UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-7852
Exact name of registrant as specified in charter: USAA MUTUAL FUNDS TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: CHRISTOPHER P. LAIA
USAA MUTUAL FUNDS TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: DECEMBER 31
Date of reporting period: DECEMBER 31, 2009
ITEM 1. REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - ANNUAL REPORT FOR PERIOD ENDING DECEMBER 31, 2009
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA TOTAL RETURN STRATEGY FUND]
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ANNUAL REPORT
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2009
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FUND OBJECTIVE
SEEKS A POSITIVE RETURN EVERY CALENDAR YEAR AND OVER THE LONG TERM (FIVE YEARS
AND MORE) TO ACHIEVE RETURNS GREATER THAN THE S&P 500 INDEX WITH LESS RISK.
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TYPES OF INVESTMENTS
One portion of the Fund's assets is shifted among stocks, investment-grade
bonds, or cash equivalents, generally investing at any given time in either (1)
stocks through the use of stock-based exchange-traded funds (ETFs), (2)
investment-grade bonds through either ETFs or direct investment, or (3) cash
equivalents through direct investment in short-term, high-quality money market
instruments or money market funds. Another portion of the Fund's assets is
invested in long and short positions of common stock of large U.S. companies.
The Fund also may utilize an index option-based strategy and a global tactical
asset allocation overlay strategy.
IRA DISTRIBUTION WITHHOLDING DISCLOSURE
We generally must withhold federal income tax at a rate of 10% of the taxable
portion of your distribution and, if you live in a state that requires state
income tax withholding, at your state's set rate. However, you may elect not to
have withholding apply or to have income tax withheld at a higher rate. If you
wish to make such an election, please call USAA Investment Management Company at
(800) 531-USAA (8722).
If you must pay estimated taxes, you may be subject to estimated tax penalties
if your estimated tax payments are not sufficient and sufficient tax is not
withheld from your distribution.
For more specific information, please consult your tax adviser.
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TABLE OF CONTENTS
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PRESIDENT'S MESSAGE 2
MANAGERS' COMMENTARY 4
FUND RECOGNITION 8
INVESTMENT OVERVIEW 10
FINANCIAL INFORMATION
Distributions to Shareholders 15
Report of Independent Registered Public Accounting Firm 16
Portfolio of Investments 17
Notes to Portfolio of Investments 33
Financial Statements 35
Notes to Financial Statements 38
EXPENSE EXAMPLE 55
TRUSTEES' AND OFFICERS' INFORMATION 57
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2010, USAA. All rights reserved.
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PRESIDENT'S MESSAGE
"LOOKING BACK AT THE MARKET DECLINE, MANY
INVESTORS WERE NOT APPROPRIATELY POSITIONED [PHOTO OF DANIEL S. McNAMARA]
RELATIVE TO THEIR RISK TOLERANCE."
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JANUARY 2010
Equities had a remarkable run during 2009. Between March 9, 2009, when the
market reached a bottom and the end of the year, stock prices steadily climbed.
Although the rally did not completely erase the declines of 2008, the market has
established a beachhead and is moving in the right direction. Likewise, the
worst of the Great Recession appears to be over. After three quarters of
negative growth, the gross domestic product (GDP) -- the broadest measure of
U.S. economic activity -- rose by 2.2% in the third quarter of 2009. Other
important measures of economic activity have also trended higher, including
industrial production, retail sales, and residential real estate sales.
Will the recovery be swift? Or will there be a "double dip?" I say "no" to both
questions. Significant assets -- including vast amounts of U.S. government
stimulus -- have been thrown into the breach. As a result, I don't expect the
economy to fall back into a recession. But I don't expect a quick recovery
either. Instead, I anticipate a slow and steady slog with lower economic growth
than the United States has enjoyed in recent decades. Access to credit is likely
to remain tight until the securitization markets heal and banks relax lending
standards. Most consumers and businesses will continue rebuilding their balance
sheets by increasing their savings rate and reducing their spending and
borrowing. While the outlook for job growth has improved, unemployment is likely
to persist at an uncomfortably high level for most of 2010.
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2 | USAA TOTAL RETURN STRATEGY FUND
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I also think the equity market is expecting a strong cyclical recovery. Although
many stocks seemed to trade at appropriate levels at the end of 2009, we see
support for some growth in prices over the near term. Meanwhile, consensus
forecasts (which are based on individual company estimates) call for corporate
earnings growth of 30% or more during 2010. Meeting these expectations will
require significant top-line revenue growth, not just more cost cutting. USAA's
expectations are more in line with top-down earnings forecasts in the 8% to 15%
range.
Of course, no one really knows what will happen. That's why it is important to
revisit your investment plan. A new year is an opportune time to stop and take
stock. Looking back at the market decline, many investors were not appropriately
positioned relative to their risk tolerance. With this in mind, I have
undertaken a review of my own investment portfolio. The process gives me the
opportunity to reflect on my goals, re-evaluate my risk tolerance, consider
changes in my investment strategy, and reposition my portfolio accordingly. I
urge you to do the same. Our trained service representatives are standing ready
to assist you -- free of charge.
At USAA Investment Management Company, we appreciate the trust you have placed
in us. We will continue to offer what we consider an excellent value -- some of
the industry's top investment talent, first-class service, and no-load mutual
funds. Thank you for the opportunity to help you with your investment needs.
Sincerely,
/s/ Daniel S. McNamara
Daniel S. McNamara
President
USAA Investment Management Company
Mutual fund operating expenses apply and continue throughout the life of the
fund.
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PRESIDENT'S MESSAGE | 3
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MANAGERS' COMMENTARY ON THE FUND
USAA Investment Management Company* Deutsche Investment Management
Americas Inc.***
JOHN P. TOOHEY, CFA U.S. Stocks
WASIF A. LATIF
Exchange-Traded Funds ROBERT WANG
JAMES FRANCIS, CFA
TONY ERA
Money Market Instruments
Credit Suisse Securities (USA) LLC's
Volaris Volatility Management Group**
Index Options
YIRONG LI, CFA
DEFINA MALUKI, CFA
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o HOW DID THE USAA TOTAL RETURN STRATEGY FUND (THE FUND) PERFORM?
For the year ended December 31, 2009, the Fund had a total return of 12.25%.
This compares to returns of 26.46% for the S&P 500(R) Index (the Index) and
29.17% for the Lipper Flexible Portfolio Funds Index.
o PLEASE DESCRIBE THE MARKET ENVIRONMENT DURING THE REPORTING YEAR.
Risk assets traded modestly higher as the year began, but then sold off
dramatically through early March 2009 as fears of a global
Past performance is no guarantee of future results.
Refer to page 11 for benchmark definitions.
*Effective July 17, 2009, Ron Sweet no longer is a manager of the Fund.
**Effective June 30, 2009, Laura B. Friedman no longer is a co-manager of
the Fund.
***Effective August 1, 2009, Julie Abbett no longer is a co-manager of the
Fund.
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4 | USAA TOTAL RETURN STRATEGY FUND
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economic meltdown dominated the equity and credit markets. The U.S. stock
market bottomed in the second week of March 2009 as massive U.S. government
stimulus programs began to gain traction. Economic data slowly but
steadily stabilized and the stock market began pricing in an economic
recovery. The stock market rally was initially concentrated in the
lowest-quality stocks, but started to broaden as the year progressed.
o WHAT FACTORS DROVE THE FUND'S PERFORMANCE?
The Fund seeks to have a positive total return every calendar year and
outperform the Index over a full market cycle using a multi-pronged,
risk-controlled strategy that attempts to avoid big stock market downturns
and participate to a significant degree in stock market gains.
The Fund had three major components during the reporting year. The first
component involved close to 70% of the Fund's assets being invested in the
SPDR Trust Series 1 exchange-traded fund, which seeks to closely track the
Index. USAA seeks to control risk in this portion of the Fund using an
equity hedging strategy that's managed by Credit Suisse Securities (USA)
LLC's Volaris Volatility Management Group (Volaris Group). The strategy
involves selling index call or corresponding exchange-traded fund (ETF)
options and purchasing index put or corresponding ETF options or put spread
options against a highly correlated stock portfolio. This carefully managed
equity hedging strategy allows us to attempt to create a collar on our
stock market exposure that effectively limits downside (and upside)
potential and gives us the flexibility to quickly change the Fund's risk
profile. This equity hedging strategy helped the Fund
Exchange Traded Funds (ETFs) are subject to risks similar to those of
stocks. Investment returns may fluctuate and are subject to market
volatility, so that an investor's shares, when redeemed or sold, may be
worth more or less than their original cost. o As interest rates rise,
existing bond prices fall. o Options are considered speculative investment
strategies. o Index collars are generally employed to protect unrealized
profits from the portfolio being protected, and the index option class
chosen will generally have an underlying index that most closely tracks the
performance of the portfolio. While losses may be limited so are potential
gains.
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MANAGERS' COMMENTARY ON THE FUND | 5
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avoid the worst of the losses when the market bottomed out on March 9, 2009,
and then kept us from participating in the full amount of the gains of the
strong stock market that occurred after that date. We work closely with
Volaris Group to actively manage the equity hedging strategy based on market
conditions.
The second component comprised about 23% of the Fund's assets in a market-
neutral strategy managed by Deutsche Investment Management Americas Inc.
(DIMA). DIMA invests primarily in long and short positions of common stock
of large U.S. companies and seeks to generate positive returns that have low
correlation with the Index. The market-neutral strategy had a slightly
negative total return for the reporting year and, therefore, was a major
factor in the Fund trailing the Index.
The third and final component comprised roughly 6% of the Fund's assets,
which were invested in a hedge fund called Deutsche iGAP Investment Trust
"B" (iGAP). Managed by DIMA, iGAP employs a global tactical asset allocation
strategy that invests only in liquid instruments, taking long or short
positions using futures on stock, currency, commodity and bond markets
around the world. The iGAP allocation had a slightly positive return for the
year.
o ARE YOU CONCERNED THAT, BY USING MULTIPLE RISK-CONTROL STRATEGIES, THE FUND
ISN'T KEEPING UP WITH THE INDEX?
From the low on March 9, 2009, the Index gained 67.8% through the end of
2009. Although we actively manage the equity hedging strategy with Volaris
Group to participate in rising markets, we may not fully participate in a
market rally of this magnitude. In terms of the market-neutral strategy and
the iGAP, they tend to outperform the Index when the stock market is down,
often providing positive total returns during such periods. The Fund did
achieve almost all (11.92%) of its yearly gain in the second half of the
year, but its best
You will find a complete list of securities that the Fund owns on pages
17-32.
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6 | USAA TOTAL RETURN STRATEGY FUND
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index-relative performance came early in the year. The benefits of this Fund
can be seen in a more complete cycle that combines the down market of 2008
and the up market of 2009. Remember that losses generally hurt more than
gains may help, so to outperform over the long term we have to maintain our
investment discipline in rising markets.
o WHAT'S USAA'S MARKET OUTLOOK?
At current valuation levels, the Index is anticipating a strong cyclical
recovery in the economy. Meeting these expectations will require significant
revenue growth, not just more of the cost cutting that drove much of the
earnings improvement in 2009. We are cautious, with our expectations being
closer to more modest top-down earnings forecasts in the 8% to 15% range.
Thank you for your investment in the fund.
THE TOTAL RETURN STRATEGY FUND MAY CHANGE THE ALLOCATION OF ITS PORTFOLIO
HOLDINGS REGULARLY WHICH MAY RESULT IN A HIGHER PROPORTION OF CAPITAL GAINS
AND A LOWER RETURN. THE FUND UTILIZES A FOCUSED INVESTMENT STRATEGY WHICH
MAY INCREASE THE VOLATILITY OF THE FUND'S INVESTMENT RESULTS. THERE IS NO
ASSURANCE THAT THE FUND'S OBJECTIVES WILL BE ACHIEVED.
