union
of the U.S. Aggregate Bond Index, U.S. Corporate High Yield Index,
Investment Grade 144A Index, Eurodollar Index, U.S. Emerging Markets Index,
and the non-ERISA eligible portion of the CMBS Index. The index covers
USD-denominated, taxable bonds that are rated either investment grade or
high-yield.
o The unmanaged Barclays U.S. Aggregate Bond Index measures the U.S.
investment grade, fixed-rated taxable bond market, including government and
corporate securities, agency mortgage pass-through securities, asset-
backed securities, and commercial mortgage-backed securities that have
remaining maturities of more than one year.
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INVESTMENT OVERVIEW | 7
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USAA FLEXIBLE INCOME FUND INSTITUTIONAL SHARES (INSTITUTIONAL SHARES)
(Ticker Symbol: UIFIX)
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6/30/16 12/31/15
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Net Assets $29.6 Million $22.9 Million
Net Asset Value Per Share $9.37 $8.33
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
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12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
14.86% 6.84% 3.75%
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EXPENSE RATIOS AS OF 12/31/15**
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BEFORE REIMBURSEMENT 0.89% AFTER REIMBURSEMENT 0.83%
(Includes acquired fund fees and expenses of 0.03%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
** The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Institutional Shares (exclusive
of commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.80% of
the Institutional Shares' average net assets. This reimbursement arrangement may
not be changed or terminated during this time period without approval of the
Fund's Board of Trustees and may be changed or terminated by the Manager at any
time after May 1, 2017. If the total annual operating expense ratio of the
Institutional Shares is lower than 0.80%, the Institutional Shares will operate
at the lower expense ratio. These expense ratios may differ from the expense
ratios disclosed in the Financial Highlights, which excludes acquired fund fees
and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
The Institutional Shares are available for investment through a USAA
discretionary managed account program, and certain advisory programs sponsored
by financial intermediaries, such as brokerage firms, investment advisors,
financial planners, third-party administrators, and insurance companies.
Institutional Shares also are available to institutional investors, which
include retirement plans, endowments, foundations, and bank trusts, as well as
other persons or legal entities that the Fund may approve from time to time, or
for purchase by a USAA fund participating in a fund-of-funds investment strategy
(USAA fund-of-funds).
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8 | USAA FLEXIBLE INCOME FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS BARCLAYS USAA
U.S. UNIVERSAL U.S. AGGREGATE BOND FLEXIBLE INCOME FUND
INDEX* INDEX INSTITUTIONAL SHARES
7/31/2013 $10,000.00 $10,000.00 $10,000.00
8/31/2013 9,943.01 9,948.88 9,937.00
9/30/2013 10,041.95 10,043.07 9,981.00
10/31/2013 10,141.31 10,124.27 10,157.00
11/30/2013 10,108.47 10,086.36 10,116.00
12/31/2013 10,064.19 10,029.36 10,209.00
1/31/2014 10,197.67 10,177.55 10,392.00
2/28/2014 10,270.33 10,231.66 10,586.00
3/31/2014 10,260.80 10,214.23 10,600.00
4/30/2014 10,345.76 10,300.43 10,712.00
5/31/2014 10,470.33 10,417.70 10,852.00
6/30/2014 10,486.22 10,423.08 11,071.00
7/31/2014 10,453.59 10,396.94 11,064.00
8/31/2014 10,566.94 10,511.72 11,114.00
9/30/2014 10,483.04 10,440.34 10,978.00
10/31/2014 10,585.79 10,542.97 10,697.00
11/30/2014 10,641.94 10,617.76 10,782.00
12/31/2014 10,623.72 10,627.72 10,596.00
1/31/2015 10,825.83 10,850.55 10,756.00
2/28/2015 10,762.70 10,748.54 10,751.00
3/31/2015 10,807.19 10,798.44 10,611.00
4/30/2015 10,794.69 10,759.70 10,745.00
5/31/2015 10,775.83 10,733.78 10,748.00
6/30/2015 10,655.49 10,616.73 10,441.00
7/31/2015 10,717.57 10,690.54 10,358.00
8/31/2015 10,686.00 10,675.17 10,238.00
9/30/2015 10,727.74 10,747.38 10,076.00
10/31/2015 10,762.06 10,749.21 10,074.00
11/30/2015 10,722.87 10,720.79 9,943.00
12/31/2015 10,669.27 10,686.16 9,711.00
1/31/2016 10,787.06 10,833.18 9,797.00
2/29/2016 10,863.75 10,910.05 10,073.00
3/31/2016 10,996.80 11,010.12 10,335.00
4/30/2016 11,071.80 11,052.41 10,767.00
5/31/2016 11,080.49 11,055.24 10,707.00
6/30/2016 11,275.40 11,253.88 11,155.00
[END CHART]
Data from 7/31/13 to 6/30/16.**
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Flexible Income Fund Institutional Shares to the benchmark listed above
(see page 7 for the benchmark definition).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the Barclays U.S.
Aggregate Bond Index as the Fund's broad-based securities market index as it
more closely represents the securities held by the Fund.
**The performance of the Barclays U.S. Universal Index and Barclays U.S.
Aggregate Bond Index is calculated from the end of the month, July 31, 2013,
while the inception date of the Institutional Shares is July 12, 2013. There may
be a slight variation of performance numbers because of this difference.
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INVESTMENT OVERVIEW | 9
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USAA FLEXIBLE INCOME FUND ADVISER SHARES (ADVISER SHARES)
(Ticker Symbol: UAFIX)
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6/30/16 12/31/15
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Net Assets $5.0 Million $4.3 Million
Net Asset Value Per Share $9.35 $8.31
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
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12/31/15-6/30/16* 1 YEAR SINCE INCEPTION 7/12/13
14.69% 6.40% 3.29%
--------------------------------------------------------------------------------
EXPENSE RATIOS AS OF 12/31/15**
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BEFORE REIMBURSEMENT 1.36% AFTER REIMBURSEMENT 1.18%
(Includes acquired fund fees and expenses of 0.03%)
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
** The expense ratios represent the total annual operating expenses, before
reductions of any expenses paid indirectly and including any acquired fund fees
and expenses, as reported in the Fund's prospectus dated May 1, 2016, and are
calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive
management, administration, and other fees to limit the expenses of the Fund so
that the total annual operating expenses of the Adviser Shares (exclusive of
commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 1.15% of
the Adviser Shares' average net assets. This reimbursement arrangement may not
be changed or terminated during this time period without approval of the Fund's
Board of Trustees and may be changed or terminated by the Manager at any time
after May 1, 2017. If the total annual operating expense ratio of the Adviser
Shares is lower than 1.15%, the Adviser Shares will operate at the lower expense
ratio. These expense ratios may differ from the expense ratios disclosed in the
Financial Highlights, which excludes acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions, if any. The
total returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on distributions (including
capital gains distributions), redemption of shares, or reinvested net investment
income.
