1933 Act File No. 33-65572
1940 Act File No. 811-7852
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OF 1933 X
Pre-Effective Amendment No. ___
Post-Effective Amendment No.
50
and
REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment
No. 51
USAA MUTUAL FUNDS
TRUST
(Exact
Name of Registrant as Specified in Charter)
9800 Fredericksburg
Road
, San
Antonio, TX 78288
(Address of Principal Executive
Offices) (Zip Code)
Registrant’s
Telephone Number, including Area Code
(210) 498-0226
Mark
S. Howard, Secretary
USAA MUTUAL FUNDS TRUST
9800 Fredericksburg Road
San Antonio
, TX
78288-0227
(Name and Address of Agent for Service)
It
is proposed that this filing will become effective under Rule 485
___
immediately upon filing pursuant to
paragraph (b)
_
X_ on (February 1, 2010) pursuant to
paragraph (b)
___
60 days after filing pursuant to paragraph
(a)(1)
_
_ on (date) pursuant to
paragraph (a)(1)
___
75 days after filing pursuant to paragraph
(a)(2)
___
on (date) pursuant to paragraph (a)(2)
If
appropriate, check the following box:
_____
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Page 1 of 151
Exhibit Index Page 96
Part A
The Prospectus for the Managed Allocation Fund
is included herein
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[USAA EAGLE LOGO (R)]
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PROSPECTUS
USAA MANAGED ALLOCATION FUND
FEBRUARY 1, 2010
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As with other mutual funds, the Securities and Exchange Commission has not
approved or disapproved of this Fund's shares or determined whether this
prospectus is accurate or complete. Anyone who tells you otherwise is committing
a crime.
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TABLE OF CONTENTS
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INVESTMENT OBJECTIVE 2
FEES AND EXPENSES 2
PRINCIPAL INVESTMENT STRATEGY 3
PRINCIPAL RISKS 3
PERFORMANCE 5
INVESTMENT ADVISER 5
PORTFOLIO MANAGERS 6
PURCHASE AND SALE OF FUND SHARES 6
TAX INFORMATION 7
PAYMENTS TO BROKER-DEALERS AND
OTHER FINANCIAL INTERMEDIARIES 7
INVESTMENT OBJECTIVE 8
PRINCIPAL INVESTMENT STRATEGY 8
RISKS 15
PORTFOLIO HOLDINGS 19
FUND MANAGEMENT 19
PORTFOLIO MANAGERS 20
PURCHASES AND REDEMPTIONS 21
OTHER IMPORTANT INFORMATION ABOUT
PURCHASES AND REDEMPTIONS 22
SHAREHOLDER INFORMATION 25
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INVESTMENT OBJECTIVE
The USAA Managed Allocation Fund (the Fund) has an objective to seek to maximize
total return, consisting primarily of capital appreciation. The Fund's Board of
Trustees may change this investment objective without shareholder approval.
FEES AND EXPENSES
The table below describes the estimated fees and expenses that you may pay,
directly and indirectly, to invest in the Fund. The annual fund operating
expenses below are based on estimated expenses.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
There are no fees or sales loads charged to your account when you buy or sell
Fund shares.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT YOU PAY EACH YEAR AS A PERCENTAGE
OF THE VALUE OF YOUR INVESTMENT)
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Management Fee .60%
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Distribution and/or Service (12b-1) Fees None
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Other Expenses .19%
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Acquired Fund Fees and Expenses .48%*
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TOTAL ANNUAL OPERATING EXPENSES 1.27%
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* The acquired fund fees and expenses are based on estimated amounts for the
current fiscal year.
EXAMPLE
This example is intended to help you compare the cost of investing in this Fund
with the cost of investing in other mutual funds. Although your actual costs may
be higher or lower, you would pay the following expenses on a $10,000
investment, assuming (1) a 5% annual return, (2) the Fund's operating expenses
remain the same, and (3) you redeem all of your shares at the end of the periods
shown.
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1 YEAR 3 YEARS
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$129 $403
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2 | USAA Managed Allocation Fund
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PORTFOLIO TURNOVER
The Fund pays transaction costs, including commissions, when it buys and sells
securities (or "turns over" its portfolio). A higher portfolio turnover rate may
indicate higher transaction costs and may result in higher taxes when Fund
shares are held in a taxable account. These costs, which are not reflected in
annual fund operating expenses or in the example, affect the Fund's performance.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest primarily in U.S. and/or
foreign (to include emerging markets) equity securities and fixed-income
securities through investments in shares of other investment companies,
including exchange-traded funds (ETFs) and real estate securities, including
real estate investment trusts (REITs). Consistent with its investment strategy,
the Fund may at times invest directly in U.S. and/or foreign equity securities
and fixed-income securities as well as futures contracts and hedge funds.
PRINCIPAL RISKS
Any investment involves risk, and there is no assurance that the Fund will
achieve its investment objective. As with other mutual funds, losing money is a
risk of investing in this Fund.
The Fund is nondiversified, which means that it 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 risks associated with a single issuer or economic, political, or
regulatory event than a diversified fund.
The Fund may change the allocation of its portfolio holdings on a frequent
basis, which may result in high portfolio turnover. In purchasing and selling
securities in order to reallocate the portfolio, the Fund will pay more in
brokerage commissions than it would without a reallocation policy. The Fund may
have a higher proportion of capital gains and a lower return than a fund that
does not have a reallocation policy.
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Because this Fund invests in stocks and other assets whose value is tied to
stocks, it is subject to stock market risk, which is the possibility that the
value of the Fund's investments in stocks will decline regardless of the success
or failure of a company's operations. A company's stock price in general may
decline over short or even extended periods, regardless of the success or
failure of a company's operations. In addition, there is a possibility that the
value of the Fund's investments in foreign securities will decrease because of
unique risks, such as currency exchange rate fluctuations; foreign market
illiquidity; emerging market risk; increased price volatility; uncertain
political conditions; exchange control regulations; foreign ownership limits;
different accounting, reporting, and disclosure requirements; difficulties in
obtaining legal judgments; and foreign withholding taxes.
ETFs, as investment companies, incur their own management and other fees and
expenses, such as trustees fees, operating expenses, registration fees, and
marketing expenses, a proportionate share of which would be borne by the Fund.
As a result, an investment by the Fund in an ETF could cause the Fund's
operating expenses to be higher and, in turn, performance to be lower than if it
were to invest directly in the securities underlying the ETF. In addition, the
Fund will be indirectly exposed to all of the risk of securities held by the
ETFs.
The Fund may invest in futures and options contracts and other types of
derivatives. Risks associated with investing in derivative instruments such as
futures contracts and options contracts include: the risk that the derivative is
not well-correlated with the security, index, or currency to which it relates;
the risk that derivatives used for risk management may not have the intended
effects and may result in losses or missed opportunities; the risk that the Fund
will be unable to sell the derivative because of an illiquid secondary market;
the risk that a counterparty is unwilling or unable to meet its obligation; the
risk of interest rate movements; and the risk that the derivatives transaction
could expose the Fund to the effects of leverage, which could increase the
Fund's exposure to the market and magnify potential losses. There is no
guarantee that derivatives activities will be employed or that they will work,
and their use could cause lower returns or even losses to the Fund.
The market value of the bonds held in the Fund's portfolio could decline because
of rising interest rates, adverse changes in supply and demand, or other market
factors. Bond prices are linked to the prevailing market interest rates. In
general, when interest rates rise, bond prices fall and when interest rates
fall, bond prices rise. The price
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4 | USAA Managed Allocation Fund
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volatility of a bond also depends on its maturity. Generally, the longer the
maturity of a bond, the greater its sensitivity to interest rates. To
compensate investors for this higher interest rate risk, bonds with longer
maturities generally offer higher yields than bonds with shorter maturities.
Some of the securities in the Fund's portfolio may be subject to credit risk,
which is the possibility that a borrower cannot make timely interest and
principal payments on its securities. The Fund accepts some credit risk as a
recognized means to enhance an investor's return. Many issuers of high-yield
securities have characteristics (including, but not limited to, high levels of
debt, an untested business plan, significant competitive and technological
challenges, legal, and political risks) which cast doubt on their ability to
honor their financial obligations. They may be unable to pay dividends, interest
when due, or return all of the principal amount of their debt obligations at
maturity. All securities varying from the highest quality to very speculative
have some degree of credit risk.
There is a possibility that the value of the Fund's investment in real estate
investment trusts (REITs) will decrease because of a decline in real estate
values in both domestic and foreign locations. Investing in REITs may subject
the Fund to many of the same risks associated with the direct ownership of real
estate. Additionally, REITs are dependent upon the capabilities of the REIT
manager(s), have limited diversification, and could be significantly impacted by
changes in tax laws.
An investment in this Fund is not a deposit of USAA Federal Savings Bank, or any
other bank, and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
PERFORMANCE
Performance history for the Fund will be available in the prospectus after the
Fund has been in operation for one full calendar year.
INVESTMENT ADVISER
USAA Investment Management Company (IMCO)
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PORTFOLIO MANAGERS
John P. Toohey, CFA, vice president of Equity Investments, is responsible for
the Fund's asset allocation and has co-managed the Fund since its inception.
Wasif A. Latif, vice president of Equity Investments, has co-managed the Fund
since its inception.
R. Matthew Freund, CFA, vice president of Fixed Income Investments, has
co-managed the Fund since its inception.
Arnold J. Espe, CFA, vice president of Fixed Income Investments, has co-managed
the Fund since its inception.
Mark W. Johnson, CFA, vice president of Equity Investments, has co-managed the
Fund since its inception.
Dan Denbow, CFA, assistant vice president and portfolio manager, has co-managed
the Fund since its inception.
PURCHASE AND SALE OF FUND SHARES
This Fund is not offered for sale directly to the general public and currently
is available for investment only through a USAA managed account program. The
Fund may be offered to other persons and legal entities that IMCO may approve
from time to time. There are no minimum initial or subsequent purchase payment
amounts for investments in the Fund.
Redemptions are effective on the day instructions are received in good order
prior to the close of the New York Stock Exchange (NYSE) (generally 4 p.m.
Eastern time) and will receive the net asset value (NAV) per share determined
for that day. However, if instructions are received after the close of the NYSE
(generally 4 p.m. Eastern time), redemptions will be effective on the next
business day.
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6 | USAA Managed Allocation Fund
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TAX INFORMATION
The Fund intends to make distributions that may be taxed as ordinary income or
capital gains.
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
If you purchase the Fund through a broker-dealer or other financial intermediary
(such as a bank), the Fund and its related companies may pay the intermediary
for certain servicing and administrative functions. These payments may create a
conflict of interest by influencing the broker-dealer or other intermediary and
your salesperson to recommend the Fund over another investment. Ask your
salesperson or visit your financial intermediary's website for more information.
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Prospectus | 7
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USAA INVESTMENT MANAGEMENT COMPANY (IMCO) MANAGES THIS FUND. FOR EASIER READING,
IMCO WILL BE REFERRED TO AS "WE" OR "US" THROUGHOUT THE PROSPECTUS.
INVESTMENT OBJECTIVE
|X| WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek to maximize total return,
consisting primarily of capital appreciation. The Fund's Board of Trustees
may change this investment objective without shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
|X| WHAT IS THE FUND'S PRINCIPAL INVESTMENT STRATEGY?
The Fund's principal investment strategy is to invest primarily in U.S.
and/or foreign (to include emerging markets) equity securities and
fixed-income securities through investments in shares of investment
companies, including ETFs and REITs. Consistent with the Fund's investment
strategy, it may at times invest directly in U.S. and/or foreign (to
include emerging markets) equity securities and fixed-income securities as
well as futures contracts and hedge funds.
|X| WHAT TYPE OF INVESTMENT COMPANIES WILL BE CONSIDERED FOR INVESTMENT IN THE
FUND?
With respect to the Fund's investments in other investment companies, the
equity mutual funds may include any type of equity mutual fund (E.G., real
estate, technology, or health care). However, the Fund may be invested in a
manner intended to diminish risk and volatility through allocations of
assets to less aggressive equity mutual funds (or to aggressive equity
mutual funds in lesser percentages). Furthermore, the Fund may at times
invest in fixed-income mutual funds made up of debt securities with varying
maturities (E.G., long-term, intermediate-term, or short-term) and credit
qualities (E.G., investment grade or non-investment grade), while at other
times, a larger emphasis will be given to one particular type of
fixed-income mutual fund.
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8 | USAA Managed Allocation Fund
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|X| WHAT ARE ETFS AND WHY ARE THEY PART OF THE FUND'S PORTFOLIO?
ETFs are, with a few exceptions, open-end investment companies that trade
on exchanges throughout the day. ETFs typically track a market index or
specific sectors of the stock or bond markets but also may be managed in a
manner that is intended to out perform a market index or sector index.
Because they trade like stocks, ETFs offer trading flexibility desired by
both individuals and institutions. Like any security that trades on an
exchange, the value of the underlying securities is the major factor in
determining an ETF's price. The price of an ETF is determined by supply and
demand. Thus, ETFs do not necessarily trade at the net asset values of
their underlying securities. The Fund will value any ETF in its portfolio
at its last sale or closing market price, which typically approximates its
net asset value although there may be times when the market price and net
asset value vary.
The Fund may rely on Securities and Exchange Commission (SEC) exemptive
orders or rules that permit funds meeting various conditions to invest in
an ETF in amounts exceeding limits set forth in the Investment Company Act
of 1940 that would otherwise be applicable.
|X| HOW WILL THE FUND UTILIZE DERIVATIVE INSTRUMENTS IN ITS PORTFOLIO?
The Fund is permitted to use various types of derivatives (contracts whose
value is based on, for example, indexes, currencies, commodities, or
securities). The Fund may use derivatives such as futures contracts in
circumstances where the managers believe they offer an economical means of
gaining exposure to a particular asset class or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining exposure to
the market.
As an alternative investment strategy in an attempt to reduce the Fund's
volatility over time, the Fund may implement an index option-based strategy
by selling index call or corresponding ETF options and buying index put or
corresponding ETF options or put spread options.
As the seller of an index call or corresponding ETF option, the Fund
receives cash (the premium) from the purchaser. The purchaser of an index
call option has the right to any appreciation in the value of the index
over a fixed price (the exercise price) on a certain date in the future
(the expiration date). If the purchaser does not exercise the option, the
Fund retains the premium. If the purchaser exercises the option, the Fund
pays the purchaser the difference between
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Prospectus | 9
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the price of the index and the exercise price of the option. The premium,
the exercise price, and the market value of the index determine the
gain or loss realized by the Fund as the seller of the index call option.
The Fund also may repurchase the call or corresponding ETF option prior to
the expiration date, ending its obligation. In this case, the cost of
repurchasing the option will determine the gain or loss realized by the
Fund.
As the buyer of an index put or corresponding ETF option, the Fund attempts
to reduce losses on its stock portfolio from a significant market decline
over a short period of time. The value of an index put or corresponding ETF
option generally increases as stock prices decrease.
|X| ARE THERE ANY RISKS TO BUYING AND SELLING INDEX OPTIONS?
Selling index call or corresponding ETF options can reduce the risk of
owning a stock portfolio, because declines in the value of the stock
portfolio would be offset to the extent of the up-front cash (premium)
received at the time of selling the call option. However, if the value of
the index on which the option is based appreciates to a price higher than
the option's exercise price, it can be expected that the purchaser will
exercise the option and the Fund will be obligated to pay the purchaser the
difference between the exercise price and the appreciated value of the
index. Therefore, selling index call or corresponding ETF options also can
limit the Fund's opportunity to profit from an increase in the market value
of the stock portfolio.
Purchasing index put or corresponding ETF options can reduce the risk of
declines in the value of a stock portfolio, because a put option gives its
purchaser, in return for a premium, the right to receive the difference
between the exercise price of the option and any decline in the value of
the index below the exercise price. However, the Fund risks losing all or
part of the cash paid for purchasing index put or corresponding ETF options
if the value of the index does not decline below its exercise price. At
times, the Fund may not own any put options, resulting in increased
exposure to a market decline. Unusual market conditions or the lack of a
ready market for any particular option at a specific time may reduce the
effectiveness of the Fund's option strategies.
|X| WHAT TYPES OF REAL ESTATE SECURITIES WILL BE INCLUDED IN THE FUND'S
PORTFOLIO?
Investments in real estate securities will consist primarily of common
stocks, mutual funds, and ETFs, and ETFs of REITs and com-
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panies that operate as real estate corporations or which have a significant
portion of their assets in real estate. We will evaluate the nature of a
company's real estate holdings to determine whether the Fund's investment
in the company's common stock will be included. In addition, we may invest
in preferred stocks, securities convertible into common stocks, and
securities that carry the right to buy common stocks of REITs and real
estate companies. The Fund generally will not acquire any direct ownership
of real estate.
|X| WHAT ROLE DO EQUITY SECURITIES PLAY IN THE FUND'S PORTFOLIO?
Up to 100% of the Fund's portfolio may be allocated to U.S. and/or foreign
equity securities (to include emerging markets), and this allocation may
consist in part or in whole of mutual funds and ETFs that hold such
securities.
From time to time, the U.S. and foreign equity markets may fluctuate
independently of each other. In other words, a decline in one market may,
in certain circumstances, be offset by a rise in another market. In
addition, foreign equity markets may provide attractive returns not
otherwise available in the U.S. markets.
|X| WHAT IS CONSIDERED TO BE A "FOREIGN COMPANY"?
A company will be designated as a foreign company by considering several
factors, including the country in which the company was legally organized,
the location of the company's assets, the location of the company's
headquarters, the countries where the company's revenues are derived, and
the principal trading market for the company's stock.
|X| WHAT IS AN "EMERGING MARKET COMPANY"?
An issuer is an emerging market company if it is organized under the laws
of an emerging market country (as defined below); the principal trading
market for its stock is in an emerging market country; or at least 50% of
its revenues or profits are derived from operations within emerging market
countries or at least 50% of its assets are located within emerging market
countries.
|X| HOW ARE THE DECISIONS TO BUY AND SELL EQUITY SECURITIES MADE?
In selecting equity securities for the Fund, we seek to invest in
companies, mutual funds, ETFs, or REITs that are attractively priced
relative to an assessment of the company's value, while recognizing that
considerations relating to the competitive position of a company's assets,
the quality of its management, the strength of its
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balance sheet, and the growth prospects of its markets impact the premium
or discount to net asset value that might be warranted.
We will sell a security either when a more attractive opportunity is
identified or upon a marked deterioration of a company's fundamentals.
|X| WHAT TYPES OF FIXED-INCOME SECURITIES MAY BE INCLUDED IN THE FUND'S
PORTFOLIO?
Up to 100% of the Fund's portfolio may be allocated to U.S. and/or foreign
(to include emerging markets) fixed-income securities and/or money market
instruments including bonds, convertible securities, leveraged loans,
preferred stocks, and mutual funds and ETFs that hold the same. The Fund
may from time to time invest in a broad range of high-yield securities.
Fixed-income securities and money market instruments are intended to
provide both liquidity and interest income. In addition, bonds provide
opportunities for capital gains.
These securities may include obligations of U.S., state, and local
governments, their agencies and instrumentalities; mortgage- and
asset-backed securities; corporate debt securities; repurchase agreements;
debt REITs; and other securities believed to have debt like
characteristics, including synthetic securities.
The Fund may use various techniques to increase or decrease its exposure to
changing security prices, interest rates, commodity prices, or other
factors that affect security values. These methods may involve derivative
transactions such as buying and selling options and futures contracts,
entering into currency exchange contracts, swap agreements, or credit
default swap agreements, purchasing indexed securities, and selling
securities short.
Certain bond and money market instruments, such as collateralized mortgage
obligations (CMOs), commercial mortgage-backed securities (CMBSs),
interest-only CMBS securities (CMBS IOs), periodic auction reset bonds,
loan interests, and direct debt instruments, Eurodollar and Yankee
obligations, and synthetic securities, are subject to special risks that
are described in the statement of additional information (SAI).
The Fund also may invest in defaulted securities, non-dollar-denominated
foreign securities, trade claims, and certain derivatives such
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as futures and options. We also may invest, without limitation, in dollar-
denominated securities of foreign issuers.
The Fund is limited to 15% of its net assets in illiquid securities. An
illiquid security is an investment that generally cannot be disposed of in
the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the investment.
|X| WHAT ARE CONSIDERED "HIGH-YIELD SECURITIES"?
We consider high-yield securities to include a broad range of securities
that produce high current income. The Fund has no limits on the credit
quality and maturity of its investments. Generally, debt securities rated
below the four highest credit grades by a public rating agency (or of
equivalent quality if not publicly rated) are considered
"non-investment-grade" or "high-yield" securities, which are considered
speculative and are subject to significant credit risk. They are sometimes
referred to as "junk" since they are believed to represent a greater risk
of default than more creditworthy "investment-grade" securities.
High-yield securities may be issued by corporations, governmental bodies,
and other issuers. These issuers might be small or obscure, just getting
started, or even large, well-known leveraged entities. They are typically
more vulnerable to financial setbacks and recession than more creditworthy
issuers and may be unable to make timely dividend, interest, and principal
payments if economic conditions weaken.
|X| WHAT IS THE DIFFERENCE BETWEEN INVESTING IN HIGH-YIELD AND INVESTING IN
INVESTMENT-GRADE BONDS?
The bond markets generally offer a greater potential return only for
accepting a greater level of risk. The two most common risks are CREDIT
RISK - or the risk that an issuer will be unable to make timely dividend,
interest, or principal payments; and INTEREST RATE RISK - or the risk that
a security's market value will change with interest rates.
In the investment-grade bond market (where credit risks are generally
considered low), a higher return is normally used to entice investors into
buying longer-maturity bonds, thereby accepting greater sensitivity to
changes in interest rates. In contrast, high-yield securities are often
considered hybrids, with characteristics of both stocks and bonds.
High-yield securities generally have less interest rate risk and higher
credit risk than higher-quality bonds. A higher return is normally used to
entice investors into buying secu-
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rities with a greater risk of default. Normally, the higher the credit risk,
the higher the potential return. In effect, high-yield investors are
trading a portion of the interest rate risk inherent in investment-grade
bonds for bond-specific credit risk (each high-yield security is a unique
story). At the same time, the volatility of high-yield securities
portfolios historically has been notably less than that of the equity market
as a whole.
As a result, high-yield securities portfolios have often acted differently
than investment-grade bond securities portfolios. High-yield securities are
more sensitive to changes in economic conditions than investment-grade
bonds. The portfolio may underperform when the outlook for the economy is
negative. Conversely, the portfolio may outperform when the economic
outlook turns positive.
|X| WHAT IS A CREDIT RATING?
A credit rating is an evaluation reflecting the possibility that an issuer
will default on a security. Rating agencies such as Moody's Investors
Service, Inc. (Moody's), Standard & Poor's Ratings Services (S&P), Fitch
Ratings, Inc. (Fitch), Dominion Bond Rating Service Limited (Dominion), and
A.M. Best Co., Inc. (A.M. Best) analyze the financial strength of an
issuer, whether the issuer is a corporation or government body. The highest
ratings are assigned to those |issuers perceived to have the least credit
risk. For example, S&P ratings range from AAA (highly unlikely to default)
to D (in default). If a security is not rated by the above-mentioned
agencies, we will assign an equivalent rating.
|X| HOW ARE THE DECISIONS TO BUY AND SELL FIXED-INCOME SECURITIES MADE?
We search for securities that represent an attractive value given current
market conditions. Recognizing value is the result of simultaneously
analyzing the risks and rewards of ownership among the securities available
in the market. In general, we focus on securities that offer high income.
We also will explore opportunities for capital appreciation.
We will sell a security if it no longer represents value. This can occur
through an increase in risk, an increase in price, or a combination of the
two. We also will sell a security if we find a more compelling value in the
market.
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|X| WHAT TYPES OF MONEY MARKET INSTRUMENTS MAY BE INCLUDED IN THE FUND'S
PORTFOLIO?
The money market instruments generally included in the Fund's portfolio are
U.S. dollar-denominated debt securities that have remaining maturities of
one year or less. They may carry either fixed or variable interest rates
and may include, but are not limited to, variable-rate demand notes;
commercial paper; Treasury bills, bonds, notes, and certificates of
deposit; repurchase agreements; asset-backed securities; Eurodollar and
Yankee obligations; and other money market securities. The Fund also may
invest in money market mutual funds.
TEMPORARY DEFENSIVE STRATEGY
As a temporary defensive measure because of market, economic, political, or
other conditions, up to 100% of the Fund's assets may be invested in defensive
positions that are not consistent with the Fund's principal strategies. This may
result in the Fund's not achieving its investment objective during the time it
is in this temporary defensive posture.
RISKS
NONDIVERSIFICATION RISK: The Fund is nondiversified, which means that it may
invest a greater percentage of its assets in a single issuer, such as a single
stock or bond, or group of issuers. 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 such issuer or issuers. Such a focused investment
strategy may increase the volatility of the Fund's investment results.
MANAGEMENT RISK: The Fund is subject to management risk because it is actively
managed, and there is no guarantee that the investment techniques and risk
analyses used by the Fund's managers will produce the desired results. The
Fund's ability to achieve its investment objective depends in part on the
managers' skills in determining the Fund's asset class allocations and in
selecting and weighting investments in each asset class. The managers'
evaluations and assumptions regarding asset classes and investments may differ
from actual market conditions, which means there is a possibility that the
investment techniques and
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risk analyses used by the Fund's managers will not produce the desired results.
STOCK MARKET RISK: Because the Fund invests in stocks and other assets whose
value is tied to stocks, it is subject to stock market risk. Stock prices in
general may decline over short or even extended periods, regardless of the
success or failure of a company's operations. Stock markets tend to run in
cycles, with periods when stock prices generally go up and periods when stock
prices generally go down. Stocks tend to be more volatile than bonds.