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MANAGERS' COMMENTARY ON THE FUND | 7
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FUND RECOGNITION
USAA TOTAL RETURN STRATEGY FUND
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OVERALL MORNINGSTAR RATING(TM)
out of 1,757 large blend funds
for the period ended December 31, 2009:
OVERALL RATING
* * * * *
3-YEAR
* * * * *
out of 1,757 funds
The Overall Morningstar Rating for a fund is derived from a weighted average of
the performance figures associated with its three-, five-, and 10-year (if
applicable) Morningstar Rating metrics. Ratings are based on risk-adjusted
returns.
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. For each fund with at least
a three-year history, Morningstar calculates a Morningstar Rating(TM) based on a
Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's
monthly performance (including the effects of sales charges, loads, and
redemption fees), placing more emphasis on downward variations and rewarding
consistent performance. The top 10% of the funds in each broad asset class
receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars,
the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.
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8 | USAA TOTAL RETURN STRATEGY FUND
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LIPPER LEADER (OVERALL)
[5]
EXPENSE
The Fund is listed as a Lipper Leader for Expense among 53 funds within the
Lipper Flexible Portfolio Funds category for the overall period ended December
31, 2009. The Fund received a Lipper Leader rating for Expense among 53 funds
for the three-year period ended December 31, 2009. Lipper ratings for Expense
reflect funds' expense minimization relative to peers with similar load
structures as of December 31, 2009.
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Ratings are subject to change every month and are based on an equal-weighted
average of percentile ranks for the Consistent Return and Expense metrics over
three-, five-, and 10-year periods (if applicable). The highest 20% of funds in
each peer group are named Lipper Leaders, the next 20% receive a score of 4, the
middle 20% are scored 3, the next 20% are scored 2, and the lowest 20% are
scored 1. Lipper ratings are not intended to predict future results, and Lipper
does not guarantee the accuracy of this information. More information is
available at WWW.LIPPERLEADERS.COM. Lipper Leader Copyright 2010, Reuters, All
Rights Reserved.
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FUND RECOGNITION | 9
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INVESTMENT OVERVIEW
USAA TOTAL RETURN STRATEGY FUND (Ticker Symbol: USTRX)
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12/31/09 12/31/08
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Net Assets $149.2 Million $143.0 Million
Net Asset Value Per Share $7.97 $7.21
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AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/09
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1 Year Since Inception 1/24/05
12.25% -0.41%
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EXPENSE RATIO*
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2.02%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
*THE EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING EXPENSES INCLUDING ANY
ACQUIRED FUND FEES AND EXPENSES AND ANY DIVIDEND EXPENSES ON SHORT SALES, BEFORE
REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AS REPORTED IN THE FUND'S PROSPECTUS
DATED MAY 1, 2009, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. THE
EXPENSE RATIO MAY DIFFER FROM THE FUND'S ACTUAL EXPENSE RATIO FOR THE YEAR ENDED
DECEMBER 31, 2009, BEFORE REIMBURSEMENT, WHICH WAS 1.70%, AS DISCLOSED IN THE
FINANCIAL HIGHLIGHTS, INCLUDING DIVIDEND EXPENSES ON SHORT SALES AND BEFORE ANY
ACQUIRED FUND FEES AND EXPENSES AND EXPENSES PAID INDIRECTLY.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions. The total
returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
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10 | USAA TOTAL RETURN STRATEGY FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER FLEXIBLE USAA TOTAL
PORTFOLIO FUNDS INDEX S&P 500 INDEX RETURN STRATEGY FUND
01/31/05 $10,000.00 $10,000.00 $10,000.00
02/28/05 10,188.52 10,210.44 10,020.00
03/31/05 10,007.72 10,029.64 9,854.00
04/30/05 9,824.85 9,839.41 9,874.07
05/31/05 10,051.58 10,152.49 9,884.10
06/30/05 10,125.36 10,166.90 9,925.25
07/31/05 10,449.34 10,545.00 10,096.37
08/31/05 10,448.92 10,448.78 9,965.51
09/30/05 10,600.57 10,533.41 9,998.75
10/31/05 10,455.83 10,357.81 10,018.93
11/30/05 10,706.71 10,749.57 10,039.11
12/31/05 10,806.95 10,753.31 10,043.95
01/31/06 11,156.20 11,038.03 10,074.42
02/28/06 11,108.49 11,067.98 10,104.89
03/31/06 11,285.24 11,205.75 10,132.31
04/30/06 11,412.27 11,356.22 10,163.01
05/31/06 11,150.67 11,029.37 10,203.95
06/30/06 11,138.94 11,044.32 10,237.82
07/31/06 11,175.97 11,112.45 10,268.81
08/31/06 11,373.16 11,376.85 10,310.14
09/30/06 11,498.50 11,670.03 10,344.23
10/31/06 11,802.06 12,050.31 10,385.98
11/30/06 12,066.02 12,279.46 10,521.68
12/31/06 12,187.09 12,451.71 10,555.63
01/31/07 12,331.83 12,640.03 10,692.86
02/28/07 12,283.67 12,392.80 10,471.19
03/31/07 12,399.00 12,531.41 10,537.71
04/30/07 12,785.79 13,086.50 10,876.27
05/31/07 13,073.50 13,543.15 11,204.26
06/30/07 13,014.20 13,318.15 11,142.87
07/31/07 12,882.48 12,905.23 11,005.04
08/31/07 12,873.74 13,098.68 11,111.06
09/30/07 13,381.17 13,588.55 11,428.12
10/31/07 13,737.37 13,804.70 11,523.97
11/30/07 13,412.18 13,227.57 11,172.50
12/31/07 13,353.40 13,135.80 11,051.97
01/31/08 12,919.38 12,347.90 10,780.68
02/29/08 12,837.69 11,946.77 10,698.12
03/31/08 12,666.94 11,895.18 10,655.48
04/30/08 13,124.02 12,474.52 11,022.50
05/31/08 13,331.89 12,636.10 11,271.13
06/30/08 12,733.00 11,570.82 10,853.18
07/31/08 12,492.21 11,473.56 10,805.73
08/31/08 12,449.51 11,639.52 10,948.07
09/30/08 11,283.16 10,602.35 10,214.35
10/31/08 9,548.04 8,821.71 8,977.69
11/30/08 9,010.17 8,188.71 8,537.72
12/31/08 9,344.88 8,275.84 8,729.62
01/31/09 8,948.31 7,578.30 8,245.31
02/28/09 8,344.66 6,771.38 7,724.68
03/31/09 8,897.56 7,364.52 8,045.34
04/30/09 9,610.14 8,069.37 8,385.12
05/31/09 10,222.11 8,520.72 8,809.83
06/30/09 10,054.33 8,537.62 8,755.23
07/31/09 10,872.60 9,183.38 9,095.24
08/31/09 11,137.50 9,514.94 9,228.81
09/30/09 11,609.76 9,869.99 9,400.03
10/31/09 11,428.59 9,686.64 9,351.45
11/30/09 11,916.10 10,267.68 9,655.07
12/31/09 12,070.54 10,466.00 9,798.67
[END CHART]
*Data from 1/31/05 to 12/31/09.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Total Return Strategy Fund to the following benchmarks:
o The unmanaged Lipper Flexible Portfolio Funds Index tracks the performance
of the 30 largest funds within the Lipper Flexible Funds category. This
category allocates its investments across various asset classes, including
domestic common stocks, bonds, and money market instruments, with a focus on
total return.
o The unmanaged S&P 500 Index represents the weighted average performance of a
group of 500 widely held, publicly traded stocks.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE CUMULATIVE
PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER
WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
*The performance of the Lipper Flexible Portfolio Funds Index and the S&P 500
Index is calculated from the end of the month, January 31, 2005, while the
Fund's inception date is January 24, 2005. There may be a slight variation of
the performance numbers because of this difference. It is not possible to invest
directly in an index.
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INVESTMENT OVERVIEW | 11
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TOP 10 COMMON STOCK POSITIONS -- LONG
AS OF 12/31/09
(% of Net Assets)
Jabil Circuit Inc. .............................................. 0.3%
Avnet Inc. ...................................................... 0.3%
Gannett Co. ..................................................... 0.3%
Cytec Industries Inc. ........................................... 0.3%
Huntsman Corp. .................................................. 0.3%
Medco Health Solutions Inc. ..................................... 0.3%
AmerisourceBergen Corp. ......................................... 0.3%
TRW Automotive Holdings Corp. ................................... 0.3%
Coventry Health Care Inc. ....................................... 0.3%
Arrow Electronics Inc. .......................................... 0.3%
TOP 10 COMMON STOCK POSITIONS -- SHORT
AS OF 12/31/09
(% of Net Assets)
Continental Airlines "B" ........................................ 0.3%
Health Net Inc. ................................................. 0.3%
ANSYS Inc. ...................................................... 0.3%
J.M. Smucker Co., The -- New Common ............................. 0.3%
Walt Disney Co. ................................................. 0.3%
Republic Services Inc. .......................................... 0.3%
Weyerhaeuser Co. ................................................ 0.3%
SBA Communications Corp. "A" .................................... 0.3%
United States Steel Corp. ....................................... 0.3%
Boeing Co. ...................................................... 0.2%
You will find a complete list of securities that the Fund owns on pages 17-32.
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12 | USAA TOTAL RETURN STRATEGY FUND
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SECTORS -- LONG COMMON STOCK POSITIONS
AS OF 12/31/09
(% of Net Assets)
Information Technology .......................................... 4.5%
Consumer Discretionary .......................................... 4.0%
Health Care ..................................................... 3.1%
Industrials ..................................................... 2.9%
Consumer Staples ................................................ 1.8%
Materials ....................................................... 1.8%
Energy .......................................................... 1.2%
Financials ...................................................... 0.7%
Telecommunication Services ...................................... 0.4%
Utilities ....................................................... 0.4%
SECTORS -- SHORT COMMON STOCK POSITIONS
AS OF 12/31/09
(% of Net Assets)
Information Technology .......................................... 3.7%
Industrials ..................................................... 3.7%
Consumer Discretionary .......................................... 3.3%
Health Care ..................................................... 3.0%
Energy .......................................................... 1.7%
Materials ....................................................... 1.6%
Consumer Staples ................................................ 1.4%
Telecommunication Services ...................................... 0.9%
Utilities ....................................................... 0.8%
Financials ...................................................... 0.7%
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INVESTMENT OVERVIEW | 13
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ASSET ALLOCATION
AS OF 12/31/09
(% of Net Assets)
Stocks -- Long .................................................. 20.8%
Stock-Based Exchange-Traded Funds* .............................. 71.5%
Hedge Funds ..................................................... 5.6%
Money Market Instruments ........................................ 3.1%
Stocks -- Short ................................................. -20.8%
Purchased Options ............................................... 0.1%
Written Options ................................................. -0.4%
* Exchange-traded funds (ETFs) are baskets of securities and are traded, like
individual stocks, on an exchange. These particular ETFs represent multiple
sectors. The Fund participates in exemptive orders held by certain ETFs that
allow the Fund to invest in these ETFs above the level permitted under the
Investment Act of 1940.
Percentages are of net assets of the Fund and may not equal 100%.
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14 | USAA TOTAL RETURN STRATEGY FUND
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DISTRIBUTIONS TO SHAREHOLDERS
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The following federal tax information related to the Fund's fiscal year ended
December 31, 2009, is provided for information purposes only and should not be
used for reporting to federal or state revenue agencies. Federal tax information
for the calendar year will be reported to you on Form 1099-DIV in January 2010.
20.62% of ordinary income distributions qualify for the dividends-received
deductions eligible to corporations.
For the fiscal year ended December 31, 2009, the Fund hereby designates 100%, or
the maximum amount allowable, of its net taxable income as dividends taxed at
individual net capital gains rates.
For the fiscal year ended December 31, 2009, certain dividends paid by the Fund
qualify as interest-related dividends. The Fund designates $3,000 as qualifying
interest income.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $1,297,000 as long-term capital gains for the fiscal year
ended December 31, 2009.