================================================================================
10 | USAA FLEXIBLE INCOME FUND
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS BARCLAYS USAA
U.S. UNIVERSAL U.S. AGGREGATE BOND FLEXIBLE INCOME FUND
INDEX* INDEX ADVISER SHARES
7/31/2013 $10,000.00 $10,000.00 $10,000.00
8/31/2013 9,943.01 9,948.88 9,932.00
9/30/2013 10,041.95 10,043.07 9,971.00
10/31/2013 10,141.31 10,124.27 10,144.00
11/30/2013 10,108.47 10,086.36 10,102.00
12/31/2013 10,064.19 10,029.36 10,190.00
1/31/2014 10,197.67 10,177.55 10,369.00
2/28/2014 10,270.33 10,231.66 10,558.00
3/31/2014 10,260.80 10,214.23 10,569.00
4/30/2014 10,345.76 10,300.43 10,677.00
5/31/2014 10,470.33 10,417.70 10,811.00
6/30/2014 10,486.22 10,423.08 11,030.00
7/31/2014 10,453.59 10,396.94 11,017.00
8/31/2014 10,566.94 10,511.72 11,064.00
9/30/2014 10,483.04 10,440.34 10,925.00
10/31/2014 10,585.79 10,542.97 10,640.00
11/30/2014 10,641.94 10,617.76 10,712.00
12/31/2014 10,623.72 10,627.72 10,532.00
1/31/2015 10,825.83 10,850.55 10,688.00
2/28/2015 10,762.70 10,748.54 10,678.00
3/31/2015 10,807.19 10,798.44 10,535.00
4/30/2015 10,794.69 10,759.70 10,664.00
5/31/2015 10,775.83 10,733.78 10,652.00
6/30/2015 10,655.49 10,616.73 10,347.00
7/31/2015 10,717.57 10,690.54 10,273.00
8/31/2015 10,686.00 10,675.17 10,151.00
9/30/2015 10,727.74 10,747.38 9,967.00
10/31/2015 10,762.06 10,749.21 9,974.00
11/30/2015 10,722.87 10,720.79 9,840.00
12/31/2015 10,669.27 10,686.16 9,598.00
1/31/2016 10,787.06 10,833.18 9,681.00
2/29/2016 10,863.75 10,910.05 9,963.00
3/31/2016 10,996.80 11,010.12 10,206.00
4/30/2016 11,071.80 11,052.41 10,643.00
5/31/2016 11,080.49 11,055.24 10,572.00
6/30/2016 11,275.40 11,253.88 11,009.00
[END CHART]
Data from 7/31/13 to 6/30/16.**
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Flexible Income Fund Adviser Shares to the benchmark listed above (see page
7 for benchmark definition).
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on distributions or the redemption of shares. Indexes are unmanaged
and you cannot invest directly in an index. The return information for the
indexes does not reflect the deduction of any fees, expenses, or taxes.
*As of May 1, 2016, the Barclays U.S. Universal Index replaced the Barclays U.S.
Aggregate Bond Index as the Fund's broad-based securities market index as it
more closely represents the securities held by the Fund.
**The performance of the Barclays U.S. Universal Index and the Barclays U.S.
Aggregate Bond Index is calculated from the end of the month, July 31, 2013,
while the inception date of the Adviser Shares is July 12, 2013. There may be a
slight variation of performance numbers because of this difference.
================================================================================
INVESTMENT OVERVIEW | 11
================================================================================
o TOP 10 HOLDINGS* - 6/30/16 o
(% of Net Assets)
U.S. Treasury Bond (STRIPS Principal), 3.09% ............................... 19.1%
U.S. Treasury Bond, 3.00% .................................................. 4.1%
Oil Insurance Ltd., 3.61% .................................................. 3.0%
Hatteras Financial Corp. ................................................... 2.9%
Southern Union Co., 3.65% .................................................. 2.8%
Hycroft Mining Corp., 15.00% ............................................... 2.7%
U.S. Treasury Bond, 3.00% .................................................. 2.7%
Nuveen Enhanced AMT-Free Municipal Credit Opportunities Fund ............... 2.6%
Dairy Farmers of America, Inc., 7.88%, cumulative redeemable, perpetual .... 2.5%
Prospect Capital Corp. ..................................................... 2.5%
You will find a complete list of securities that the Fund owns on pages 14-19.
*Excludes money market instruments and futures.
================================================================================
12 | USAA FLEXIBLE INCOME FUND
================================================================================
o ASSET ALLOCATION* - 6/30/16 o
[PIE CHART OF ASSET ALLOCATION]
U.S. TREASURY SECURITIES 27.1%
COMMON STOCKS 21.9%
MONEY MARKET INSTRUMENTS 13.7%
CORPORATE OBLIGATIONS 12.7%
COMMERCIAL MORTGAGE SECURITIES 6.3%
PREFERRED STOCKS 5.1%
COLLATERALIZED MORTGAGE OBLIGATIONS 3.4%
CONVERTIBLE SECURITIES 2.7%
INVESTMENT COMPANIES 2.6%
EURODOLLAR AND YANKEE OBLIGATIONS 1.7%
[END CHART]
Percentages are of the net assets of the Fund and may not equal 100%.
*Excludes futures.
================================================================================
INVESTMENT OVERVIEW | 13
================================================================================
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
BONDS (53.9%)
CORPORATE OBLIGATIONS (12.7%)
ENERGY (4.3%)
-------------
OIL & GAS DRILLING (0.6%)
$ 3,648 Schahin II Finance Co. SPV Ltd.(a),(b) 5.88% 9/25/2023 $ 529
----------
OIL & GAS STORAGE & TRANSPORTATION (3.7%)
1,000 Enterprise Products Operating, LLC(c) 7.00 6/01/2067 790
4,000 Southern Union Co.(c) 3.65(d) 11/01/2066 2,360
----------
3,150
----------
Total Energy 3,679
----------
FINANCIALS (3.0%)
-----------------
PROPERTY & CASUALTY INSURANCE (3.0%)
3,200 Oil Insurance Ltd.(a),(c) 3.61(d) _(e) 2,528
----------
UTILITIES (5.4%)
----------------
ELECTRIC UTILITIES (3.7%)
1,800 NextEra Energy Capital Holdings, Inc.(c) 6.35(d) 10/01/2066 1,435
2,000 PPL Capital Funding, Inc.(c) 6.70 3/30/2067 1,687
----------
3,122
----------
MULTI-UTILITIES (1.7%)
2,000 Dominion Resources, Inc.(c) 2.93(d) 9/30/2066 1,483
----------
Total Utilities 4,605
----------
Total Corporate Obligations (cost: $15,051) 10,812
----------
CONVERTIBLE SECURITIES (2.7%)
MATERIALS (2.7%)
----------------
GOLD (2.7%)
1,453 Hycroft Mining Corp.(j) (cost: $1,395) 15.00 22/10/2020 2,325
----------
================================================================================
14 | USAA FLEXIBLE INCOME FUND
================================================================================
------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
------------------------------------------------------------------------------------------------------------------------
EURODOLLAR AND YANKEE OBLIGATIONS (1.7%)
ENERGY (1.7%)
-------------
OIL & GAS STORAGE & TRANSPORTATION (1.7%)
$ 2,000 TransCanada PipeLines Ltd.(c) (cost: $2,026) 6.35% 5/15/2067 $ 1,420
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (3.4%)
FINANCIALS (3.4%)
-----------------
2,636 Countrywide Alternative Loan Trust 4.59(d) 3/25/2035 5
702 Sequoia Mortgage Trust 1.35(d) 9/20/2033 623
1,694 Structured Asset Mortgage Investments, Inc. 0.95(d) 7/19/2035 1,560
700 Wells Fargo Mortgage Backed Securities Trust 3.02(d) 4/25/2035 663
----------
Total Financials 2,851
----------
Total Collateralized Mortgage Obligations (cost: $2,960) 2,851
----------
COMMERCIAL MORTGAGE SECURITIES (6.3%)
FINANCIALS (6.3%)
-----------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (4.1%)
1,000 Citigroup Commercial Mortgage Trust 6.34 12/10/2049 749
805 Merrill Lynch Mortgage Trust(c) 5.74 5/12/2039 801
2,000 Morgan Stanley Capital I Trust 5.59 3/12/2044 1,921
----------
3,471
----------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (2.2%)
17,479 GS Mortgage Securities Trust,
acquired 1/02/2014; cost $712(a),(f) 0.84 3/10/2044 450
34,854 JPMBB Commercial Mortgage Securities Trust,
acquired 4/30/2014; cost $2,275(f) 1.40 4/15/2047 1,453
----------
1,903
----------
Total Financials 5,374
----------
Total Commercial Mortgage Securities (cost: $5,526) 5,374
----------
U.S. TREASURY SECURITIES (27.1%)
BONDS (27.1%)
3,000 3.00%, 11/15/2045 3,450
2,000 3.00%, 5/15/2045(g) 2,299
2,000 3.02%, 5/15/2045 (STRIPS Principal)(h) 989
32,000 3.09%, 8/15/2044 (STRIPS Principal)(h) 16,195
----------
22,933
----------
Total U.S. Treasury Securities (cost: $19,180) 22,933
----------
Total Bonds (cost: $46,138) 45,715
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 15
================================================================================
------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (29.6%)
COMMON STOCKS (21.9%)
ENERGY (1.4%)
-------------
INTEGRATED OIL & GAS (1.4%)
280,000 Gazprom PAO ADR $ 1,212
----------
FINANCIALS (10.7%)
------------------
ASSET MANAGEMENT & CUSTODY BANKS (5.8%)
250,000 Apollo Investment Corp. 1,385
100,000 Ares Capital Corp. 1,420
270,000 Prospect Capital Corp. 2,112
----------
4,917
----------
REITs - MORTGAGE (4.9%)
150,000 Hatteras Financial Corp. 2,460
200,000 Two Harbors Investment Corp. 1,712
----------
4,172
----------
Total Financials 9,089
----------
MATERIALS (9.8%)
----------------
GOLD (8.5%)
174,500 Alamos Gold, Inc. "A" 1,501
88,599 AuRico Metals, Inc.* 70
75,000 Goldcorp, Inc. 1,435
49,180 Hycroft Mining Corp.*, acquired 5/30/2014-5/21/2015; cost $4,195(f),(i) 49