ETFS RISK: The Fund may invest a substantial portion of its assets in ETFs,
which are registered investment companies. By investing in the Fund, you will be
exposed to the same risks of the ETFs' holdings as the ETFs themselves in direct
proportion to the allocation of the Fund's assets among those ETFs. You also
will indirectly bear fees and expenses charged by the ETFs in which the Fund
invests in addition to the Fund's direct fees and expenses. In addition, each
ETF typically is a "passive investor" and therefore invests in the securities
and sectors contained in the index it seeks to track without regard for or
analysis of the prospects of such securities or sectors. An ETF may invest in
all of the securities in such index or in a representative sample of such
securities. The ETFs will not attempt to take defensive positions in volatile or
declining markets or under other conditions. Furthermore, the ETFs will not be
able to duplicate exactly the performance of the underlying indexes they track.
The difference in performance between an ETF and the index it seeks to track can
be due to, among other factors, the expenses that the ETF pays, regulatory
constraints, investment strategies, or techniques undertaken by the ETF, and
changes to an underlying index. There also may be a lack of correlation between
the securities in an index and those actually held by an ETF. Moreover, the
market price of an ETF may be different from the NAV of such ETF (I.E., the ETF
may trade at a discount or premium to its NAV). The performance of a fund that
invests in such an ETF could be adversely impacted. In addition, although the
ETFs are generally listed on securities exchanges, there can be no assurances
that an active trading market for such ETFs will be maintained. Secondary market
trading in the ETFs also may be halted by a national securities exchange because
of market conditions or for other reasons. There can be no assurances that the
requirement necessary to maintain the listing of the ETFs will continue to be
met or will remain unchanged.
FOREIGN INVESTING RISK: Foreign investing risk is the possibility that the value
of the Fund's investments in foreign securities will decrease because of unique
risks, such as currency exchange rate fluctuations;
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16 | USAA Managed Allocation Fund
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foreign market illiquidity; emerging market risk; increased price volatility;
uncertain political conditions; exchange control regulations; foreign ownership
limits; different accounting, reporting, and disclosure requirements;
difficulties in obtaining legal judgments; and foreign withholding taxes. Two
forms of foreign investing risk are emerging markets risk and political risk.
|X| EMERGING MARKETS RISK: Investments in countries that are in the early
stages of their industrial development involve exposure to economic
structures that generally are less diverse and mature than those in the
United States and to political systems that may be less stable.
|X| POLITICAL RISK: Political risk includes a greater potential for coups
d'etat, revolts, and expropriation by governmental organizations.
Those risks are particularly heightened in this Fund due to the fact that within
the universe of foreign investing, investments in emerging market countries are
most volatile.
INTEREST RATE RISK: As a mutual fund that may invest in bonds, the Fund is
subject to the risk that the market value of the bonds it holds will decline
because of rising interest rates. Bond prices are linked to the prevailing
market interest rates. In general, when interest rates rise, bond prices fall
and when interest rates fall, bond prices rise. The price volatility of a bond
also depends on its maturity. Generally, the longer the maturity of a bond, the
greater its sensitivity to interest rates. To compensate investors for this
higher risk, bonds with longer maturities generally offer higher yields than
bonds with shorter maturities.
|X| IF INTEREST RATES INCREASE, the yield of the Fund may increase and the
market value of the Fund's debt securities will likely decline, adversely
affecting the Fund's NAV and total return.
|X| IF INTEREST RATES DECREASE, the yield of the Fund may decrease and the
market value of the Fund's debt securities may increase, which would likely
increase the Fund's NAV and total return.
CREDIT RISK: Credit risk is the possibility that a borrower cannot make timely
dividend, interest, and principal payments on its securities or that negative
perceptions of the issuer's ability to make such payments will cause the price
of that security to decline. Many issuers of high-yield securities have
characteristics (including, but not limited to, high levels of debt, an untested
business plan, significant competitive and technological challenges, legal, and
political risks), which cast doubt on their ability to honor their financial
obligations. They may be unable to
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pay dividends, interest when due, or return all of the principal amount of their
debt obligations at maturity.
When evaluating potential investments for the Fund, our analysts assess credit
risk and its impact on the Fund's portfolio. In addition, the public rating
agencies may provide estimates of the credit quality of the securities. The
ratings may not take into account every risk that dividends, interest, or
principal will be repaid on a timely basis.
GLOBAL REAL ESTATE SECURITIES AND REIT INVESTMENT RISK: The possibility
that the Fund's investments in global real estate securities and REITs will
decrease because of a decline in real estate values in both domestic and
foreign locations. Investing in REITs may subject the Fund to many of the same
risks associated with the direct ownership of real estate. Additionally, REITs
are dependent upon the capabilities of the REIT manager(s), have limited
diversification, and could be significantly impacted by changes in tax laws.
DERIVATIVES RISK: The Fund may invest in futures and options contracts and other
types of derivatives. Risks associated with derivatives include the risk that
the derivative is not well-correlated with the security, index, or currency to
which it relates; the risk that derivatives used for risk management may not
have the intended effects and may result in losses or missed opportunities; the
risk that the Fund will be unable to sell the derivative because of an illiquid
secondary market; the risk that a counterparty is unwilling or unable to meet
its obligation; the risk of interest rate movements; and the risk that the
derivatives transaction could expose the Fund to the effects of leverage, which
could increase the Fund's exposure to the market and magnify potential losses.
There is no guarantee that derivatives activities will be employed or that they
will work, and their use could reduce potential returns or even cause losses to
the Fund.
LEVERAGING RISK: The risk associated with securities or practices that multiply
small price movements into large changes in value. The more the Fund invests in
leveraged instruments or strategies that use leveraged instruments, the more
this leverage will magnify any losses on those investments.
LIQUIDITY RISK: The risk that the Fund's investment generally cannot be disposed
of in the ordinary course of business, seven days or less, at approximately the
same value at which the Fund has valued the investment.
PORTFOLIO TURNOVER RISK: To implement the Fund's principal investment strategy,
the Fund's securities may need to be actively and frequently
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traded. The Fund's portfolio turnover rate will likely exceed 100% and vary
from year to year depending on the frequency of the investment allocation
decisions made. A high turnover rate increases transaction costs and may
increase taxable capital gains, which may adversely affect Fund performance.
ADDITIONAL INFORMATION
This prospectus doesn't tell you about every policy or risk of investing in the
Fund. For additional information about the Fund's investment policies and the
types of securities in which the Fund's assets may be invested, you may want to
request a copy of the SAI (the back cover tells you how to do this).
PORTFOLIO HOLDINGS
The Fund's policies and procedures with respect to the disclosure of the Fund's
portfolio securities are available in the Fund's SAI, which is available upon
request.
FUND MANAGEMENT
IMCO serves as the manager of this Fund. We are an affiliate of United Services
Automobile Association (USAA), a large, diversified financial services
institution. Our mailing address is P.O. Box 659453, San Antonio, Texas
78265-9825. IMCO had approximately $72 billion in total assets under management
as of December 31, 2009.
IMCO provides investment management services to the Fund pursuant to an Advisory
Agreement. Under this agreement, we are responsible for managing the business
and affairs of the Fund, subject to the authority of and supervision by the
Fund's Board of Trustees. Under the Advisory Agreement, IMCO serves as the asset
allocation manager of the Fund. A discussion regarding the basis of the Board
of Trustees' approval of the Fund's Advisory Agreement will be available in
the Fund's annual report to shareholders for periods ended May 31.
The Fund is authorized, although we have no present intention of utilizing such
authority, to use a "manager-of-managers" structure. We could select (with
approval of the Fund's Board of Trustees and without shareholder approval) one
or more subadvisers to manage the actual day-to-day investment of the Fund's
assets. We would monitor each subadviser's performance through quantitative and
qualitative analysis and
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Prospectus | 19
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periodically report to the Fund's Board of Trustees as to whether each
subadviser's agreement should be renewed, terminated, or modified. We also
would be responsible for allocating assets to the subadvisers. The allocation
for each subadviser could range from 0% to 100% of the Fund's assets, and we
could change the allocations without shareholder approval.
For its services, the Fund pays IMCO an investment management fee, which is
accrued daily and paid monthly, equal to an annualized rate of three-fifths of
one percent (0.60%) of the Fund's average net assets.
In addition to providing investment management services, we also provide
administration, shareholder servicing, and distribution services to the Fund.
Its affiliate, USAA Shareholder Account Services (SAS), provides transfer agency
services to the Fund.
PORTFOLIO MANAGERS
JOHN P. TOOHEY, CFA, vice president of Equity Investments, joined USAA in
February 2009. He is responsible for the Fund's asset allocation and has
co-managed the Fund since its inception. Prior to joining USAA, Mr. Toohey was a
managing director at AIG Investments from December 2000 to January 2009, where
he was responsible for the investments supporting AIG's pension plans worldwide.
He also was co-portfolio manager for four lifestyle and asset allocation funds,
oversaw the equity index fund business, and served as a senior member of the
external client asset allocation team. Education: B.A., mathematics, Williams
College. He is a Fellow of the Society of Actuaries and holds the Chartered
Financial Analyst (CFA) designation.
WASIF A. LATIF, vice president of Equity Investments, joined USAA in June 2006
and has co-managed the Fund since its inception. Prior to joining USAA, he
was an equity portfolio manager at Deutsche Bank Private Wealth Management
(DB PWM) from December 1998 to May 2006, where he was responsible for managing
two fund-of-fund products and an international equity fund. Mr. Latif also
was a member of DB PWM's U.S. Investment Committee responsible for
covering the international equity and emerging markets asset classes.
Education: B.S. finance, University of Indianapolis, and M.B.A., University
of Illinois at Chicago.
R. MATTHEW FREUND, CFA, vice president of Fixed Income Investments, has
co-managed the Fund since its inception. Mr. Freund has 21 years of investment
management experience and has worked for us for 15 years.
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20 | USAA Managed Allocation Fund
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Education: B.A., Franklin & Marshall College; M.B.A., Indiana University.
He holds the CFA designation and is a member of the CFA Institute and the CFA
Society of San Antonio.
ARNOLD J. ESPE, CFA, vice president of Fixed Income Investments, has co-managed
the Fund since its inception. Mr. Espe has 26 years of investment management
experience and has worked for us for 10 years. Education: B.S., Willamette
University; M.B.A., University of Oregon. He holds the CFA designation and is a
member of the CFA Institute and the CFA Society of San Antonio.
MARK W. JOHNSON, CFA, vice president of Equity Investments, has co-managed the
Fund since its inception. Mr. Johnson has 36 years of investment management
experience and has worked for us for 21 years. Education: B.B.A. and M.B.A.,
University of Michigan. He holds the CFA designation and is a member of the CFA
Institute and the CFA Society of San Antonio.
DAN DENBOW, CFA, assistant vice president and portfolio manager, has co-managed
the Fund since its inception. Mr. Denbow has 17 years of investment management
experience and has worked for us for 12 years. Education: B.B.A. and M.B.A.,
Texas Christian University. He holds the CFA designation and is a member of the
CFA Institute and the CFA Society of San Antonio.
The SAI provides additional information about the portfolio managers'
compensation, other accounts, and ownership of Fund securities.
PURCHASES AND REDEMPTIONS
OPENING AN ACCOUNT
This Fund is not offered for sale directly to the general public and currently
is available for investment only through a USAA managed account program. The
Fund may be offered to other persons and legal entities that IMCO may approve
from time to time. There are no minimum initial or subsequent purchase payment
amounts for investments in the Fund.
EFFECTIVE DATE
The Fund's purchase price will be the NAV per share next determined after we
receive a request in proper form. The Fund's NAV is determined as of the close
of the regular trading session (generally 4 p.m. Eastern time) of the NYSE each
day it is open. If we receive a request
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Prospectus | 21
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and payment prior to that time, the purchase price will be the NAV per share
determined for that day. If we receive a request or payment after that time, the
purchase will be effective on the next business day.
REDEEMING AN ACCOUNT
Redemptions are effective on the day instructions are received in good order
prior to the close of the NYSE (generally 4 p.m. Eastern time) and will receive
the NAV per share determined for that day. However, if instructions are received
after the close of the NYSE (generally 4 p.m. Eastern time), redemptions will be
effective on the next business day.
We will send your money within seven days after the effective date of
redemption. For federal income tax purposes, a redemption is a taxable event; as
such, you may realize a capital gain or loss. Such capital gains or losses are
based on the difference between your cost basis in the shares originally
purchased and the price of the shares received upon redemption.
In addition, the Fund may elect to suspend the redemption of shares or postpone
the date of payment in limited circumstances (E.G., if the NYSE is closed or
when permitted by order of the SEC).
OTHER IMPORTANT INFORMATION ABOUT PURCHASES AND REDEMPTIONS
EXCESSIVE SHORT-TERM TRADING POLICY
The USAA Funds generally are not intended as short-term investment vehicles
(except for the money market funds, the USAA Short-Term Bond Fund, and the USAA
Tax Exempt Short-Term Fund). Some investors try to profit by using excessive
short-term trading practices involving mutual fund shares, frequently referred
to as "market timing."
Excessive short-term trading activity can disrupt the efficient management of a
fund and raise its transaction costs by forcing portfolio managers to first buy
and then sell portfolio securities in response to a large investment by
short-term traders. While there is no assurance that the USAA Funds can deter
all excessive and short-term trading, the Board of Trustees of the USAA Funds
has adopted the following policies (except for the money market funds, the USAA
Short-Term Bond Fund, and the USAA Tax Exempt Short-Term Fund). These policies
are
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22 | USAA Managed Allocation Fund
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designed to deter disruptive, excessive short-term trading without
needlessly penalizing BONA FIDE investors.
To deter such trading activities, the USAA Funds' policies and procedures
include:
|X| Each fund reserves the right to reject any purchase order, including an
exchange, that it regards as disruptive to the efficient management of the
particular fund.
|X| Each fund may use a fair value pricing service or other model to assist in
establishing the current value of foreign securities held by any of the
USAA Funds. Fair value pricing is used to adjust for stale pricing that may
occur between the close of certain foreign exchanges or markets and the
time the USAA Funds calculate their NAV. Using fair value pricing is
intended to deter those trying to take advantage of time-zone differences
in the valuation of foreign securities and to prevent dilution to long-term
investors. Fair value pricing of a foreign security can result in the USAA
Funds' using a price that is higher or lower than the closing price of a
foreign security for purposes of calculating a fund's NAV.
A FUND'S RIGHT TO REJECT PURCHASE AND EXCHANGE
ORDERS AND LIMIT TRADING IN ACCOUNTS
The USAA Funds' main safeguard against excessive short-term trading is their
right to reject purchase or exchange orders if in the best interest of the
affected fund. In exercising this discretion to reject purchase and exchange
orders, a fund deems that certain excessive short-term trading activities are
not in the best interest of the fund because such activities can hamper the
efficient management of a fund. Generally, persons who engage in an "in and out"
(or "out and in") transaction within a 30-day period will violate the USAA
Funds' policy if they engage in another "in and out" (or "out and in")
transaction in the same fund within 90 days. Each fund also reserves the right
to restrict future purchases if an investor is classified as engaged in other
patterns of excessive short-term trading, including after one large disruptive
purchase and redemption. Finally, each fund reserves the right to reject any
other purchase or exchange order in other situations that do not involve
excessive short-term trading activities if in the best interest of a fund.
The following transactions are exempt from the excessive short-term trading
activity policies described above:
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Prospectus | 23
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|X| Transactions in the money market funds, USAA Short-Term Bond Fund, and USAA
Tax Exempt Short-Term Fund;
|X| Purchases and sales pursuant to automatic investment or withdrawal plans;
|X| Purchases and sales made through USAA Strategic Fund Adviser(R), USAA
Private Investment Management(R), USAA College Savings Plan(R), USAA
Federal Savings Bank Trust Department, USAA Global Opportunities Portfolio,
or other designated USAA managed account programs;
|X| Purchases and sales of the USAA institutional shares by the USAA Target
Retirement Funds; and
|X| Other transactions that are not motivated by short-term trading
considerations if they are approved by transfer agent management personnel
and are not disruptive to a fund.
If a person is classified as engaged in excessive short-term trading, the remedy
will depend upon the trading activities of the investor in the account and
related accounts and its disruptive effect, and can include warnings to cease
such activity and/or restrictions or termination of trading privileges in a
particular fund or all USAA Funds.
The USAA Funds rely on the transfer agent to review trading activity for
excessive short-term trading. There can be no assurance, however, that our
monitoring activities will successfully detect or prevent all excessive
short-term trading.
The USAA Funds seek to apply these policies and procedures uniformly to all
investors; however, some investors purchase USAA Fund shares through financial
intermediaries that establish omnibus accounts to invest in the USAA Funds for
their clients and submit net orders to purchase or redeem shares after combining
their client orders. The USAA Funds subject to short-term trading policies
generally treat these omnibus accounts as an individual investor and will apply
the short-term trading policies to the net purchases and sales submitted by the
omnibus account, unless the funds or their transfer agent have entered into an
agreement requiring the omnibus account to submit the underlying trading
information for their clients upon our request and/or monitor for excessive
trading. For those omnibus accounts for which we have entered into agreements to
provide underlying trade information, the financial intermediary or USAA Funds
review net activity in these onmi-
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24 | USAA Managed Allocation Fund
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bus accounts for activity that indicates potential excessive short-term
trading activity. If we detect suspicious trading activity at the omnibus
account level, we will request underlying trading information and review the
underlying trading activity for individual accounts to identify individual
accounts engaged in excessive short-term trading activity. We will instruct
the omnibus account to restrict, limit, or terminate trading privileges in a
particular fund for individual accounts identified as engaging in excessive
short-term trading through these omnibus accounts.
We also may rely on the financial intermediary to review for and identify
underlying trading activity for indiviudal accounts engaged in excessive
short-term trading activity, and to restict, limit, or terminate trading
privileges if the financial intermediary's policies are determined by us to be
at least as stringent as the USAA Funds' policy.
Because of the increased costs to review underlying trading information, the
USAA Funds will not enter into agreements with every financial intermediary that
operates an omnibus account. The USAA Funds or their transfer agent could decide
to enter into such contracts with financial intermediaries for all funds or
particular funds and can terminate such agreements at any time.
SHAREHOLDER INFORMATION
CURRENT PRICE AND TOTAL RETURN INFORMATION
For the most current price and total return information for this Fund, you may
call the USAA self-service telephone system at (800) 531-USAA (8722).
Additionally, you may find the most current price of your Fund's shares in the
business section of your newspaper in the mutual fund section under the heading
"USAA Group" and the appropriate newspaper symbol. If you prefer to obtain this
information from an online service, you may do so by using its ticker symbol.
The Fund will receive its ticker symbol when it acquires $25 million in assets
or 1,000 shareholders.
You also may access this information through our USAA.COM website once you have
established Internet access. In addition, you may see the Fund's total return
quoted in advertisements and reports. You also may see a comparison of the
Fund's performance to that of other mutual funds with similar investment
objectives and to stock or relevant indices. You must remember that historical
performance does not necessarily indicate what will happen in the future.
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Prospectus | 25
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SHARE PRICE CALCULATION
The price at which you purchase and redeem Fund shares is equal to the NAV per
share determined on the effective date of the purchase or redemption. You may
buy and sell Fund shares at the NAV per share without a sales charge. The Fund's
NAV per share is calculated as of the close of the NYSE (generally 4 p.m.
Eastern time) each day that the NYSE is open for regular trading. The NYSE is
closed on most national holidays and Good Friday.
VALUATION OF SECURITIES
Portfolio securities, including 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. Portfolio 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.
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 NAV may not take place at the
same time the prices of certain foreign securities held by the Fund are
determined. In most cases, events affecting the values of foreign securities
that occur between the time of their last quoted sales or official closing
prices and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not be reflected in the value of the Fund's foreign
securities. However, we will monitor for events that would materially affect the
value of the Fund's foreign securities. If we determine that a particular event
would materially affect the value of the Fund's foreign securities, then we,
under valuation procedures approved by the Fund's Board of Trustees, will
consider such available information that we deem relevant to determine a fair
value for the affected foreign securities. In addition, the Fund may use
information from an external vendor or other sources to adjust the foreign
market closing prices of foreign equity securities to reflect what the Fund
believes to be the fair value of the securities as of the close of the NYSE.
Fair valuation of affected foreign equity securities may occur frequently based
on an assessment that events which occur on a fairly regular basis (such as U.S.
market movements) are significant.
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26 | USAA Managed Allocation Fund
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Debt securities with maturities greater than 60 days are valued each business
day by a pricing service (the Service) approved by the Board of Trustees. The
Service uses an evaluated mean between quoted bid and asked prices or the last
sales price to price securities when, in the Service's judgment, these prices
are readily available and are representative of the securities' market values.
For many securities, such prices are not readily available. The Service
generally prices those securities based on methods that include consideration of
yields or prices of securities of comparable quality, coupon, maturity, and
type; indications as to values from dealers in securities; and general market
conditions.
Debt securities purchased with original or remaining maturities of 60 days or
less are valued at amortized cost, which approximates market value. Repurchase
agreements are valued at cost.
Investments in open-end investment companies, hedge, or other funds, other than
ETFs are valued at their NAV at the end of each business day.
Futures contracts are valued based upon the last quoted sale price at the close
of market on the principal exchange on which they are traded.
Option contracts are valued by a pricing service at the National Best Bid/Offer
(NBBO) composite price, which is derived from the best available bid and ask
prices i n all participating options exchanges determined to most closely
reflect market value of the options at the time of computation of the Fund's
NAV.
Securities for which market quotations are not readily available or are
considered unreliable, or whose values have been materially affected by events
occurring after the close of their primary markets but before the pricing of the
Fund, are valued in good faith by us at fair value using valuation procedures
approved by the Fund's Board of Trustees. The effect of fair value pricing is
that securities may not be priced on the basis of quotations from the primary
market in which they are traded, and the actual price realized from the sale of
a security may differ materially from the fair value price. Valuing these
securities at fair value is intended to cause the Fund's NAV to be more reliable
than it otherwise would be.
Fair value methods used by the Fund include, but are not limited to, obtaining
market quotations from secondary pricing services, broker-dealers, or widely
used quotation systems. General factors considered in determining the fair value
of securities include fundamental analytical data, the nature and duration of
any restrictions on disposition of the
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Prospectus | 27
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securities, and an evaluation of the forces that influence the market in which
the securities are purchased and sold.
For additional information on how securities are valued, see VALUATION OF
SECURITIES in the Fund's SAI.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund pays net investment income dividends annually. Ordinarily, any net
realized capital gain distributions will be paid in December of each year. The
Fund may make additional distributions to shareholders when considered
appropriate or necessary. For example, the Fund could make an additional
distribution to avoid the imposition of any federal income or excise tax.
We will automatically reinvest all income dividends and capital gain
distributions in additional shares of the Fund unless you request to receive
these distributions by way of EFT. The share price will be the NAV of the Fund
shares computed on the ex-distribution date. Any income dividends or capital
gain distributions made by the Fund will reduce the NAV per share by the amount
of the dividends or other distributions on the ex-distribution date. You should
consider carefully the effects of purchasing shares of the Fund shortly before
any dividend or other distribution. Some or all of these distributions are
subject to taxes. We will invest in your account any dividend or other
distribution payment returned to us by your financial institution at the current
NAV per share.
TAXES
This tax information is quite general and refers to the federal income tax law
in effect as of the date of this prospectus. Distributions that shareholders
receive from the Fund are subject to federal income tax and may be subject to
state or local taxes. A 15% maximum federal income tax rate will apply to
individual shareholders through December 31, 2010, for (1) gains on redemptions
of Fund shares held for more than one year and (2) the Fund's distributions from
net gains on the sale or exchange of the Fund's capital assets held for more
than one year and from the Fund's qualified dividend income, which consists of
dividends received from domestic corporations and certain foreign corporations
assuming certain holding period and other requirements are met by the Fund and
the shareholder. Because each investor's tax circumstances are unique and
because the tax laws are subject to change, we recommend that you consult your
tax adviser about your investment.
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28 | USAA Managed Allocation Fund
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|X| FOREIGN
Dividends and interest the Fund receives, and gains it realizes, on foreign
securities may be subject to income, withholding, or other taxes foreign
countries and U.S. possessions impose (foreign taxes) that would reduce the
yield and/or total return on its investments. Tax conventions between certain
countries and the United States may reduce or eliminate foreign taxes, however,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors.
If more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the Foreign Election) that would
permit you to take a credit (or a deduction) for foreign taxes paid by the Fund.
If the Foreign Election is made, you would include in your gross income both
dividends you received from the Fund and the amount of your proportionate share
of those foreign taxes. As a shareholder of the Fund, you would be entitled to
treat your share of the foreign taxes paid as a credit against your U.S. federal
income tax, subject to the limitations set forth in the Internal Revenue Code
with respect to the foreign tax credit generally. Alternatively, you could, if
it were to your advantage, treat the foreign taxes paid by the Fund as an
itemized deduction in computing your taxable income rather than as a tax
credit. It is anticipated that the Fund will make the Foreign Election, in
which event it will report to you shortly after each taxable year your share of
the foreign taxes it paid and its foreign-source income.
|X| SHAREHOLDER TAXATION
Dividends from net investment income and distributions of the excess of
short-term capital gains over net long-term capital losses are taxable to you as
ordinary income, whether received in cash or reinvested in additional shares. A
portion of these dividends may qualify for the 70% dividends-received deduction
available to corporations and for the maximum 15% tax rate applicable to
qualified dividend income available to individuals.
Regardless of the length of time you have held Fund shares, distributions of net
capital gain (I.E., the excess of net long-term gain over net short-term capital
loss) that the Fund realizes are taxable to you as long-term capital gains
whether received in cash or reinvested in additional shares. These gains will
qualify for a reduced capital gains rate for shareholders who are individuals.