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DISTRIBUTIONS TO SHAREHOLDERS | 15
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA TOTAL RETURN STRATEGY FUND:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the USAA Total Return Strategy Fund (one of the
portfolios constituting USAA Mutual Funds Trust) (the "Fund") as of December 31,
2009, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatements. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2009, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Total Return Strategy Fund at December 31, 2009, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
February 17, 2010
================================================================================
16 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
PORTFOLIO OF INVESTMENTS
December 31, 2009
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
LONG POSITIONS (101.0%)
COMMON STOCKS (20.8%)(a)
CONSUMER DISCRETIONARY (4.0%)
-----------------------------
APPAREL & ACCESSORIES & LUXURY GOODS (0.2%)
8,500 Coach, Inc. $ 310
--------
APPAREL RETAIL (0.2%)
7,400 Ross Stores, Inc. 316
--------
AUTO PARTS & EQUIPMENT (0.3%)
15,900 TRW Automotive Holdings Corp.* 380
--------
AUTOMOBILE MANUFACTURERS (0.2%)
33,700 Ford Motor Co.* 337
--------
AUTOMOTIVE RETAIL (0.2%)
7,400 Advance Auto Parts, Inc. 299
--------
CABLE & SATELLITE (0.4%)
8,200 Scripps Networks Interactive "A" 340
7,620 Time Warner Cable, Inc. 316
--------
656
--------
CONSUMER ELECTRONICS (0.2%)
9,300 Garmin Ltd. 285
--------
DISTRIBUTORS (0.2%)
6,100 Genuine Parts Co. 232
--------
EDUCATION SERVICES (0.4%)
10,300 Career Education Corp.* 240
4,600 DeVry, Inc. 261
700 ITT Educational Services, Inc.* 67
--------
568
--------
GENERAL MERCHANDISE STORES (0.1%)
6,100 Family Dollar Stores, Inc. 170
--------
HOMEFURNISHING RETAIL (0.0%)
2,600 Aaron's, Inc. 72
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
HOTELS, RESORTS, & CRUISE LINES (0.1%)
6,000 Wyndham Worldwide Corp. $ 121
--------
HOUSEHOLD APPLIANCES (0.2%)
4,100 Whirlpool Corp. 331
--------
INTERNET RETAIL (0.4%)
1,500 Amazon.com, Inc.* 202
2,400 Expedia, Inc.* 62
1,600 Priceline.com, Inc.* 349
--------
613
--------
MOVIES & ENTERTAINMENT (0.0%)
2,500 Warner Music Group Corp.* 14
--------
PUBLISHING (0.5%)
27,100 Gannett Co., Inc. 402
8,200 McGraw-Hill Companies, Inc. 275
4,100 New York Times Co. "A"* 51
--------
728
--------
RESTAURANTS (0.1%)
1,000 McDonald's Corp. 62
3,800 Starbucks Corp.* 88
--------
150
--------
SPECIALIZED CONSUMER SERVICES (0.1%)
3,100 Brinks Home Security Holdings, Inc.* 101
--------
SPECIALTY STORES (0.2%)
15,400 Barnes & Noble, Inc. 294
--------
Total Consumer Discretionary 5,977
--------
CONSUMER STAPLES (1.8%)
-----------------------
AGRICULTURAL PRODUCTS (0.2%)
10,800 Archer-Daniels-Midland Co. 338
--------
FOOD RETAIL (0.1%)
4,800 SUPERVALU, Inc. 61
--------
HOUSEHOLD PRODUCTS (0.4%)
3,500 Colgate-Palmolive Co. 288
4,700 Kimberly-Clark Corp. 299
--------
587
--------
PACKAGED FOODS & MEAT (0.5%)
13,800 Dean Foods Co.* 249
6,100 Hershey Co. 218
24,700 Sara Lee Corp. 301
--------
768
--------
================================================================================
18 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
PERSONAL PRODUCTS (0.4%)
6,900 Herbalife Ltd. $ 280
7,200 Mead Johnson Nutrition Co. 315
--------
595
--------
SOFT DRINKS (0.2%)
14,600 Coca-Cola Enterprises, Inc. 309
--------
Total Consumer Staples 2,658
--------
ENERGY (1.2%)
-------------
OIL & GAS DRILLING (0.2%)
13,100 Rowan Companies, Inc.* 297
--------
OIL & GAS EQUIPMENT & SERVICES (0.3%)
2,600 Oceaneering International, Inc.* 152
7,500 Oil States International, Inc.* 295
--------
447
--------
OIL & GAS EXPLORATION & PRODUCTION (0.7%)
1,400 Cimarex Energy Co. 74
4,500 EXCO Resources, Inc. 95
20,700 Mariner Energy, Inc.* 240
6,900 Newfield Exploration Co.* 333
18,900 Quicksilver Resources, Inc.* 284
--------
1,026
--------
Total Energy 1,770
--------
FINANCIALS (0.7%)
-----------------
CONSUMER FINANCE (0.4%)
7,700 Capital One Financial Corp. 295
23,800 Discover Financial Services 350
--------
645
--------
REGIONAL BANKS (0.3%)
28,700 Huntington Bancshares, Inc. 105
38,900 Marshall & Ilsley Corp. 212
23,300 Popular, Inc. 53
--------
370
--------
Total Financials 1,015
--------
HEALTH CARE (3.1%)
------------------
BIOTECHNOLOGY (0.5%)
1,100 Alexion Pharmaceuticals, Inc.* 54
6,400 Gilead Sciences, Inc.* 277
13,100 Myriad Genetics, Inc.* 342
--------
673
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
HEALTH CARE DISTRIBUTORS (0.6%)
14,600 AmerisourceBergen Corp. $ 381
8,500 Cardinal Health, Inc. 274
4,900 McKesson Corp. 306
--------
961
--------
HEALTH CARE EQUIPMENT (0.1%)
9,100 Hill-Rom Holdings, Inc. 218
--------
HEALTH CARE FACILITIES (0.4%)
6,100 Community Health Systems, Inc.* 217
10,500 Universal Health Services, Inc. "B" 320
--------
537
--------
HEALTH CARE SERVICES (0.3%)
6,000 Medco Health Solutions, Inc.* 383
--------
LIFE SCIENCES TOOLS & SERVICES (0.0%)
600 Waters Corp.* 37
--------
MANAGED HEALTH CARE (0.7%)
1,400 Aetna, Inc. 45
15,600 Coventry Health Care, Inc.* 379
7,400 Humana, Inc.* 325
11,200 UnitedHealth Group, Inc. 341
--------
1,090
--------
PHARMACEUTICALS (0.5%)
8,200 Endo Pharmaceuticals Holdings, Inc.* 168
9,500 Forest Laboratories, Inc.* 305
8,800 Valeant Pharmaceuticals International* 280
--------
753
--------
Total Health Care 4,652
--------
INDUSTRIALS (2.9%)
------------------
AEROSPACE & DEFENSE (0.3%)
3,600 ITT Corp. 179
4,100 Lockheed Martin Corp. 309
--------
488
--------
AIR FREIGHT & LOGISTICS (0.1%)
3,000 United Parcel Service, Inc. "B" 172
--------
AIRLINES (0.2%)
4,000 Copa Holdings S.A. "A" 218
--------
BUILDING PRODUCTS (0.0%)
900 Armstrong World Industries, Inc.* 35
--------
================================================================================
20 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
COMMERCIAL PRINTING (0.2%)
14,000 R.R. Donnelley & Sons Co. $ 312
--------
CONSTRUCTION & ENGINEERING (0.5%)
7,900 Jacobs Engineering Group, Inc.* 297
3,400 KBR, Inc. 65
10,600 Shaw Group, Inc.* 305
--------
667
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.6%)
8,300 Navistar International Corp.* 321
8,600 Oshkosh Corp. 318
17,000 Trinity Industries, Inc. 297
--------
936
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
2,100 Hubbell, Inc. "B" 99
800 Thomas & Betts Corp.* 29
--------
128
--------
INDUSTRIAL CONGLOMERATES (0.2%)
9,000 Carlisle Companies, Inc. 308
--------
INDUSTRIAL MACHINERY (0.2%)
12,200 Timken Co. 289
--------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
1,000 MSC Industrial Direct Co., Inc. "A" 47
3,900 WESCO International, Inc.* 105
--------
152
--------
TRUCKING (0.4%)
7,200 Con-Way, Inc. 252
7,000 Ryder System, Inc. 288
--------
540
--------
Total Industrials 4,245
--------
INFORMATION TECHNOLOGY (4.5%)
-----------------------------
APPLICATION SOFTWARE (0.1%)
17,200 Compuware Corp.* 124
--------
COMMUNICATIONS EQUIPMENT (0.3%)
4,800 EchoStar Corp. "A"* 97
7,700 Harris Corp. 366
--------
463
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
COMPUTER HARDWARE (0.6%)
2,300 International Business Machines Corp. $ 301
23,100 NCR Corp.* 257
10,000 Teradata Corp.* 314
--------
872
--------
COMPUTER STORAGE & PERIPHERALS (0.2%)
8,000 Western Digital Corp.* 353
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.8%)
7,300 Broadridge Financial Solutions, Inc. 165
4,200 Computer Sciences Corp.* 242
3,400 DST Systems, Inc.* 148
5,800 Global Payments, Inc. 312
7,400 Hewitt Associates, Inc. "A"* 313
2,400 NeuStar, Inc. "A"* 55
--------
1,235
--------
ELECTRONIC COMPONENTS (0.2%)
34,800 Vishay Intertechnology, Inc.* 291
--------
ELECTRONIC MANUFACTURING SERVICES (0.3%)
26,300 Jabil Circuit, Inc. 457
--------
INTERNET SOFTWARE & SERVICES (0.3%)
2,500 Sohu.com, Inc.* 143
10,400 VeriSign, Inc.* 252
--------
395
--------
IT CONSULTING & OTHER SERVICES (0.2%)
16,500 SAIC, Inc.* 313
--------
SYSTEMS SOFTWARE (0.5%)
10,000 Microsoft Corp. 305
7,900 Red Hat, Inc.* 244
12,800 Symantec Corp.* 229
--------
778
--------
TECHNOLOGY DISTRIBUTORS (1.0%)
12,700 Arrow Electronics, Inc.* 376
13,800 Avnet, Inc.* 416
16,900 Ingram Micro, Inc. "A"* 295
8,000 Tech Data Corp.* 373
--------
1,460
--------
Total Information Technology 6,741
--------
================================================================================
22 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
MATERIALS (1.8%)
----------------
DIVERSIFIED CHEMICALS (0.6%)
1,700 Ashland, Inc. $ 67
12,500 Cabot Corp. 328
2,300 Eastman Chemical Co. 139
34,000 Huntsman Corp. 384
--------
918
--------
DIVERSIFIED METALS & MINING (0.1%)
3,100 Walter Industries, Inc. 233
--------
PAPER PACKAGING (0.1%)
2,800 Bemis Co., Inc. 83
--------
PAPER PRODUCTS (0.2%)
12,900 International Paper Co. 346
--------
SPECIALTY CHEMICALS (0.5%)
10,800 Cytec Industries, Inc. 393
4,700 Lubrizol Corp. 343
--------
736
--------
STEEL (0.3%)
7,100 Commercial Metals Co. 111
6,500 Reliance Steel & Aluminum Co. 281
--------
392
--------
Total Materials 2,708
--------
TELECOMMUNICATION SERVICES (0.4%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.1%)
23,800 Qwest Communications International, Inc. 100
--------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
57,200 Sprint Nextel Corp.* 209
2,700 Telephone & Data Systems, Inc. 92
5,900 U.S. Cellular Corp.* 250
--------
551
--------
Total Telecommunication Services 651
--------
UTILITIES (0.4%)
----------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.3%)
3,200 AES Corp.* 43
6,000 Constellation Energy Group, Inc. 211
11,100 NRG Energy, Inc.* 262
--------
516
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
MULTI-UTILITIES (0.1%)
5,500 MDU Resources Group, Inc. $ 130
--------
Total Utilities 646
--------
Total Common Stocks (cost: $24,635) 31,063
--------
EXCHANGE-TRADED FUNDS (71.5%)
956,670 SPDR Trust Series 1(b) (cost: $122,990) 106,612
--------
HEDGE FUNDS (5.6%)
517,063 Deutsche iGAP Investment Trust "B" , acquired
8/01/2008; cost: $10,000*(c),(d) 8,428
--------
MONEY MARKET INSTRUMENTS (3.1%)
MONEY MARKET FUNDS (3.1%)
4,583,191 State Street Institutional Liquid Reserve Fund,
0.15%(e) (cost: $4,583) 4,583
--------
Total Long Positions (cost: $162,208) 150,686
--------
TOTAL INVESTMENTS (COST: $162,208) $150,686
========
SHORT POSITIONS (20.8%)
COMMON STOCKS (20.8%)
CONSUMER DISCRETIONARY (3.3%)
-----------------------------
ADVERTISING (0.1%)
6,600 Clear Channel Outdoor Holdings, Inc. "A"* 69
900 Lamar Advertising Co. "A"* 28
--------
97
--------
APPAREL RETAIL (0.1%)
3,300 Abercrombie & Fitch Co. "A" 115
--------
AUTO PARTS & EQUIPMENT (0.4%)
9,300 BorgWarner, Inc. 309
8,000 Gentex Corp. 143
2,700 Johnson Controls, Inc. 73
--------
525
--------
AUTOMOTIVE RETAIL (0.4%)
14,300 CarMax, Inc.* 347
7,800 O'Reilly Automotive, Inc.* 297
--------
644
--------