300,000 Kinross Gold Corp.* 1,467
42,000 Newmont Mining Corp. 1,643
159,000 Novagold Resources, Inc.* 973
----------
7,138
----------
SILVER (1.3%)
47,000 Silver Wheaton Corp. 1,106
----------
Total Materials 8,244
----------
Total Common Stocks (cost: $22,590) 18,545
----------
PREFERRED STOCKS (5.1%)
CONSUMER STAPLES (2.5%)
-----------------------
AGRICULTURAL PRODUCTS (2.5%)
20,000 Dairy Farmers of America, Inc., 7.88%, cumulative redeemable, perpetual(a),(c) 2,120
----------
ENERGY (1.0%)
-------------
OIL & GAS EXPLORATION & PRODUCTION (1.0%)
3,000 Chesapeake Energy Corp., 5.75%, perpetual(a) 845
----------
================================================================================
16 | USAA FLEXIBLE INCOME FUND
================================================================================
------------------------------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
------------------------------------------------------------------------------------------------------------------------
FINANCIALS (1.6%)
-----------------
THRIFTS & MORTGAGE FINANCE (1.6%)
300,000 Freddie Mac, 8.38%, perpetual* $ 1,354
--------
Total Preferred Stocks (cost: $6,387) 4,319
--------
INVESTMENT COMPANIES (2.6%)
134,502 Nuveen Enhanced AMT-Free Municipal Credit Opportunities Fund (cost: $1,953) 2,187
--------
Total Equity Securities (cost: $30,930) 25,051
--------
MONEY MARKET INSTRUMENTS (13.7%)
MONEY MARKET FUNDS (13.7%)
11,588,471 State Street Institutional Liquid Reserves Fund Premier Class, 0.47%(c),(k)
(cost: $11,588) 11,588
--------
TOTAL INVESTMENTS (COST: $88,656) $ 82,354
========
------------------------------------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF CONTRACT APPRECIATION/
CONTRACTS EXPIRATION VALUE (DEPRECIATION)
LONG/(SHORT) DATE (000) (000)
------------------------------------------------------------------------------------------------------------------------
FUTURES (24.7%)
(40) E-mini S&P 500 09/16/2016 $ (4,180) $ (6)
(70) Japanese Yen Currency 09/19/2016 (8,494) (318)
(72) Russell 2000 Mini 09/16/2016 (8,261) 85
-------- ------
TOTAL FUTURES $(20,935) $ (239)
======== ======
================================================================================
PORTFOLIO OF INVESTMENTS | 17
================================================================================
------------------------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
------------------------------------------------------------------------------------------------------------------------
ASSETS (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL
------------------------------------------------------------------------------------------------------------------------
Bonds:
Corporate Obligations $ - $10,812 $ - $10,812
Convertible Securities - 2,325 - 2,325
Eurodollar and Yankee Obligations - 1,420 - 1,420
Collateralized Mortgage Obligations - 2,851 - 2,851
Commercial Mortgage Securities - 5,374 - 5,374
U.S. Treasury Securities 5,749 17,184 - 22,933
Equity Securities:
Common Stocks 18,496 - 49 18,545
Preferred Stocks - 4,319 - 4,319
Investment Companies 2,187 - - 2,187
Money Market Instruments:
Money Market Funds 11,588 - - 11,588
Futures(1) 85 - - 85
------------------------------------------------------------------------------------------------------------------------
Total $38,105 $44,285 $49 $82,439
------------------------------------------------------------------------------------------------------------------------
LIABILITIES LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
------------------------------------------------------------------------------------------------------------------------
Futures(1) $ (324) $ - $ - $ (324)
------------------------------------------------------------------------------------------------------------------------
Total $ (324) $ - $ - $ (324)
------------------------------------------------------------------------------------------------------------------------
(1)Futures are valued at the unrealized appreciation/(depreciation) on the
investment.
Refer to the Portfolio of Investments for additional industry, country, or
geographic region classifications.
------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF LEVEL 3 INVESTMENTS
------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE
SECURITIES COMMON STOCKS
------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2015 $1,444 $12
Purchases - -
Sales - -
Transfers into Level 3 - -
Transfers out of Level 3 1,444 -
Net realized gain (loss) on investments - -
Change in net unrealized appreciation/(depreciation) of investments - 37
------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2016 $ - $49
------------------------------------------------------------------------------------------------------------------------
================================================================================
18 | USAA FLEXIBLE INCOME FUND
================================================================================
FAIR VALUE LEVEL TRANSFERS
--------------------------
For the period of January 1, 2016, through June 30, 2016, the table below shows
the transfers between Level 1, Level 2, and Level 3. The Fund's policy is to
recognize any transfers in and transfers out as of the beginning of the
reporting period in which the event or circumstance that caused the transfer
occurred.
TRANSFERS INTO TRANSFERS INTO TRANSFERS INTO
(OUT OF) (OUT OF) (OUT OF)
ASSETS ($ IN 000s) LEVEL 1 LEVEL 2 LEVEL 3
---------------------------------------------------------------------------------------------------
Convertible Securities(I) $- $1,444 $(1,444)
---------------------------------------------------------------------------------------------------
(I)Transferred from Level 3 to Level 2 as result of the securities no longer
being a single broker quote.
================================================================================
PORTFOLIO OF INVESTMENTS | 19
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net
assets. Investments in foreign securities were 11.5% of net assets at June
30, 2016.
o CATEGORIES AND DEFINITIONS
EURODOLLAR AND YANKEE OBLIGATIONS - Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee
obligations are dollar-denominated instruments that are issued by foreign
issuers in the U.S. capital markets.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) - Collateralized mortgage
obligations are debt obligations of a legal entity that are fully
collateralized by a portfolio of mortgages or mortgage-related securities.
CMOs are issued in multiple classes (tranches), with specific adjustable or
fixed interest rates, varying maturities, and must be fully retired no
later than its final distribution date. The cash flow from the underlying
mortgages is used to pay off each tranche separately. CMOs are designed to
provide investors with more predictable maturities than regular mortgage
securities, but such maturities can be difficult to predict because of the
effect of prepayments.
================================================================================
20 | USAA FLEXIBLE INCOME FUND
================================================================================
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES - Asset-backed
securities represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates of
the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments. Stated
interest rates on commercial mortgage-backed securities may change slightly
over time as underlying mortgages pay down.
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS IOs) - Represent
the right to receive only the interest payments on an underlying pool of
commercial mortgage loans. The purchase yield reflects an anticipated yield
based upon interest rates at the time of purchase and the estimated timing
and amount of future cash flows. Coupon rates after purchase vary from
period to period. The principal amount represents the notional amount of
the underlying pool on which current interest is calculated. CMBS IOs are
backed by loans that have various forms of prepayment protection, which
include lock-out provisions, yield maintenance provisions, and prepayment
penalties. This serves to moderate their prepayment risk. CMBS IOs are
subject to default-related prepayments that may have a negative impact on
yield.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REIT Real estate investment trust
STRIPS Separate trading of registered interest and principal of securities
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 21
================================================================================
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Asset Management
Company (the Manager) under liquidity guidelines approved by USAA Mutual
Funds Trust's Board of Trustees (the Board), unless otherwise noted as
illiquid.