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|X| WITHHOLDING
Federal law requires the Fund to withhold (referred to as "backup withholding")
and remit to the U.S. Treasury 28% of (1) taxable income dividends, capital gain
distributions, and proceeds of redemptions otherwise payable to any
non-corporate shareholder who fails to furnish the Fund with a correct taxpayer
identification number and (2) those dividends and distributions otherwise
payable to any such shareholder who:
|X| Underreports dividend or interest income or
|X| Fails to certify that he or she is not subject to backup withholding.
To avoid this withholding requirement, you must certify, on your application or
on a separate IRS Form W-9 supplied by the Fund's transfer agent, that your
taxpayer identification number is correct and you currently are not subject to
backup withholding.
|X| REPORTING
The Fund will report information to you annually concerning the tax status of
dividends and other distributions for federal income tax purposes.
SHAREHOLDER MAILINGS
|X| HOUSEHOLDING
Through our ongoing efforts to help reduce Fund expenses, each household will
receive a single copy of the Fund's most recent financial reports and prospectus
even if you or a family member owns more than one account in the Fund. For many
of you, this eliminates duplicate copies and saves paper and postage costs to
the Fund. However, if you would like to receive individual copies, please
contact us and we will begin your individual delivery within 30 days of your
request.
|X| ELECTRONIC DELIVERY
Log on to USAA.COM and sign up to receive your statements, confirmations,
financial reports, and prospectuses via the Internet instead of through the
mail.
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30 | USAA Managed Allocation Fund
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NOTES
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Prospectus | 31
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NOTES
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32 | USAA Managed Allocation Fund
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Prospectus | 33
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9800 Fredericksburg Road PRSRT STD
San Antonio, Texas 78288 U.S. Postage
PAID
USAA
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SAVE PAPER AND FUND COSTS
At USAA.COM click: MY DOCUMENTS
Set preferences to USAA DOCUMENTS ONLINE
If you would like more information about the Fund, you may call (800) 531-USAA
(8722) to request a free copy of the Fund's statement of additional
information (SAI), annual or semiannual reports (once available), or to ask
other questions about the Fund. The SAI has been filed with the SEC and is
incorporated by reference to and legally a part of this prospectus. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance
during the last fiscal year. The Fund's annual and semiannual reports (once
available) also may be viewed, free of charge, on USAA.COM. A complete
description of the Fund's policies and procedures with respect to the
disclosure of the Fund's portfolio securities is available in the Fund's SAI.
The SAI is not available on USAA.COM because of cost considerations and lack
of investor demand.
To view these documents, along with other related documents, you may visit the
IDEA database on the SEC's website (www.sec.gov) or the Commission's Public
Reference Room in Washington, DC. Information on the operation of the Public
Reference Room may be obtained by calling (202) 551-8090. Additionally, copies
of this information may be obtained, after payment of a duplicating fee, by
electronic request at the following e-mail address: publicinfo@sec.gov or by
writing the Public Reference Section of the Commission, Washington, DC
20549-0102.
[GRAPHIC OMITTED]
Recycled
Paper
[USAA EAGLE LOGO (R)] WE KNOW WHAT IT MEANS TO SERVE. (R)
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93921-0210 Investment Company Act File No. 811-7852 (C)2010, USAA.
All rights reserved.
<PAGE>
Part B
Statement of Additional Information
for Managed Allocation Fund
is included herein
<PAGE>
[USAA EAGLE LOGO (R)] USAA MUTUAL STATEMENT OF
FUNDS TRUST ADDITIONAL INFORMATION
FEBRUARY 1, 2010
USAA MANAGED ALLOCATION FUND
--------------------------------------------------------------------------------
USAA MUTUAL FUNDS TRUST (the Trust) is a registered investment company offering
shares of forty-six no-load mutual funds, one of which is described in this
Statement of Additional Information (SAI): the Managed Allocation Fund (the
Fund). The Fund is classified as nondiversified.
You may obtain a free copy of the prospectus dated February 1, 2010, for the
Fund by writing to USAA Mutual Funds Trust 9800 Fredericksburg Road, San
Antonio, TX 78288 or by calling toll free (800) 531-USAA (8722). You also may
request a free copy be sent to you via e-mail. The prospectus provides the basic
information you should know before investing in the Fund. This SAI is not a
prospectus and contains information in addition to and more detailed than that
set forth in the prospectus. It is intended to provide you with additional
information regarding the activities and operations of the Trust and the Fund,
and should be read in conjunction with the prospectus. The Fund's annual report
to shareholders will be available, without charge, once the Fund has completed
its first annual period.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
2 Valuation of Securities
3 Conditions of Purchase and Redemption
3 Additional Information Regarding Redemption of Shares
3 Investment Policies
18 Investment Restrictions
19 Portfolio Transactions and Brokerage Commissions
20 Fund History and Description of Shares
21 Tax Considerations
23 Trustees and Officers of the Trust
28 The Trust's Manager
31 Portfolio Manager Disclosure
32 Portfolio Holdings Disclosure
33 General Information
34 Appendix A - Tax-Exempt Securities and Their Ratings
<PAGE>
VALUATION OF SECURITIES
Shares of the Fund are offered only to eligible investors, as described in the
prospectus, on a continuing, best-efforts basis through USAA Investment
Management Company (IMCO or the Manager). The offering price for shares of the
Fund is equal to the current net asset value (NAV) per share. The NAV per share
of the Fund is calculated by adding the value of all its portfolio securities
and other assets, deducting its liabilities, and dividing by the number of
shares outstanding.
The Fund's NAV per share is calculated each day, Monday through Friday, except
days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively. The Fund
reserves the right to calculate the NAV per share on a business day that the
NYSE is closed.
The value of securities of the Fund is determined by one or more of the
following methods:
Portfolio 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. Portfolio
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 a 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.
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 NAV may not take place at the
same time the price of certain foreign securities held by the Fund are
determined. In most cases, events affecting the values of foreign securities
that occur between the time of their last quoted sales or official closing
prices are determined and the close of normal trading on the NYSE on a day the
Fund's NAV is calculated will not be reflected in the value of the Fund's
foreign securities. However, the Manager will monitor for events that would
materially affect the value of the Fund's foreign securities. If the Manager
determines that a particular event would materially affect the value of the
Fund's foreign securities, then the Manager, under valuation procedures approved
by the Board of Trustees, will consider such available information that it deems
relevant to determine a fair value for the affected foreign securities. In
addition, the Fund may use information from an external vendor or other sources
to adjust the foreign market closing prices of foreign equity securities to
reflect what the Fund believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity securities may
occur frequently based on an assessment that events which occur on a fairly
regular basis (such as U.S. market movements) are significant.
Debt securities with maturities greater than 60 days are valued each business
day by a pricing service (the Service) approved by the Board of Trustees. The
Service uses an evaluated mean between quoted bid and asked prices or the last
sales price to price securities when, in the Service's judgment, these prices
are readily available and are representative of the securities' market values.
For many securities, such prices are not readily available. The Service
generally prices 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. Debt securities purchased with original or remaining maturities of
60 days or less may be stated at amortized cost, which approximates market
value. Repurchase agreements are valued at cost.
Investments in investment companies, hedge, or other funds, other than ETFs are
valued at their net asset value at the end of each business day. Futures
contracts are valued based upon the last sale price at the close of market on
the principal exchange on which they are traded. Option contracts are valued by
a pricing service at the National Best Bid/Offer (NBBO) composite price, which
is derived from the best available bid and ask prices in all participating
options exchanges determined to most closely reflect market value of the options
at the time of computation of the Fund's NAV.
Securities for which market quotations are not readily available or are
considered unreliable, or whose values have been materially affected by events
occurring after the close of their primary markets but before the pricing of a
Fund, are valued in good faith by the Manager at fair value using valuation
procedures approved by the Board of Trustees. The effect of fair value pricing
is that securities may not be priced on the basis of quotations from the primary
market in which they are traded and
2
<PAGE>
the actual price realized from the sale of a security may differ materially
from the fair value price. Valuing these securities at fair value is intended
to cause the Fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services, broker-dealers, or
widely used quotation systems. General factors considered in determining the
fair value of securities include fundamental analytical data, the nature and
duration of any restrictions on disposition of the securities, and an evaluation
of the forces that influenced the market in which the securities are purchased
and sold.
CONDITIONS OF PURCHASE AND REDEMPTION
All investments in Shares of the Fund must be denominated in U.S. dollars and,
subject to the terms of the prospectus, must be in the form of cash or other
consideration that is not inconsistent with the provisions of the 1940 Act or
other applicable law.
NONPAYMENT
If any order to purchase shares is canceled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, USAA
Shareholder Account Services (Transfer Agent) will treat the cancellation as a
redemption of shares purchased, and you will be responsible for any resulting
loss incurred by the Fund or the Manager. If you are a shareholder, the Transfer
Agent can redeem shares from any of your accounts as reimbursement for all
losses. In addition, you may be prohibited or restricted from making future
purchases in any of the USAA family of funds. A $29 fee is charged for all
returned items, including checks and electronic funds transfers.
ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES
The value of your investment at the time of redemption may be more or less than
the cost at purchase, depending on the value of the securities held in your
Fund's portfolio. Requests for redemption that are subject to any special
conditions or that specify an effective date other than as provided herein
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares of the Fund, depending upon the price when redeemed.
The Board of Trustees may cause the redemption of an account with a balance of
less than $250, provided that (1) the value of such account has been reduced,
for reasons other than market action, below the minimum initial investment in
such Fund at the time of the establishment, (2) the account has remained below
the minimum initial investment for six months, and (3) 30 days' prior written
notice of the proposed redemption has been sent to you. The Trust, subject to
approval of the Board of Trustees, anticipates closing certain small accounts
yearly. Shares will be redeemed at the NAV on the date fixed for redemption.
The Trust reserves the right to suspend the right of redemption or postpone the
date of payment (1) for any periods during which the NYSE is closed, (2) when
trading in the markets the Trust normally utilizes is restricted, or an
emergency exists as determined by the SEC so that disposal of the Trust's
investments or determination of its NAV is not reasonably practicable, or (3)
for such other periods as the SEC by order may permit for protection of the
Trust's shareholders.
For the mutual protection of the investor and the Fund, the Trust may require a
signature guarantee. If required, each signature on the account registration
must be guaranteed. Signature guarantees are acceptable from FDIC member banks,
brokers, dealers, municipal securities dealers, municipal securities brokers,
government securities dealers, government securities brokers, credit unions,
national securities exchanges, registered securities associations, clearing
agencies, and savings associations. A signature guarantee for active duty
military personnel stationed abroad may be provided by an officer of the United
States Embassy or Consulate, a staff officer of the Judge Advocate General, or
an individual's commanding officer.
INVESTMENT POLICIES
The sections captioned INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGY in
the Fund's prospectus describe the investment objective(s) and the investment
policies applicable to the Fund. There can, of course, be no assurance that the
Fund will achieve its investment objective(s). The Fund's objective(s) is not a
fundamental policy and may be changed upon notice to, but without the approval
of, the Fund's shareholders. If there is a change in the investment objective of
the Fund, the Fund's shareholders should consider whether the Fund remains an
appropriate investment in light of then-current needs.
3
<PAGE>
The following is provided as additional information. Unless described as a
principal investment policy in the Fund's prospectus, these represent the non-
principal investment policies of the Fund.
TEMPORARY DEFENSIVE POLICY
The Fund may on a temporary basis because of market, economic, political, or
other conditions, invest up to 100% of its assets in investment-grade,
short-term debt instruments. Such securities may consist of obligations of the
U.S. government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus, and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper and other corporate debt
obligations.
SECTION 4(2) COMMERCIAL PAPER AND RULE 144A SECURITIES
The Fund may invest in commercial paper issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (1933 Act) (Section 4(2) Commercial Paper).
Section 4(2) Commercial Paper is restricted as to disposition under the federal
securities laws; therefore, any resale of Section 4(2) Commercial Paper must be
effected in a transaction exempt from registration under the 1933 Act. Section
4(2) Commercial Paper is normally resold to other investors through or with the
assistance of the issuer or investment dealers who make a market in Section 4(2)
Commercial Paper, thus providing liquidity.
The Fund also may purchase restricted securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act (Rule
144A Securities). Rule 144A provides a non-exclusive safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
institutional investors.
MUNICIPAL LEASE OBLIGATIONS
The Fund may invest in municipal lease obligations, installment purchase
contract obligations, and certificates of participation in such obligations
(collectively, lease obligations). A lease obligation does not constitute a
general obligation of the municipality for which the municipality's taxing power
is pledged, although the lease obligation is ordinarily backed by the
municipality's covenant to budget for the payments due under the lease
obligation.
Certain lease obligations contain "non-appropriation" clauses, which provide
that the municipality has no oblgation to make lease obligation payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although "non-appropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. In evaluating a potential investment in such a lease obligation, the
Manager will consider: (1) the credit quality of the obligor; (2) whether the
underlying property is essential to a governmental function; and (3) whether the
lease obligation contains covenants prohibiting the obligor from substituting
similar property if the obligor fails to make appropriations for the lease
obligation.
LIQUIDITY DETERMINATIONS
The Board of Trustees has adopted guidelines pursuant to which municipal lease
obligations, Section 4(2) Commercial Paper, Rule 144A Securities, certain
restricted debt securities that are subject to put or demand features
exercisable within seven days (Demand Feature Securities) and other securities
(whether registered or not) that may be considered illiquid before or after
purchase due to issuer bankruptcy, delisting, thin or no trading SEC guidance,
or similar factors (other securities) may be determined to be liquid for
purposes of complying with SEC limitations applicable to each Fund's investments
in illiquid securities. In determining the liquidity of municipal lease
obligations, Section 4(2) Commercial Paper, Rule 144A Securities, and other
securities, the Manager will, pursuant to the Board Adopted Liquidity
Procedures, among other things, consider the following factors established by
the Board of Trustees: (1) the frequency of trades and quotes for the security,
(2) the number of dealers willing to purchase or sell the security and the
number of other potential purchasers, (3) the willingness of dealers to
undertake to make a market in the security, and (4) the nature of the security
and the nature of the marketplace trades, including the time needed to dispose
of the security, the method of soliciting offers, and the mechanics of transfer.
Additional factors considered by the Manager in determining the liquidity of a
municipallease obligation are:
4
<PAGE>
(1) whether the lease obligation is of a size that will be attractive to
institutional investors, (2) whether the lease obligation contains a non-
appropriation clause and the likelihood that the obligor will fail to make an
appropriation therefor, and (3) such other factors as the Manager may determine
to be relevant to such determination. In determining the liquidity of
Demand Feature Securities, the Manager will evaluate the credit quality of the
party (the Put Provider) issuing (or guaranteeing performance on) the put or
demand feature of the Demand Feature Securities. In evaluating the credit
quality of the Put Provider, the Manager will consider all factors that it deems
indicative of the capacity of the Put Provider to meet its obligations under the
Demand Feature Securities based upon a review of the Put Provider's outstanding
debt and financial statements and general economic conditions.
Certain foreign securities (including Eurodollar obligations) may be eligible
for resale pursuant to Rule 144A in the United States and may also trade without
restriction in one or more foreign markets. Such securities may be determined to
be liquid based upon these foreign markets without regard to their eligibility
for resale pursuant to Rule 144A. In such cases, these securities will not be
treated as Rule 144A Securities for purposes of the liquidity guidelines
established by the Board of Trustees.
CALCULATION OF DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY
Dollar-weighted average portfolio maturity is derived by multiplying the value
of each debt instrument by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the Fund's debt
instruments. An obligation's maturity is typically determined on a stated final
maturity basis, although there are some exceptions to this rule.
With respect to obligations held by the Fund, if it is probable that the issuer
of an instrument will take advantage of a maturity-shortening device, such as a
call, refunding, or redemption provision, the date on which the instrument will
probably be called, refunded, or redeemed may be considered to be its maturity
date. Also, the maturities of mortgage-backed securities, some asset-backed
securities, and securities subject to sinking fund arrangements are determined
on a weighted average life basis, which is the average time for principal to be
repaid. For mortgage-backed and some asset-backed securities, this average time
is calculated by assuming prepayment rates of the underlying loans. These
prepayment rates can vary depending upon the level and volatility of interest
rates. This, in turn, can affect the weighted average life of the security. The
weighted average lives of these securities will be shorter than their stated
final maturities. In addition, for purposes of the Fund's investment policies,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features such as puts or demand
features that, in the judgment of the Manager, will result in the instrument
being valued in the market as though it has the earlier maturity.
Finally, for purposes of calculating the dollar weighted average portfolio
maturity of the Fund, the maturity of a debt instrument with a periodic interest
reset date will be deemed to be the next reset date, rather than the remaining
stated maturity of the instrument if, in the judgment of the Manager, the
periodic interest reset features will result in the instrument being valued in
the market as though it has the earlier maturity.
EURODOLLAR AND YANKEE OBLIGATIONS
A portion of the Fund's assets may be invested in Eurodollar obligations or
Yankee obligations. Eurodollar obligations are dollar-denominated instruments
that have been 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 have been issued by foreign issuers in the U.S. capital markets.
Eurodollar and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk, market risk, and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from leaving
the country. Other risks include: adverse political and economic developments;
the extent and quality of government regulation of financial markets and
institutions; the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers. However, Eurodollar and Yankee obligations
will undergo the same type of credit analysis as domestic issues in which the
Fund invests, and will have at least the same financial strength as the domestic
issuers approved for the Fund.
5
<PAGE>
MASTER DEMAND NOTES
The Fund's assets may be invested in master demand notes, which are obligations
that permit the investment of fluctuating amounts by the Fund, at varying rates
of interest using direct arrangements between the Fund, as lender, and the
borrower. These notes permit daily changes in the amounts borrowed. The Fund has
the right to increase the amount under the note at any time up to the full
amount provided by the note agreement, or to decrease the amount, and the
borrower may repay up to the full amount of the note without penalty.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Because master demand notes are direct
lending arrangements between the lender and borrower, these instruments
generally will not be traded, and there generally is no secondary market for
these notes, although they are redeemable (and immediately repayable by the
borrower) at face value, plus accrued interest, at any time. We will invest the
Fund's assets in master demand notes only if the Fund's Board of Trustees or its
delegate has determined that they are of credit quality comparable to the debt
securities in which the Fund generally may invest.
PERIODIC AUCTION RESET BONDS
The Fund may invest in periodic auction reset bonds. Periodic auction reset
bonds are bonds whose interest rates are reset periodically through an auction
mechanism. For purposes of calculating the portfolio weighted average maturity
of the Fund, the maturity of periodic auction reset bonds will be deemed to be
the next interest reset date, rather than the remaining stated maturity of the
instrument.
Periodic auction reset bonds, similar to short-term debt instruments, are
generally subject to less interest rate risk than long-term fixed rate debt
instruments because the interest rate will be periodically reset in a market
auction. Periodic auction reset bonds with a long remaining stated maturity
(I.E., ten years or more), however, could have greater market risk than fixed
short-term debt instruments, arising from the possibility of auction failure or
insufficient demand at an auction, resulting in greater price volatility of such
instruments compared to fixed short-term bonds.
SYNTHETIC INSTRUMENTS
The Fund may invest in tender option bonds, bond receipts, and similar synthetic
municipal instruments. A synthetic instrument is a security created by combining
an intermediate or long-term municipal bond with a right to sell the instrument
back to the remarketer or liquidity provider for repurchase on short notice.
This right to sell is commonly referred to as a tender option. Usually, the
tender option is backed by a conditional guarantee or letter of credit from a
bank or other financial institution. Under its terms, the guarantee may expire
if the municipality defaults on payments of interest or principal on the
underlying bond, if the credit rating of the municipality is downgraded, or if
interest on the underlying bond loses its tax-exempt statues. Synthetic
instruments involve structural risks that could adversely affect the value of
the instrument or could result in a Fund holding an instrument for a longer
period of time than originally anticipated. For example, because of the
structure of a synthetic instrument, there is a risk that the instrument will
lose its tax-exempt treatment or that the Fund will not be able to exercise its
tender option.
PUT BONDS
The Fund's assets may be invested in securities (including securities with
variable interest rates) that may be redeemed or sold back (put) to the issuer
of the security or a third party prior to stated maturity (put bonds). Such
securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer. Under the Fund's portfolio allocation
procedure, maturity for put bonds is deemed to be the date on which the put
becomes exercisable.
BRADY BONDS AND EMERGING MARKETS DEBT
Brady Bonds are securities created through a restructuring plan introduced by
former U.S. Treasury Secretary Nicholas Brady. The Brady Plan made provisions
whereby existing commercial bank loans to both public and private entities in
selected developing countries are exchanged for Brady Bonds. These bonds may be
denominated in other currencies, but are usually denominated in U.S. dollars.
Brady Bonds are actively traded in over-the-counter markets. As the markets for
these securities have from time to time been subject to disruption, the Manager
will monitor, on a continuous basis, the liquidity of Brady Bonds held in the
Fund's portfolio.
6
<PAGE>
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities, which are bonds, preferred
stocks, and other securities that pay interest or dividends and offer the buyer
the ability to convert the security into common stock. The value of convertible
securities depends partially on interest rate changes and the credit quality of
the issuer. Because a convertible security affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation of
the underlying common stock, the value of convertible securities also depends on
the price of the underlying common stock.
The convertible securities in which the Fund will invest may be rated below
investment grade as determined by Moody's Investors Service (Moody's) or
Standard & Poor's Ratings Group (S&P), or unrated but judged by the Manager to
be of comparable quality (commonly called junk bonds). For a more complete
description of debt ratings, see APPENDIX A. Such securities are deemed to be
speculative and involve greater risk of default due to changes in interest
rates, economic conditions, and the issuer's creditworthiness. As a result,
their market prices tend to fluctuate more than higher-quality securities.
During periods of general economic downturns or rising interest rates, issuers
of such securities may experience financial difficulties, which could affect
their ability to make timely interest and principal payments. The Fund's ability
to timely and accurately value and dispose of lower-quality securities may also
be affected by the absence or periodic discontinuance of liquid trading markets.
FOREIGN SECURITIES
The Fund may invest its assets in foreign securities purchased in either foreign
(non-dollar denominated) or U.S. markets, including American depositary receipts
(ADRs) and global depositary receipts (GDRs). Investing in foreign securities
poses unique risks: currency exchange rate fluctuations; foreign market
illiquidity; increased price volatility; exchange control regulations; foreign
ownership limits; different accounting, reporting, and disclosure requirements;
political or social instability, including policies of foreign governments which
may affect their respective equity markets; foreign taxation requirements
including withholding taxes; and difficulties in obtaining legal judgments. In
the past, equity and debt instruments of foreign markets have been more volatile
than equity and debt instruments of U.S. securities markets.
Any such investments will be made in compliance with U.S. and foreign currency
restrictions, tax laws, and laws limiting the amount and types of foreign
investments. Pursuit of the Fund's investment objectives will involve currencies
of the United States and of foreign countries. Consequently, changes in exchange
rates, currency convertibility, and repatriation requirements may favorably or
adversely affect the Funds.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in order to protect against
uncertainty in the level of future foreign exchange rates. A forward contract
involves an agreement to purchase or sell a specific currency at a specified
future date or over a specified time period at a price set at the time of the
contract. These contracts are usually traded directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirements, and no commissions are charged.
The Fund may enter into forward currency contracts under two circumstances.
First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the U.S.
dollar price of the security until settlement. By entering into such a contract,
the Fund will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and the foreign
currency from the date the security is purchased or sold to the date on which
payment is made or received. Second, when management of the Fund believes that
the currency of a specific country may deteriorate relative to the U.S. dollar,
it may enter into a forward contract to sell that currency. The Fund may not
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities held in its portfolio denominated or quoted in, or
bearing a substantial correlation to, such currency.
The use of forward contracts involves certain risks. The precise matching of
contract amounts and the value of securities involved generally will not be
possible since the future value of such securities in currencies more than
likely will change between the date the contract is entered into and the date it
matures. The projection of short-term currency market move-
7
<PAGE>
ments is extremely difficult and successful execution of a short-term hedging
strategy is uncertain. Under normal circumstances, consideration of the prospect
for currency parities will be incorporated into the longer term investment
strategies. The Manager believes it is important, however, to have the
flexibility to enter into such contracts when it determines it is in the best
interest of the Fund to do so. It is impossible to forecast what the market
value of portfolio securities will be at the expiration of a contract.
Accordingly, it may be necessary for the Fund to purchase additional currency
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver, and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell some of the foreign currency received on
the sale of the portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver. The Fund is not required to enter
into such transactions and will not do so unless deemed appropriate by the
Manager.
Although the Fund values its assets each business day in terms of U.S. dollars,
it does not intend to convert its foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and shareholders should be aware
of currency conversion costs. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
EQUITY SECURITIES
The Fund may invest in equity securities listed on any domestic or foreign
securities exchange or traded in the over-the-counter market as well as certain
restricted or unlisted securities. As used herein, "equity securities" are
defined as common stock, preferred stock, trust or limited partnership
interests, rights and warrants to subscribe to or purchase such securities,
sponsored or unsponsored ADRs, EDRs, GDRs, and convertible securities,
consisting of debt securities or preferred stock that may be converted into
common stock or that carry the right to purchase common stock. Common stocks,
the most familiar type, represent an equity (ownership) interest in a
corporation. They may or may not pay dividends or carry voting rights. Common
stock occupies the most junior position in a company's capital structure.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company's financial condition and on
overall market and economic conditions. Smaller companies are especially
sensitive to these factors.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its respective net assets, in securities that
are illiquid. Illiquid securities are generally those securities that a fund
cannot dispose of in the ordinary course of business, in seven days or less, at
approximately the same value at which a Fund has valued the securities.
ADJUSTABLE-RATE SECURITIES
The interest rate on an adjustable-rate security fluctuates periodically.