BROADCASTING (0.0%)
900 Liberty Media-Starz "A"* 42
--------
================================================================================
24 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
CABLE & SATELLITE (0.2%)
9,001 DIRECTV "A"* $ 300
--------
CASINOS & GAMING (0.4%)
4,500 Boyd Gaming Corp.* 38
1,500 International Game Technology 28
24,900 MGM Mirage* 227
1,100 Penn National Gaming, Inc.* 30
6,800 WMS Industries, Inc.* 272
--------
595
--------
CONSUMER ELECTRONICS (0.2%)
7,800 Harman International Industries, Inc. 275
--------
DISTRIBUTORS (0.2%)
18,400 LKQ Corp.* 360
--------
HOMEBUILDING (0.2%)
14,500 KB Home 198
11,400 Lennar Corp. "A" 146
--------
344
--------
HOTELS, RESORTS, & CRUISE LINES (0.2%)
8,800 Starwood Hotels & Resorts Worldwide, Inc. 322
--------
HOUSEHOLD APPLIANCES (0.1%)
4,000 Stanley Works 206
--------
MOTORCYCLE MANUFACTURERS (0.2%)
10,400 Harley-Davidson, Inc. 262
--------
MOVIES & ENTERTAINMENT (0.3%)
2,200 Liberty Media Corp. - Capital "A"* 52
12,700 Walt Disney Co. 410
--------
462
--------
PUBLISHING (0.2%)
7,200 Meredith Corp. 222
--------
RESTAURANTS (0.1%)
24,900 Wendy's/Arby's Group, Inc. "A" 117
--------
Total Consumer Discretionary 4,888
--------
CONSUMER STAPLES (1.4%)
-----------------------
AGRICULTURAL PRODUCTS (0.2%)
4,700 Bunge Ltd. 300
--------
DRUG RETAIL (0.2%)
9,600 CVS Caremark Corp. 309
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
HOUSEHOLD PRODUCTS (0.2%)
5,000 Energizer Holdings, Inc.* $ 307
--------
PACKAGED FOODS & MEAT (0.7%)
13,800 Flowers Foods, Inc. 328
6,700 J.M. Smucker Co. 414
5,900 McCormick & Co., Inc. 213
2,700 Ralcorp Holdings, Inc.* 161
--------
1,116
--------
PERSONAL PRODUCTS (0.1%)
2,600 NBTY, Inc.* 113
--------
Total Consumer Staples 2,145
--------
ENERGY (1.7%)
-------------
COAL & CONSUMABLE FUELS (0.3%)
7,100 Alpha Natural Resources, Inc.* 308
3,100 Arch Coal, Inc. 69
1,400 Massey Energy Co. 59
--------
436
--------
OIL & GAS DRILLING (0.2%)
7,300 Atwood Oceanics, Inc.* 262
--------
OIL & GAS EQUIPMENT & SERVICES (0.1%)
3,000 Dresser-Rand Group, Inc.* 95
--------
OIL & GAS EXPLORATION & PRODUCTION (0.9%)
5,400 Comstock Resources, Inc.* 219
21,900 Denbury Resources, Inc.* 324
4,000 Noble Energy, Inc. 285
4,600 Pioneer Natural Resources Co. 221
6,400 Range Resources Corp. 319
--------
1,368
--------
OIL & GAS REFINING & MARKETING (0.2%)
11,200 Sunoco, Inc. 292
--------
Total Energy 2,453
--------
FINANCIALS (0.7%)
-----------------
ASSET MANAGEMENT & CUSTODY BANKS (0.1%)
2,100 Northern Trust Corp. 110
--------
INVESTMENT BANKING & BROKERAGE (0.1%)
15,300 Charles Schwab Corp. 288
--------
PROPERTY & CASUALTY INSURANCE (0.1%)
288 Markel Corp.* 98
--------
================================================================================
26 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
REGIONAL BANKS (0.4%)
2,400 Cullen/Frost Bankers, Inc. $ 120
13,455 First Horizon National Corp.* 180
21,300 TCF Financial Corp. 290
--------
590
--------
Total Financials 1,086
--------
HEALTH CARE (3.0%)
------------------
BIOTECHNOLOGY (1.2%)
800 Abraxis BioScience, Inc.* 32
23,300 Amylin Pharmaceuticals, Inc.* 331
8,400 BioMarin Pharmaceutical, Inc.* 158
4,900 Cephalon, Inc.* 306
1,200 Gen-Probe, Inc.* 51
4,700 OSI Pharmaceuticals, Inc.* 146
6,700 United Therapeutics Corp.* 353
8,400 Vertex Pharmaceuticals, Inc.* 360
--------
1,737
--------
HEALTH CARE DISTRIBUTORS (0.1%)
7,300 Patterson Companies, Inc.* 204
--------
HEALTH CARE EQUIPMENT (0.5%)
4,600 Medtronic, Inc. 203
3,400 St. Jude Medical, Inc.* 125
2,100 Teleflex, Inc. 113
5,300 Zimmer Holdings, Inc.* 313
--------
754
--------
HEALTH CARE FACILITIES (0.1%)
6,100 VCA Antech, Inc.* 152
--------
HEALTH CARE SUPPLIES (0.2%)
8,400 DENTSPLY International, Inc. 295
--------
HEALTH CARE TECHNOLOGY (0.2%)
14,100 Allscripts - Misys Healthcare Solutions, Inc.* 285
--------
LIFE SCIENCES TOOLS & SERVICES (0.4%)
4,900 Covance, Inc.* 267
6,100 Life Technologies Corp.* 319
3,000 PerkinElmer, Inc. 62
--------
648
--------
MANAGED HEALTH CARE (0.3%)
19,100 Health Net, Inc.* 445
--------
Total Health Care 4,520
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
INDUSTRIALS (3.7%)
------------------
AEROSPACE & DEFENSE (0.5%)
4,700 BE Aerospace, Inc.* $ 110
6,800 Boeing Co. 368
17,000 Spirit AeroSystems Holdings, Inc. "A"* 338
--------
816
--------
AIRLINES (0.6%)
18,400 AMR Corp.* 142
25,600 Continental Airlines, Inc. "B"* 459
31,700 Southwest Airlines Co. 362
--------
963
--------
BUILDING PRODUCTS (0.1%)
7,800 USG Corp.* 110
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.8%)
9,600 AGCO Corp.* 311
4,500 Deere & Co. 243
9,300 PACCAR, Inc. 337
5,600 Wabtec Corp. 229
--------
1,120
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.2%)
4,900 AMETEK, Inc. 188
2,200 Roper Industries, Inc. 115
--------
303
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.7%)
14,400 Republic Services, Inc. 408
1,600 Stericycle, Inc.* 88
6,800 Waste Connections, Inc.* 227
9,400 Waste Management, Inc. 318
--------
1,041
--------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.2%)
20,100 Monster Worldwide, Inc.* 350
--------
INDUSTRIAL MACHINERY (0.1%)
3,000 IDEX Corp. 93
--------
RAILROADS (0.2%)
4,700 Union Pacific Corp. 300
--------
SECURITY & ALARM SERVICES (0.2%)
12,000 Corrections Corp. of America* 295
--------
================================================================================
28 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
4,500 GATX Corp. $ 129
--------
Total Industrials 5,520
--------
INFORMATION TECHNOLOGY (3.7%)
-----------------------------
APPLICATION SOFTWARE (0.9%)
9,900 ANSYS, Inc.* 430
12,200 Autodesk, Inc.* 310
50,000 Cadence Design Systems, Inc.* 300
21,200 Nuance Communications, Inc.* 329
--------
1,369
--------
COMMUNICATIONS EQUIPMENT (0.4%)
35,400 Brocade Communications Systems, Inc.* 270
21,700 Ciena Corp.* 235
--------
505
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.1%)
1,600 Visa, Inc. "A" 140
--------
ELECTRONIC COMPONENTS (0.2%)
17,500 Corning, Inc. 338
--------
ELECTRONIC EQUIPMENT & INSTRUMENTS (0.2%)
4,100 Itron, Inc.* 277
--------
HOME ENTERTAINMENT SOFTWARE (0.4%)
24,200 Activision Blizzard, Inc.* 269
16,600 Electronic Arts, Inc.* 294
--------
563
--------
INTERNET SOFTWARE & SERVICES (0.2%)
12,700 eBay, Inc.* 299
--------
SEMICONDUCTOR EQUIPMENT (0.9%)
23,600 Applied Materials, Inc. 329
8,200 Lam Research Corp.* 322
22,500 MEMC Electronic Materials, Inc.* 306
10,400 Novellus Systems, Inc.* 243
5,100 Varian Semiconductor Equipment Associates, Inc.* 183
--------
1,383
--------
SEMICONDUCTORS (0.4%)
29,500 Cypress Semiconductor Corp.* 312
16,600 NVIDIA Corp.* 310
--------
622
--------
Total Information Technology 5,496
--------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
MATERIALS (1.6%)
----------------
CONSTRUCTION MATERIALS (0.6%)
9,300 Eagle Materials, Inc. $ 242
3,100 Martin Marietta Materials, Inc. 277
6,100 Vulcan Materials Co. 322
--------
841
--------
DIVERSIFIED METALS & MINING (0.2%)
8,600 Southern Copper Corp. 283
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.2%)
4,900 Intrepid Potash, Inc.* 143
2,700 Mosaic Co. 161
--------
304
--------
FOREST PRODUCTS (0.3%)
9,200 Weyerhaeuser Co. 397
--------
GOLD (0.1%)
5,100 Royal Gold, Inc. 240
--------
STEEL (0.2%)
6,900 United States Steel Corp. 380
--------
Total Materials 2,445
--------
TELECOMMUNICATION SERVICES (0.9%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.2%)
8,500 CenturyTel, Inc. 308
--------
WIRELESS TELECOMMUNICATION SERVICES (0.7%)
7,500 American Tower Corp. "A"* 324
7,000 Crown Castle International Corp.* 273
2,000 Leap Wireless International, Inc.* 35
11,200 SBA Communications Corp. "A"* 383
--------
1,015
--------
Total Telecommunication Services 1,323
--------
UTILITIES (0.8%)
----------------
ELECTRIC UTILITIES (0.4%)
14,200 Great Plains Energy, Inc. 275
14,500 Weststar Energy, Inc. 315
--------
590
--------
GAS UTILITIES (0.2%)
7,200 EQT Corp. 316
--------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.1%)
2,000 Ormat Technologies, Inc. 76
--------
================================================================================
30 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
--------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
--------------------------------------------------------------------------------
WATER UTILITIES (0.1%)
7,100 Aqua America, Inc. $ 125
--------
Total Utilities 1,107
--------
Total Common Stocks (proceeds: $26,201) 30,983
--------
TOTAL SHORT POSITIONS (PROCEEDS: $26,201) $ 30,983
========
--------------------------------------------------------------------------------
NUMBER
OF CONTRACTS
--------------------------------------------------------------------------------
PURCHASED OPTIONS (0.1%)
948 Put - S&P 500 Index expiring January 16, 2010
at 1,005 (cost: $381) 161
--------
WRITTEN OPTIONS (0.4%)
(948) Call - S&P 500 Index expiring January 16, 2010 at 1,135 (602)
(948) Put - S&P 500 Index expiring January 16, 2010 at 890 (47)
--------
TOTAL WRITTEN OPTIONS (PREMIUMS RECEIVED: $1,328) $ (649)
========
================================================================================
PORTFOLIO OF INVESTMENTS | 31
<PAGE>
================================================================================
---------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
ASSETS FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
---------------------------------------------------------------------------------------------------
Long Positions:
Common Stocks $ 31,063 $ - $- $ 31,063
Exchange-Traded Funds 106,612 - - 106,612
Hedge Funds - 8,428 - 8,428
Money Market Instruments 4,583 - - 4,583
Purchased Options 161 - - 161
---------------------------------------------------------------------------------------------------
Total $142,419 $8,428 $- $150,847
---------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
LIABILITIES FOR IDENTICAL LIABILITIES INPUTS INPUTS TOTAL
---------------------------------------------------------------------------------------------------
Short Positions:
Common Stocks $(30,983) $- $- $(30,983)
Written Options (649) - - (649)
---------------------------------------------------------------------------------------------------
Total $(31,632) $- $- $(31,632)
---------------------------------------------------------------------------------------------------
================================================================================
32 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
December 31, 2009
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
The Fund may rely on certain Securities and Exchange Commission (SEC)
exemptive orders or rules that permit funds meeting various conditions to
invest in an exchange-traded fund (ETF) in amounts exceeding limits set
forth in the Investment Company Act of 1940 that would otherwise be
applicable.