(b) At June 30, 2016, the issuer was in default with respect to interest
and/or principal payments.
(c) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at June 30, 2016.
(d) Variable-rate or floating-rate security - interest rate is adjusted
periodically. The interest rate disclosed represents the rate at
June 30, 2016.
(e) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(f) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board. The aggregate market value of these securities at
June 30, 2016, was $1,952,000, which represented 2.3% of the Fund's net
assets.
(g) Securities with a value of $2,299,000 are segregated as collateral for
initial margin requirements on open futures contracts.
(h) Zero-coupon security. Rate represents the effective yield at the date of
purchase.
(i) Security was fair valued at June 30, 2016, by the Manager in accordance
with valuation procedures approved by the Board. The total value of all
such securities was $49,000, which represented 0.1% of the Fund's net
assets.
================================================================================
22 | USAA FLEXIBLE INCOME FUND
================================================================================
(j) Pay-in-kind (PIK) - security in which the issuer will have or has the
option to make all or a portion of the interest or dividend payments in
additional securities.
(k) Rate represents the money market fund annualized seven-day yield at
June 30, 2016.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 23
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $88,656) $ 82,354
Cash 147
Receivables:
Capital shares sold 132
USAA Asset Management Company (Note 6C) 30
Dividends and interest 474
Securities sold 1,977
--------
Total assets 85,114
--------
LIABILITIES
Payables:
Capital shares redeemed 75
Variation margin on futures contracts 238
Accrued management fees 39
Accrued transfer agent's fees 3
Other accrued expenses and payables 49
--------
Total liabilities 404
--------
Net assets applicable to capital shares outstanding $ 84,710
========
NET ASSETS CONSIST OF:
Paid-in capital $100,206
Accumulated overdistribution of net investment income (139)
Accumulated net realized loss on investments and futures transactions (8,816)
Net unrealized depreciation of investments and futures contracts (6,541)
--------
Net assets applicable to capital shares outstanding $ 84,710
========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $50,065/5,353 shares outstanding) $ 9.35
========
Institutional Shares (net assets of $29,599/3,160 shares outstanding) $ 9.37
========
Adviser Shares (net assets of $5,046/539 shares outstanding) $ 9.35
========
See accompanying notes to financial statements.
================================================================================
24 | USAA FLEXIBLE INCOME FUND
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $2) $ 448
Interest 1,086
--------
Total income 1,534
--------
EXPENSES
Management fees 221
Administration and servicing fees:
Fund Shares 44
Institutional Shares 13
Adviser Shares 3
Transfer agent's fees:
Fund Shares 35
Institutional Shares 13
Distribution and service fees (Note 6E):
Adviser Shares 6
Custody and accounting fees:
Fund Shares 24
Institutional Shares 9
Adviser Shares 2
Postage:
Fund Shares 2
Shareholder reporting fees:
Fund Shares 7
Institutional Shares 1
Trustees' fees 14
Registration fees:
Fund Shares 19
Institutional Shares 11
Adviser Shares 11
Professional fees 50
Other 10
--------
Total expenses 495
Expenses reimbursed:
Fund Shares (24)
Institutional Shares (31)
Adviser Shares (12)
--------
Net expenses 428
--------
NET INVESTMENT INCOME 1,106
--------
================================================================================
FINANCIAL STATEMENTS | 25
================================================================================
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FUTURES CONTRACTS
Net realized loss on:
Investments $(1,171)
Futures transactions (2,102)
Change in net unrealized appreciation/(depreciation) of:
Investments 14,338
Futures contracts 159
-------
Net realized and unrealized gain 11,224
-------
Increase in net assets resulting from operations $12,330
=======
See accompanying notes to financial statements.
================================================================================
26 | USAA FLEXIBLE INCOME FUND
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended
December 31, 2015
--------------------------------------------------------------------------------------------------------
6/30/2016 12/31/2015
--------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 1,106 $ 6,328
Net realized loss on investments (1,171) (7,343)
Net realized gain on long-term capital gain distributions
from other investment companies - 2
Net realized gain on foreign currency transactions - 63
Net realized gain (loss) on futures transactions (2,102) 600
Change in net unrealized appreciation/(depreciation) of:
Investments 14,338 (11,341)
Foreign currency translations - (18)
Futures contracts 159 944
--------------------------------
Increase (decrease) in net assets resulting from operations 12,330 (10,765)
--------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares (1,071) (2,702)
Institutional Shares (536) (2,944)
Adviser Shares (88) (189)
--------------------------------
Total distributions of net investment income (1,695) (5,835)
--------------------------------
Net realized gains:
Fund Shares - (617)
Institutional Shares - (246)
Adviser Shares - (46)
--------------------------------
Total distributions of net realized gains - (909)
--------------------------------
Distributions to shareholders (1,695) (6,744)
--------------------------------
NET DECREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Fund Shares (12,727) (1,572)
Institutional Shares 3,601 (67,454)
Adviser Shares 204 (40)
--------------------------------
Total net decrease in net assets from
capital share transactions (8,922) (69,066)
--------------------------------
Net increase (decrease) in net assets 1,713 (86,575)
================================================================================
FINANCIAL STATEMENTS | 27
================================================================================
NET ASSETS
Beginning of period 82,997 169,572
--------------------------------
End of period $84,710 $ 82,997
================================
Accumulated undistributed (overdistribution of)
net investment income:
End of period $ (139) $ 450
================================
See accompanying notes to financial statements.
================================================================================
28 | USAA FLEXIBLE INCOME FUND
================================================================================
NOTES TO FINANCIAL STATEMENTS
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940, as amended (the 1940 Act), is an open-end management investment company
organized as a Delaware statutory trust consisting of 54 separate funds.
Additionally, the Fund qualifies as a registered investment company under
Accounting Standards Codification Topic 946. The information presented in this
semiannual report pertains only to the USAA Flexible Income Fund (the Fund),
which is classified as diversified under the 1940 Act. The Fund's investment
objective is to seek total return through a combination of income and capital
appreciation.
The Fund consists of three classes of shares: Flexible Income Fund Shares (Fund
Shares), Flexible Income Fund Institutional Shares (Institutional Shares), and
Flexible Income Fund Adviser Shares (Adviser Shares). Each class of shares has
equal rights to assets and earnings, except that each class bears certain
class-related expenses specific to the particular class. These expenses include
administration and servicing fees, transfer agent fees, postage, shareholder
reporting fees, distribution and service (12b-1) fees, and certain registration
and custodian fees. Expenses not attributable to a specific class, income, and
realized gains or losses on investments are allocated to each class of shares
based on each class' relative net assets. Each class has exclusive voting rights
on matters related solely to that class and separate voting rights on matters
that relate to all classes. The Institutional Shares are available for
investment through a USAA discretionary managed account program and certain
advisory programs sponsored by financial intermediaries, such as brokerage
firms, investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments, foundations, and bank
trusts, as well as other persons or legal entities that
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
================================================================================
the Fund may approve from time to time, or for purchase by a USAA fund
participating in a fund-of-funds investment strategy (USAA fund-of-funds). The
Adviser Shares permit investors to purchase shares through financial
intermediaries, including banks, broker-dealers, insurance companies, investment
advisers, plan sponsors, and financial professionals that provide various
administrative and distribution services.
A. SECURITY VALUATION - The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures, which are approved by the Board. Among other
things, these policies and procedures allow the Fund to utilize independent
pricing services, quotations from securities dealers, and a wide variety of
sources and information to establish and adjust the fair value of
securities as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the Board regarding
application of the pricing and fair valuation policies and procedures
during the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings
to review prior actions taken by the Committee and USAA Asset Management
Company (the Manager), an affiliate of the Fund. Among other things, these
monthly meetings include a review and analysis of back testing reports,
pricing service quotation comparisons, illiquid securities and fair value
determinations, pricing movements, and daily stale price monitoring.
The value of each security is determined (as of the close of trading on the
New York Stock Exchange (NYSE) on each business day the NYSE is open) as
set forth below:
1. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Board.