Generally, the security's yield is based on a U.S. dollar-based interest-rate
benchmark such as the Federal Funds Rate, the 90-day Treasury bill rate, or the
London Interbank Offered Rate (LIBOR). The yields on these securities are reset
on a periodic basis (for example, daily, weekly, or quarterly) or upon a change
in the benchmark interest rate. The yields are closely correlated to changes in
money market interest rates.
VARIABLE-RATE DEMAND NOTES
The Fund may invest in securities that provide the right to sell the securities
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 a rate that reflects current market conditions. The
effective maturity for these instruments is deemed to be less than 397 days in
accordance with detailed regulatory requirements. These interest rate
adjustments can both raise and lower the income generated by such securities.
These changes will have the same effect on the income earned by the Fund
depending on the proportion of such securities held.
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VARIABLE-RATE AND FLOATING-RATE SECURITIES
The Fund may invest in variable-rate and floating-rate securities, which bear
interest at rates that are adjusted periodically to market rates. These interest
rate adjustments can both raise and lower the income generated by such
securities. These changes will have the same effect on the income earned by the
Fund depending on the proportion of such securities held. Because the interest
rates of variable-rate and floating-rate securities are periodically adjusted to
reflect current market rates, the market value of the variable-rate and
floating-rate securities is less affected by changes in prevailing interest
rates than the market value of securities with fixed interest rates. The market
value of variable-rate and floating-rate securities usually tends toward par
(100% of face value) at interest rate adjustment time.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may invest in debt securities offered on a when-issued or
delayed-delivery basis; that is, delivery of and payment for the securities take
place after the date of the commitment to purchase, normally within 45 days. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the buyer enters into the commitment. A Fund may sell
these securities before the settlement date if it is deemed advisable.
Debt securities purchased on a when-issued or delayed-delivery basis are subject
to changes in value in the same way as other debt securities held in the Fund's
portfolios are; that is, both generally experience appreciation when interest
rates decline and depreciation when interest rates rise. The value of such
securities will also be affected by the public's perception of the
creditworthiness of the issuer and anticipated changes in the level of interest
rates. Purchasing securities on a when-issued or delayed-delivery basis involves
a risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. To ensure that
the Fund will be able to meet its obligation to pay for when-issued or
delayed-delivery securities at the time of settlement, the Fund will segregate
cash or liquid securities at least equal to the amount of the when-issued or
delayed-delivery commitments. The segregated securities are valued at market,
and any necessary adjustments are made to keep the value of the cash and/or
segregated securities at least equal to the amount of such commitments by the
Fund.
On the settlement date of the when-issued or delayed-delivery securities, the
Fund will meet its obligations from then available cash, sale of segregated
securities, sale of other securities, or from sale of the when-issued or
delayed-delivery securities themselves (which may have a value greater or less
than the Trust's payment obligations). Sale of securities to meet such
obligations carries with it a greater potential for the realization of capital
gains.
SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF SECURITIES (STRIPS)
The Fund may invest in STRIPS, which are U.S. Treasury securities, that allow
the investor to hold and trade the individual interest and principal components
of eligible Treasury notes and bonds as separate securities. STRIPS can only be
purchased and held through financial institutions and government securities
brokers and dealers. These securities are backed by the full faith and credit of
the U.S. government.
TREASURY INFLATION-PROTECTED SECURITIES (TIPS)
The Fund may invest in TIPS, which are U.S. Treasury securities that have been
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 prevailing real, or after inflation,
interest rates. The U.S. Treasury guarantees repayment of at least the face
value of these securities in the event of sustained deflation or a drop in
prices.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS (REITS)
Because the Fund may invest a portion of its assets in equity securities of
REITs, the Fund may also be subject to certain risks associated with direct
investments in real estate. In addition, the Fund may invest a portion of its
assets in the debt and preferred securities of REITs and, therefore, may be
subject to certain other risks, such as credit risk, associated with investment
in these securities. REITs may be affected by changes in the value of their
underlying properties and by defaults by borrowers or tenants. Furthermore,
REITs are dependent upon the specialized management skills of their managers
and may
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have limited geographic diversification, thereby subjecting them to risks
inherent in financing a limited number of projects. REITs depend generally on
their ability to generate cash flow to make distributions to shareholders,
and certain REITs have self-liquidation provisions by which mortgages held may
be paid in full and distributions of capital returns may be made at any time.
PREFERRED STOCKS
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in its
claim on income for dividend payments and on assets should the company be
liquidated. Like common stock, preferred stocks represent partial ownership in a
company, although preferred stockholders do not enjoy any of the voting rights
of common stockholders. Also unlike common stock, a preferred stock pays a fixed
dividend that does not fluctuate, although the company does not have to pay this
dividend if it lacks the financial ability to do so. The main benefit to owning
preferred stock is that the investor has a greater claim on the company's assets
than common stockholders. Preferred stockholders always receive their dividends
first and, in the event the company goes bankrupt, preferred stockholders are
paid off before common stockholders.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements, which are collateralized by
underlying securities. A repurchase agreement is a transaction in which a
security is purchased with a simultaneous commitment to sell it back to the
seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date, usually not more than seven days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest, which is unrelated to the coupon rate or maturity of
the purchased security. The Fund maintains custody of the underlying securities
prior to their repurchase, either through its regular custodian or through a
special "tri-party" custodian that maintains separate accounts for both the Fund
and its counterparty. Thus, the obligation of the counterparty to pay the
repurchase price on the date agreed to or upon demand is, in effect, secured by
the underlying securities. In these transactions, the securities purchased by
the Fund will be those in which it is authorized to invest and have a total
value equal to or in excess of the amount of the repurchase obligation. If the
seller defaults and the value of the underlying security declines, the Fund may
incur a loss and may incur expenses in selling the collateral. If the seller
seeks relief under the bankruptcy laws, the disposition of the collateral may be
delayed or limited. The Fund will invest in repurchase agreement transactions
with parties whose creditworthiness has been reviewed and found satisfactory by
the Manager.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in securities issued by other investment companies that
invest in eligible quality, short-term debt securities and seek to maintain a $1
NAV per share, i.e., "money market" funds. In addition, the Fund may invest in
securities issued by other non-money market investment companies (including
exchange-traded funds). As a shareholder of another investment company, the Fund
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would be
in addition to the advisory and other expenses that the Fund bears in connection
with its own operations. The Fund may invest in securities issued by other
investment companies subject to statutory limitations prescribed by the 1940 Act
and the rules thereunder. The Fund may rely on certain SEC exemptive orders that
permit funds meeting various conditions to invest in an ETF in amounts exceeding
limits set forth in the 1940 Act that would otherwise be applicable.
EXCHANGE-TRADED FUNDS (ETFS)
The Fund may invest a substantial portion of its assets in ETFs, which are
registered investment companies. By investing in the Fund, you will be exposed
to the same risks of the ETFs' holdings as the ETFs themselves in direct
proportion to the allocation of the Fund's assets among those ETFs. You also
will indirectly bear fees and expenses charged by the ETFs in which the Fund
invests in addition to the Fund's direct fees and expenses. In addition, each
ETF typically is a "passive investor" and therefore invests in the securities
and sectors contained in the index it seeks to track without regard for or
analysis of the prospects of such securities or sectors. An ETF may invest in
all of the securities in such index or in a representative sample of such
securities. The ETFs will not attempt to take defensive positions in volatile or
declining markets or under
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other conditions. Furthermore, the ETFs will not be able to duplicate exactly
the performance of the underlying indexes they track. The difference in
performance between an ETF and the index it seeks to track can be due to, among
other factors, the expenses that the ETF pays, regulatory constraints,
investment strategies, or techniques undertaken by the ETF, and changes to an
underlying index. There also may be a lack of correlation between the securities
in an index and those actually held by an ETF. Moreover, the market price of an
ETF may be different from the NAV of such ETF (I.E., the ETF may trade at a
discount or premium to its NAV). The performance of a fund that invests in
such an ETF could be adversely impacted. In addition, although the ETFs are
generally listed on securities exchanges, there can be no assurances that an
active trading market for such ETFs will be maintained. Secondary market
trading in the ETFs also may be halted by a national securities exchange
because of market conditions or for other reasons. There can be no assurances
that the requirement necessary to maintain the listing of the ETFs will
continue to be met or will remain unchanged. The price of an ETF is determined
by supply and demand.
MORTGAGE-BACKED SECURITIES (MBSs)
The Fund may invest in MBSs. MBSs include, but are not limited to, securities
issued by the Government National Mortgage Association (Ginnie Mae), Fannie Mae,
and Freddie Mac. These securities represent ownership in a pool of mortgage
loans. They differ from conventional bonds in that principal is paid back to the
investor as payments are made on the underlying mortgages in the pool.
Accordingly, the Fund receives monthly scheduled payments of principal and
interest along with any unscheduled principal prepayments on the underlying
mortgages. Because these scheduled and unscheduled principal payments must be
reinvested at prevailing interest rates, mortgage-backed securities do not
provide an effective means of locking in long-term interest rates for the
investor. Like other fixed income securities, when interest rates rise, the
value of an MBS with prepayment features will generally decline. In addition,
when interest rates are declining, the value of MBSs with prepayment features
may not increase as much as other fixed income securities. The weighted average
life of such securities is likely to be substantially shorter than the stated
final maturity as a result of scheduled principal payments and unscheduled
principal prepayments.
The Fund may also invest in MBSs that include collateralized mortgage
obligations (CMOs), stripped mortgage-backed securities (SBMSs), and mortgage
dollar rolls.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. CMOs are divided into pieces (tranches) with
varying maturities. 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. Failure to
accurately predict prepayments can adversely affect a Fund's return on these
investments. CMOs may also be less marketable than other securities.
SMBSs are derivative multi-class mortgage securities. SMBSs may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks, and special purpose entities
of the foregoing. SMBSs are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the interest
only "IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to recoup some or all of
its initial investment in these securities even if the security is in one of the
highest rating categories. Although SMBSs are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, established trading markets for these types of securities
are not as developed and, accordingly, these securities may be deemed "illiquid"
and subject to the Fund's limitations on investment in illiquid securities.
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In mortgage dollar roll transactions, the Fund sells MBSs for delivery in the
current month and simultaneously contracts to purchase substantially similar
securities on a specified future date. While the Fund would forego principal
and interest paid on the MBSs during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. At the time the Fund enters into a mortgage dollar roll, it
designates on its books and records cash or liquid securities to secure its
obligation for the forward commitment to buy MBSs. Mortgage dollar roll
transactions may be considered a borrowing by the Fund. The mortgage dollar
rolls entered into by th Fund may be used as arbitrage transactions in which
the Fund will maintain an offsetting position in investment grade debt
obligations or repurchase agreements that mature on or before the settlement
date on the related mortgage dollar roll. Because the Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions may involve leverage.
In addition, the Fund may also invest in commercial mortgage-backed securities
(CMBSs) and interest only commercial mortgage-backed securities (CMBS IOs).
CMBSs include securities that reflect an interest in, and are secured by,
mortgage loans on commercial real property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, apartments,
hotels and motels, nursing homes, hospitals and senior living centers. Many of
the risks of investing in commercial mortgage-backed securities reflect the
risks of investing in the real estate securing the underlying mortgage loans.
These risks reflect the effects of local and other economic conditions on real
estate markets, the ability of tenants to make loan payments, and the ability of
a property to attract and retain tenants. In addition, commercial properties,
particularly industrial and warehouse properties, are subject to environmental
risks and the burdens and costs of compliance with environmental laws and
regulations. CMBSs may be less liquid and exhibit greater price volatility than
other types of mortgage-backed securities.
CMBS IOs are similar to the SMBSs described above, but are contrasted by being
backed by loans that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment penalties.
Therefore, they generally have less prepayment risk than SMBSs, and are also
less sensitive to interest rate changes. CMBS IOs are subject to recessionary
default-related prepayments that may have a negative impact on yield.
ZERO COUPON BONDS
The Fund may invest in zero coupon bonds. A zero coupon bond is a security that
is sold at a deep discount from its face value ("original issue discount"),
makes no periodic interest payments, and is redeemed at face value when it
matures. The lump sum payment at maturity increases the price volatility of the
zero coupon bond to changes in interest rates when compared to a bond that
distributes a semiannual coupon payment. In calculating its income, the Fund
accrues the daily amortization of the original issue discount.
DERIVATIVES
The Fund may buy and sell certain types of derivatives, such as options, futures
contracts, options on futures contracts, and swaps (each as described below)
under circumstances in which such instruments are expected by the Manager to aid
in achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (E.G., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures contracts,
and swaps enable the Fund to take both "short" positions (positions which
anticipate a decline in the market value of a particular asset or index) and
"long" positions (positions which anticipate an increase in the market value of
a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Manager anticipates unusually high or low market volatility.
The Manager may enter into derivative positions for the Fund for either hedging
or non-hedging purposes. The term hedging is applied to defensive strategies
designed to protect the Fund from an expected decline in the market value of an
asset or group of assets that the Fund owns (in the case of a short hedge) or to
protect the Fund from an expected rise in the market value of an asset or group
of assets which it intends to acquire in the future (in the case of a long or
"anticipatory" hedge). Non-hedging strategies include strategies designed to
produce incremental income (such as the option writing strategy described
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below) or "speculative" strategies, which are undertaken to equitize the cash
or cash equivalent portion of the Fund's portfolio or to profit from (i) an
expected decline in the market value of an asset or group of assets which the
Fund does not own or (ii) expected increases in the market value of an asset
which it does not plan to acquire. Information about specific types of
instruments is provided below.
FUTURES CONTRACTS
The Fund may use futures contracts to implement its investment strategy. Futures
contracts are publicly traded contracts to buy or sell an underlying asset,
security, or group of assets, such as a currency, interest rate or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on a security or an index of securities
normally enables a buyer to participate in the market movement of the underlying
asset or index after paying a transaction charge and posting margin in an amount
equal to a small percentage of the value of the underlying asset or index. The
Fund will initially be required to deposit with the Trust's custodian or the
futures commission merchant effecting the futures transaction an amount of
"initial margin" in cash or securities, as permitted under applicable regulatory
policies.
Initial margin in futures transactions is different from margin in securities
transactions in that the former does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is like a
performance bond or good faith deposit on the contract. Subsequent payments
(called "maintenance or variation margin") to and from the broker will be made
on a daily basis as the price of the underlying asset fluctuates. This process
is known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect to
close the position by taking an opposite position that will terminate the Fund's
position in the futures contract. A final determination of maintenance margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or a gain. While futures contracts with respect to
securities do provide for the delivery and acceptance of such securities, such
delivery and acceptance are seldom made.
COVER
Transactions using certain derivative instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies or other options, futures contracts or
forward contracts, or (2) cash or liquid assets with a value, marked-to-market
daily, sufficient to cover its potential obligations to the extent not covered
as provided in (1) above. The Fund will comply with SEC guidelines regarding
cover for these instruments and will, if the guidelines so require, designate
cash or liquid securities in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold while the position in
the corresponding derivative instrument is open, unless they are replaced with
other appropriate assets. As a result, the commitment of a large portion of the
Fund's assets to cover in accounts could impede portfolio management or the
Fund's ability to meet redemption requests or other current obligations.
OPTIONS ON SECURITIES AND SECURITIES INDEXES
The Fund may purchase and sell options on securities or securities indexes to
implement its investment strategy. There are two basic types of options: "puts"
and "calls." Each type of option can be used to establish either a long or a
short position, depending upon whether a Fund is the purchaser or a writer of
the option. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during
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the option period. Conversely, a put option on a security gives the purchaser
the right to sell, and the writer the obligation to buy, the underlying asset at
the exercise price during the option period.
Purchased options have limited risk equal to the amount of the premium paid for
the option. Such options afford the opportunity for gain corresponding to the
increase or decrease in the value of the optioned asset. In general, a purchased
put increases in value as the value of the underlying security falls and a
purchased call increases in value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the premium
paid by the buyer). Written options have varying degrees of risk. An uncovered
written call option theoretically carries unlimited risk, as the market price of
the underlying asset could rise far above the exercise price before its
expiration. This risk is tempered when the call option is covered, that is, when
the option writer owns the underlying asset. In this case, the writer runs the
risk of the lost opportunity to participate in the appreciation in value of the
asset rather than the risk of an out-of-pocket loss. A written put option has
defined risk, that is, the difference between the agreed-upon price that a Fund
must pay to the buyer upon exercise of the put and the value, which could be
zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer effects a
closing purchase transaction, the option expires, or until the option is
exercised. To secure its obligation to deliver the underlying asset in the case
of a call option, or to pay for the underlying asset in the case of a put
option, a covered writer is required to deposit in escrow the underlying
security or other assets in accordance with the rules of the applicable clearing
corporation and exchanges.
Among the options that the Fund may purchase or sell are options on a securities
index. In general, options on an index of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities, or futures contracts,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included in the
index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
OPTIONS ON FUTURES CONTRACTS
The Fund may invest in options on futures contracts to implement its investment
strategy. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
LIMITATIONS AND RISKS OF OPTIONS AND FUTURES ACTIVITY
As noted above, the Fund may engage in both hedging and non-hedging strategies.
Although effective hedging can generally capture the bulk of a desired risk
adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in the hedged asset correlate with price movements of the
futures and options.
Non-hedging strategies typically involve special risks. The profitability of the
Fund's non-hedging strategies will depend on the ability of the Manager to
analyze both the applicable derivatives market and the market for the underlying
asset or group of assets. Derivatives markets are often more volatile than
corresponding securities markets and a relatively small change in the price of
the underlying asset or group of assets can have a magnified effect upon the
price of a related derivative instrument.
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Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange that provides a secondary market. There can be
no assurance that a liquid secondary market will exist for any particular
futures contract or option at any specific time. Thus, it may not be possible to
close such an option or futures position prior to maturity. The inability to
close options and futures positions also could have an adverse impact on a
Fund's ability to effectively carry out its derivative strategies and might, in
some cases, require the Fund to deposit cash to meet applicable margin
requirements.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures contract or an option on a
futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Management of the Trust has claimed an exclusion on behalf of the Trust and the
Funds from the definition of "commodity pool operator" under the Commodity
Exchange Act and, therefore, the Trust and Funds are not subject to registration
or regulation as commodity pool operators under that Act.
SWAP ARRANGEMENTS
The Fund may enter into various forms of swap arrangements with counterparties
with respect to interest rates, currency rates or indices, including purchase of
caps, floors and collars as described below. In an interest rate swap the Fund
could agree for a specified period to pay a bank or investment banker the
floating rate of interest on a so-called notional principal amount (I.E., an
assumed figure selected by the parties for this purpose) in exchange for
agreement by the bank or investment banker to pay the Fund a fixed rate of
interest on the notional principal amount. In a currency swap the Fund would
agree with the other party to exchange cash flows based on the relative
differences in values of a notional amount of two (or more) currencies; in an
index swap, the Fund would agree to exchange cash flows on a notional amount
based on changes in the values of the selected indices. The purchase of a cap
entitles the purchaser to receive payments from the seller on a notional amount
to the extent that the selected index exceeds an agreed upon interest rate or
amount whereas the purchase of a floor entitles the purchaser to receive such
payments to the extent the selected index falls below an agreed upon interest
rate or amount. A collar combines buying a cap and selling a floor.
The Fund may enter into credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis. For example, in an
interest rate swap, amounts generated by application of the fixed rate and
floating rate to the notional principal amount would first offset one another,
with the Fund either receiving or paying the difference between such amounts. In
order to be in a position to meet any obligations resulting from swaps, the Fund
will set up a segregated custodial account to hold liquid assets, including
cash. For swaps entered into on a net basis, assets will be segregated having a
NAV equal to any excess of the Fund's accrued obligations over the accrued
obligations of the other party; for swaps on other than a net basis, assets will
be segregated having a value equal to the total amount of the Fund's
obligations. Collateral is treated as illiquid.
These arrangements will be made primarily for hedging purposes, to preserve the
return on an investment or on a portion of the Fund's portfolio. However, the
Fund may, as noted above, enter into such arrangements for income purposes to
the extent permitted by applicable law. In entering into a swap arrangement, the
Fund is dependent upon the creditworthiness and good faith of the counterparty.
The Fund will attempt to reduce the risk of nonperformance by the counterparty
by dealing only with established, reputable institutions. The swap market is
still relatively new and emerging; positions in swap contracts are generally
illiquid and are not readily transferable to another counterparty. The use of
interest rate swaps is a highly specialized
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activity that involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the Manager is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used. Moreover,
even if the Manager is correct in its forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
The Fund may enter into credit default swap contracts (CDSs) for investment
purposes. If the Fund is a seller of a CDS contract, the Fund would be required
to pay the par (or other agreed-upon) value of a referenced debt obligation to
the counterparty in the event of a default by a third party, such as a U.S. or
foreign corporate issuer, on the debt obligation. In return, the Fund would
receive from the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs,
the Fund would keep the stream of payments and would have no payment
obligations. As the seller, the Fund would be subject to investment exposure on
the notional amount of the swap.
The Fund may also purchase CDS contracts in order to hedge against the risk of
default of debt securities it holds, in which case the Fund would function as
the counterparty referenced above. This would involve the risk that the swap may
expire worthless and would only generate income in the event of an actual
default by the issuer of the underlying obligation (as opposed to a credit
downgrade or other indication of financial instability). It would also involve
credit risk; the seller may fail to satisfy its payment obligations to the Fund
in the event of a default.
ASSET-BACKED SECURITIES (ABSs)
The Fund may invest in ABSs. ABS represent a participation in, or are secured
by and payable from, a stream of payments generated by particular assets, such
as credit card, motor vehicle, or trade receivables. They may be pass-through
certificates, which have characteristics very similar to mortgage-backed
securities, discussed above.
With respect to the Fund, such pass-through certificates may include equipment
trust certificates (ETC) secured by specific equipment, such as airplanes and
railroad cars. ETC securities may also be enhanced by letters of credit. An ABS
may also be in the form of asset-backed commercial paper, which is issued by a
special purpose entity, organized solely to issue the commercial paper and to
purchase interests in the assets. The credit quality of these securities depends
primarily upon the quality of the underlying assets and the level of credit
support and enhancement provided.
On occasion, the pool of assets may also include a swap obligation, which is
used to change the cash flows on the underlying assets. As an example, a swap
may be used to allow floating rate assets to back a fixed-rate obligation.
Credit quality depends primarily on the quality of the underlying assets, the
level of credit support, if any, provided by the structure or by a third-party
insurance wrap, and the credit quality of the swap counterparty, if any.
The weighted average life of such securities is likely to be substantially
shorter than their stated final maturity as a result of scheduled principal
payments and unscheduled principal prepayments.
LOAN INTERESTS AND DIRECT DEBT INSTRUMENTS
The Fund may invest in loan interests and direct debt instruments, which are
interests in amounts owed by a corporate, governmental, or other borrower to
lenders or lending syndicates (in the case of loans and loan participations), to
suppliers of goods or services (in the case of trade claims or other
receivables), or to other parties. These investments involve a risk of loss in
case of the default, insolvency, or bankruptcy of the borrower.
Purchasers of loans and other forms of direct indebtedness depend primarily upon
the creditworthiness of the borrower for payment of interest and repayment of
principal. If scheduled interest or principal payments are not made, or are not
made in a timely manner, the value of the instrument may be adversely affected.
Loans that are fully secured provide more protections than unsecured loans in
the event of failure to make scheduled interest or principal payments. However,
there is no assurance that the liquidation of collateral from a secured loan
would satisfy the borrower's obligation, or that the collateral could be
liquidated. Indebtedness of borrowers whose creditworthiness is poor involves
substantially greater risks and may be highly speculative. Borrowers that are in
bankruptcy or restructuring may never pay off their indebtedness, or may pay
only a small fraction of the amount owed. Direct indebtedness of developing
countries also involves a risk that the governmental entities responsible for
the repayment of the debt may be unable, or unwilling, to pay interest and repay
principal when due.
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Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks, such as a loan
foreclosure, and costs and liabilities associated with owning and disposing of
the collateral. In addition, it is possible that a purchaser could be held
liable as a co-lender. Direct debt instruments may also involve a risk of
insolvency of the lending bank or other intermediary.
A loan is often administered by a bank or other financial institution that acts
as agent for all holders. The agent administers the terms of the loan, as
specified in the loan agreement. Unless the purchaser has direct recourse
against the borrower, the purchaser may have to rely on the agent to apply
appropriate credit remedies against a borrower under the terms of the loan or
other indebtedness. If assets held by the agent for the benefit of a purchaser
were determined to be subject to the claims of the agent's general creditors,
the purchaser might incur certain costs and delays in realizing payment on the
loan or loan participation and could suffer a loss of principal or interest.
Direct indebtedness may include letters of credit, revolving credit facilities,
or other standby financing commitments that obligate purchasers to make
additional cash payments on demand. These commitments may have the effect of
requiring a purchaser to increase its investment in a borrower at a time when it
would not otherwise have done so, even if the borrower's condition makes it
unlikely that the amount will ever be repaid.
For purposes of Fund investment limitations, the Fund generally will treat the
borrower as the "issuer" of indebtedness held by the Fund. In the case of loan
participations where a bank or other lending institution serves as financial
intermediary between a fund and the borrower, if the participation does not
shift to the Fund the direct debtor-creditor relationship with the borrower, SEC
interpretations require the Fund, in some circumstances, to treat both the
lending bank or other lending institution and the borrower as "issuers" for
purposes of the fund's investment policies. Treating a financial intermediary as
an issuer of indebtedness may restrict the Fund's ability to invest in
indebtedness related to a single financial intermediary, or a group of
intermediaries engaged in the same industry, even if the underlying borrowers
represent many different companies and industries.