o CATEGORIES AND DEFINITIONS
HEDGE FUNDS -- private investment funds open to a limited range of investors
and exempt from certain regulations. Deutsche iGAP Investment Trust, managed
by Deutsche Bank Trust Company Americas, invests primarily in a diversified
portfolio of short-term money market investments, and long and short
positions in exchange-traded equity index and government bond index futures,
currency forward contracts, and other derivative instruments. The Fund may
redeem all or part of its investment upon 10 days' prior written notice.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 33
<PAGE>
================================================================================
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
SPDR Exchange-traded funds, managed by State Street Global Advisers, that
represent a portfolio of stocks designed to closely track a specific
market index. SPDR is an acronym for the first member of the fund
family, Standard & Poor's Depositary Receipts, which tracks the S&P
500 Index. SPDRs are traded on securities exchanges.
o SPECIFIC NOTES
(a) Securities are pledged with a broker as collateral for short positions
borrowed and segregated to cover the value of the short positions.
(b) At December 31, 2009, the security, or a portion thereof, is segregated
to cover the notional value of outstanding written call options.
(c) Restricted security that is not registered under the Securities Act of
1933.
(d) Security deemed illiquid by USAA Investment Management Company (the
Manager) under liquidity guidelines approved by the Board of Trustees.
The aggregate market value of these securities at December 31, 2009, was
$8,428,000, which represented 5.6% of the Fund's net assets.
(e) Rate represents the money market fund annualized seven-day yield at
December 31, 2009.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
34 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
December 31, 2009
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $162,208) $150,686
Purchased options, at market value (cost of $381) 161
Cash 45
Deposits with broker for securities sold short 29,205
Receivables:
Capital shares sold 432
Dividends and interest 586
--------
Total assets 181,115
--------
LIABILITIES
Payables:
Dividends for securities sold short 25
Capital shares redeemed 93
Securities sold short, at market value (proceeds of $26,201) 30,983
Written options, at market value (premiums received of $1,328) 649
Accrued management fees 75
Accrued transfer agent's fees 5
Other accrued expenses and payables 79
--------
Total liabilities 31,909
--------
Net assets applicable to capital shares outstanding $149,206
========
NET ASSETS CONSIST OF:
Paid-in capital $196,996
Accumulated undistributed net investment income 25
Accumulated net realized loss on investments,
securities sold short, and options (31,970)
Net unrealized depreciation of investments,
securities sold short, and options (15,845)
--------
Net assets applicable to capital shares outstanding $149,206
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 18,730
========
Net asset value, redemption price, and offering price per share $ 7.97
========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 35
<PAGE>
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended December 31, 2009
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 2,620
Interest 12
--------
Total income 2,632
--------
EXPENSES
Management fees 828
Administration and servicing fees 205
Transfer agent's fees 624
Custody and accounting fees 92
Postage 33
Shareholder reporting fees 28
Trustees' fees 10
Registration fees 27
Professional fees 57
Dividend expense on securities sold short 369
Other 44
--------
Total expenses 2,317
Transfer agent's fees reimbursed (Note 5E) (56)
Expenses reimbursed (187)
--------
Net expenses 2,074
--------
NET INVESTMENT INCOME 558
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
SECURITIES SOLD SHORT, AND OPTIONS
Net realized gain (loss) on:
Investments (15,131)
Securities sold short 5,633
Options (6,676)
Payment from USAA Investment Management Company (Note 5D) 8
Change in net unrealized appreciation/depreciation of:
Investments 37,777
Securities sold short (7,222)
Options 459
--------
Net realized and unrealized gain 14,848
--------
Increase in net assets resulting from operations $ 15,406
========
See accompanying notes to financial statements.
================================================================================
36 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended December 31,
--------------------------------------------------------------------------------
2009 2008
------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 558 $ 1,987
Net realized loss on investments (15,131) (6,847)
Net realized gain (loss) on securities sold short 5,633 (15,059)
Net realized gain (loss) on options (6,676) 12,011
Payment from USAA Investment Management Company (Note 5D) 8 -
Change in net unrealized appreciation/depreciation of:
Investments 37,777 (35,276)
Securities sold short (7,222) 2,302
Options 459 (455)
------------------------
Increase (decrease) in net assets resulting from operations 15,406 (41,337)
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (531) (2,890)
Net realized gains (1,664) (1,314)
------------------------
Distributions to shareholders (2,195) (4,204)
------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 28,037 28,257
Reinvested dividends 2,172 4,036
Cost of shares redeemed (37,192) (94,489)
------------------------
Decrease in net assets from capital share transactions (6,983) (62,196)
------------------------
Capital contribution from USAA Transfer Agency Company - 1
------------------------
Net increase (decrease) in net assets 6,228 (107,736)
NET ASSETS
Beginning of year 142,978 250,714
------------------------
End of year $149,206 $ 142,978
========================
Accumulated undistributed (overdistribution of) net
investment income:
End of year $ 25 $ (39)
========================
CHANGE IN SHARES OUTSTANDING
Shares sold 3,760 3,280
Shares issued for dividends reinvested 281 525
Shares redeemed (5,139) (10,722)
------------------------
Decrease in shares outstanding (1,098) (6,917)
========================
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 37
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
December 31, 2009
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940 (the 1940 Act), as amended, is an open-end management investment company
organized as a Delaware statutory trust consisting of 46 separate funds. The
information presented in this annual report pertains only to the USAA Total
Return Strategy Fund (the Fund), which is classified as nondiversified under the
1940 Act. The Fund's investment objective is to seek a positive return every
calendar year and over the long term (five years and more) to achieve returns
greater than the S&P 500 Index with less risk.
As a nondiversified fund, the Fund may invest a greater percentage of its assets
in a single issuer, such as a single stock-based or bond-based exchange-traded
fund (ETF), a single corporate bond, or a single money market instrument.
Because a relatively high percentage of the Fund's total assets may be invested
in the securities of a single issuer or a limited number of issuers, the
securities of the Fund may be more sensitive to changes in the market value of a
single issuer, a limited number of issuers, or large companies generally. Such a
focused investment strategy may increase the volatility of the Fund's investment
results because this Fund may be more susceptible to risk associated with a
single economic, political, or regulatory event than a diversified fund.
A. SECURITY VALUATION -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange (NYSE) on each business day
the NYSE is open) as set forth below:
1. Equity securities, including ETFs and equity securities sold short,
except as otherwise noted, traded primarily on a domestic securities
exchange or the Nasdaq over-the-counter markets are
================================================================================
38 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
valued at the last sales price or official closing price on the exchange
or primary market on which they trade. If no last sale or official
closing price is reported or available, the average of the bid and asked
prices generally is used.
2. Equity securities trading in various foreign markets may take place on
days when the NYSE is closed. Further, when the NYSE is open, the
foreign markets may be closed. Therefore, the calculation of the Fund's
net asset value (NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined. In most
cases, events affecting the values of foreign securities that occur
between the time of their last quoted sales or official closing prices
and the close of normal trading on the NYSE on a day the Fund's NAV is
calculated will not be reflected in the value of the Fund's foreign
securities. However, USAA Investment Management Company (the Manager),
an affiliate of the Fund, and the Fund's subadvisers, if applicable,
will monitor for events that would materially affect the value of the
Fund's foreign securities. The Fund's subadvisers have agreed to notify
the Manager of significant events they identify that would materially
affect the value of the Fund's foreign securities. If the Manager
determines that a particular event would materially affect the value of
the Fund's foreign securities, then the Manager, under valuation
procedures approved by the Trust's Board of Trustees, will consider
such available information that it deems relevant to determine a fair
value for the affected foreign securities. In addition, the Fund may
use information from an external vendor or other sources to adjust the
foreign market closing prices of foreign equity securities to reflect
what the Fund believes to be the fair value of the securities as of the
close of the NYSE. Fair valuation of affected foreign equity securities
may occur frequently based on an assessment that events that occur on a
fairly regular basis (such as U.S. market movements) are significant.
3. Investments in open-end investment companies, hedge, or other funds,
other than ETFs, are valued at their NAV at the end of each business
day.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
<PAGE>
================================================================================
4. Debt securities purchased with original or remaining maturities of 60
days or less may be valued at amortized cost, which approximates market
value.
5. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the Trust's
Board of Trustees. The Service uses an evaluated mean between quoted
bid and asked prices or the last sales price to price securities when,
in the Service's judgment, these prices are readily available and are
representative of the securities' market values. For many securities,
such prices are not readily available. The Service generally prices
these securities based on methods that include consideration of yields
or prices of securities of comparable quality, coupon, maturity, and
type; indications as to values from dealers in securities; and general
market conditions.
6. Repurchase agreements are valued at cost, which approximates market
value.
7. Options are valued by a pricing service at the National Best Bid/Offer
(NBBO) composite price, which is derived from the best available bid
and ask prices in all participating options exchanges determined to
most closely reflect market value of the options at the time of
computation of the Fund's NAV.
8. Securities for which market quotations are not readily available or are
considered unreliable, or whose values have been materially affected by
events occurring after the close of their primary markets but before
the pricing of the Fund, are valued in good faith at fair value, using
methods determined by the Manager in consultation with the Fund's
subadvisers, under valuation procedures approved by the Trust's Board
of Trustees. The effect of fair value pricing is that securities may
not be priced on the 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.