The Service uses an evaluated mean between quoted bid and asked prices
or the last sales price to value a security when, in the Service's
================================================================================
30 | USAA FLEXIBLE INCOME FUND
================================================================================
judgment, these prices are readily available and are representative of
the security's market value. For many securities, such prices are not
readily available. The Service generally prices those securities based
on methods which include consideration of yields or prices of
securities of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and general market
conditions. Generally, debt securities are categorized in Level 2 of
the fair value hierarchy; however, to the extent the valuations include
significant unobservable inputs, the securities would be categorized in
Level 3.
2. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange
or the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which
they trade. Equity securities traded primarily on foreign securities
exchanges or markets are valued at the last quoted sales price, or the
most recently determined official closing price calculated according
to local market convention, available at the time the Fund is valued.
If no last sale or official closing price is reported or available, the
average of the bid and asked prices generally is used. Actively traded
equity securities listed on a domestic exchange generally are
categorized in Level 1 of the fair value hierarchy. Certain preferred
and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
3. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In many
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sales or official closing prices
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not need to be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that
would materially affect the value of the Fund's foreign
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
================================================================================
securities and, if necessary, the Committee will consider such
available information that it deems relevant and will determine a fair
value for the affected foreign securities in accordance with valuation
procedures. In addition, information from an external vendor or other
sources may be used to adjust the foreign market closing prices of
foreign equity securities to reflect what the Committee believes to be
the fair value of the securities as of the close of the NYSE. Fair
valuation of affected foreign equity securities may occur frequently
based on events that occur on a fairly regular basis (such as U.S.
market movements) are significant and are categorized in Level 2 of the
fair value hierarchy.
4. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
5. Short-term debt securities with original or remaining maturities of 60
days or less may be valued at amortized cost, provided that amortized
cost represents the fair value of such securities.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the last sale price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the last sale price on the prior trading date if
it is within the spread between the closing bid and asked prices closest
to the last reported sale price.
8. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event
has been recognized in relation to a security or class of securities,
the securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and the
actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is
intended to cause the Fund's NAV to be more reliable than it otherwise
would be.
================================================================================
32 | USAA FLEXIBLE INCOME FUND
================================================================================
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, and an evaluation of the forces that influenced the
market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS - Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the Portfolio of Investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
Level 2 - inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indexes.
Level 3 - inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
The valuation of securities falling in the Level 3 category are primarily
supported by quoted prices obtained from a broker-dealer participating in
the market for these securities. However, these securities are included in
the Level 3 category due to limited market transparency and/or a lack of
corroboration to support the quoted prices.
Refer to the Portfolio of Investments for a reconciliation of investments
in which significant unobservable inputs (Level 3) were used in determining
value.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
================================================================================
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - The Fund may buy, sell,
and enter into certain types of derivatives, including, but not limited to
futures contracts, options, options on futures contracts, and forward
currency contracts, under circumstances in which such instruments are
expected by the portfolio manager to aid in achieving the Fund's investment
objective. The Fund also may use derivatives in circumstances where the
portfolio manager believes they offer an economical means of gaining
exposure to a particular asset class or securities market or to keep cash
on hand to meet shareholder redemptions or other needs while maintaining
exposure to the market. With exchange-listed futures contracts and options,
counterparty credit risk to the Fund is limited to the exchange's
clearinghouse which, as counterparty to all exchange-traded futures
contracts and options, guarantees the transactions against default from the
actual counterparty to the trade. The Fund's derivative agreements held at
June 30, 2016, did not include master netting provisions.
FUTURES CONTRACTS - The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts to
gain exposure to, or hedge against, changes in the value of equities,
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified price
on a specified date. Upon entering into such contracts, the Fund is
required to deposit with the broker in either cash or securities an initial
margin in an amount equal to a certain percentage of the contract amount.
Subsequent payments (variation margin) are made or received by the Fund
each day, depending on the daily fluctuations in the value of the contract,
and are recorded for financial statement purposes as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Upon entering into
such contracts, the Fund bears the risk of interest or exchange rates or
securities prices moving unexpectedly in an unfavorable direction, in which
case, the Fund may not achieve the anticipated benefits of the futures
contracts.
================================================================================
34 | USAA FLEXIBLE INCOME FUND
================================================================================
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF JUNE 30, 2016* (IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
----------------------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ASSETS AND ASSETS AND
ACCOUNTED FOR AS LIABILITIES LIABILITIES
HEDGING INSTRUMENTS LOCATION FAIR VALUE LOCATION FAIR VALUE
----------------------------------------------------------------------------------------------------
Equity contracts Net unrealized $85** Net unrealized $ 6**
depreciation of depreciation of
investments and investments and
futures contracts futures contracts
Foreign exchange contracts - Net unrealized 318**
depreciation of
investments and
futures contracts
----------------------------------------------------------------------------------------------------
Total $85 $324
----------------------------------------------------------------------------------------------------
* For open derivative instruments as of June 30, 2016, see the Portfolio of
Investments, which also is indicative of activity for the six-month
period ended June 30, 2016.
** Includes cumulative appreciation/(depreciation) of futures as reported on
the Portfolio of Investments. Only current day's variation margin is
reported within the Statement of Assets and Liabilities.
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
SIX-MONTH PERIOD ENDED JUNE 30, 2016 (IN THOUSANDS)
CHANGE IN
UNREALIZED
DERIVATIVES NOT REALIZED APPRECIATION/
ACCOUNTED FOR AS STATEMENT OF GAIN (LOSS) (DEPRECIATION)
HEDGING INSTRUMENTS OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
----------------------------------------------------------------------------------------------------
Equity contracts Net realized loss on $ (753) $ 273
futures transactions /
Change in net unrealized
appreciation/(depreciation)
of Futures contracts
Foreign exchange contracts Net realized loss on futures (1,349) (114)
transactions / Change in
net unrealized appreciation/
(depreciation) of
Futures contracts
----------------------------------------------------------------------------------------------------
Total $(2,102) $ 159
----------------------------------------------------------------------------------------------------
D. FEDERAL TAXES - The Fund's policy is to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
================================================================================
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
E. INVESTMENTS IN SECURITIES - Security transactions are accounted for on
the date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the
ex-dividend date. If the ex-dividend date has passed, certain dividends
from foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Discounts and premiums are amortized
over the life of the respective securities, using the effective yield
method for long-term securities and the straight-line method for short-term
securities. Foreign income and capital gains on some foreign securities may
be subject to foreign taxes, which are accrued as applicable, as a
reduction to such income and realized gains. These foreign taxes have been
provided for in accordance with the understanding of the applicable
countries' tax rules and rates.
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS - Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis can take place a month or more after
the trade date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may increase or
decrease in value prior to their delivery. The Fund maintains segregated
assets with a market value equal to or greater than the amount of its
purchase commitments. The purchase of securities on a delayed-delivery or
when-issued basis may increase the volatility of the Fund's NAV to the
extent that the Fund makes such purchases and commitments while remaining
substantially fully invested.
G. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective
dates of such transactions.
================================================================================
36 | USAA FLEXIBLE INCOME FUND
================================================================================
2. Market value of securities, other assets, and liabilities at the
exchange rate obtained from an independent pricing service on a daily
basis.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts received.
At the end of the Fund's fiscal year, these net realized foreign currency
gains/losses are reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the Statement of Assets
and Liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities, other than investments in
securities, resulting from changes in the exchange rate.
H. EXPENSES PAID INDIRECTLY - Through arrangements with the Fund's
custodian and other banks utilized by the Fund for cash management
purposes, realized credits, if any, generated from cash balances in the
Fund's bank accounts may be used to directly reduce the Fund's expenses.
For the six-month period ended June 30, 2016, there were no custodian and
other bank credits.
I. REDEMPTION FEES - Adviser Shares held in the Fund less than 60 days are
subject to a redemption fee equal to 1.00% of the proceeds of the redeemed
or exchanged shares. All redemption fees paid will be accounted for by the
Fund as an addition to paid in capital. For the six-month period ended June
30, 2016, the Adviser Shares did not charge any redemption fees.
J. INDEMNIFICATIONS - Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business, the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
================================================================================
Trust's maximum exposure under these arrangements is unknown, as this would
involve future claims that may be made against the Trust that have not yet
occurred. However, the Trust expects the risk of loss to be remote.
K. USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at an interest rate based on
the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 9.0 basis points of the amount of the committed loan
agreement. Prior to September 30, 2015, the maximum annual facility fee was 7.0
basis points of the amount of the committed loan agreement. The facility fees
are allocated among the USAA Funds based on their respective average net assets
for the period.
The USAA Funds may request an optional increase of the committed loan agreement
from $500 million up to $750 million. If the USAA Funds increase the committed
loan agreement, the assessed facility fee by CAPCO will be increased to 10.0
basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO facility fees
of less than $500, which represents 0.1% of the total fees paid to CAPCO by the
USAA Funds. The Fund had no borrowings under this agreement during the six-month
period ended June 30, 2016.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of December 31,
2016, in accordance with applicable tax law.
================================================================================
38 | USAA FLEXIBLE INCOME FUND
================================================================================
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
At December 31, 2015, the Fund had net capital loss carryforwards of $5,941,000,
for federal income tax purposes as shown in the table below. It is unlikely that
the Board will authorize a distribution of capital gains realized in the future
until the capital loss carryforwards have been used.
CAPITAL LOSS CARRYFORWARDS
---------------------------------
TAX CHARACTER
---------------------------------
(NO EXPIRATION) BALANCE
--------------- ----------
Short-Term $2,755,000
Long-Term 3,186,000
----------
Total $5,941,000
==========
For the six-month period ended June 30, 2016, the Fund did not incur any income
tax, interest, or penalties, and has recorded no liability for net unrecognized
tax benefits relating to uncertain income tax positions. On an ongoing basis,
the Manager will monitor the Fund's tax positions to determine if adjustments to
this conclusion are necessary. The statute of limitations on the Fund's tax
return filings generally remain open for the three preceding fiscal reporting
year ends and remain subject to examination by the Internal Revenue Service and
state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$6,798,000 and $25,239,000, respectively.
As of June 30, 2016, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $7,804,000 and $14,106,000, respectively, resulting in net unrealized
depreciation of $6,302,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
================================================================================
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock at
no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated USAA fund-of-funds as well as other persons or legal
entities that the Fund may approve from time to time. Capital share transactions
for all classes were as follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
JUNE 30, 2016 DECEMBER 31, 2015
------------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
FUND SHARES:
Shares sold 835 $ 7,392 1,829 $ 17,097
Shares issued from reinvested
dividends 77 668 219 1,982
Shares redeemed (2,269) (20,787) (2,245) (20,651)
------------------------------------------------------------
Net decrease from capital share
transactions (1,357) $(12,727) (197) $ (1,572)
============================================================
INSTITUTIONAL SHARES:
Shares sold 580 $ 5,184 130 $ 1,199
Shares issued from reinvested
dividends 61 536 344 3,191
Shares redeemed (237) (2,119) (7,969) (71,844)
------------------------------------------------------------
Net increase (decrease) from capital
share transactions 404 $ 3,601 (7,495) $(67,454)
============================================================
ADVISER SHARES:
Shares sold 39 $ 352 5 $ 50
Shares issued from reinvested
dividends -** 4 1 7
Shares redeemed* (16) (152) (10) (97)
------------------------------------------------------------
Net increase (decrease) from capital
share transactions 23 $ 204 (4) $ (40)
============================================================
*Net of redemption fees, if any.
**Represents less than 500 shares.
================================================================================
40 | USAA FLEXIBLE INCOME FUND
================================================================================
(6) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES - The Manager provides investment management services to
the Fund pursuant to an Advisory Agreement. Under this agreement, the
Manager is responsible for managing the business and affairs of the Fund
and for directly managing the day-to-day investment of the Fund's assets,
subject to the authority of and supervision by the Board. The Manager also
is authorized to select (with approval of the Board and without shareholder
approval) one or more subadvisers to manage the day-to-day investment of a
portion of the Fund's assets. For the six-month period ended June 30, 2016,
the Fund had no subadviser(s).
The Fund's management fees are accrued daily and paid monthly at an
annualized rate of 0.50% of the Fund's average net assets. For the six-
month period ended June 30, 2016, the Fund incurred total management fees,
paid or payable to the Manager, of $221,000.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and 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 average net assets of the Fund Shares and Adviser Shares, and
0.10% of average net assets of the Institutional Shares. For the six-month
period ended June 30, 2016, the Fund Shares, Institutional Shares, and
Adviser Shares incurred administration and servicing fees, paid or payable
to the Manager, of $44,000, $13,000, and $3,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
reimbursement of a portion of these expenses incurred by the Manager. For
the six-month period ended June 30, 2016, the Fund reimbursed the Manager
$1,000 for these compliance and legal services. These expenses are
included in the professional fees on the Fund's Statement of Operations.
C. EXPENSE LIMITATION - The Manager agreed, through May 1, 2017, to limit
the total annual operating expenses of the Fund Shares, Institutional
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
================================================================================
Shares, and Adviser Shares to 0.90%, 0.80%, and 1.15%, respectively, of
their average net assets, excluding extraordinary expenses and before
reductions of any expenses paid indirectly, and to reimburse the Fund
Shares, Institutional Shares, and the Adviser Shares for all expenses in
excess of those amounts. This expense limitation arrangement may not be
changed or terminated through May 1, 2017, without approval of the Board,
and may be changed or terminated by the Manager at any time after that
date. For the six-month period ended June 30, 2016, the Fund incurred
reimbursable expenses from the Manager for the Fund Shares, Institutional
Shares, and Adviser Shares of $24,000, $31,000, and $12,000, respectively,
of which $30,000 was receivable from the Manager.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund Shares and Adviser Shares based on an
annual charge of $25.50 per shareholder account plus out-of-pocket
expenses. SAS pays a portion of these fees to certain intermediaries for
administration and servicing of accounts that are held with such
intermediaries. Transfer agent's fees for Institutional Shares are paid
monthly based on a fee accrued daily at an annualized rate of 0.10% of the
Institutional Shares' average net assets, plus out-of-pocket expenses. For
the six-month period ended June 30, 2016, the Fund Shares, Institutional
Shares and Adviser Shares incurred transfer agent's fees, paid or payable
to SAS, of $35,000, $13,000, and less than $500, respectively.
E. DISTRIBUTION AND SERVICE (12b-1) FEES - The Fund has adopted a plan
pursuant to Rule 12b-1 under the 1940 Act with respect to the Adviser
Shares. Under the plan, the Adviser Shares pay fees to USAA Investment
Management Company (IMCO), the distributor, for distribution and
shareholder services. IMCO pays all or a portion of such fees to
intermediaries that make the Adviser Shares available for investment by
their customers. The fee is accrued daily and paid monthly at an annual
rate of 0.25% of the Adviser Shares' average net assets. Adviser Shares are
offered and sold without imposition of an initial sales charge or a
contingent deferred sales charge. For the six-month period ended June 30,
2016, the Adviser Shares incurred distribution and service (12b-1) fees of
$6,000.
================================================================================
42 | USAA FLEXIBLE INCOME FUND
================================================================================
F. UNDERWRITING SERVICES - IMCO provides exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis and
receives no fee or other compensation for these services, but may receive
12b-1 fees as described above, with respect to Adviser Shares.