EQUITY-LINKED STRUCTURED NOTES
Equity-linked structured notes are derivative securities that are specifically
designed to combine the characteristics of one or more underlying securities and
their equity derivatives in a single note form. The return and/or yield or
income component may be based on the performance of the underlying equity
securities, an equity index, and/or option positions. Equity-linked structured
notes are typically offered in limited transactions by financial institutions in
either registered or non-registered form. An investment in equity-linked notes
creates exposure to the credit risk of the issuing financial institution, as
well as to the market risk of the underlying securities. There is no guaranteed
return of principal with these securities and the appreciation potential of
these securities may be limited by a maximum payment or call right. In certain
cases, equity-linked notes may be more volatile and less liquid than less
complex securities or other types of fixed-income securities. Such securities
may exhibit price behavior that does not correlate with other fixed-income
securities.
EXCHANGE-TRADED NOTES ETNs)
ETNs are a type of unsecured, unsubordinated debt security. This type of debt
security differs from other types of bonds and notes because ETN returns are
based upon the performance of a market index minus applicable fees, no period
coupon payments are distributed, and no principal protections exists. The
purpose of ETNs is to create a type of security that combines both the aspects
of bonds and exchange traded funds (ETF). Similar to ETFs, ETNs are traded on
a major exchange (I.E. NYSE) during normal trading hours. However, investors
also can hold the debt security until maturity. At that time, the issuer will
give the investor a cash amount that would be equal to principal amount (subject
to the day's index factor). One factor that affects the ETN's value is the
credit rating of the issuer. Therefore, the value of the ETN may drop despite
no change in the underlying index, instead due to a downgrade in the issuer's
credit rating.
GLOBAL TACTICAL ASSET ALLOCATION (GTAA) STRATEGY
In an attempt to enhance the Fund's return, the Fund may employ a GTAA strategy,
which is a total return strategy designed to add value by benefiting from short-
and medium-term mispricing within global equity, bond, and currency markets.
This strategy will be accomplished by investing the Fund's assets in hedge or
other funds that invest in short-term money market
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instruments, long and short positions in global equity and fixed-income
exchange-traded futures, currency forwards, and other derivative instruments
such as swaps.
The GTAA strategy seeks to enhance the Fund's return by shifting investment
weightings among global equity, bond, and currency markets in an effort to
capture short- and medium-term market moves. The end result is a portfolio of
equity, bond, and currency positions intended to generate returns for the Fund
that exceed those that could be achieved without the GTAA strategy, although
there can be no guarantee that such result will be achieved. Because the GTAA
strategy focuses on short- and medium-term market moves, the strategy in this
portfolio is expected to change frequently.
The GTAA strategy invests in options and futures based on any type of security
or index, including options and futures traded on foreign exchanges. Some
options and futures strategies, including selling futures, buying puts, and
writing calls, hedge the strategy's investments against price fluctuations.
Other strategies, including buying futures, writing puts, and buying calls, tend
to increase and will broaden the strategy's market exposure. Options and futures
may be combined with each other, or with forward contracts, in order to adjust
the risk and return characteristics of an overall strategy.
A GTAA strategy also may contain forward currency exchange contracts (agreements
to exchange one currency for another at a future date), may buy and sell options
and futures contracts relating to foreign currencies, and may purchase
securities indexed to foreign currencies. Currency management strategies allow
this portion of the portfolio to shift investment exposure from one currency to
another or to attempt to profit from anticipated declines in the value of a
foreign currency relative to the U.S. dollar. Successful implementation of a
GTAA strategy depends on the judgment of the GTAA strategy manager as to the
potential risks and rewards of implementing the different types of strategies.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust for the
Fund. These restrictions may not be changed in any material way for the Fund
without approval by the lesser of (1) 67% or more of the voting securities
present at a meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2) more than 50%
of the Fund's outstanding voting securities. The investment restrictions of one
Fund may thus be changed without affecting those of any other Fund.
The Fund:
(1) may not borrow money, except to the extent permitted by the 1940 Act,
the rules and regulations thereunder and any applicable exemptive
relief.
(2) may not purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry.
(3) may not issue senior securities, except as permitted under the 1940
Act.
(4) may not underwrite securities of other issuers, except to the extent
that it may be deemed to act as a statutory underwriter in the
distribution of any restricted securities or not readily marketable
securities.
(5) may make loans only as permitted under the 1940 Act, the rules and
regulations thereunder and any applicable exemptive relief.
(6) may not purchase or sell commodities or commodity contracts unless
acquired as a result of ownership of securities or other instruments
issued by persons that purchase or sell commodities or commodities
contracts; but this shall not prevent the Fund from purchasing, selling
and entering into financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies),
options on financial futures contracts (including futures contracts on
indices of securities, interest rates and currencies), warrants, swaps,
forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities.
(7) may not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments, except that each Fund may
invest in securities or other instruments backed by real estate or
securities of companies that deal in real estate or are engaged in the
real estate business.
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With respect to the Fund's concentration policies as described, the Manager uses
various recognized industry classification services including, but not limited
to industry classifications established by Standard & Poor's (S&P), Bloomberg
L.P., and Frank Russell Company, with certain modifications. The Manager also
may include additional industries as separate classifications, to the extent
applicable. Because the Manager has determined that certain categories within,
or in addition to, those set forth by the S&P have unique investment
characteristics, additional industries may be included as industry
classifications. The Manager classifies municipal obligations by projects with
similar characteristics, such as toll road revenue bonds, housing revenue bonds,
or higher education revenue bonds. In addition, the Fund may not concentrate
investments in any one industry, although it may invest up to 25% of the value
of its total assets in one industry.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Manager, subject to the general control of the Trust's Board of Trustees,
places all orders for the purchase and sale of Fund securities. In executing
portfolio transactions and selecting brokers and dealers, it is the Trust's
policy to seek the best overall terms available. The Manager shall consider such
factors as it deems relevant, including the breadth of the market in the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, for the specific
transaction or on a continuing basis. Securities purchased or sold in the
over-the-counter market will be executed through principal market makers, except
when, in the opinion of the Manager, better prices and execution are available
elsewhere. In addition, the Manager may effect certain "riskless principal"
transactions through certain dealers in over-the-counter markets under which
mark-ups or mark-downs (which in this context may be deemed the equivalent of
commissions) are paid on such transactions.
The Fund will have no obligation to deal with any particular broker or group of
brokers in the execution of portfolio transactions. The Fund contemplates that,
consistent with obtaining the best overall terms available, brokerage
transactions may be effected through USAA Brokerage Services, an affiliated
discount brokerage service of the Manager. The Trust's Board of Trustees has
adopted procedures in conformity with the requirements of Rule 17e-1 under the
1940 Act designed to ensure that all brokerage commissions paid to USAA
Brokerage Services or any broker affiliated directly or indirectly with the Fund
or the Manager are reasonable and fair. The Trust's Board of Trustees has
authorized the Manager for the Fund to effect portfolio transactions for the
Fund on any exchange of which the Manager (or any entity or person associated
with the Manager) is a member and to retain compensation in connection with such
transactions. Any such transactions will be effected and related compensation
paid only in accordance with applicable SEC regulations.
The Trust's Board of Trustees has approved procedures in conformity with the
requirements of Rule 10f-3 under the 1940 Act whereby the Fund may purchase
securities that are offered in underwritings in which an affiliate of the
Manager participates. These procedures prohibit the Fund from directly or
indirectly benefiting an affiliate of the Manager in connection with such
underwritings. In addition, for underwritings where the Manager participates as
a principal underwriter, certain restrictions may apply that could, among other
things, limit the amount of securities that the Fund could purchase in the
underwritings.
In the allocation of brokerage business used to purchase securities for the
Fund, preference may be given to those broker-dealers who provide research and
brokerage services to the Manager as long as there is no sacrifice in obtaining
the best overall terms available. Payment for such services may also be
generated through fixed price public offering underwriting concessions from
purchases of new issue fixed-income securities. Such research and brokerage
services may include, for example: advice concerning the value of securities;
the advisability of investing in, purchasing, or selling securities, and the
availability of securities or the purchasers or sellers of securities; analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and performance of accounts; and various functions
incidental to effecting securities transactions, such as clearance and
settlement. These research services may also include access to research on third
party databases, such as historical data on companies, financial statements,
earnings history and estimates, and corporate releases; real-time quotes and
financial news; research on specific fixed income securities; research on
international market news and securities; and rating services on companies and
industries. Thus, the Manager may be able to supplement its own information and
to consider the views and information of other research organizations in
arriving at its investment decisions. If such information is received and it is
in fact useful to the Manager, it may tend to reduce the Manager's costs.
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In return for such services, the Fund may pay to a broker a "higher commission"
(as such term may be interpreted by the SEC) than may be charged by other
brokers, provided that the Manager determines in good faith that such commission
is reasonable in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular transaction
or of the overall responsibility of the Manager to the Fund and its other
clients. The receipt of research from broker-dealers that execute transactions
on behalf of the Trust may be useful to the Manager in rendering investment
management services to other clients (including affiliates of the Manager); and
conversely, such research provided by broker-dealers who have executed
transaction orders on behalf of other clients may be useful to the Manager in
carrying out its obligations to the Trust. While such research is available to
and may be used by the Manager in providing investment advice to all its clients
(including affiliates of the Manager), not all of such research may be used by
the Manager for the benefit of the Trust. Such research and services will be in
addition to and not in lieu of research and services provided by the Manager,
and the expenses of the Manager will not necessarily be reduced by the receipt
of such supplemental research. See THE TRUST'S MANAGER.
The Manager continuously reviews the performance of the broker-dealers with whom
it places orders for transactions. A periodic evaluation is made of brokerage
transaction costs and services. In evaluating the performance of brokers and
dealers, the Manager considers whether the broker-dealer has generally provided
the Manager with the best overall terms available, which includes obtaining the
best available price and most favorable execution.
To the extent permitted by applicable law, and in all instances subject to the
Fund's policies regarding best execution, the Manager may allocate brokerage
transactions to broker-dealers that have entered into commission recapture
arrangements in which the broker-dealer allocates a portion of the commissions
paid by the Fund toward the reduction of that Fund's expenses.
Securities of the same issuer may be purchased, held, or sold at the same time
by the Trust for the Fund or other accounts or companies for which the Manager
acts as the investment adviser (including affiliates of the Manager). On
occasions when the Manager deems the purchase or sale of a security to be in the
best interest of the Trust, as well as the Manager, the Manager, to the extent
permitted by applicable laws and regulations, may aggregate such securities to
be sold or purchased for the Trust with those to be sold or purchased for other
customers in order to obtain best execution and lower brokerage commissions, if
any. In such event, allocation of the securities so purchased or sold, as well
as the expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Trust. In some instances, this
procedure may affect the price and size of the position obtainable for the
Trust.
The Trust pays no brokerage commissions as such for debt securities. The market
for such securities is typically a "dealer" market in which investment dealers
buy and sell the securities for their own accounts, rather than for customers,
and the price may reflect a dealer's mark-up or mark-down. In addition, some
securities may be purchased directly from issuers.
The Manager may direct a portion of the Fund's brokerage transactions to certain
broker-dealers that provided the Manager with research, analysis, advice, and
similar services.
PORTFOLIO TURNOVER RATES
The rate of portfolio turnover of the Fund will not be a limiting factor when
the Manager deems changes in the Fund's portfolio appropriate in view of its
investment objective(s). Ordinarily, the Fund will not purchase or sell
securities solely to achieve short-term trading profits, although the Fund may
sell portfolio securities without regard to the length of time held if
consistent with the Fund's investment objective(s).
The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year. Short-term investments such as, but not
limited to, commercial paper and short-term U.S. government securities are not
considered when computing the turnover rate.
FUND HISTORY AND DESCRIPTION OF SHARES
The Trust, formerly known as USAA State Tax-Free Trust, is an open-end
management investment company established as a statutory trust under the laws of
the state of Delaware pursuant to a Master Trust Agreement dated June 21, 1993,
as amended.
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The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Forty-six such portfolios have been established, one of which is
described in this SAI. Under the Master Trust Agreement, the Board of Trustees
is authorized to create new portfolios in addition to those already existing
without shareholder approval.
The Fund is a series of the Trust and is nondiversified. The Trust began
offering shares of the Fund in February 2010. The Fund's assets and all income,
earnings, profits, and proceeds thereof, subject only to the rights of
creditors, are specifically allocated to the Fund. They constitute the
underlying assets of the Fund, are required to be segregated on the books of
account, and are to be charged with the expenses of the Fund. Any general
expenses of the Trust not readily identifiable as belonging to the Fund are
allocated on the basis of the Fund's relative net assets during the fiscal year
or in such other manner as the Trustees determines to be fair and equitable.
Each share of the Fund represents an equal proportionate interest in the Fund
with every other share and is entitled to dividends and distributions out of the
net income and capital gains belonging to the Fund when declared by the Board.
Upon liquidation of the Fund, shareholders are entitled to share pro rata in the
net assets belonging to the Fund available for distribution.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless otherwise required by the 1940 Act. Under certain circumstances, however,
shareholders may apply to the Trustees for shareholder information in order to
obtain signatures to request a shareholder meeting. The Trust may fill vacancies
on the Board or appoint new Trustees if the result is that at least two-thirds
of the Trustees have still been elected by shareholders. Moreover, pursuant to
the Master Trust Agreement, any Trustee may be removed by the vote of two-thirds
of the outstanding Trust shares and holders of 10% or more of the outstanding
shares of the Trust can require Trustees to call a meeting of shareholders for
the purpose of voting on the removal of one or more Trustees. The Trust will
assist in communicating to other shareholders about the meeting. On any matter
submitted to the shareholders, the holder of the Fund share is entitled to one
vote for each dollar of net asset value owned on the record date, and a
fractional vote for each fractional dollar of net asset value owned on the
record date. However, on matters affecting an individual Fund, a separate vote
of the shareholders of that Fund is required. Shareholders of the Fund are not
entitled to vote on any matter that does not affect the Fund but which requires
a separate vote of another Fund.
Shares do not have cumulative voting rights, which means that holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of the
Trust's Board of Trustees, and the holders of less than 50% of the shares voting
for the election of Trustees will not be able to elect any person as a Trustee.
Shareholders of a particular Fund might have the power to elect all of the
Trustees of the Trust because that Fund has a majority of the total outstanding
shares of the Trust. When issued, the Fund's shares are fully paid and
nonassessable, have no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.
TAX CONSIDERATIONS
TAXATION OF THE FUNDS
The Fund intends to qualify each taxable year for treatment as a regulated
investment company (RIC) under Subchapter M of Chapter 1 of the Internal Revenue
Code of 1986, as amended (the Code). Accordingly, the Fund will not be liable
for federal income tax on its taxable net investment income and net capital
gains (net long-term capital gains in excess of net short-term capital losses)
that it distributes to its shareholders, provided that the Fund continues to
qualify as a RIC.
To qualify for treatment as a RIC, the Fund must, among other things, (1) derive
at least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities, or foreign currencies, and other income
(including gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies
(the 90% test), (2) distribute annually to its shareholders 90% of its net
investment company taxable income, net short-term capital gains (the excess of
short-term capital gains over short-term losses), net gains from certain foreign
currency transactions for the taxable year, and net tax-exempt interest (the
distribution requirement); and (3) satisfy certain diversifications requirements
at the close of each quarter of the Fund's taxable year.
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The Code imposes a nondeductible 4% excise tax on a RIC that fails to distribute
by the end of a calendar year an amount at least equal to the sum of (1) 98% of
its ordinary (taxable) income for that calendar year, (2) 98% of its capital
gain net income for the twelve-month period ending on October 31 of that year,
and (3) any prior income and gains not distributed. Each Fund intends to
continue to make distributions necessary to avoid imposition of the excise tax.
The use of hedging strategies, such as writing (selling) and purchasing options
and futures contracts and entering into forward currency contracts, involves
complex rules that will determine for income tax purposes the amount, character,
and timing of recognition of the gains and losses the Fund realizes in
connection therewith. Gain from the disposition of foreign currencies (except
certain gains that may be excluded by future regulations), and gains from
options, futures and forward currency contracts the Fund derives with respect to
its business of investing in securities or foreign currencies, will be treated
as qualifying income under the 90% test.
The Fund may invest in certain futures and "nonequity" options (I.E., certain
listed options, such as those on a "broad-based" securities index) and certain
foreign currency options and forward currency contracts with respect to which it
makes a particular election that will be subject to section 1256 of the Code
(collectively section 1256 contracts). Any section 1256 contracts the Fund holds
at the end of its taxable year generally must be "marked-to- market" (that is,
treated as having been sold at that time for their fair market value) for
federal income tax purposes, with the result that unrealized gains or losses
will be treated as though they were realized. Sixty percent of any net gain or
loss recognized on these deemed sales, and 60% of any net realized gain or loss
from any actual sales of section 1256 contracts, will be treated as long-term
capital gain or loss, and the balance will be treated as short-term capital gain
or loss. These rules may operate to increase the amount that a Fund must
distribute to satisfy the distribution requirement (I.E., with respect to the
portion treated as short-term capital gain), which will be taxable to its
shareholders as ordinary income, and to increase the net capital gain a Fund
recognizes, without in either case increasing the cash available to it.
Section 988 of the Code also may apply to forward currency contracts and options
on foreign currencies. Under that section, each foreign currency gain or loss
generally is computed separately and treated as ordinary income or loss. These
gains or losses will increase or decrease the amount of the Fund's investment
company taxable income to be distributed to its shareholders as ordinary income,
rather than affecting the amount of its net capital gain. In the case of overlap
between sections 1256 and 988, special provisions determine the character and
timing of any income, gain, or loss.
Code section 1092 (dealing with straddles) also may affect the taxation of
certain options, futures, and forward currency contracts in which the Fund may
invest. That section defines a "straddle" as offsetting positions with respect
to actively traded personal property; for these purposes, options, futures, and
forward contracts are positions in personal property. Under that section, any
loss from the disposition of a position in a straddle generally may be deducted
only to the extent the loss exceeds the unrealized gain on the offsetting
position(s) of the straddle. In addition, these rules may postpone the
recognition of loss that otherwise would be recognized under the mark-to-market
rules discussed above. The regulations under section 1092 also provide certain
"wash sale" rules, which apply to transactions where a position is sold at a
loss and a new offsetting position is acquired within a prescribed period, and
"short sale" rules applicable to straddles. If the Fund makes certain elections,
the amount, character, and timing of recognition of gains and losses from the
affected straddle positions would be determined under rules that vary according
to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to the Fund of
straddle transactions are not entirely clear.
The Fund may invest in the stock of "passive foreign investment companies"
(PFICs). A PFIC is any foreign corporation (with certain exceptions) that, in
general, meets either of the following tests: (1) at least 75% of its gross
income for the taxable year is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, the Fund will be subject to federal income tax on a portion of
any "excess distribution" it receives on the stock of a PFIC or of any gain on
its disposition of that stock (collectively PFIC income), plus interest thereon,
even if the Fund distributes the PFIC income as a dividend to its shareholders.
The balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent it
distributes that income to its shareholders. It is anticipated that any taxes on
the Fund with respect to investments in PFICs would be insignificant.
22
<PAGE>
TAXATION OF THE SHAREHOLDERS
Distributions are generally included in a shareholder's gross income for the
taxable year in which they are received. However, distributions the Fund
declares in October, November, or December, which are payable to shareholders of
record in such a month will be deemed to have been received on December 31, if
the Fund pays the distributions during the following January. If a shareholder
receives a distribution taxable as long-term capital gain with respect to shares
and redeems or exchanges the shares before he or she has held them for more than
six months, any loss on the redemption or exchange that is less than or equal to
the amount of the distribution will be treated as long-term capital loss.
If the Fund engages in securities lending, the borrower generally will be
obligated to pay the Fund an amount equal to ("in lieu of") any dividend paid on
the loaned securities during the loan term. Even if the dividend otherwise would
be eligible for the 15% maximum federal income tax rate on "qualified dividend
income" received by individuals (through December 31, 2010), such "in lieu of"
payments, when distributed to the Fund's shareholders, will not be treated as
"qualified dividend income" and instead will be taxed at the shareholders'
marginal federal income tax rates.
TRUSTEES AND OFFICERS OF THE TRUST
The Board of Trustees consists of six Trustees who supervise the business
affairs of the Trust. The Board of Trustees is responsible for the general
oversight of the Fund's business and for assuring that the Fund is managed in
the best interests of the Fund's respective shareholders. The Board of Trustees
periodically reviews the Fund's investment performance as well as the quality of
other services provided to the Fund and its shareholders by the Fund's service
providers, including IMCO and its affiliates.
Set forth below are the Non-Interested Trustees, the Interested Trustee,
officers, and each of their respective offices and principal occupations during
the last five years, length of time served, and information relating to any
other directorships held.
23
<PAGE>
NON-INTERESTED TRUSTEES
POSITION(S) TERM OF OFFICE** PRINCIPAL OCCUPATION(S) AND NUMBER OF USAA
NAME, ADDRESS* HELD WITH AND LENGTH OF OUTSIDE DIRECTORSHIPS DURING FUNDS OVERSEEN BY
AND AGE FUNDS TIME SERVED THE PAST FIVE YEARS TRUSTEE/OFFICER
Barbara B. Trustee January 1994 President, Postal Addvantage One registered
Dreeben (64) (7/92-present), a database investment company
management service. consisting of 46 funds
Robert L. Mason, Trustee January 1997 Institute Analyst, Southwest One registered
Ph.D. (63) Research Institute (3/02-present); investment company
Staff Analyst, Southwest Research consisting of 46 funds
Institute, which focuses in the
fields of technological research
(9/98-3/02).
Barbara B. Trustee January 2008 Academic Director of the El Paso One registered
Ostdiek Ph.D. (45) Corporation Finance Center at investment company
Jesse H. Jones Graduate consisting of 46 funds
School of Management at Rice
University (7/02-present);
Associate Professor of Finance
at Jesse H. Jones Graduate
School of Management at
Rice University (7/01-present).
Michael F. Trustee January 2000 President of Reimherr Business One registered
Reimherr (64) Consulting (5/95-present), an investment company
organization that performs consisting of 46 funds
business valuations of large
companies to include the
development of annual
business plans, budgets,
and internal financial
reporting.
Richard A. Trustee and January 1992 Vice President, Beldon Roofing One registered
Zucker (66) Chairman and Chair since Company (7/85-present). investment company
February 2005 consisting of 46 funds
* The address for each Non-Interested Trustee is USAA Investment Management
Company, P.O. Box 659430, San Antonio, Texas 78265-9430.
** The term of office for each Trustee is twenty (20) years or until the
Trustee reaches age 70. All members of the Board of Trustees shall be
presented to shareholders for election or reelection, as the case may be,
at least once every five (5) years. Vacancies on the Board of Trustees can
be filled by the action of a majority of the Trustees, provided that at
least two-thirds of the Trustees have been elected by the shareholders.
24
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST WHO ARE EMPLOYEES OF THE MANAGER OR
AFFILIATED COMPANIES AND ARE CONSIDERED "INTERESTED PERSONS" UNDER THE 1940 ACT.
POSITION(S) TERM OF OFFICE PRINCIPAL OCCUPATION(S) AND NUMBER OF USAA
NAME, ADDRESS* HELD WITH AND LENGTH OF OUTSIDE DIRECTORSHIPS DURING FUNDS OVERSEEN BY
AND AGE FUNDS TIME SERVED THE PAST FIVE YEARS TRUSTEE/OFFICER
Christopher W. Trustee, February 2001 President, Financial Services Group, One registered
Claus (49) President, USAA (1/07-present); President and investment company
and Vice Chair of the Board of Directors, consisting of 46 funds
Chairman USAA Investment Management Company
(IMCO) (2/08-present); President, USAA
Financial Advisors, Inc. (FAI) (12/07-present);
Chair of the Board of Directors and Chief
Investment Officer IMCO, (1/07-2/08); President
and Chief Executive Officer, Director, and
Chairman of the Board of Directors, IMCO
(12/04-1/07). Mr. Claus also serves as Chair of
the Board of Directors of USAA Shareholder Account
Services (SAS); USAA Financial Planning
Services Insurance Agency, Inc. (FPS) and FAI.
He also is a director of USAA Life Insurance
Company (USAA Life).
Dan McNamara Vice December 2009 President and Director, IMCO, FAI, One registered
(43) President FPS (10/09-present); President, investment company
Banc of America and SAS consisting of 46 funds
(10/09-present); President Banc of
America Investment Advisors (9/07-9/09);
Managing Director Planning and
Financial Products Group, Bank of
America (9/01-9/09).
Clifford A. Vice May 2002 Senior Vice President, Fixed Income One registered
Gladson (59) President Investments, IMCO (9/02-present). investment company
Mr. Gladson also serves as a consisting of 46 funds
director for SAS.
John P. Toohey Vice June 2009 Vice President, Equity Investments, One registered
(41) President IMCO (2/09-present); Managing investment company
Director, AIG Investments, consisting of 46 funds
(12/00-1/09).
25
<PAGE>
POSITION(S) TERM OF OFFICE PRINCIPAL OCCUPATION(S) AND NUMBER OF USAA
NAME, ADDRESS* HELD WITH AND LENGTH OF OUTSIDE DIRECTORSHIPS DURING FUNDS OVERSEEN BY
AND AGE FUNDS TIME SERVED THE PAST FIVE YEARS TRUSTEE/OFFICER
Mark S. Howard Secretary September 2002 Senior Vice President and Deputy One registered
(46) General Counsel, Business & Regulatory investment company
Services USAA (10/08-present); Senior consisting of 46 funds
Vice President, USAA Life/IMCO/ FPS
General Counsel, USAA (10/03-10/08).
Mr. Howard also holds the officer
positions of Senior Vice President,
Secretary and Counsel for USAA Life,
FPS and FAI, and is an Assistant
Secretary of USAA, IMCO, and SAS.