================================================================================
40 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, or widely used quotation systems. General factors
considered in determining the fair value of securities include
fundamental analytical data, the nature and duration of any restrictions
on disposition of the securities, and an evaluation of the forces that
influenced the market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS -- Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the portfolio of investments
is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 -- inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
Level 2 -- inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indices.
Level 3 -- inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- On January 1, 2009, the
Fund adopted an accounting standard that requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features
in derivative agreements, if any.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
<PAGE>
================================================================================
The Fund may buy, sell, and enter into certain types of derivatives,
including, but not limited to futures contracts, options, and options on
futures contracts under circumstances in which such instruments are
expected by the portfolio manager to aid in achieving the Fund's investment
objective. The Fund also may use derivatives in circumstances where the
portfolio manager believes they offer an economical means of gaining
exposure to a particular asset class or securities market or to keep cash
on hand to meet shareholder redemptions or other needs while maintaining
exposure to the market. With exchange listed futures contracts and
options, counterparty credit risk to the Fund is limited to the exchange's
clearinghouse which, as counterparty to all exchange-traded futures
contracts and options, guarantees the transactions against default from the
actual counterparty to the trade.
OPTION TRANSACTIONS -- The Fund is subject to equity price risk in the
normal course of pursuing its investment objectives. The Fund may use
options on underlying instruments, namely, equity securities, ETFs, and
equity indexes, to gain exposure to, or hedge against, changes in the value
of equity securities, ETFs, or equity indexes. A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying instrument at a specified price during a specified period.
Conversely, a put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying instrument at a specified
price during a specified period. The purchaser of the option pays a premium
to the writer of the option.
Premiums paid for purchased options are included in the Fund's statement of
assets and liabilities as an investment. If a purchased option expires
unexercised, the premium paid is recognized as a realized loss. If a
purchased call option on a security is exercised, the cost of the security
acquired includes the exercise price and the premium paid. If a purchased
put option on a security is exercised, the realized gain or loss on the
security sold is determined from the exercise price, the original cost of
the security, and the premium paid. The risk associated with purchasing a
call or put option is limited to the premium paid.
================================================================================
42 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
Premiums received from writing options are included in the Fund's statement
of assets and liabilities as a liability. If a written option expires
unexercised, the premium received is recognized as a realized gain. If a
written call option on a security is exercised, the realized gain or loss
on the security sold is determined from the exercise price, the original
cost of the security, and the premium received. If a written put option on
a security is exercised, the cost of the security acquired is the exercise
price paid less the premium received. The Fund, as a writer of an option,
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
In an attempt to reduce the Fund's volatility over time, the Fund may
implement a strategy that involves writing (selling) index call or
corresponding ETF options and purchasing index put or corresponding ETF
options or index put spread options against a highly correlated stock
portfolio. The combination of the diversified stock portfolio with the
index call and put or corresponding ETF options is designed to provide the
Fund with consistent returns over a wide range of equity market
environments. This strategy may not fully protect the Fund against declines
in the portfolio's value, and the Fund could experience a loss. Options on
securities indexes are different from options on individual securities in
that the holder of the index options contract has the right to receive an
amount of cash equal to the difference between the exercise price and the
closing price of the underlying index on exercise date. If an option on an
index is exercised, the realized gain or loss is determined from the
exercise price, the value of the underlying index, and the amount of the
premium.
FAIR VALUES OF DERIVATIVE INSTRUMENTS AS OF DECEMBER 31, 2009*
(IN THOUSANDS)
ASSET DERIVATIVES LIABILITY DERIVATIVES
-----------------------------------------------------------------------------------------
STATEMENT OF STATEMENT OF
DERIVATIVES NOT ACCOUNTED ASSETS AND ASSETS AND
FOR AS HEDGING INSTRUMENTS LIABILITIES LIABILITIES
UNDER STATEMENT 133 LOCATION FAIR VALUE LOCATION FAIR VALUE
-----------------------------------------------------------------------------------------
Equity contracts Purchased $161 Written $649
options options
-----------------------------------------------------------------------------------------
* For open derivative instruments as of December 31, 2009, see the portfolio of
investments, which is also indicative of activity for the year ended
December 31, 2009.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
<PAGE>
================================================================================
THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2009 (IN THOUSANDS)
CHANGE IN
DERIVATIVES NOT UNREALIZED
ACCOUNTED FOR AS REALIZED APPRECIATION
HEDGING INSTRUMENTS STATEMENT OF GAIN (LOSS) (DEPRECIATION)
UNDER STATEMENT 133 OPERATIONS LOCATION ON DERIVATIVES ON DERIVATIVES
--------------------------------------------------------------------------------------
Equity contracts Net realized gain (loss) on $(6,668)* $459
options/Change in net
unrealized appreciation/
depreciation of options
--------------------------------------------------------------------------------------
* Includes payment from USAA Investment Management Company (Note 5D).
D. SHORT POSITIONS -- The Fund may engage in short sales (selling securities
it does not own) as part of its normal investment activities. Short
positions are collateralized by cash proceeds from the short sales and by
designated long positions. In order to sell securities it does not own, the
Fund must borrow the securities from a broker or lending agent. If the
borrowed security pays a dividend during this time, the Fund must pay the
amount of the dividend to the broker or lending agent. This amount is shown
as "dividend expense" on the Fund's statement of operations. The Fund is
subject to risk of loss if the broker executing the short sale or the
lending agent were to fail to perform its obligation under the contractual
terms.
Short sales involve the risk that the Fund will incur a loss by
subsequently buying the security at a higher price than the price at which
the Fund previously sold the security short. Short sale transactions result
in off-balance-sheet risk because the ultimate obligation may exceed the
amount shown in the accompanying statement of assets and liabilities.
Because the Fund's loss on a short sale stems from increases in the value
of the security sold short, the extent of such loss, like the price of the
security sold short, is theoretically unlimited. By contrast, a Fund's loss
on a long position arises from decreases in the value of the security held
by the Fund and therefore is limited by the fact that a security's value
cannot drop below zero. A gain, limited to the price at which the Fund sold
the
================================================================================
44 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
security short, or a loss, unlimited in size, will be recognized upon the
termination of a short sale.
The Fund may not always be able to close out a short position at a
particular time or at an acceptable price. The lender of securities sold
short may request that borrowed securities be returned to it on short
notice, and the Fund may have to buy the borrowed securities at an
unfavorable price. If this occurs at a time when other short sellers of the
same security also want to cover their positions, it is more likely that
the Fund will have to cover its short sale at an unfavorable price and
potentially reduce or eliminate any gain, or increase or cause a loss, as a
result of the short sale.
E. REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with
commercial banks or recognized security dealers. These agreements are
collateralized by underlying securities. The collateral obligations are
marked-to-market daily to ensure their value is equal to or in excess of
the repurchase agreement price plus accrued interest and are held by the
Fund, either through its regular custodian or through a special "tri-party"
custodian that maintains separate accounts for both the Fund and its
counterparty, until maturity of the repurchase agreement. Repurchase
agreements are subject to credit risk, and the Fund's Manager monitors the
creditworthiness of sellers with which the Fund may enter into repurchase
agreements.
F. FEDERAL TAXES -- The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its income to its shareholders.
Therefore, no federal income tax provision is required.
G. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income and expense on securities sold short, less foreign
taxes, if any, is recorded on the ex-dividend date. If the ex-dividend
date has passed, certain dividends from foreign securities are recorded
upon notification. Interest income is recorded daily on the accrual basis.
Discounts and premiums are amortized over
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
<PAGE>
================================================================================
the life of the respective securities, using the effective yield method for
long-term securities and the straight-line method for short-term securities.
H. EXPENSES PAID INDIRECTLY -- Through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management purposes, realized
credits, if any, generated from cash balances in the Fund's bank accounts
may be used to directly reduce the Fund's expenses. For the year ended
December 31, 2009, these custodian and other bank credits reduced the
Fund's expenses by less than $500.
I. INDEMNIFICATIONS -- Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
J. USE OF ESTIMATES -- The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $750 million with USAA Capital Corporation (CAPCO), an affiliate of
the Manager. The purpose of the agreement is to meet temporary or emergency cash
needs, including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at a rate per annum equal to
the rate at which CAPCO obtains funding in the capital markets, with no markup.
The USAA funds that are party to the loan agreement are assessed facility fees
by CAPCO based on the funds' assessed proportionate share
================================================================================
46 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
of CAPCO's operating expenses related to obtaining and maintaining CAPCO's
funding programs in total (in no event to exceed 0.13% annually of the amount of
the committed loan agreement). Prior to September 25, 2009, the maximum annual
facility fee was 0.07% of the amount of the committed loan agreement. The
facility fees are allocated among the funds based on their respective average
net assets for the period.
For the year ended December 31, 2009, the Fund paid CAPCO facility fees of
$1,000, which represents 0.4% of the total fees paid to CAPCO by the USAA funds.
The Fund had no borrowings under this agreement during the year ended December
31, 2009.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting resulted in reclassifications to the statement of assets
and liabilities to increase paid-in capital by $2,314,000, increase accumulated
undistributed net investment income by $37,000, and increase accumulated net
realized loss on investments by $2,351,000. This includes differences in the
accounting for dividend distributions, dividend expenses on short sales, and
investments in partnerships. These reclassifications had no effect on net
assets.
The tax character of distributions paid during the years ended December 31,
2009, and 2008, was as follows:
2009 2008
-----------------------------
Ordinary income* $ 898,000 $4,204,000
Long-term realized capital gains 1,297,000 -
* Includes distribution of short-term realized capital gains, if any, which are
taxable as ordinary income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
<PAGE>
================================================================================
As of December 31, 2009, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income $ 914,000
Accumulated capital and other losses 19,002,000
Unrealized depreciation of investments 24,882,000
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales, the
mark-to-market adjustments on certain investments, and the mark-to-market of
open purchased options contracts.
Distributions of net investment income are made quarterly. Distributions of
realized gains from security transactions not offset by capital losses are made
annually in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes. At December 31, 2009, the Fund had a current
post-October loss of $1,284,000 and capital loss carryovers of $17,718,000, for
federal income tax purposes. The post-October loss will be recognized on the
first day of the following fiscal year. If not offset by subsequent capital
gains, the capital loss carryovers will expire in 2017. It is unlikely that the
Trust's Board of Trustees will authorize a distribution of capital gains
realized in the future until the capital loss carryovers have been used or
expire.
The Fund is required to evaluate tax positions taken or expected to be taken in
the course of preparing the Fund's tax returns to determine whether the tax
positions are "more-likely-than-not" of being sustained by the applicable tax
authority. Income tax and related interest and penalties would be recognized by
the Fund as tax expense in the statement of operations if the tax positions were
deemed to not meet the more-likely-than-not threshold. For the year ended
December 31, 2009, the Fund did not incur any income tax, interest, or
penalties. As of December 31, 2009, the Manager has reviewed all open tax years
and concluded that there was no impact to the Fund's net assets or results of
operations. Tax years ended December 31, 2006, through December 31, 2009, remain
subject to examination by the Internal Revenue Service and state taxing
authorities. On an ongoing basis, the Manager will monitor its tax positions to
determine if adjustments to this conclusion are necessary.
================================================================================
48 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the year ended December 31, 2009, were $69,313,000
and $91,217,000, respectively.
As of December 31, 2009, the cost of securities, including short-term
securities, for federal income tax purposes, was $175,729,000.
Gross unrealized appreciation and depreciation of investments as of December 31,
2009, for federal income tax purposes, were $6,831,000 and $31,713,000
respectively, resulting in net unrealized depreciation of $24,882,000.
For the year ended December 31, 2009 transactions in written call and put
options* were as follows:
PREMIUMS
NUMBER OF RECEIVED
CONTRACTS (000'S)
-----------------------------
Outstanding at December 31, 2008 - $ -
Options written 12,911 10,585
Options terminated in closing purchase transactions (7,451) (7,894)
Options expired (3,564) (1,363)
-----------------------------
Outstanding at December 31, 2009 1,896 $ 1,328
=============================
*Refer to Note 1C for a discussion of derivative instruments and how they are
accounted for in the Fund's financial statements.