(7) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA funds and
is one of 20 USAA mutual funds in which the affiliated USAA fund-of-funds
invest. The USAA fund-of-funds do not invest in the underlying funds for the
purpose of exercising management or control. As of June 30, 2016, the USAA
fund-of-funds owned the following percentages of the total outstanding shares of
the Fund:
AFFILIATED USAA FUND OWNERSHIP %
-------------------------------------------------------------------------------
Cornerstone Conservative 5.3
Target Retirement Income 6.7
Target Retirement 2020 8.1
Target Retirement 2030 8.5
Target Retirement 2040 4.6
Target Retirement 2050 1.7
Target Retirement 2060 0.1
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At June 30, 2016,
USAA and its affiliates owned 1,004,000 Fund Shares and 500,000 Adviser Shares
which represents 18.8% of the Fund Shares outstanding, 92.7% of the Adviser
Shares outstanding and 16.6% of the Fund's outstanding shares.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
================================================================================
(8) FINANCIAL HIGHLIGHTS - FUND SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
-------------------------------------------------------------------
2016 2015 2014 2013***
-------------------------------------------------------------------
Net asset value at beginning of period $ 8.31 $ 9.59 $ 9.99 $ 10.00
----------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .11 .41 .52(a) .22(a)
Net realized and unrealized gain (loss) 1.10 (1.21) (.14)(a) (.02)(a)
----------------------------------------------------------------
Total from investment operations 1.21 (.80) .38(a) .20(a)
----------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.39) (.49) (.18)
Realized capital gains - (.09) (.29) (.03)
----------------------------------------------------------------
Total distributions (.17) (.48) (.78) (.21)
----------------------------------------------------------------
Net asset value at end of period $ 9.35 $ 8.31 $ 9.59 $ 9.99
================================================================
Total return (%)* 14.73 (8.66) 3.69 2.02
Net assets at end of period (000) $50,065 $55,762 $66,235 $31,636
Ratios to average net assets:**
Expenses (%)(c) 1.03(b),(d) .97(e) .92 1.00(b)
Expenses, excluding reimbursements (%)(c) 1.11(b) .97 .92 1.00(b)
Net investment income (%) 2.43(b) 4.53 5.03 4.10(b)
Portfolio turnover (%) 9 36(f) 90(g) 39
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$58,699,000.
*** Fund Shares commenced operations on July 12, 2013.
(a) Calculated using average shares.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Fund Shares before
reductions of any expenses paid indirectly. The Fund Shares' expenses paid
indirectly decreased the expense ratios as follows:
- - - (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Effective May 1, 2016, the Manager voluntarily agreed to limit the annual
expenses of the Fund Shares to 0.90% of the Fund Shares' average net assets.
(e) Prior to May 1, 2015, the Manager had voluntarily agreed to limit the annual
expenses of the Fund Shares to 1.00% of the Fund Shares' average net assets.
(f) Reflects overall decrease in purchases and sales of securities.
(g) Partial year - Fund commenced operations on July 12, 2013.
================================================================================
44 | USAA FLEXIBLE INCOME FUND
================================================================================
(8) FINANCIAL HIGHLIGHTS (CONTINUED) - INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
-------------------------------------------------------------------
2016 2015 2014 2013***
-------------------------------------------------------------------
Net asset value at beginning of period $ 8.32 $ 9.59 $ 9.99 $ 10.00
----------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .11 .43(a) .52 .24(a)
Net realized and unrealized gain (loss) 1.12 (1.21)(a) (.13) (.03)(a)
----------------------------------------------------------------
Total from investment operations 1.23 (.78)(a) .39 .21(a)
----------------------------------------------------------------
Less distributions from:
Net investment income (.18) (.40) (.50) (.19)
Realized capital gains - (.09) (.29) (.03)
----------------------------------------------------------------
Total distributions (.18) (.49) (.79) (.22)
----------------------------------------------------------------
Net asset value at end of period $ 9.37 $ 8.32 $ 9.59 $ 9.99
================================================================
Total return (%)* 15.00 (8.46) 3.79 2.09
Net assets at end of period (000) $29,599 $22,942 $98,348 $97,101
Ratios to average net assets:**
Expenses (%)(c) .80(b) .80 .80 .80(b)
Expenses, excluding reimbursements (%)(c) 1.04(b) .86 .85 .88(b)
Net investment income (%) 2.69(b) 4.57 5.08 4.65(b)
Portfolio turnover (%) 9 36(e) 90(d) 39
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$25,729,000.
*** Institutional Shares commenced operations on July 12, 2013.
(a) Calculated using average shares.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Partial year - Fund commenced operations on July 12, 2013.
(e) Reflects overall decrease in purchases and sales of securities.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
================================================================================
(8) FINANCIAL HIGHLIGHTS (CONTINUED) - ADVISER SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
-------------------------------------------------------------------
2016 2015 2014 2013***
-------------------------------------------------------------------
Net asset value at beginning of period $ 8.31 $ 9.59 $ 9.99 $10.00
---------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .10 .39 .47 .20(a)
Net realized and unrealized gain (loss) 1.11 (1.21) (.12) (.01)(a)
---------------------------------------------------------------
Total from investment operations 1.21 (.82) .35 .19(a)
---------------------------------------------------------------
Less distributions from:
Net investment income (.17) (.37) (.46) (.17)
Realized capital gains - (.09) (.29) (.03)
---------------------------------------------------------------
Total distributions (.17) (.46) (.75) (.20)
---------------------------------------------------------------
Net asset value at end of period $ 9.35 $ 8.31 $ 9.59 $ 9.99
===============================================================
Total return (%)* 14.69 (8.86) 3.35 1.90
Net assets at end of period (000) $5,046 $4,293 $4,989 $4,996
Ratios to average net assets:**
Expenses (%)(c) 1.15(b) 1.19(f) 1.25 1.25(b)
Expenses, excluding reimbursements (%)(c) 1.68(b) 1.33 1.55 1.54(b)
Net investment income (%) 2.37(b) 4.32 4.62 3.76(b)
Portfolio turnover (%) 9 36(e) 90(d) 39
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods of less
than one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were
$4,618,000.
*** Adviser Shares commenced operations on July 12, 2013.
(a) Calculated using average shares.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total annual operating expenses of the Adviser Shares before
reductions of any expenses paid indirectly. The Adviser Shares' expenses
paid indirectly decreased the expense ratios as follows:
- - - (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(d) Partial year - Fund commenced operations on July 12, 2013.
(e) Reflects overall decrease in purchases and sales of securities.
(f) Prior to May 1, 2015, the Manager had voluntarily agreed to limit the annual
expenses of the Adviser Shares to 1.25% of the Adviser Shares' average net
assets.
================================================================================
46 | USAA FLEXIBLE INCOME FUND
================================================================================
EXPENSE EXAMPLE
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, distribution and service
(12b-1) fees, and other Fund operating expenses. This example is intended to
help you understand your indirect costs, also referred to as "ongoing costs" (in
dollars), of investing in the Fund and to compare these costs with the ongoing
costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of January 1, 2016, through June
30, 2016.
ACTUAL EXPENSES
The line labeled "actual" under each share class in the table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the beginning
of the period, to estimate the expenses that you paid over the period. Simply
divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number for your share
class in the "actual" line under the heading "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to
================================================================================
EXPENSE EXAMPLE | 47
================================================================================
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the line labeled "hypothetical"
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016-
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,147.30** $5.50**
Hypothetical
(5% return before expenses) 1,000.00 1,019.74** 5.17**
INSTITUTIONAL SHARES
Actual 1,000.00 1,150.00 4.28
Hypothetical
(5% return before expenses) 1,000.00 1,020.89 4.02
ADVISER SHARES
Actual 1,000.00 1,146.90 6.14
Hypothetical
(5% return before expenses) 1,000.00 1,019.14 5.77
*Expenses are equal to the annualized expense ratio of 1.03% for Fund Shares,
0.80% for Institutional Shares, and 1.15% for Adviser Shares, which are net of
any reimbursements and expenses paid indirectly, multiplied by the average
account value over the period, multiplied by 182 days/366 days (to reflect the
one-half-year period). The Fund's actual ending account values are based on its
actual total returns of 14.73% for Fund Shares, 15.00% for Institutional
Shares, and 14.69% for Adviser Shares for the six-month period of January 1,
2016, through June 30, 2016.