Christopher P. Assistant November 2008 Vice President, Financial Advice One registered
Laia (50) Secretary & Solutions Group General investment company
Counsel, USAA (10/08-present); consisting of 46 funds
Vice President, Securities Counsel,
USAA (6/07-10/08); Vice President
and Secretary, IMCO and SAS, (12/09-
present); Vice President and Assistant
Secretary, FAI and FPS (7/07-present);
General Counsel, Secretary, and Partner,
Brown Advisory (6/02-6/07).
Roberto Galindo, Treasurer February 2008 Assistant Vice President, Portfolio One registered
Jr. (49) Accounting/Financial Administration, investment company
USAA (12/02-present); Assistant consisting of 46 funds
Treasurer, USAA family of funds
(7/00-2/08).
William A. Smith Assistant February 2009 Vice President, Senior Financial One registered
(61) Treasurer Officer and Treasurer, FAI, FPS, investment company
SAS (2/09-present); Senior Financial consisting of 46 funds
Officer, USAA Life (2/07-present);
consultant, Robert Half/Accounttemps,
(8/06-1/07); Chief Financial Officer,
California State Automobile Association
(8/04-12/05).
Jeffrey D. Hill Chief September Assistant Vice President, Mutual One registered
(42) Compliance 2004 Funds Compliance, USAA (9/04-present). investment company
Officer consisting of 46 funds
* The address of the Interested Trustee and each officer is P.O. Box 659430,
San Antonio, Texas 78265-9430.
26
<PAGE>
COMMITTEES OF THE BOARD OF TRUSTEES
The Board of Trustees typically conducts regular meetings five or six times a
year to review the operations of the Funds in the USAA family of funds. A
portion of these meetings is devoted to various committee meetings of the Board
of Trustees, which focus on particular matters. In addition, the Board of
Trustees may hold special meetings by telephone or in person to discuss specific
matters that may require action prior to the next regular meeting. The Board of
Trustees has four committees: an Executive Committee, an Audit Committee, a
Pricing and Investment Committee, and a Corporate Governance Committee. The
duties of these four Committees and their present membership are as follows:
EXECUTIVE COMMITTEE: Between the meetings of the Board of Trustees and while the
Board is not in session, the Executive Committee of the Board of Trustees has
all the powers and may exercise all the duties of the Board of Trustees in the
management of the business of the Trust which may be delegated to it by the
Board. Trustees Claus and Zucker are members of the Executive Committee.
AUDIT COMMITTEE: The Audit Committee of the Board of Trustees reviews the
financial information and the independent auditor's reports and undertakes
certain studies and analyses as directed by the Board. Trustees Dreeben, Mason,
Ostdiek, Reimherr, and Zucker are members of the Audit Committee.
PRICING AND INVESTMENT COMMITTEE: The Pricing and Investment Committee of the
Board of Trustees acts upon various investment-related issues and other matters
which have been delegated to it by the Board. Trustees Claus, Dreeben, Mason,
Ostdiek, Reimherr, and Zucker are members of the Pricing and Investment
Committee.
CORPORATE GOVERNANCE COMMITTEE: The Corporate Governance Committee of the Board
of Trustees maintains oversight of the organization, performance, and
effectiveness of the Board and Non-Interested Trustees. Trustees Dreeben, Mason,
Ostdiek, Reimherr, and Zucker are members of the Corporate Governance
Committee.
In addition to the previously listed Trustees and/or officers of the Trust who
also serve as Directors and/or officers of the Manager, the following
individuals are executive officers of the Manager: Daniel S. McNamara,
President; and Dawn Cooper, Senior Vice President, Distribution Services. There
are no family relationships among the Trustees, officers, and managerial level
employees of the Trust.
The following table sets forth the dollar range of total equity securities
beneficially owned by the Trustees in the Fund and all of the USAA Funds
overseen by the Trustees as of the calendar year ended December 31, 2009.
USAA USAA FUND
MANAGED ALLOCATION COMPLEX
FUND TOTAL
INTERESTED TRUSTEE
Christopher W. Claus None Over $100,000
NON-INTERESTED TRUSTEES
Barbara B. Dreeben None Over $100,000
Robert L. Mason None Over $100,000
Barbara B. Ostdiek None $10,001 - $50,000
Michael F. Reimherr None Over $100,000
Richard A. Zucker None Over $100,000
27
<PAGE>
The following table sets forth information describing the compensation of the
current Trustees of the Trust for their services as Trustees for the fiscal year
ended December 31, 2009.
NAME AGGREGATE TOTAL COMPENSATION
OF COMPENSATION FROM FROM THE USAA
TRUSTEE FUND LISTED IN THIS SAI FAMILY OF FUNDS (B)
INTERESTED TRUSTEE
Christopher W. Claus None (a) None (a)
NON-INTERESTED TRUSTEES
Barbara B. Dreeben None $89,150
Robert L. Mason, Ph.D. None $89,150
Barbara B. Ostdiek, Ph.D. None $83,150
Michael F. Reimherr None $83,150
Richard A. Zucker None $95,150
(a) Christopher W. Claus is affiliated with the Trust's investment adviser,
IMCO, and, accordingly, receives no remuneration from the Trust or any
other Fund of the USAA Fund Complex.
(b) At December 31, 2009, the USAA Fund Complex consisted of one registered
investment company offering 45 individual funds.
No compensation is paid by any fund to any Trustee who is a director, officer,
or employee of IMCO or its affiliates. No pension or retirement benefits are
accrued as part of Fund expenses. The Trust reimburses certain expenses of the
Trustees who are not affiliated with the Manager. As of the date of this SAI,
the officers and Trustees of the Trust and their families as a group owned
beneficially or of record less than 1% of the outstanding shares of the Trust.
THE TRUST'S MANAGER
As described in the Fund's prospectus, IMCO is the Manager and investment
adviser for the Fund. IMCO, organized in May 1970, is a wholly owned indirect
subsidiary of United Services Automobile Association (USAA), a large,
diversified financial services institution, and has served as investment adviser
and underwriter for USAA Mutual Funds Trust from its inception.
In addition to managing the Trust's assets, IMCO advises and manages the
investments of USAA and its affiliated companies. As of the date of this SAI,
total assets under management by IMCO were approximately $72 billion, of which
approximately $45 billion were in mutual fund portfolios.
ADVISORY AGREEMENT
The Manager provides investment management and advisory services to the Fund
pursuant to an Advisory Agreement dated July 31, 2006, as amended (Advisory
Agreement). Under this agreement, the Manager provides an investment program,
carries out the investment policies, and manages the portfolio assets for the
Fund. The Manager is authorized, subject to the control of the Board of Trustees
of the Trust, to determine the selection, amount, and time to buy or sell
securities for the Fund. The Advisory Agreement authorizes the Manager to retain
one or more Subadvisers for the management of all or a portion of the Fund's
investment portfolio. Under the Advisory Agreement, the Manager is responsible
for monitoring the services furnished pursuant to the Subadvisory Agreements, if
applicable, and making recommendations to the Board with respect to the
retention or replacement of Subadvisers and renewal of Subadvisory Agreements.
In addition, the Manager manages certain portfolio assets for certain of the
Fund, as described in the prospectuses.
For the services under this agreement, the Fund has agreed to pay the Manager a
fee computed as described under FUND MANAGEMENT in its prospectus. Management
fees are computed and accrued daily and are payable monthly. The Manager
compensates all personnel, officers, and Trustees of the Trust if such persons
are also employees of the Manager or its affiliates.
Except for the services and facilities provided by the Manager, the Fund pays
all other expenses incurred in its operations. Expenses for which the Fund is
responsible include taxes (if any);
28
<PAGE>
expenses of issuance and redemption of shares; charges of transfer agents,
custodians, and dividend disbursing agents; costs of preparing and distributing
proxy material; audit and legal expenses; certain expenses of registering and
qualifying shares for sale; fees of Trustees who are not interested (not
affiliated) persons of the Manager; costs of printing and mailing the
prospectus, SAI, and periodic reports to existing shareholders; and any other
charges or fees not specifically enumerated. The Manager pays the cost of
printing and mailing copies of the prospectus, the SAI, and reports to
prospective shareholders.
The Advisory Agreement with respect to the Fund will remain in effect until
January 31, 2012, and will continue in effect from year to year thereafter for
the Fund as long as its is approved at least annually by a vote of the
outstanding voting securities of the Fund (as defined by the 1940 Act) or by the
Board of Trustees (on behalf of the Fund) including a majority of the
Non-Interested Trustees, at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated at any time by either the
Trust or the Manager on 60 days' written notice. The agreement will
automatically terminate in the event of its assignment (as defined by the 1940
Act).
The Fund has agreed to pay IMCO a management fee computed daily and paid
monthly, at an annual rate equal to three fifths of one percent (0.60%) of the
average net assets of the Fund.
ADMINISTRATION AND SERVICING AGREEMENT
Under an Administration and Servicing Agreement effective February 1, 2010, IMCO
is obligated on a continuous basis to provide such administrative services as
the Board of Trustees of the Trust reasonably deems necessary for the proper
administration of the Fund. IMCO will generally assist in all aspects of the
Fund's operations; supply and maintain office facilities, statistical and
research data, data processing services, clerical, accounting, bookkeeping and
recordkeeping services (including without limitation the maintenance of such
books and records as are required under the 1940 Act and the rules thereunder,
except as maintained by other agents), internal auditing, executive and
administrative services, and stationery and office supplies; prepare and file
tax returns; supply financial information and supporting data for reports to and
filings with the SEC and various state Blue Sky authorities; supply supporting
documentation for meetings of the Board of Trustees; provide and maintain an
appropriate fidelity bond; process and coordinate purchases and redemptions and
coordinate and implement wire transfers in connection therewith; execute orders
under any offer of exchange involving concurrent purchases and redemptions of
shares of one or more funds in the USAA family of funds; respond to shareholder
inquiries; assist in processing shareholder proxy statements, reports,
prospectuses, and other shareholder communications; furnish statements and
confirmations of all account activity; respond to shareholder complaints and
other correspondence; and negotiate arrangements with, and supervise and
coordinate the activities of, agents and others to supply services. For these
services under the Administration and Servicing Agreement, the Trust has agreed
to pay IMCO a fee computed daily and paid monthly, at an annual rate equal to
five one-hundredths of one percent (0.05%) of the average net assets for the
Fund. We may also delegate one or more of our responsibilities to others at our
expense.
In addition to the services provided under the Fund's Administration and
Servicing Agreement, the Manager also provides certain compliance, legal, and
tax services for the benefit of the Funds. The Trust's Board of Trustees may
approve the reimbursement of these expenses incurred by the Manager.
CODES OF ETHICS
The Fund's Manager has adopted a Code of Ethics pursuant to Rule 17j-1 under the
1940 Act, which permits personnel covered by the rule to invest in securities
that may be purchased or held by a Fund but prohibits fraudulent, deceptive, or
manipulative conduct in connection with that personal investing. The Trust's
Board of Trustees reviews the administration of the Code of Ethics at least
annually and receives certifications from the Manager regarding compliance with
the Code of Ethics annually.
While the officers and employees of the Manager, as well as those of the Fund,
may engage in personal securities transactions, there are certain restrictions
in the procedures in the Code of Ethics adopted by the Manager and the Fund.
The Code of Ethics are designed to ensure that the shareholders' interests come
before the individuals who manage the Fund. The Code of Ethics requires the
portfolio manager and other employees with access to information about the
purchase or sale of securities by the Fund to abide by the Code of Ethics
requirements before executing permitted personal trades. A copy of the Code of
Ethics has been filed with the SEC and is available for public view.
29
<PAGE>
PROXY VOTING POLICIES AND PROCEDURES
The Trust's Board of Trustees has delegated the Manager authority to vote on
proposals presented to shareholders of portfolio securities held by the Fund.
The Manager generally will vote on proposals presented to shareholders of
portfolio securities held by the Fund. However, the Manager reserves the right
not to vote on such proposals where it determines that the cost of exercising
voting rights on behalf of a Fund exceeds the benefit of exercising such voting
rights. In addition, the Manager generally will not vote on proposals presented
to shareholders with respect to foreign securities that are on loan under the
Fund's securities lending program. In this connection, the Manager has
determined that the potential return from lending such securities generally is
more advantageous to the Fund than recalling such securities from the borrower
to exercise voting rights with respect thereto. In addition, the Manager
generally will not vote on proposals presented to shareholders with respect to
foreign securities that are subject to share blocking where the foreign company
prevents the sale of shares for a certain period of time around the shareholder
meeting. For companies in countries with share blocking periods, the
disadvantage of being unable to sell the stock regardless of changing conditions
typically outweighs the advantages of voting at the shareholder meeting. The
Manager has retained RiskMetrics Group (RMG), formerly Institutional Shareholder
Services, Inc., to receive proxy statements, provide voting
recommendations, vote shares according to our instructions, and to keep records
of our votes on behalf of the Fund. RMG has developed a set of criteria for
evaluating and making recommendations on proxy voting issues (for example,
elections of boards of directors or mergers and reorganizations). These criteria
and general voting recommendations are set forth in the RMG U.S. Proxy Voting
Guidelines and RMG International Proxy Voting Guidelines (the RMG Guidelines) as
customized by the Manager with respect to certain matters. The Manager retains
the authority to determine the final vote for securities held by the Fund.
To avoid any improper influence on the Manager's voting decisions, the Manager
generally will follow the voting recommendations of RMG, except as briefly
described below. Before any voting deadline, RMG will provide the Manager's Head
of Equity Investments (or his or her delegate) with a summary of the proposal
and a recommendation based on the RMG Guidelines. In evaluating RMG's
recommendations, the Manager may consider information from many sources,
including the Fund's portfolio manager, the Manager's Investment Strategy
Committee, the management of a company presenting a proposal, shareholder
groups, and other sources. The Manager believes that the recommendation of
management should be given weight in determining how to vote on a particular
proposal. The Manager's Head of Equity Investments will then review RMG's
recommendations, and if he or she determines that it would be in the Fund's best
interests to vote the shares contrary to RMG's recommendation, he or she must
determine, based on reasonable inquiry, whether any material conflict of
interest exists between the Fund, on the one hand, and the Manager, the Fund's
principal underwriter, or any person who is an affiliated person of the Fund,
the Manager, or the Fund's principal underwriter, on the other. If a material
conflict of interest is determined to exist, the Head of Equity Investments may
vote contrary to RMG's recommendation only if the proposed voting recommendation
of the Head of Equity Investments is reviewed by the Manager's Investment
Strategy Committee, which will determine how to vote the particular proxy. With
respect to any such proxy votes, the information prepared by the Manager's
Investment Strategy Committee regarding any material conflict of interest
identified will be summarized and presented to the Fund's Board of Trustees at
the next regularly scheduled meeting of the Board. The Manager's Investment
Strategy Committee also may establish certain proxy voting procedures for votes
on certain matters that will override any RMG recommendation.
Copies of the Manager's proxy voting policies and procedures are available
without charge (i) by calling 800-531-USAA (8722); (ii) at USAA.COM; and (iii)
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 (i) without charge at USAA.COM; and (ii) on
the SEC's website at http://www.sec.gov.
UNDERWRITER
The Trust has an agreement with IMCO for exclusive underwriting and distribution
of the Fund's shares on a continuing best efforts basis. This agreement provides
that IMCO will receive no fee or other compensation for such distribution
services.
30
<PAGE>
TRANSFER AGENT
USAA Shareholder Account Services (Transfer Agent), 9800 Fredericksburg Road,
San Antonio, TX 78288, performs transfer agent services for the Trust under a
Transfer Agency Agreement. For its services under the Transfer Agency Agreement,
the Trust pays the Transfer Agent an annual fixed fee of five one-hundredths of
one percent (0.05%) of the average net assets per account. The fee is subject to
change at any time. In addition to the account-based fee, the Transfer Agent
also is entitled to reimbursement from the Trust for all reasonable
out-of-pocket expenses, charges and other disbursements incurred by it in
connection with the performance of services under the Transfer Agency Agreement,
including but not limited to: (1) the cost of any and all forms, statements,
labels, envelopes, checks, tax forms, and other printed materials which is
required by the Transfer Agent to perform its duties; (2) delivery charges,
including postage incurred in delivering materials to, and receiving them from,
the Trust and shareholders; (3) communication charges; (4) maintenance of
shareholder records (including charges for retention and imaging); (5) tax
reporting systems; (6) counsel fees; and (7) cash and asset management services.
Also, the Transfer Agent is authorized to enter into third party service
agreements in which the Trust will pay the Transfer Agent the lesser of (i) the
amount payable by Transfer Agent to the servicing agent, or (ii) the amount that
would have been paid to the Transfer Agent if all the accounts had been
maintained by the agent maintained by the Transfer Agent.
The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth of
the annual fee. The Fund pays all out-of-pocket expenses of the Transfer Agent
and other expenses which are incurred at the specific direction of the Trust. In
addition, certain entities may receive payments directly or indirectly from the
Transfer Agent, IMCO, or their affiliates for providing shareholder services to
their clients who hold Fund shares.
PORTFOLIO MANAGER DISCLOSURE
USAA
OTHER ACCOUNTS MANAGED: The following table sets forth other accounts for which
the Fund's portfolio managers were primarily responsible for the day-to-day
portfolio management as of December 31, 2009, unless otherwise specified.
Number of Other Accounts Managed and Assets by Account Type
| Number of Accounts and Assets for Which Advisory Fee is Performance-Based
|
Portfolio Manager
| Registered Investment Companies
| Other Pooled Investment Vehicles
| Other Accounts
| Registered Investment Companies
| Other Pooled Investment Vehicles
| Other Accounts
| |
John P. Toohey
| 10 ($1.4 bil
| 0
| 0
| 4 ($563 mil)
| 0
| 0
| |
Wasif A. Latif
| 10 ($1.4 bil
| 0
| 0
| 4 ($563 mil)
| 0
| 0
| |
R. Matthew Freund
| 4 ($3.5 bil)
| 0
| 0
| 3 ($3.5 bil)
| 0
| 0
| |
Arnold J. Espe
| 4 ($967 mil)
| 0
| 0
| 3 ($956 mil)
| 0
| 0
| |
Mark W. Johnson
| 3 ($1.6 bil)
| 0
| 0
| 3 ($956 mil)
| 0
| 0
| |
Dan Denbow
| 3 ($1.6 bil)
| 0
| 0
| 2 ($105 mil)
| 0
| 0
| |
CONFLICTS OF INTEREST: These portfolio managers provide portfolio management
services only to investment companies in the USAA retail fund family and do not
manage any private accounts or unregistered mutual funds. Portfolio managers
make investment decisions for the funds they manage based on the fund's
investment objective, permissible investments, cash flow and other relevant
investment considerations that they consider applicable to that portfolio.
Therefore, portfolio managers could purchase or sell securities for one
portfolio and not another portfolio, or can take similar action for two
portfolios at different times, even if the portfolios have the same investment
objective and permissible investments.
Potential conflicts of interest may arise when allocating and/or aggregating
trades for funds with a performance fee and those without a performance fee.
IMCO often will aggregate multiple orders for the same security for different
mutual funds into one single order. To address these potential conflicts of
interest, IMCO has adopted detailed procedures regarding the allocation of
client orders, and such transactions must be allocated to funds in a fair and
equitable manner.
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<PAGE>
The performance of each Fund is also periodically reviewed by IMCO's Investment
Strategy Committee (ISC), and portfolio managers have the opportunity to explain
the reasons underlying a Fund's performance. The ISC and the Trust's Board of
Trustees also routinely review and compare the performance of the Funds with the
performance of other funds with the same investment objectives and permissible
investments.
As discussed above, IMCO has policies and procedures designed to seek to
minimize potential conflicts of interest arising from portfolio managers
advising multiple funds. The Mutual Funds compliance department monitors a
variety of areas to ensure compliance with the USAA Funds Compliance Program
written procedures, including monitoring each fund's compliance with its
investment restrictions and guidelines, and monitoring and periodically
reviewing or testing transactions made on behalf of multiple funds to seek to
ensure compliance with the USAA Funds Compliance Program written policies and
procedures.
COMPENSATION: IMCO's compensation structure includes a base salary and an
incentive component. The portfolio managers are officers of IMCO and their base
salary is determined by the salary range for their official position, which is
influenced by market and competitive considerations. The base salary is fixed
but can change each year as a result of the portfolio manager's annual
evaluation or if the portfolio manager is promoted. Each portfolio manager also
is eligible to receive an incentive payment based on the performance of the
Fund(s) managed by the portfolio manager compared to each Fund's comparative
ranking against all funds within the appropriate Lipper category, or for money
market funds within the appropriate iMoney Net, Inc. category. Each fund, except
for the money market funds, has a performance fee component to the advisory fee
earned by IMCO. The performance fee adjustment for these Funds is based on the
Fund's relative performance compared to the Fund's comparative ranking against
the appropriate Lipper index as set forth in the Fund's prospectus. Portfolio
managers will receive incentive payments under this plan only if the Funds they
manage are at or above the 50th percentile compared to their industry peers, and
the incentive payment increases the higher the Fund's relative ranking in its
peer universe. In determining the incentive payment of a portfolio manager who
manages more than one Fund, IMCO considers the relative performance of each Fund
in proportion to the total assets managed by the portfolio manager.
In addition to salary and incentive payments, portfolio managers also
participate in other USAA benefits to the same extent as other employees. Also,
USAA has established certain supplemental retirement programs and bonus program
available to all officers of USAA-affiliated companies.
PORTFOLIO OWNERSHIP: As of the date of this SAI, no portfolio manager
beneficially owned shares of the Fund.
PORTFOLIO HOLDINGS DISCLOSURE
The Trust's Board of Trustees has adopted a policy on selective disclosure of
portfolio holdings. The Trust's policy is to protect the confidentiality of the
Fund's portfolio holdings and prevent the selective disclosure of material
non-public information about the identity of such holdings. To prevent the
selective disclosure of portfolio holdings of the Fund, the general policy of
the Fund is to not disclose any portfolio holdings of the Fund, other than the
portfolio holdings filed with the SEC on Form N-CSR (I.E., annual and semiannual
reports) and Form N-Q (I.E., quarterly portfolio holdings reports), and any
portfolio holdings made available on USAA.COM. This general policy shall not
apply, however, in the following instances:
|X| Where the person to whom the disclosure is made owes a fiduciary or
other duty of trust or confidence to the Fund (E.G., auditors, attorneys, and
Access Persons under the Fund's Code of Ethics);
|X| Where the person has a valid reason to have access to the portfolio
holdings information and has agreed not to disclose or misuse the information
(E.G., custodians, accounting agents, securities lending agents, subadvisers,
rating agencies, mutual fund evaluation services, such as Lipper Inc., and proxy
voting agents);
|X| As disclosed in this SAI; and
|X| As required by law or a regulatory body.
If portfolio holdings are released pursuant to an ongoing arrangement with any
party that owes a fiduciary or other duty of trust or confidence to the Fund or
has a valid reason to have access to the portfolio holdings information and has
agreed not to disclose or misuse the information, the Fund must have a
legitimate business purpose for doing so, and neither the Fund, nor the Manager
or its affiliates, may receive any compensation in connec-
32
<PAGE>
tion with an arrangement to make available information about the Fund's
portfolio holdings. If the applicable conditions set forth above are satisfied,
a Fund may distribute portfolio holdings to mutual fund evaluation services such
as Lipper and broker-dealers that may be used by the Fund, for the purpose of
efficient trading and receipt of relevant research. In providing this
information to broker-dealers, reasonable precautions are taken to avoid any
potential misuse of the disclosed information.
The Fund also may disclose any and all portfolio information to its service
providers and others who generally need access to such information in the
performance of their contractual duties and responsibilities and are subject to
duties of confidentiality, including a duty not to trade on non-public
information, imposed by law and/or agreement. These service providers include
each Fund's custodian, auditors, attorneys, investment adviser and
subadviser(s), administrator, and each of their respective affiliates and
advisers.
Any person or entity that does not have a previously approved ongoing
arrangement to receive non- public portfolio holdings information and seeks a
Fund's portfolio holdings information that (i) has not been filed with the SEC,
or (ii) is not available on USAA.COM, must submit its request in writing to the
Fund's Chief Compliance Officer (CCO), or USAA Securities Counsel, who will make
a determination whether disclosure of such portfolio holdings may be made and
whether the relevant Fund needs to make any related disclosure in its SAI. A
report will be made to each Fund's Board of Trustees at each quarterly meeting
about (i) any determinations made by the CCO or USAA Securities Counsel,
pursuant to the procedures set forth in this paragraph, and (ii) any violations
of the portfolio holdings policy.
The Fund intends to post its annual and semiannual reports, and quarterly
schedules of portfolio holdings on USAA.COM after these reports are filed with
the Securities and Exchange Commission. In addition, the Fund intends to post
its top ten holdings on USAA.COM 15 days following the end of each month.
In order to address potential conflicts of interest between the interests of the
Fund's shareholders, on the one hand, and the interests of the Fund's investment
adviser, principal underwriter, or certain affiliated persons, on the other, the
Fund has adopted the policies described above (i) prohibiting the receipt of
compensation in connection with an arrangement to make available information
about the Fund's portfolio holdings and (ii) requiring certain requests for
non-public portfolio holdings information to be approved by the CCO or USAA
Securities Counsel, and then reported to the Fund's Board, including the Non
Interested Trustees.
GENERAL INFORMATION
CUSTODIAN AND ACCOUNTING AGENT
State Street Bank and Trust Company, P.O. Box 1713, Boston, Massachusetts 02105,
is the Trust's custodian and accounting agent. The custodian is responsible for,
among other things, safeguarding and controlling the Fund's cash and securities,
handling the receipt and delivery of securities, processing the pricing of the
Fund's securities, and collecting interest on the Fund's investments. The
accounting agent is responsible for, among other things, calculating the Fund's
daily net asset value and other recordkeeping functions. In addition, assets of
the Fund may be held by certain foreign subcustodians and foreign securities
depositories as agents of the Custodian in accordance with the rules and
regulations established by the SEC.