(5) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES -- The Manager provides investment management services to
the Fund pursuant to an Advisory Agreement. Under this agreement, the
Manager is responsible for managing the business and affairs of the Fund
and for directly managing the day-to-day investment of a portion of the
Fund's assets, subject to the authority of and supervision by the Trust's
Board of Trustees. The Manager also is authorized to select (with approval
of the Trust's Board of Trustees and without shareholder approval) one or
more subadvisers to manage the day-to-day investment of a portion of the
Fund's assets. The Manager
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
<PAGE>
================================================================================
monitors each subadviser's performance through quantitative and qualitative
analysis, and periodically recommends to the Trust's Board of Trustees as
to whether each subadviser's agreement should be renewed, terminated, or
modified. The Manager also is responsible for allocating assets to the
subadvisers. The allocation for each subadviser can range from 0% to 100%
of the Fund's assets, and the Manager can change the allocations without
shareholder approval.
The investment management fee for the Fund is composed of a base fee and a
performance adjustment. The Fund's base is accrued daily and paid monthly
at an annualized rate of 0.65% of the Fund's average net assets for the
fiscal year.
The performance adjustment is calculated monthly by comparing the Fund's
performance to that of the Lipper Flexible Portfolio Funds Index over the
performance period. The Lipper Flexible Portfolio Funds Index tracks the
total return performance of the 30 largest funds in the Lipper Flexible
Funds category. The performance period for the Fund consists of the current
month plus the previous 35 months. The following table is utilized to
determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS(1)
----------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund
and its relevant index, rounded to the nearest 0.01%. Average net assets
are calculated over a rolling 36-month period.
The annual performance adjustment rate is multiplied by the average net
assets of the Fund over the entire performance period, which is then
multiplied by a fraction, the numerator of which is the number of days in
the month and the denominator of which is 365 (366 in leap years). The
resulting amount is the performance adjustment; a positive adjustment in
the case of overperformance, or a negative adjustment in the case of
underperformance.
================================================================================
50 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper Flexible Portfolio Funds Index over that period,
even if the Fund had overall negative returns during the performance period.
For the year ended December 31, 2009, the Fund incurred total management
fees, paid or payable to the Manager, of $828,000, which included a (0.04)%
performance adjustment of $(58,000).
B. SUBADVISORY ARRANGEMENTS -- The Manager has entered into an investment
subadvisory agreements with Deutsche Investment Management Americas Inc.
(DIMA) and Credit Suisse Securities (USA) LLC (CSSU) for its Volaris
Volatility Management Group (Volaris Group), under which DIMA directs the
investment and reinvestment of a portion of the Fund's assets (as allocated
from time to time by the Manager) and the Volaris Group directs the
investment and reinvestment of the portion of the Fund's assets invested in
index options (as allocated from time to time by the Manager).
The Manager (not the Fund) pays DIMA a subadvisory fee in the annual amount
of 0.60% of the portion of the Fund's average daily net assets that DIMA
manages. For the year ended December 31, 2009, the Manager incurred
subadvisory fees, paid or payable to DIMA, of $196,000.
The Manager (not the Fund) pays CSSU's Volaris Group a subadvisory fee
based on the total notional amount of the options contracts that CSSU's
Volaris Group manages in the USAA Balanced Strategy Fund, the USAA
Cornerstone Strategy Fund, the USAA First Start Growth Fund, the USAA
Global Opportunities Fund, and the USAA Total Return Strategy Fund, in an
annual amount of 0.23% on the first $50 million of the total notional
amount; 0.20% on the total notional amount over $50 million and up to $250
million; 0.12% on the total notional amount over $250 million and up to
$500 million; 0.10% on the total notional amount over $500 million and up
to $2 billion; and 0.08% on the total notional amount over $2 billion. The
notional amount is based on the daily closing price of the index that
underlies the written
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
<PAGE>
================================================================================
options strategy for the Fund. For the year ended December 31, 2009, the
Manager incurred subadvisory fees for the Fund, paid or payable to CSSU's
Volaris Group of $101,000.
C. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain
administration and shareholder servicing functions for the Fund. For such
services, the Manager receives a fee accrued daily and paid monthly at an
annualized rate of 0.15% of the Fund's average net assets. For the year
ended December 31, 2009, the Fund incurred administration and servicing
fees, paid or payable to the Manager, of $205,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Trust's Board of Trustees
has approved the reimbursement of a portion of these expenses incurred by
the Manager. For the year ended December 31, 2009, the Fund reimbursed the
Manager $6,000 for these compliance and legal services. These expenses are
included in the professional fees on the Fund's statement of operations.
D. EXPENSE LIMITATION -- The Manager had voluntarily agreed to limit the
annual expenses of the Fund to 1.00% of its average annual net assets,
excluding extraordinary expenses and dividend expense on securities sold
short and before reductions of any expenses paid indirectly, and reimbursed
the Fund for all expenses in excess of that amount. The Manager has
terminated this voluntary agreement effective May 1, 2009. For the year
ended December 31, 2009, the Fund incurred reimbursable expenses of
$187,000.
For the year ended December 31, 2009, the Manager reimbursed the Fund
$8,000 for a loss incurred from the sale of option contracts that were
purchased in excess of what was required to hedge the equity portion of the
Fund's portfolio.
E. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund based on an annual
================================================================================
52 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
charge of $23 per shareholder account plus out-of-pocket expenses. The
Fund also pays SAS fees that are related to the administration and
servicing of accounts that are traded on an omnibus basis. For the year
ended December 31, 2009, the Fund incurred transfer agent's fees, paid or
payable to SAS, of $624,000. Additionally, for the year ended December 31,
2009, the Fund recorded a receivable from SAS for a capital contribution of
less than $500 for adjustments related to corrections to shareholder
accounts. During the year ended December 31, 2009, SAS reimbursed the Fund
$56,000 for corrections in fees paid for the administration and servicing
of certain accounts.
F. UNDERWRITING SERVICES -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) SUBSEQUENT EVENTS
Events or transactions that occur after the balance sheet date but before the
financial statements are issued are categorized as recognized or non-recognized
for financial statement purposes. The Manager has evaluated subsequent events
through February 17, 2010, the date the financial statements were issued, and
has determined there were no events that required recognition or disclosure in
the Fund's financial statements.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
<PAGE>
================================================================================
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------------------
2009 2008 2007 2006 2005*
----------------------------------------------------------------------------
Net asset value at beginning of period $ 7.21 $ 9.37 $ 10.00 $ 9.89 $ 10.00
----------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .03 .13 .13 .39 .15
Net realized and unrealized gain (loss) .85(h) (2.09) .35 .11 (.11)
----------------------------------------------------------------------------
Total from investment operations .88 (1.96) .48 .50 .04
----------------------------------------------------------------------------
Less distributions from:
Net investment income (.03) (.13) (.13) (.39) (.15)
Realized capital gains (.09) (.07) (.98) - -
----------------------------------------------------------------------------
Total distributions (.12) (.20) (1.11) (.39) (.15)
----------------------------------------------------------------------------
Net asset value at end of period $ 7.97 $ 7.21 $ 9.37 $ 10.00 $ 9.89
============================================================================
Total return (%)** 12.25(g),(h) (21.01) 4.70(a) 5.09 .44
Net assets at end of period (000) $149,206 $142,978 $250,714 $293,619 $205,630
Ratios to average net assets:***
Expenses including dividend expense
on securities sold short (%)(b)
Including reimbursements(i) 1.56(g) 1.31 1.12(a) 1.00 1.00(c)
Excluding reimbursements 1.70(g) 1.60 1.31 1.20 1.21(c)
Expenses excluding dividend expense
on securities sold short (%)(b)
Including reimbursements(i) 1.29(g) 1.00 1.00(a) 1.00 1.00(c)
Excluding reimbursements 1.43(g) 1.29 1.19 1.20 1.21(c)
Net investment income (%) .41 1.00 1.22 4.09 1.88(c)
Portfolio turnover (%)(f) 68(d) 384(d) 471(d) 200(e) 443(e)
* Fund commenced operations on January 24, 2005.
** Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return. Total returns for periods less
than one year are not annualized.
*** For the year ended December 31, 2009, average net assets were $136,363,000.
(a) For the year ended December 31, 2007, SAS voluntarily reimbursed the Fund
for a portion of the transfer agent's fees incurred.The reimbursement had
no effect on the Fund's total return or ratio of expenses to average net
assets.
(b) Reflects total operating expenses of the Fund before reductions of any
expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratios by less than 0.01%.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(d) Calculated excluding securities sold short, covers on securities sold
short, and options transactions. The turnover rate for the portion of the
Fund invested in ETFs and bonds was calculated using average daily market
value for the years ended December 31, 2007 and 2008, and calculated using
average monthly market value for the year ended December 31, 2009.
(e) Calculated using average daily market value for the number of months
during which the Fund was invested in long-term securities (ETFs and
bonds), which, for the year ended December 31, 2006, and the period ended
December 31, 2005, were two and seven, respectively.
(f) The Fund's various investment strategies may create a large volume of
purchase and sales transactions relative to the market value of portfolio
investments, which results in portfolio turnover rates exceeding 100%.
(g) During the year ended December 31, 2009, SAS reimbursed the Fund $56,000
for corrections in fees paid for the administration and servicing of
certain accounts. The effect of this reimbursement on the Fund's total
return was less than 0.01%. The reimbursement decreased the Fund's expense
ratios by 0.04%. This decrease is excluded from the expense ratios in the
Financial Highlights table.
(h) For the year ended December 31, 2009, the Manager reimbursed the Fund
$8,000 for a loss incurred from the sale of option contracts purchased in
excess of the amount required to hedge the equity portion of the Fund's
portfolio. The effect of this reimbursement on the Fund's net realized
loss per share and total return was less than 0.01%.
(i) Prior to May 1, 2009, the Manager voluntarily agreed to limit the annual
expenses of the Fund to 1.00% of the Fund's average net assets.
================================================================================
54 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
EXPENSE EXAMPLE
December 31, 2009 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of July 1, 2009, through
December 31, 2009.
ACTUAL EXPENSES
The first line of the table on the next page provides information about actual
account values and actual expenses. You may use the information in this line,
together with the amount you invested at the beginning of the period, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this
================================================================================
EXPENSE EXAMPLE | 55
<PAGE>
================================================================================
information to compare the ongoing costs of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the second line of the table is
useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these direct
costs were included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2009 -
JULY 1, 2009 DECEMBER 31, 2009 DECEMBER 31, 2009
-------------------------------------------------------------------
Actual $1,000.00 $1,119.20 $8.07
Hypothetical
(5% return before expenses) 1,000.00 1,017.59 7.68
* Expenses are equal to the Fund's annualized expense ratio of 1.51%, which is
net of any reimbursements and expenses paid indirectly and includes dividend
expense for securities sold short, multiplied by the average account value
over the period, multiplied by 181 days/365 days (to reflect the one-half-year
period). The Fund's ending account value on the first line in the table is
based on its actual total return of 11.92% for the six-month period of July 1,
2009, through December 31, 2009.
================================================================================
56 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
The Board of Trustees of the Trust consists of six Trustees. These Trustees and
the Trust's Officers supervise the business affairs of the USAA family of funds.
The Board of Trustees is responsible for the general oversight of the funds'
business and for assuring that the funds are managed in the best interests of
each fund's respective shareholders. The Board of Trustees periodically reviews
the funds' investment performance as well as the quality of other services
provided to the funds and their shareholders by each of the fund's service
providers, including USAA Investment Management Company (IMCO) and its
affiliates. The term of office for each Trustee shall be 20 years or until the
Trustee reaches age 70. All members of the Board of Trustees shall be presented
to shareholders for election or re-election, as the case may be, at least once
every five years. Vacancies on the Board of Trustees can be filled by the action
of a majority of the Trustees, provided that at least two-thirds of the Trustees
have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. Each serves on
the Board of Trustees of the USAA family of funds consisting of one registered
investment company offering 46 individual funds as of December 31, 2009. Unless
otherwise indicated, the business address of each is 9800 Fredericksburg Road,
San Antonio, TX 78288.