================================================================================
48 | USAA FLEXIBLE INCOME FUND
================================================================================
**The Funds' annualized expense ratio of 1.03% for the Fund Shares on the
previous page reflects a change effective May 1, 2016, where the Manager
voluntarily agreed to limit the annual expenses of the Fund Shares to 0.90% of
the Fund Shares' average net assets. Had the expense limitation been in effect
for the entire six-month period of January 1, 2016, through June 30, 2016, the
values in the table on the previous page would be as shown below.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD
ACCOUNT VALUE ACCOUNT VALUE JANUARY 1, 2016 -
JANUARY 1, 2016 JUNE 30, 2016 JUNE 30, 2016
-------------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,147.30 $4.81
Hypothetical
(5% return before expenses) 1,000.00 1,020.39 4.52
================================================================================
EXPENSE EXAMPLE | 49
================================================================================
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
--------------------------------------------------------------------------------
At an in-person meeting of the Board of Trustees (the Board) held on April 22,
2016, the Board, including the Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act of 1940, as amended) of the
Trust (the Independent Trustees), approved for an annual period the continuance
of the Advisory Agreement between the Trust and the Manager with respect to the
Fund. In advance of the meeting, the Trustees received and considered a variety
of information relating to the Advisory Agreement and the Manager, and were
given the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
counsel retained by the Independent Trustees (Independent Counsel) and received
materials from such Independent Counsel discussing the legal standards for their
consideration of the proposed continuation of the Advisory Agreement with
respect to the Fund. The Independent Trustees also reviewed the proposed
continuation of the Advisory Agreement with respect to the Fund in private
sessions with Independent Counsel at which no representatives of management were
present. At each regularly scheduled meeting of the Board and its committees,
the Board receives and reviews, among other things, information concerning the
Fund's performance and related services provided by the Manager. At the meeting
at which the renewal of the Advisory Agreement is considered, particular focus
is given to information concerning Fund performance, fees and total expenses as
================================================================================
50 | USAA FLEXIBLE INCOME FUND
================================================================================
compared to comparable investment companies, and the Manager's profitability
with respect to the Fund. However, the Board noted that the evaluation process
with respect to the Manager is an ongoing one. In this regard, the Board's and
its committees' consideration of the Advisory Agreement included information
previously received at such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by Independent Counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES - In considering the nature, extent, and
quality of the services provided by the Manager under the Advisory Agreement,
the Board reviewed information provided by the Manager relating to its
operations and personnel. The Board also took into account its knowledge of the
Manager's management and the quality of the performance of the Manager's duties
through Board meetings, discussions, and reports during the preceding year. The
Board considered the fees paid to the Manager and the services provided to the
Fund by the Manager under the Advisory Agreement, as well as other services
provided by the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment advisory
services provided to the Fund, the Manager and its affiliates provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements, and
other services necessary for the operation of the Fund and the Trust. The Board
considered the Manager's management style and the performance of the Manager's
duties under the Advisory Agreement. The Board considered the level and depth of
knowledge of the Manager, including the professional experience and
qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," also was considered. The Manager's role
in
================================================================================
ADVISORY AGREEMENT(S) | 51
================================================================================
coordinating the activities of the Fund's other service providers also was
considered. The Board also considered the Manager's risk management processes.
The Board considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high quality of
services under the Advisory Agreement. In reviewing the Advisory Agreement, the
Board focused on the experience, resources, and strengths of the Manager and its
affiliates in managing the Fund, as well as other funds in the Trust. The Board
also reviewed the compliance and administrative services provided to the Fund by
the Manager, including the Manager's oversight of the Fund's day-to-day
operations and oversight of Fund accounting. The Trustees, guided also by
information obtained from their experiences as trustees of the Trust, also
focused on the quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE - In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classification,
sales load type (in this case, retail investment companies with no sales loads),
asset size, and expense components (the expense group) and (ii) a larger group
of investment companies that includes all no-load retail open-end investment
companies with the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the expense universe). Among other
data, the Board noted that the Fund's management fee rate - which includes
advisory and administrative services - was above the median of its expense group
and its expense universe. The data indicated that the Fund's total expenses were
above the median of its expense group and its expense universe. The Board took
into account the various services provided to the Fund by the Manager and its
affiliates, including the high quality of services received by the Fund from the
Manager. The Board also noted the level and method of computing the management
fee. The Board also took into account management's discussion of the Fund's
expenses.
================================================================================
52 | USAA FLEXIBLE INCOME FUND
================================================================================
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
performance universe). The Fund's performance universe consisted of the Fund and
all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was lower than the average of its performance universe and its
Lipper index for the one-year period ended December 31, 2015. The Board also
noted that the Fund's percentile performance ranking was in the bottom 50% of
its performance universe for the one-year period ended December 31, 2015. The
Board took into account management's discussion of the Fund's performance.
COMPENSATION AND PROFITABILITY - The Board took into consideration the level and
method of computing the management fee. The information considered by the Board
included operating profit margin information for the Manager's business as a
whole. The Board also received and considered profitability information related
to the management revenues from the Fund. This information included a review of
the methodology used in the allocation of certain costs to the Fund. The
Trustees reviewed the profitability of the Manager's relationship with the Fund
before tax expenses. In reviewing the overall profitability of the management
fee to the Manager, the Board also considered the fact that affiliates provide
shareholder servicing and administrative services to the Fund for which they
receive compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager.
================================================================================
ADVISORY AGREEMENT(S) | 53
================================================================================
ECONOMIES OF SCALE - The Board considered whether there should be changes in the
management fee rate or structure in order to enable the Fund to participate in
any economies of scale. The Board took into account management's discussion of
the current advisory fee structure. The Board also considered the effect of
Fund's growth and size on its performance and fees, noting that the Fund may
realize other economies of scale if assets increase proportionately more than
some expenses. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS - The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the performance of the Fund is being
addressed; (iv) the Fund's advisory expenses are reasonable in relation to those
of similar funds and to the services to be provided by the Manager; and (v) the
Manager's and its affiliates' level of profitability from their relationship
with the Fund is reasonable in light of the nature and high quality of services
provided by the Manager and the type of fund. Based on its conclusions, the
Board determined that continuation of the Advisory Agreement would be in the
best interests of the Fund and its shareholders.
================================================================================
54 | USAA FLEXIBLE INCOME FUND
================================================================================
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1700
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "My Accounts" on
SELF-SERVICE 24/7 usaa.com select your mutual fund
AT USAA.COM account and either click the link or
select 'I want to...' and select
OR CALL the desired action.
(800) 531-USAA (8722)
(210) 531-8722
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) in summary within the Statement of Additional
Information on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge (i) at
USAA.COM; and (ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722) or (210) 531-8722;
(ii) at USAA.COM; and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These
Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling (800) 732-0330.
================================================================================
--------------
USAA PRSRT STD
9800 Fredericksburg Road U.S. Postage
San Antonio, TX 78288 PAID
USAA
--------------
SAVE PAPER AND FUND COSTS
Under MY PROFILE on USAA.COM select MANAGE PREFERENCES
Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA We know what it means to serve.(R)
=============================================================================
97757-0816 (C)2016, USAA. All rights reserved.
| (a) | (1).NOT APPLICABLE. This item must be disclosed only in annual reports. |
| (a) | (2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit 99.CERT. |
| (a) | (3). Not Applicable. |
| (b). | Certification pursuant to Rule 30a-2(b) under the Investment Company Act of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit 99.906CERT. |
| By: |
/S/ DANIEL S. MCNAMARA Daniel S. McNamara |
President | Date: 08/23/2016 |
| By: |
/S/ ROBERTO GALINDO, JR. Roberto Galindo, Jr. |
Treasurer | Date: 08/26/2016 |
| 1. | I have reviewed the reports on Form N-CSR/S for the period ending June 30, 2016, for the following funds of USAA MUTUAL FUNDS TRUST: |
| 2. | Based on my knowledge, these reports do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by these reports; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in these reports, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in these reports; |
| 4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the Registrant and have: |
| 5. | The Registrant’s other certifying officer(s) and I have disclosed to the Registrant’s auditors and the audit committee of the Registrant’s board of trustees (or persons performing the equivalent functions): |
| 1. | I have reviewed the reports on Form N-CSR/S for the period ending June 30, 2016, for the following funds of USAA MUTUAL FUNDS TRUST: |
| 2. | Based on my knowledge, these reports do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by these reports; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in these reports, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in these reports; |
| 4. | The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the Registrant and have: |
| 5. | The Registrant’s other certifying officer(s) and I have disclosed to the Registrant’s auditors and the audit committee of the Registrant’s board of trustees (or persons performing the equivalent functions): |
| 1. | The Reports fully comply with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Reports fairly present, in all material respects, the financial condition and results of operations of the issuer. |
| 1. | The Reports fully comply with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Reports fairly present, in all material respects, the financial condition and results of operations of the issuer. |