COUNSEL
K&L Gates LLP, 1601 K Street N.W., Washington, DC 20006, reviews certain legal
matters for the Trust in connection with the shares offered by the prospectus.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, 1800 Frost Bank Tower, 100 West Houston Street, San Antonio,
Texas 78205, is the independent registered public accounting firm for the Fund.
In this capacity, the firm is responsible for the audits of the annual financial
statements of the Fund and reporting thereon.
33
<PAGE>
APPENDIX A - LONG-TERM AND SHORT-TERM DEBT RATINGS
1. LONG-TERM DEBT RATINGS:
MOODY'S INVESTOR SERVICES (MOODY'S)
Aaa Obligations rated Aaa are judged to be of the best quality, with minimal
credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B Obligations rated B are considered speculative and are subject to high
risk.
Caa Obligations are rated Caa are judged to be of poor standing and are subject
to very high credit risk.
Ca Obligations are rated Ca are highly speculative and are likely in, or very
near, default, with some respect of recovery of principal and interest.
C Obligations are rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal or
interest.
NOTE: MOODY'S APPLIES NUMERICAL MODIFIERS 1, 2, AND 3 IN EACH GENERIC RATING
CLASSIFICATION FROM AAA THROUGH C. THE MODIFIER 1 INDICATES THAT THE OBLIGATION
RANKS IN THE HIGHER END OF ITS GENERIC RATING CATEGORY, THE MODIFIER 2 INDICATES
A MID-RANGE RANKING, AND THE MODIFIER 3 INDICATES A RANKING IN THE LOWER END OF
THAT GENERIC RATING CATEGORY.
STANDARD & POOR'S RATINGS GROUP (S&P)
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation
and C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could
lead to the obligor's inadequate capacity to meet its financial commitment
on the obligation.
B An obligation rated B is more vulnerable to non payment than obligations
rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor's capacity or
willingness to meet its financial commitment on the obligation.
34
<PAGE>
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C An obligation rated C may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on
this obligation are being continued.
D An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO CCC MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
FITCH RATINGS (FITCH)
AAA HIGHEST CREDIT QUALITY. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA VERY HIGH CREDIT QUALITY. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A HIGH CREDIT QUALITY. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB GOOD CREDIT QUALITY. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This is
the lowest investment-grade category.
BB SPECULATIVE. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B HIGHLY SPECULATIVE. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment. CCC HIGH
DEFAULT RISK. "CCC" ratings indicate default is a real possibility.
Capacity for meeting financial commitment is solely reliant upon sustained,
favorable business or economic developments.
CC HIGH DEFAULT RISK. A "CC" rating indicates that default of some kind
appears probable.
C HIGH DEFAULT RISK. "C" ratings signal imminent default.
DDD DEFAULT. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve
as general guidelines. "DDD" obligations have the highest potential for
recovery, around 90% - 100% of outstanding amounts and accrued interest.
35
<PAGE>
PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO CCC MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.
DOMINION BOND RATING SERVICE LIMITED (DOMINION)
As is the case with all Dominion rating scales, long-term debt ratings are meant
to give an indication of the risk that the borrower will not fulfill its full
obligations in a timely manner with respect to both interest and principal
commitments. Dominion ratings do not take factors such as pricing or market risk
into consideration and are expected to be used by purchasers as one part of
their investment process. Every Dominion rating is based on quantitative and
qualitative considerations that are relevant for the borrowing entity.
AAA Bonds rated "AAA" are of the highest credit quality, with exceptionally
strong protection for the timely repayment of principal and interest.
Earnings are considered stable, the structure of the industry in which the
entity operates is strong, and the outlook for future profitability is
favorable. There are few qualifying factors present that would detract from
the performance of the entity, the strength of liquidity and coverage
ratios is unquestioned, and the entity has established a creditable track
record of superior performance. Given the extremely tough definition that
Dominion has established for this category, few entities are able to
achieve a AAA rating.
AA Bonds rated "AA" are of superior credit quality, and protection of interest
and principal is considered high. In many cases, they differ from bonds
rated AAA only to a small degree. Given the extremely tough definition that
Dominion has for the AAA category (which few companies are able to
achieve), entities rated AA are also considered to be strong credits, which
typically exemplify above-average strength in key areas of consideration
and are unlikely to be significantly affected by reasonably foreseeable
events.
A Bonds rated "A" are of satisfactory credit quality. Protection of interest
and principal is still substantial, but the degree of strength is less than
with AA rated entities. While a respectable rating, entities in the "A"
category are considered to be more susceptible to adverse economic
conditions and have greater cyclical tendencies than higher rated
companies.
BBB Bonds rated "BBB" are of adequate credit quality. Protection of interest
and principal is considered adequate, but the entity is more susceptible to
adverse changes in financial and economic conditions, or there may be other
adversities present that reduce the strength of the entity and its rated
securities.
BB Bonds rated "BB" are defined to be speculative, where the degree of
protection afforded interest and principal is uncertain, particularly
during periods of economic recession. Entities in the BB area typically
have limited access to capital markets and additional liquidity support
and, in many cases, small size or lack of competitive strength may be
additional negative considerations.
B Bonds rated "B" are highly speculative and there is a reasonably high level
of uncertainty which exists as to the ability of the entity to pay interest
and principal on a continuing basis in the future, especially in periods of
economic recession or industry adversity.
CCC/
CC/C
Bonds rated in any of these categories are very highly speculative and are
in danger of default of interest and principal. The degree of adverse
elements present is more severe than bonds rated "B." Bonds rated below "B"
often have characteristics, which, if not remedied, may lead to default. In
practice, there is little difference between the "C" to "CCC" categories,
with "CC" and "C" normally used to lower ranking debt of companies where
the senior debt is rated in the "CCC" to "B" range.
D This category indicates Bonds in default of either interest or principal.
NOTE: (HIGH/LOW) GRADES ARE USED TO INDICATE THE RELATIVE STANDING OF A CREDIT
WITHIN A PARTICULAR RATING CATEGORY. THE LACK OF ONE OF THESE DESIGNATIONS
INDICATES A RATING THAT IS ESSENTIALLY IN THE MIDDLE OF THE CATEGORY. NOTE THAT
"HIGH" AND "LOW" GRADES ARE NOT USED FOR THE AAA CATEGORY.
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<PAGE>
A.M. BEST CO., INC. (A.M. BEST)
A.M. Best's Long-Term Debt Rating (issue credit rating) is an opinion as to the
issuer's ability to meet its financial obligations to security holders when due.
There ratings are assigned to debt and preferred stock issues.
aaa Assigned to issues, where the issuer has, in A.M. Best's opinion, an
exceptional ability to meet the terms of the obligation.
aa Assigned to issues, where the issuer has, in A.M. Best's opinion, a very
strong ability to meet the terms of the obligation.
a Assigned to issues, where the issuer has, in A.M. Best's opinion, a strong
ability to meet the terms of the obligation.
bbb Assigned to issues, where the issuer has, in A.M. Best's opinion, an
adequate ability to meet the terms of the obligation; however, is more
susceptible to changes in economic or other conditions. bb Assigned to
issues, where the issuer has, in A.M. Best's opinion, speculative credit
characteristics generally due to a modest margin of principal and interest
payment protection and vulnerability to economic changes.
b Assigned to issues, where the issuer has, in A.M. Best's opinion, very
speculative credit characteristics generally due to a modest margin of
principal and interest payment protection and extreme vulnerability to
economic changes.
ccc, cc,
c
Assigned to issues, where the issuer has, in A.M. Best's opinion, extremely
speculative credit characteristics, generally due to a modest margin of
principal and interest payment protection and/or limited ability to
withstand adverse changes in economic or other conditions.
d In default on payment of principal, interest or other terms and conditions.
The rating also is utilized when a bankruptcy petition, or similar action,
has been filed.
RATINGS FROM "AA" TO "BBB" MAY BE ENHANCED WITH A "+" (PLUS) OR "-" (MINUS) TO
INDICATE WHETHER CREDIT QUALITY IS NEAR THE TOP OR BOTTOM OF A CATEGORY.
2. SHORT-TERM DEBT RATINGS:
MOODY'S MUNICIPAL
MIG 1 This designation denotes superior credit quality. Excellent protection
is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for
refinancing.
MIG 2 This designation denotes strong credit quality. Margins of protection
are ample, although not as large as in the preceding group.
MIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
MOODY'S DEMAND OBLIGATIONS
VMIG 1 This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
VMIG 2 This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
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<PAGE>
VMIG 3 This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the
timely payment of purchase price upon demand.
SG This designation denotes speculative-grade credit quality. Demand
features rated in this category may be supported by a liquidity provider
that does not have an investment grade short-term rating or may lack the
structural and/or legal protections necessary to ensure the timely
payment of purchase price upon demand.
MOODY'S CORPORATE AND GOVERNMENT
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
Prime-2 Issuers rated Prime-2 have a strong ability for repayment of senior
short-term promissory obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree.
Prime-3 Issuers rated Prime-3 have an acceptable ability for repayment of
senior short-term obligations. The effect of industry characteristics
and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NP Not Prime. Issues do not fall within any of the Prime rating
categories.
S&P MUNICIPAL
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
S&P CORPORATE AND GOVERNMENT
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the due
date, even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period.
FITCH
F1 HIGHEST CREDIT QUALITY. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit features.
F2 GOOD CREDIT QUALITY. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
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<PAGE>
F3 FAIR CREDIT QUALITY. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B SPECULATIVE. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D DEFAULT. Denotes actual or imminent payment default.
DOMINION COMMERCIAL PAPER
R-1 (high) Short-term debt rated "R-1 (high)" is of the highest credit
quality, and indicates an entity that possesses unquestioned
ability to repay current liabilities as they fall due. Entities
rated in this category normally maintain strong liquidity
positions, conservative debt levels and profitability, which is
both stable and above average. Companies achieving an "R-1
(high)" rating are normally leaders in structurally sound
industry segments with proven track records, sustainable positive
future results and no substantial qualifying negative factors.
Given the extremely tough definition that Dominion has
established for an "R-1 (high)," few entities are strong enough
to achieve this rating.
R-1 (middle) Short-term debt rated "R-1 (middle)" is of superior credit
quality and, in most cases, ratings in this category differ from
"R-1 (high)" credits to only a small degree. Given the extremely
tough definition that Dominion has for the "R-1 (high)" category
(which few companies are able to achieve), entities rated "R-1
(middle)" are also considered strong credits which typically
exemplify above average strength in key areas of consideration
for debt protection.
R-1 (low) Short-term debt rated "R-1 (low)" is of satisfactory credit
quality. The overall strength and outlook for key liquidity, debt
and profitability ratios is not normally as favorable as with
higher rating categories, but these considerations are still
respectable. Any qualifying negative factors that exist are
considered manageable, and the entity is normally of sufficient
size to have some influence in its industry.
R-2 (high),
R-2 (middle),
R-2 (low) Short-term debt rated "R-2" is of adequate credit quality and
within the three subset grades, debt protection ranges from
having reasonable ability for timely repayment to a level, which
is considered only just adequate. The liquidity and debt ratios
of entities in the "R-2" classification are not as strong as
those in the "R-1" category, and the past and future trend may
suggest some risk of maintaining the strength of key ratios in
these areas. Alternative sources of liquidity support are
considered satisfactory; however, even the strongest liquidity
support will not improve the commercial paper rating of the
issuer. The size of the entity may restrict its flexibility, and
its relative position in the industry is not typically as strong
as an "R-1 credit." Profitability trends, past and future, may be
less favorable, earnings not as stable, and there are often
negative qualifying factors present, which could also make the
entity more vulnerable to adverse changes in financial and
economic conditions.
R-3 (high),
R-3 (middle),
R-3 (low) Short-term debt rated "R-3" is speculative, and within the three
subset grades, the capacity for timely payment ranges from mildly
speculative to doubtful. "R-3" credits tend to have weak
liquidity and debt ratios, and the future trend of these ratios
is also unclear. Due to its speculative nature, companies with
"R-3" ratings would normally have very limited access to
alternative sources of liquidity. Earnings would typically be
very unstable, and the level of overall profitability of the
entity is also likely to be low. The industry environment may be
weak, and strong negative qualifying factors are also likely to
be present.
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<PAGE>
NOTE: THE DOMINION RATING CATEGORIES FOR SHORT-TERM DEBT USE "HIGH," "MIDDLE,"
OR "LOW" AS SUBSET GRADES TO DESIGNATE THE RELATIVE STANDING OF THE CREDIT
WITHIN A PARTICULAR RATING CATEGORY.
A.M. BEST
AMB-1+ Assigned to issues, where the issuer has, in A.M. Best's opinion, the
strongest ability to repay short-term debt obligations.
AMB-1 Assigned to issues, where the issuer has, in A.M. Best's opinion, an
outstanding ability to repay short-term debt obligations.
AMB-2 Assigned to issues, where the issuer has, in A.M. Best's opinion, a
satisfactory ability to repay short-term debt obligations.
AMB-3 Assigned to issues, where the issuer has, in A.M. Best's opinion, an
adequate ability to repay short-term debt obligations; however,
adverse economic conditions will likely lead to a reduced capacity to
meet its financial commitments on shorter debt obligations.
AMB-4 Assigned to issues, where the issuer has, in A.M. Best's opinion,
speculative credit characteristics and is vulnerable to economic or
other external changes, which could have a marked impact on the
company's ability to meet its commitments on short-term debt
obligations.
d In default on payment of principal, interest or other terms and
conditions. The rating is also utilized when a bankruptcy petition,
or similar action, has been filed.
40
93922-0210
USAA MUTUAL FUNDS
TRUST
PART
C.
OTHER
INFORMATION
Item
23.
Exhibits
a
(i)
USAA Mutual Funds Trust First Amended and Restated Master Trust Agreement dated
April 20, 2006 (12)
(ii)
USAA Mutual Funds Trust Second Amended and Restated Master Trust Agreement dated
June 27, 2006 (15)
b
First Amended and Restated By-Laws, dated April 20, 2006 (12)
c
None other than provisions contained in Exhibits (a)(i), (a)(ii), and (b)
above
d
(i)
Advisory Agreement dated August 1, 2001 with respect to the Florida Tax-Free
Income and Florida Tax-Free Money Market Funds (7)
(ii)
Management Agreement for the Extended Market Index Fund dated August 1, 2006
(15)
(iii)
Advisory Agreement for the Nasdaq-100 Index Fund dated August 1, 2006 (15)
(iv)
Management Agreement for the S&P 500 Index Fund dated August 1, 2006
(15)
(v)
Advisory Agreement dated August 1, 2006 with respect to all other funds
(15)
(vi)
Investment Subadvisory Agreement between IMCO and BHMS dated August 1, 2006
(15)
(vii)
Investment Subadvisory Agreement between IMCO and Batterymarch dated August 1,
2006 (15)
(viii) Investment
Subadvisory Agreement between IMCO and The Boston Company dated August 1, 2006
(15)
(ix)
Investment Subadvisory Agreement between IMCO and GMO dated August 1, 2006
(15)
(x)
Investment Subadvisory Agreement between IMCO and Loomis Sayles dated August 1,
2006 (15)
(xi)
Investment Subadvisory Agreement between IMCO and Marsico dated August 1, 2006
(15)
(xii)
Investment Subadvisory Agreement between IMCO and MFS dated August 1, 2006
(15)
(xiii) Investment
Subadvisory Agreement between IMCO and NTI dated August 1, 2006 (15)
(xiv)
Investment Subadvisory Agreement between IMCO and OFI Institutional dated August
1, 2006 (15)
(xv)
Investment Subadvisory Agreement between IMCO and Wellington Management dated
August 1, 2006 (15)
(xvi)
Investment Subadvisory Agreement between IMCO and Credit Suisse Asset
Management, LLC dated October 2, 2006 (16)
(xvii) Amendment No.
1 to Investment Subadvisory Agreement between IMCO and
Batterymarch dated August 1, 2006. (15)
(xviii) Investment Subadvisory
Agreement between IMCO and Deutsche Investment Management Americas Inc. dated
October 2, 2006 (16)
(xix)
Amendment No. 2 to Investment Subadvisory Agreement between IMCO and
Batterymarch dated October 2, 2006 (16)
C-2
(xx)
Amendment No. 1 to Investment Subadvisory Agreement between IMCO and Deutsche
Investment Management Americas Inc. (18)
(xxi)
Investment Subadvisory Agreement between IMCO and Quantitative Management
Associates dated July 9, 2007 (19)
(xxii) Investment
Subadvisory Agreement between IMCO and UBS Global Asset Management dated July 9,
2007 (19)
(xxiii) Investment Subadvisory
Agreement between IMCO and The Renaissance Group, LLC dated December 3, 2007
(22)
(xxiv) Investment
Subadvisory Agreement between IMCO and Credit Suisse Securities (USA) LLC dated
October 1, 2007 (22)
(xxv) Letter
Agreement to Advisory Agreement adding Global Opportunities Fund (31)
(xxvi) Amendment No. 2 to
Investment Subadvisory Agreement between IMCO and Deutsche Investment Management
Americas Inc. (31)
(xxvii) Amendment No. 1 to
Investment Subadvisory Agreement between IMCO and Quantitative Management
(31)
(xxviii) Amendment No. 1 to Investment
Subadvisory Agreement between IMCO and Credit Suisse Securities
(USA) LLC (31)
(xxix) Amendment No. 1 to
Investment Subadvisory Agreement between IMCO and The Boston Company (31)
(xxx) Amendment No.
1 to Investment Subadvisory Agreement between IMCO and Credit Suisse Asset
Management, LLC (31)
(xxxi) Letter Agreement to
Advisory Agreement adding Target Retirement Income Fund, Target Retirement 2020
Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund, and Target
Retirement 2050 Fund (31)
(xxxii) Form of Letter Agreement
to Advisory Agreement adding Managed Allocation Fund (38)
(xxxiii) Investment Subadvisory Agreement
between IMCO and Epoch Investment Partners, Inc. (filed herewith)
e
(i)
Underwriting Agreement dated June 25, 1993 (1)
(ii)
Letter Agreement dated May 10, 1994 adding Texas Tax-Free Income Fund and
Texas Tax-Free Money Market Fund (1)
(iii)
Letter Agreement to Underwriting Agreement adding 37 funds (15)
(iv)
Letter Agreement to Underwriting Agreement adding Global Opportunities Fund
(31)
(v)
Letter Agreement to Underwriting Agreement adding Target Retirement Income Fund,
Target Retirement 2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040
Fund, and Target Retirement 2050 Fund (31)
(vi)
Form of Letter Agreement to Underwriting Agreement adding Managed Allocation
Fund (38)
f
Not Applicable
g
(i)
Amended and Restated Custodian Agreement dated July 31, 2006 with Fee Schedule
dated November 28, 2006 (16)
(ii)
Form of Custodian Agreement for Extended Market Index Fund (12)
C-3
(iii)
Custodian Agreement for S&P 500 Index Fund dated July 31, 2006 (17)
(iv)
Subcustodian Agreement dated March 24, 1994 (2)
(v)
Fee Schedule dated July 1, 2007 (20)
(vi)
Letter Agreement to the Amended and Restated Custodian Agreement adding Global
Opportunities Fund (31)
(vii)
Amendment No. 1 to Amended and Restated Custodian Agreement adding Target
Retirement Income Fund, Target Retirement 2020 Fund, Target Retirement 2030
Fund, Target Retirement 2040 Fund, and Target Retirement 2050 Fund (26)
(viii) Form of
Letter Agreement to the Amended and Restated Custodian Agreement adding Managed
Allocation Fund (38)
h
(i)
Transfer Agency Agreement dated November 13, 2002 (8)
(ii)
Letter Agreement to Transfer Agency Agreement dated August 1, 2006 adding 37
funds (15)
(iii)
Administration and Servicing Agreement dated August 1, 2001 with respect to the
Florida Tax-Free Income and Florida Tax-Free Money Market Funds (7)
(iv)
Letter Agreement dated August 1, 2006, to the Administration and Servicing
Agreement for 37 Funds (15)
(v)
Letter Agreement dated May 10, 1994 adding Texas Tax-Free Income Fund and
Texas Tax-Free Money Market Fund (1)
(vi)
Master Revolving Credit Facility Agreement with USAA Capital Corporation dated
September 25, 2009 (filed herewith)
(vii) Agreement
and Plan of Conversion and Termination with respect to USAA Mutual Fund,
Inc. (15)
(viii)
Agreement and Plan of Conversion and Termination with respect to USAA
Investment Trust (15)
(ix)
Agreement and Plan of Conversion and Termination with respect to USAA Tax Exempt
Fund, Inc. (15)
(x)
Amended and Restated Master-Feeder Participation Agreement Among USAA Mutual
Funds Trust, BlackRock Advisors, LLC, USAA Investment Management Company, and
BlackRock Distributors, Inc. Dated as of October 1, 2006 (23)
(xi)
Amended and Restated Subadministration Agreement dated October 1, 2006
(23)
(xii)
Letter Agreement to the Transfer Agency Agreement adding Global Opportunities
Fund (31)
(xiii) Letter
Agreement to the Administration and Servicing Agreement adding Global
Opportunities Fund (31)
(xiv) Letter
Agreement to the Transfer Agency Agreement adding Target Retirement Income Fund,
Target Retirement 2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040
Fund, and Target Retirement 2050 Fund (31)
(xv)
Letter Agreement to the Administration and Servicing Agreement adding Target
Retirement Income Fund, Target Retirement 2020 Fund, Target Retirement 2030
Fund, Target Retirement 2040 Fund, and Target Retirement 2050 Fund (31)
(xvi) Form of
Letter Agreement to the Transfer Agency Agreement adding Managed Allocation Fund
(38)
(xvii) Form of
Letter Agreement to the Administration and Servicing Agreement adding Managed
Allocation Fund (38)
C-4
i
(i)
Opinion and Consent of Counsel with respect to Cornerstone Strategy, Balanced
Strategy, Growth and Tax Strategy, Emerging Markets, Emerging Markets
Institutional Shares, International, International Institutional Shares,
Precious Metals and Minerals, Precious Metals and Minerals Institutional Shares,
and World Growth Funds, and GNMA and Treasury Money Market Trusts (36)
(ii)
Opinion and Consent of Counsel with respect to Aggressive Growth Fund shares,
Aggressive Growth Fund institutional shares, Growth Fund shares, Growth Fund
institutional shares, Growth & Income Fund, Income Fund shares, Income Fund
institutional shares, Income Stock Fund shares, Income Stock Fund institutional
shares, Short-Term Bond Fund shares, Short-Term Bond Fund institutional
shares, Money Market Fund, Science & Technology Fund, First Start Growth
Fund, Small Cap Stock Fund shares, Small Cap Stock Fund institutional shares,
Intermediate-Term Bond Fund shares, Intermediate-Term Bond Fund institutional
shares, High-Yield Opportunities Fund shares, High-Yield Opportunities Fund
institutional shares, Capital Growth Fund, Value Fund shares, and Value Fund
institutional shares (39)
(iii)
Opinion and Consent of Counsel with respect to Total Return Strategy, Extended
Market Index, S&P 500 Index (Member shares and Reward shares), Nasdaq-100
Index, Global Opportunities, Target Retirement Income, Target Retirement 2020,
Target Retirement 2030, Target Retirement 2040, and Target Retirement 2050 Funds
(33)
(iv)
Opinion and Consent of Counsel with respect to Tax Exempt Long-Term, Tax Exempt
Intermediate-Term, Tax Exempt Short-Term, Tax Exempt Money Market, California
Bond, California Money Market, New York Bond, New York Money Market, Virginia
Bond, Virginia Money Market, Florida Tax-Free Income, and Florida Tax-Free Money
Market Funds (34)
(v)
Opinion and Consent of Counsel with respect to the Managed Allocation Fund
(filed herewith)
j
(i)
Consent of Independent Registered Public Accounting Firm with respect to
Cornerstone Strategy Fund, Balanced Strategy Fund, Growth and Tax Strategy Fund,
Emerging Markets Fund shares, Emerging Markets institutional shares,
International Fund shares, International Fund institutional shares, Precious
Metals and Minerals Fund shares, Precious Metals and Minerals Fund institutional
shares, World Growth Fund, GNMA Trust, and Treasury Money Market Trust
(36)
(ii)
Consent of Independent Registered Public Accounting Firm with respect to
Aggressive Growth Fund shares, Aggressive Growth Fund institutional shares,
Growth Fund shares, Growth Fund institutional shares, Growth & Income Fund,
Income Fund shares, Income Fund institutional shares, Income Stock Fund shares,
Income Stock Fund institutional shares, Short-Term Bond Fund shares,
Short-Term Bond Fund institutional shares, Money Market Fund, Science &
Technology Fund, First Start Growth Fund, Small Cap Stock Fund shares, Small Cap
Stock Fund institutional shares, Intermediate-Term Bond Fund shares,
Intermediate-Term Bond Fund institutional shares, High-Yield Opportunities Fund
shares, High-Yield Opportunities Fund institutional shares, Capital Growth Fund,
Value Fund shares, and Value Fund institutional shares (39)
C-5
(iii) Consent
of Independent Registered Public Accounting Firm with respect to Total Return
Strategy, Extended Market Index, S&P 500 Index (Member shares and Reward
shares), Nasdaq-100 Index, Global Opportunities, Target Retirement Income,
Target Retirement 2020, Target Retirement 2030, Target Retirement 2040, and
Target Retirement 2050 Funds (33)
(iv)
Consent of Independent Registered Public Accounting Firm with respect to Tax
Exempt Long-Term, Tax Exempt Intermediate-Term, Tax Exempt Short-Term, Tax
Exempt Money Market, California Bond, California Money Market, New York Bond,
New York Money Market, Virginia Bond, Virginia Money Market, Florida Tax-Free
Income, and Florida Tax-Free Money Market Funds (34)
k
Omitted Financial Statements - Not Applicable
l
Subscriptions and Investment
Letters
(i)
Florida Bond Fund and Florida Money Market Fund dated June 25, 1993 (1)
(ii)
Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund dated May 3,
1994 (1)
(iii)
Subscription and Investment Letter for Global Opportunities Fund (31)
(iv)
Subscription and Investment Letter for Target Retirement Income Fund, Target
Retirement 2020 Fund, Target Retirement 2030 Fund, Target Retirement 2040 Fund,
and Target Retirement 2050 Fund (31)
(v)
Form of Subscription and Investment Letter for Managed Allocation Fund
(38)
m
12b-1 Plans - Not Applicable
n
18f-3 Plans
(i)
Amended and Restated Multiple Class Plan Purchase to Rule 18f-3 USAA Mutual
Funds Trust (S&P 500 Index Fund) (33)
(ii)
Amended and Restated Multiple Class Plan Purchase to Rule 18f-3 USAA Mutual
Funds Trust (27)
o
Reserved
(i)
USAA Investment Management Company dated October 1, 2009 (38)
(ii)
Northern Trust Investments dated February 1, 2005 (14)
(iii)
BlackRock, Inc. dated September 30, 2006 (16)
(iv)
Batterymarch Financial Management, Inc. dated February 1, 2005 (14)
(v)
Marsico Capital Management, LLC dated September 1, 2008 (31)
(vi)
Wellington Management Company, LLP dated October 1, 2008 (32)
(vii)
Loomis, Sayles & Company, L.P. dated June 1, 2006 (15)
(viii) Grantham,
Mayo, Van Otterloo & Co., LLC dated October 26, 2005 (15)
(ix)
Barrow, Hanley, Mewhinney & Strauss, Inc. dated January 3, 2006 (24)
(x)
OFI Institutional Asset Management dated March 31, 2006 (15)
(xi)
The Boston Company Asset Management LLC dated November 2006 (17)
C-6
(xii)
MFS Investment Management dated January 1, 2007 (17)
(xiii) Credit Suisse
Asset Management, LLC dated April 2006 (15)
(xiv) Deutsche
Investment Management Americas Inc. dated August 11, 2006 (20)
(xv)
Quantitative Management Associates January 9, 2007 (19)
(xvi) UBS
Global Asset Management June 11, 2007(19)
(xvii) Renaissance
Investment Management July 2007 (22)
(xviii) Epoch Investment
Partners, Inc. December 4, 2009 (filed herewith)
q
Powers of Attorney
(a)
Powers of Attorney for Christopher W. Claus, Michael Reimherr, Richard A.
Zucker,
Barbara B. Dreeben, and Robert L. Mason dated September 13, 2006
(15)
(b)
Powers of Attorney for Barbara Ostdiek and Roberto Galindo, Jr. dated February
27, 2008 (23)
(1) Previously
filed with Post-Effective Amendment No. 4 of the Registrant (No. 33-65572 with
the Securities and Exchange Commission on July 25, 1995).
(2) Previously filed
with Post-Effective Amendment No. 5 of the Registrant (No. 33-65572 with the
Securities and Exchange Commission on July 25, 1996).
(3)
Previously filed with Post-Effective Amendment No. 6 of the
Registrant (No. 33-65572 with the Securities and Exchange Commission on July 31,
1997).
(4) Previously filed
with Post-Effective Amendment No. 8 of the Registrant (No. 33-65572 with the
Securities and Exchange Commission on June 1, 1999).
(5)
Previously filed with Post-Effective Amendment No. 9 of the
Registrant (No. 33-65572 with the Securities and Exchange Commission on June 1,
2000).
(6)
Previously filed with Post-Effective Amendment No. 10 of the
Registrant (No. 33-65572 with the Securities and Exchange Commission on June 22,
2001).
(7)
Previously filed with Post-Effective Amendment No. 11 of the
Registrant (No. 33-65572 with the Securities and Exchange Commission on July 31,
2002).
(8)
Previously filed with Post-Effective Amendment No. 12 of the
Registrant (No. 33-65572 with the Securities and Exchange Commission on July 29,
2003).
(9)
Previously filed with Post-Effective Amendment No. 13 of the
Registrant (No. 33-65572 with the Securities and Exchange Commission on May 28,
2004).
(10)
Previously filed with Post-Effective Amendment No. 15 of the Registrant
(No. 33-65572 with the Securities and Exchange Commission on June 1,
2005).
C-7
(11)
Previously filed with Post-Effective Amendment No. 16 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on July 28, 2005).
(12) Previously filed with Post-Effective Amendment
No. 18 of the Registrant (No. 33-65572 with the Securities and Exchange
Commission on May 16, 2006).
(13)
Previously filed with Post-Effective Amendment No. 19 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on June 1, 2006).
(14)
Previously filed with Post-Effective Amendment No. 20 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on July 28, 2006).
(15)
Previously filed with Post-Effective Amendment No. 21 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on September 29,
2006).
(16)
Previously filed with Post-Effective Amendment No. 22 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on November 28,
2006).
(17)
Previously filed with Post-Effective Amendment No. 23 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on March 1, 2007).
(18)
Previously filed with Post-Effective Amendment No. 24 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on April 26, 2007).
(19)
Previously filed with Post-Effective Amendment No. 25 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on July 26, 2007).
(20)
Previously filed with Post-Effective Amendment No. 27 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on September 26,
2007).
(21)
Previously filed with Post-effective Amendment No. 28 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on September 28,
2007).
(22)
Previously filed with Post-effective Amendment No. 29 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on November 26,
2007).
(23)
Previously filed with Post-effective Amendment No. 30 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on February 29,
2008).
(24)
Previously filed with Post-effective Amendment No. 31 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on April 28, 2008).
C-8
(25)
Previously filed with Post-effective Amendment No. 32 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on May 9, 2008).
(26)
Previously filed with Post-effective Amendment No. 33 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on May 9, 2008).
(27)
Previously filed with Post-effective Amendment No. 34 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on May 30, 2008).
(28)
Previously filed with Post-effective Amendment No. 35 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on July 28, 2008).
(29)
Previously filed with Post-effective Amendment No. 37 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on July 31, 2008).
(30)
Previously filed with Post-effective Amendment No. 38 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on July 31, 2008).
(31)
Previously filed with Post-effective Amendment No. 40 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on September 26, 2008).
(32)
Previously filed with Post-effective Amendment No. 41 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on November 26, 2008).
(33)
Previously filed with Post-effective Amendment No. 42 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on April 29, 2009).
(34)
Previously filed with Post-effective Amendment No. 44 of the Registrant
(No. 33-65572 with the Securities and Exchange Commission on July 30, 2009).
(35) Previously
filed with Post-effective Amendment No. 45 of the Registrant (No. 33-65572 with
the Securities and Exchange Commission on July 31, 2009).
(36) Previously
filed with Post-effective Amendment No. 46 of the Registrant (No. 33-65572 with
the Securities and Exchange Commission on September 28, 2009).
(37)
Previously filed with Post-effective Amendment No. 47 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on September 30,
2009).
(38)
Previously filed with Post-effective Amendment No. 48 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on November 17,
2009).
(39)
Previously filed with Post-effective Amendment No. 49 of the Registrant (No.
33-65572 with the Securities and Exchange Commission on November 25,
2009).
C-9
Item 24.
Persons Controlled by or
Under Common Control with the Fund
Information pertaining to persons controlled by or under common control with
Registrant is hereby incorporated by reference to the section captioned
“Trustees and Officers of the Trust” in the Statement of Additional
Information.
Item
25.
Indemnification
Protection for the liability of the adviser and underwriter and for the officers
and trustees of the Registrant is provided by two methods:
(a)
The Trustee and Officer
Liability Policy
. This policy covers all losses incurred by the
Registrant, its adviser and its underwriter from any claim made against those
entities or persons during the policy period by any shareholder or former
shareholder of any Fund by reason of any alleged negligent act, error or
omission committed in connection with the administration of the investments of
said Registrant or in connection with the sale or redemption of shares issued by
said Registrant. The Trust will not pay for such insurance to the extent that
payment therefor is in violation of the Investment Company Act of 1940 or the
Securities Act of 1933.
(b)
Indemnification Provisions
under Agreement and Declaration of Trust
. Under Article VI of the
Registrant’s Agreement and Declaration of Trust, each of its Trustees and
officers or any person serving at the Registrant’s request as directors,
officers or trustees of another organization in which the Registrant has any
interest as a shareholder, creditor or otherwise (“Covered Person”) shall be
indemnified against all liabilities, including but not limited to amounts paid
in satisfaction of judgments, in compromise or as fines and penalties, and
expenses, including reasonable accountants’ and counsel fees, incurred by any
Covered Person in connection with the defense or disposition of any action, suit
or other proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such Covered Person may be or may
have been involved as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by reason of being or
having been such an officer, director or trustee, except with respect to any
matter as to which it has been determined that such Covered Person had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person’s office (such conduct
referred to hereafter as “Disabling Conduct”). A determination that the Covered
Person is entitled to indemnification may be made by (i) a final decision on the
merits by a court or other body before whom the proceeding was brought that the
person to be indemnified was not liable by reason of Disabling Conduct, (ii)
dismissal of a court action or an administrative proceeding against a Covered
Person for insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the Covered Person was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are
C-10
neither “interested persons” of the Registrant as defined in section 2(a)(19) of
the 1940 Act nor parties to the proceeding, or (b) an independent legal counsel
in a written opinion.
Expenses, including accountants and counsel fees so incurred by any such Covered
Person (but excluding amounts paid in satisfaction of judgments, in compromise
or as fines or penalties), may be paid from time to time from funds attributable
to the Fund of the Registrant in question in advance of the final disposition of
any such action, suit or proceeding, provided that the Covered Person shall have
undertaken to repay the amounts so paid to the Fund of the Registrant in
question if it is ultimately determined that indemnification of such expenses is
not authorized under this Article VI and (i) the Covered Person shall have
provided security for such undertaking, (ii) the Registrant shall be insured
against losses arising by reason of any lawful advances, or (iii) a majority of
a quorum of the disinterested Trustees who are not a party to the proceeding, or
an independent legal counsel in a written opinion, shall have determined, based
on a review of readily available facts (as opposed to full trial-type inquiry),
that there is reason to believe that the Covered Person ultimately will be found
entitled to indemnification.
As to any matter disposed of by a compromise payment by any such Covered Person
pursuant to a consent decree or otherwise, no such indemnification either for
said payment or for any other expenses shall be provided unless such
indemnification shall be approved (a) by a majority of the disinterested
Trustees who are not parties to the proceeding or (b) by an independent legal
counsel in a written opinion. Approval by the Trustees pursuant to clause
(a) or by independent legal counsel pursuant to clause (b) shall not prevent the
recovery from any Covered Person of any amount paid to such Covered Person in
accordance with any of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person’s office.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the Registrant’s Agreement and Declaration of the Trust
or otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the securities being registered, then the Registrant will,
unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
C-11
Item
26.
Business and Other
Connections of the Investment Adviser
Information pertaining to business and other connections of the Registrant’s
investment adviser is hereby incorporated by reference to the section of the
Prospectus captioned “Fund Management” and to the section of the Statement of
Additional Information captioned “Trustees and Officers of the Trust.”
With
respect to certain funds of the Registrant, IMCO currently engages the following
subadvisers:
(a)
Wellington Management Company, LLP (Wellington Management), located at 75 State
Street, Boston, Massachusetts 02109, serves as a subadviser to the Growth &
Income, Science & Technology Fund, and Small Cap Stock Fund. The information
required by this Item 26 with respect to each director and officer of Wellington
Management is incorporated herein by reference to Wellington Management’s
current Form ADV as amended and filed with the SEC.
(b)
Loomis, Sayles & Company, L.P. (Loomis Sayles), located at One Financial
Center, Boston, Massachusetts 02111, serves as a subadviser to the Growth Fund
and Growth & Income Fund. The information required by this Item 26 with
respect to each director and officer of Loomis Sayles is incorporated herein by
reference to Loomis Sayles’ current Form ADV as amended and filed with the
SEC.
(c)
Grantham, Mayo, Van Otterloo & Co. LLC (GMO), located at 40 Rowes Wharf,
Boston, Massachusetts 02110 serves as a subadviser to the Income Stock Fund. The
information required by this Item 26 with respect to each director and officer
of GMO is incorporated herein by reference to GMO’s current Form ADV as amended
and filed with the SEC.
(d)
Marsico Capital Management, LLC (Marsico), located at 1200 17th Street, Suite
1600, Denver, Colorado 80202, serves as a subadviser to the Aggressive Growth
Fund. The information required by this Item 26 with respect to each director and
officer of Marsico is incorporated herein by reference to Marsico’s current Form
ADV as amended and filed with the SEC.
(e)
Barrow, Hanley, Mewhinney & Strauss, Inc. (BHMS), located at 2200 Ross
Avenue, 31st Floor, Dallas, Texas 75201-2761, serves as a subadviser to the
Growth & Income Fund and Value Fund. The information required by this Item
26 with respect to each director and officer of BHMS is incorporated herein by
reference to BHMS’ current Form ADV as amended and filed with the SEC.
(f)
Batterymarch Financial Management, Inc. (Batterymarch), located at 200 Clarendon
Street, Boston, Massachusetts 02116, serves as a subadviser to the Cornerstone
Strategy Fund, Capital Growth Fund, Small Cap Stock Fund, and Emerging Markets
Fund. The information required by this Item 26 with respect to each director and
officer of Batterymarch is incorporated herein by reference to Batterymarch’s
current Form ADV as amended and filed with the SEC.
C-12
(g)
Northern Trust Investments, N.A. (NTI), located at 50 S. LaSalle Street,
Chicago, Illinois 60603, serves as a subadviser to the Growth and Tax Strategy
Fund, S&P 500 Index Fund, and Nasdaq-100 Index Fund. The information
required by this Item 26 with respect to each director and officer of NTI is
incorporated herein by reference to NTI’s current Form ADV as amended and filed
with the SEC.
(h)
OFI Institutional Asset Management (OFI Institutional), located at Two World
Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281-1008,
serves as a subadviser to the Income Stock Fund. The information required by
this Item 26 with respect to each director and officer of OFI is incorporated
herein by reference to OFI’s current Form ADV as amended and filed with the
SEC.
(i)
The Boston Company Asset Management, LLC (The Boston Company), located at Mellon
Financial Center, One Boston Place, Boston, Massachusetts 02108-4408, serves as
a subadviser to the Emerging Markets Fund and Global Opportunities Fund. The
information required by this Item 26 with respect to each director and officer
of The Boston Company is incorporated herein by reference to The Boston
Company’s current Form ADV as amended and filed with the SEC, and is
incorporated herein by reference.
(j)
MFS Investment Management (MFS), located at 500 Boylston Street, Boston,
Massachusetts 02116, serves as a subadviser to the International Fund and World
Growth Fund. The information required by this Item 26 with respect to each
director and officer of MFS is incorporated herein by reference to MFS’s current
Form ADV as amended and filed with the SEC, and is incorporated herein by
reference.
(k)
Credit Suisse Asset Management, LLC (Credit Suisse), located at Eleven Madison
Avenue, New York, New York 10010, serves as a subadviser to the Cornerstone
Strategy Fund, First Start Growth Fund, and Global Opportunities Fund. The
information required by this Item 26 with respect to each director and officer
of Credit Suisse is incorporated herein by reference to Credit Suisse’s current
Form ADV as amended and filed with the SEC.
(l)
Deutsche Investment Management Americas Inc. (DIMA), located at 345 Park Avenue,
New York, New York 10154, serves as subadvisor to the Balanced Strategy Fund,
Total Return Strategy Fund, and Global Opportunities Fund. The information
required by this Item 26 with respect to each director and officer of DIMA is
incorporated herein by reference to DIMA’s current Form ADV as amended and filed
with the SEC.
(m)
Quantitative Management Associates (QMA), located at 466 Lexington Avenue, New
York, New York 10017, serves as subadvisor to the Cornerstone Strategy Fund and
Global Opportunities Fund. The information required by this Item 26 with respect
to each director and officer of QMA is incorporated herein by reference to QMA’s
current Form ADV as amended and filed with the SEC.
(n)
UBS Global Asset Management (UBS), located at One North Wacker Drive, Chicago,
Illinois 60614, serves as subadvisor to the Growth & Income Fund. The
information required by this Item 26 with respect to each director and officer
of UBS is incorporated herein by reference to UBS’s current Form ADV as amended
and filed with the SEC.
C-13
(o)
Credit Suisse Securities, (USA) LLC (CSSU ), located at Eleven Madison Avenue,
New York, New York 10010, serves as a subadviser to the Balanced Strategy Fund,
Cornerstone Strategy Fund, Total Strategy Fund, First Start Growth Fund, and
Global Opportunities Fund. The information required by this Item 26 with
respect to each director and officer of CSSU is incorporated herein by reference
to CSSU current Form ADV as amended and filed with the SEC.
(p) The
Renaissance Group, LLC (Renaissance), located at 625 Eden Park Drive, Suite
1200, Cincinnati, Ohio 45202, serves as a subadviser to the Growth Fund. The
information required by this Item 26 with respect to each director and officer
of Renaissance is incorporated herein by reference to Renaissance’s current Form
ADV as amended and filed with the SEC.
(q) Epoch Investment Partners,
Inc. located at 640 Fifth Avenue, 18th Floor, New York, New York 10019, serves
as a subadviser to the Income Stock Fund. The information required by this Item
26 with respect to each director and officer of Epoch is incorporated herein by
reference to Epoch’s current Form ADV as amended and filed with the SEC.
Item 27.
Principal
Underwriters
(a) USAA Investment Management Company (the
“Adviser”) acts as principal underwriter and distributor of the Registrant’s
shares on a best-efforts basis and receives no fee or commission for its
underwriting services.
(b) Following is information concerning
directors and executive officers of USAA Investment Management Company.
Name and
Principal
Position and
Offices
Position and Offices
Business
Address
with Underwriter
with
Fund
Christopher W.
Claus
Chairman
President, Trustee
9800 Fredericksburg
Road
of the Board of
Directors and
Vice Chairman
San Antonio, TX
78288
of the Board of
Trustees
Daniel S.
McNamara
President and
Director
Vice President
9800 Fredericksburg Road
San Antonio, TX 78288
Kristi A.
Matus
Director
None
9800 Fredericksburg Road
San Antonio, TX 78288
C-14
Clifford A.
Gladson
Senior Vice
President,
Vice President
9800 Fredericksburg
Road
Fixed Income Investments
San Antonio, TX 78288
Mark S.
Howard
Senior Vice President,
Secretary
9800 Fredericksburg
Road
Secretary and Counsel
San Antonio, TX
78288
Roberto Galindo,
Jr.
Assistant Vice
President
Treasurer
9800 Fredericksburg
Road
Mutual Fund Financial
San Antonio, TX
78288
Administration
Jeffrey D.
Hill
Assistant Vice
President
Chief Compliance
9800 Fredericksburg
Road
Mutual Funds
Compliance Officer
San Antonio, TX 78288
Dawn
Cooper
Director and
Senior
None
San Antonio, TX
78288
Distribution Services
(c) Not
Applicable
Item
28.
Location of Accounts and
Records
The following entities prepare, maintain and preserve the records required by
Section 31(a) of the Investment Company Act of 1940 (the “1940 Act”) for the
Registrant. These services are provided to the Registrant through written
agreements between the parties to the effect that such services will be provided
to the Registrant for such periods prescribed by the Rules and Regulations of
the Securities and Exchange Commission under the 1940 Act and such records are
the property of the entity required to maintain and preserve such records and
will be surrendered promptly on request.
USAA Investment
Management Company
9800
Fredericksburg Road
San
Antonio, Texas 78288
|
Northern Trust
Investments, N.A.
50 S.
LaSalle Street
Chicago,
Illinois 60603
|
|
|
USAA Shareholder
Account Services
9800
Fredericksburg Road
San
Antonio, Texas 78288
|
Chase Manhattan
Bank
4 Chase
MetroTech
18th
Floor
Brooklyn,
New York 11245
|
|
|
State Street Bank
and Trust Company
1776
Heritage Drive
North
Quincy, Massachusetts 02171
|
|
C-15
Wellington
Management Company, LLP
75
State Street
Boston,
Massachusetts 02109
(records
relating to its functions as a subadviser with respect to the Growth &
Income Fund, Science & Technology Fund, and Small Cap Stock Fund)
Loomis,
Sayles & Company, L.P.
One
Financial Center
Boston,
Massachusetts 02111
(records
relating to its functions as a subadviser with respect to the Growth Fund and
Growth & Income Fund)
Grantham,
Mayo, Van Otterloo & Co.
40
Rowes Wharf
Boston,
Massachusetts 02110
(records
relating to its functions as a subadviser with respect to the Income Stock
Fund)
Marsico
Capital Management, LLC
1200
17th Street
Suite
1600
Denver,
Colorado 80202
(records
relating to its functions as a subadviser with respect to the Aggressive Growth
Fund)
Barrow,
Hanley, Mewhinney & Strauss, Inc.
3232
McKinney Avenue
15th
Floor
Dallas,
Texas 75204-2429
(records
relating to its functions as a subadviser with respect to the Growth &
Income Fund and Value Fund)
Batterymarch
Financial Management, Inc.
200
Clarendon Street
Boston,
Massachusetts 02116
(records
relating to its functions as a subadviser with respect to the Cornerstone
Strategy Fund, Capital Growth Fund, Small Cap Stock Fund, and Emerging Markets
Fund)
Northern
Trust Investments, N.A.
50
S. LaSalle Street
Chicago,
Illinois 60603
(records
relating to its functions as a subadviser to the Growth and Tax Strategy Fund,
S&P 500 Index Fund, and Nasdaq-100 Index Fund)
C-16
OFI
Institutional Asset Management
Two
World Financial Center
225
Liberty Street, 11th Floor
New
York, New York 10281-1008
(records
relating to its functions as a subadviser to the Income Stock Fund)
The
Boston Company Asset Management, LLC
Mellon Financial Center
One Boston Place
Boston, Massachusetts 02108-4408
(records relating to its functions as a subadviser with respect to the
Emerging Markets Fund and Global Opportunities Fund)
MFS Investment Management
500 Boylston Street
Boston, Massachusetts 02116
(records relating to its functions as a subadviser with respect to the
International Fund and World Growth Fund)
Credit Suisse Asset Management, LLC
Eleven Madison Avenue
New York, New York 10010
(records relating to its functions as a subadviser with respect to the
Cornerstone Strategy Fund, First Start Growth Fund, and Global Opportunities
Fund)
Deutsche
Investment Management Americas Inc.
345 Park Avenue
New York, New York 10154
(records relating to its functions as a subadviser with respect to the
Balanced Strategy Fund, Total Return Strategy Fund, and Global Opportunities
Fund)
Quantitative
Management Associates
Jennison Associates LLC
466 Lexington Avenue
New York, New York 10017
(records relating to its functions as a subadviser with respect to the
Cornerstone Strategy Fund and Global Opportunities Fund)
UBS
Global Asset Management
One North Wacker Drive
Chicago, Illinois 60614
(records relating to its functions as a subadviser with respect to the
Growth & Income Fund)
C-17
Credit
Suisse Securities, (USA) LLC
Eleven Madison Avenue
New York, New York 10010
(records relating to its functions as a subadviser with respect to the
Balanced Strategy Fund, Cornerstone Strategy Fund, Total Strategy Fund,
First Start Growth Fund, and Global Opportunities Fund)
The
Renaissance Group, LLC
625 Eden Park Drive, Suite 1200
Cincinnati, Ohio 45202
(records relating to its functions as a subadviser with respect to the
Growth Fund)
Epoch
Investment Partners, Inc.
640 Fifth Avenue, 18th Floor
New York, New York 10019
(records relating to its functions as a subadviser with respect to the
Income Stock Fund)
Item
29.
Management
Services
Not Applicable.
Item
30.
Undertakings
None.
C-18
SIGNATURES
Pursuant
to the requirements of the Securities Act and the Investment Company Act, the
Registrant certifies that it meets all requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities Act and has
duly caused this amendment to its registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of San Antonio
and state of Texas on the 29th day of January, 2010.
USAA MUTUAL FUNDS TRUST
*
Christopher W. Claus
President
Pursuant
to the requirements of the Securities Act, this amendment to the registration
statement has been signed below by the following persons in the capacities and
on the date(s) indicated.
(Signature)
(Title)
(Date)
*
Chairman of
the
January 29,
2010
Richard A. Zucker
Board of
Trustees
*
Vice Chairman of the
Board
January 29,
2010
Christopher W.
Claus
of Trustees and President
(Principal Executive
Officer)
*
Treasurer
(Principal)
January 29,
2010
Roberto Galindo,
Jr.
Financial and
Accounting
Officer)
*
Trustee
January 29,
2010
Barbara B. Dreeben
*
Trustee
January 29,
2010
Robert L. Mason
*
Trustee
January 29,
2010
Barbara B. Ostdiek
*
Trustee
January 29,
2010
Michael F. Reimherr
*By: /s/
Mark S.
Howard
Mark S. Howard,
Attorney-in-Fact, under Powers of Attorney dated September 13, 2006, and
February 27, 2008, which are incorporated herein and filed under Post Effective
Amendments No. 21 and No. 30 with the Securities and Exchange Commission on
September 29, 2006, and February 29, 2008, respectively.
C-19
EXHIBIT
INDEX
Exhibit
Item
Page No.
d
(xxxiii) Investment Subadvisory Agreement
between IMCO and Epoch Investment Partners,
Inc.
97
i
(v)
Opinion and Consent of Counsel with respect to Managed Allocation
Fund
110
p
(xviii) Epoch Investment
Partners, Inc. December 4,
2009
113
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