If you would like more information about the funds' Trustees, you may call
(800)531-USAA (8722) to request a free copy of the funds' statement of
additional information (SAI).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 57
<PAGE>
================================================================================
INTERESTED TRUSTEE(1)
--------------------------------------------------------------------------------
CHRISTOPHER W. CLAUS(2, 4)
Trustee
Born: December 1960
Year of Election or Appointment: 2001
Chair of the Board of Directors, IMCO (11/04-present); President, IMCO
(2/01-10/09); Chief Investment Officer, IMCO (2/07-2/08); Chief Executive
Officer, IMCO (2/01-2/07); Chair of the Board of Directors, USAA Financial
Advisors, Inc. (FAI) (1/07-present); President, FAI (12/07-10/09); President,
Financial Advice and Solutions Group (FASG) USAA (9/09-present); President,
Financial Services Group, USAA (1/07-9/09). Mr. Claus serves as Chair of the
Board of Directors of USAA Investment Corporation, USAA Shareholder Account
Services (SAS), USAA Financial Planning Services Insurance Agency, Inc. (FPS),
and FAI. He also is Vice Chair for USAA Life Insurance Company (USAA Life).
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
BARBARA B. DREEBEN(3, 4, 5, 6)
Trustee
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list management
service. Mrs. Dreeben holds no other directorships of any publicly held
corporations or other investment companies outside the USAA family of funds.
================================================================================
58 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
ROBERT L. MASON, Ph.D.(3, 4, 5, 6)
Trustee
Born: June 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present), which focuses in
the fields of technological research. Dr. Mason holds no other directorships of
any publicly held corporations or other investment companies outside the USAA
family of funds.
BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7)
Trustee
Born: March 1964
Year of Election or Appointment: 2007
Academic Director of the El Paso Corporation Finance Center at Jesse H. Jones
Graduate School of 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). Dr. Ostdiek holds no other directorships of any
publicly held corporations or other investment companies outside the USAA family
of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an organization that
performs business valuations of large companies to include the development of
annual business plans, budgets, and internal financial reporting. Mr. Reimherr
holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 59
<PAGE>
================================================================================
RICHARD A. ZUCKER(2, 3, 4, 5, 6)
Trustee and Chair of the Board of Trustees
Born: July 1943
Year of Election or Appointment: 1992(+)
Vice President, Beldon Roofing Company (7/85-present). Mr. Zucker holds no other
directorships of any publicly held corporations or other investment companies
outside the USAA family of funds.
(1) Indicates the Trustee is an employee of IMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee
(3) Member of Audit Committee
(4) Member of Pricing and Investment Committee
(5) Member of Corporate Governance Committee
(6) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(7) Dr. Ostdiek was appointed the Audit Committee Financial Expert for the
Funds' Board in November 2008.
(+) Mr. Zucker was elected as Chair of the Board in 2005.
================================================================================
60 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
INTERESTED OFFICERS(1)
--------------------------------------------------------------------------------
DANIEL S. McNAMARA
Vice President
Born: June 1966
Year of Appointment: 2009
President and Director, IMCO, FAI, FPS, and SAS (10/09-present); President, Banc
of America Investment Advisors (9/07-9/09); Managing Director, Planning and
Financial Products Group, Bank of America (9/01-9/09).
CLIFFORD A. GLADSON
Vice President
Born: November 1950
Year of Appointment: 2002
Senior Vice President, Fixed Income Investments, IMCO (9/02-present).
Mr. Gladson also serves as a Director for SAS.
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, Equity Investments, IMCO (2/09-present); Managing Director, AIG
Investments (12/00-1/09).
MARK S. HOWARD
Secretary
Born: October 1963
Year of Appointment: 2002
Senior Vice President and Deputy General Counsel, Business & Regulatory
Services, USAA (10/08-present); Senior 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, FAI, and FPS,
and is an Assistant Secretary of USAA, IMCO, and SAS.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 61
<PAGE>
================================================================================
ROBERTO GALINDO, Jr.
Treasurer
Born: November 1960
Year of Appointment: 2000
Assistant Vice President, Portfolio Accounting/Financial Administration, USAA
(12/02-present); Assistant Treasurer, USAA family of funds (7/00-2/08).
CHRISTOPHER P. LAIA
Assistant Secretary
Born: January 1960
Year of Appointment: 2008
Vice President, FASG General Counsel, USAA (10/08-present); Vice President,
Securities Counsel, USAA (6/07-10/08); General Counsel, Secretary, and Partner,
Brown Advisory (6/02-6/07). Mr. Laia also holds the Officer positions of Vice
President and Secretary, IMCO and SAS, and Vice President and Assistant
Secretary, FAI and FPS.
WILLIAM A. SMITH
Assistant Treasurer
Born: June 1948
Year of Appointment: 2009
Vice President, Senior Financial Officer, and Treasurer, FASG, FAI, and SAS
(2/09-present); Senior Financial 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 Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA (9/04-present).
(1) Indicates those Officers who are employees of IMCO or affiliated companies
and are considered "interested persons" under the Investment Company Act
of 1940.
================================================================================
62 | USAA TOTAL RETURN STRATEGY FUND
<PAGE>
================================================================================
TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
Richard A. Zucker
--------------------------------------------------------------------------------
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, AND San Antonio, Texas 78265-9825
DISTRIBUTOR
--------------------------------------------------------------------------------
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
--------------------------------------------------------------------------------
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
--------------------------------------------------------------------------------
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
ACCOUNTING FIRM San Antonio, Texas 78205
--------------------------------------------------------------------------------
MUTUAL FUND Under "Products & Services"
SELF-SERVICE 24/7 click "Investments," then
AT USAA.COM "Mutual Funds"
OR CALL Under "My Accounts" go to
(800) 531-USAA "Investments." View account balances,
(8722) or click "I want to...," and select
the desired action.
--------------------------------------------------------------------------------
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's Web site at HTTP://WWW.SEC.GOV. Information regarding
how the Fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available (i) at USAA.COM; and (ii) on
the SEC's Web site at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's Web site at HTTP://WWW.SEC.GOV. These Forms N-Q also may
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) 732-0330.
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48703-0210 (C)2010, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On September 24, 2009, the Board of Trustees of USAA Mutual Funds Trust approved
a Code of Ethics (Sarbanes Code) applicable solely to its senior financial
officers, including its principal executive officer (President), as defined
under the Sarbanes-Oxley Act of 2002 and implementing regulations of the
Securities and Exchange Commission. A copy of the Sarbanes Code is attached as
an Exhibit to this Form N-CSR.
No waivers (explicit or implicit) have been granted from a provision of the
Sarbanes Code.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
On November 18, 2008, the Board of Trustees of USAA Mutual Funds Trust
designated Dr. Barbara B. Ostdiek, Ph.D. as the Board's audit committee
financial expert. Dr. Ostdiek has served as an Associate Professor of Management
at Rice University since 2001. Dr. Ostdiek also has served as an Academic
Director at El Paso Corporation Finance Center since 2002. Dr. Ostdiek is an
independent trustee who serves as a member of the Audit Committee, Pricing and
Investment Committee and the Corporate Governance Committee of the Board of
Trustees of USAA Mutual Funds Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Mutual Funds Trust, consists of 46 funds in
all. Only 10 funds of the Registrant have a fiscal year-end of December 31 and are
included within this report (the Funds). The aggregate fees accrued or billed by
the Registrant's independent auditor, Ernst & Young LLP, for professional
services rendered for the audit of the Registrant's annual financial statements
and services provided in connection with statutory and regulatory filings by the
Registrant for the Funds for fiscal years ended December 31, 2009 and 2008 were
$262,287 and $244,927, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid to Ernst & Young, LLP
by USAA Shareholder Account Services (SAS) for professional services rendered
for audit related services related to the annual study of internal controls of
the transfer agent for fiscal years ended December 31, 2009 and 2008 were $61,513
and $63,500, respectively. All services were preapproved by the Audit Committee.
(c) TAX FEES. No such fees were billed by Ernst & Young LLP for the review of
federal, state and city income and tax returns and excise tax calculations for
fiscal years ended December 31, 2009 and 2008.
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended December 31, 2009 and 2008.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for December 31, 2009 and 2008 were $104,896 and
$108,000, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2009 and 2008 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
Funds. The Board of Trustees will consider Ernst & Young LLP's independence and
will consider whether the provision of these non-audit services to IMCO is
compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
Item 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 11. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA Mutual
Funds Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. The only change to the
procedures was to document the annual disclosure controls and procedures
established for the new section of the shareholder reports detailing the factors
considering by the Trust's Board in approving the Trust's advisory agreements.
ITEM 12. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUNDS TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Funds Trust (the Trust or the Funds) has adopted this code
of ethics (the Code) to comply with Section 406 of the Sarbanes-Oxley Act of
2002 (the Act) and implementing regulations of the Securities and Exchange
Commission (SEC). The Code applies to the Trust's Principal Executive Officer,
Principal Financial Officer and Principal Accounting Officer (each a Covered
Officer), as detailed in Appendix A.
The purpose of the Code is to promote:
- honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between the Covered
Officers' personal and professional relationships;
- full, fair, accurate, timely and understandable disclosure in
reports and documents that the Trust files with, or submits
to, the SEC and in other public communications made by the
Trust;
- compliance with applicable laws and governmental rules and
regulations;
- prompt internal reporting of violations of the Code to the
Chief Legal Officer of the Trust, the President of the Trust
(if the violation concerns the Treasurer), the CEO of USAA,
and if deemed material to the Funds' financial condition or
reputation, the Chair of the Trust's Board of Trustees; and
- accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically.
B. GENERAL RULE. Covered Officers Should Avoid Actual and Apparent
Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
- use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the
detriment of the Funds and their shareholders;
- cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
- accept gifts, gratuities, entertainment or any other benefit from
any person or entity that does business or is seeking to do
business with the Funds DURING CONTRACT NEGOTIATIONS.
- accept gifts, gratuities, entertainment or any other benefit with
a market value over $100 per person, per year, from or on behalf
of any person or entity that does, or seeks to do, business with
or on behalf of the Funds.
- EXCEPTION. Business-related entertainment such as meals,
and tickets to sporting or theatrical events, which are
infrequent and not lavish are excepted from this
prohibition. Such entertainment must be appropriate as to
time and place, reasonable and customary in nature, modest
in cost and value, incidental to the business, and not so
frequent as to raise any question of impropriety
(Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
- service as a director on the board or an officer of any public or
private company, other than a USAA company or the Trust, must be
approved by the USAA Funds' and Investment Code of Ethics
Committee and reported to the Trust.
- the receipt of any non-nominal (I.E., valued over $25) gifts from
any person or entity with which a Trust has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of
Secretary of the Trust shall be considered the Chief Legal Officer
of the Trust.
- the receipt of any business-related entertainment from any person
or entity with which the Funds have current or prospective
business dealings must be approved in advance by the Chief Legal
Officer unless such entertainment qualifies as Customary Business
Entertainment.
- any ownership interest in, or any consulting or employment
relationship with, any of the Trust's service providers, other
than IMCO or any other USAA company, must be approved by the CEO
of USAA and reported to the Trust's Board.
- any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other
than an interest arising from the Covered Officer's employment,
such as compensation or equity ownership should be approved by the
CEO of USAA and reported to the Trust's Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
- Each Covered Officer should familiarize himself with the
disclosure requirements applicable to the Funds, and the
procedures and policies implemented to promote full, fair,
accurate, timely and understandable disclosure by the Trust.
- Each Covered Officer should not knowingly misrepresent, or
cause others to misrepresent, facts about the Funds to others,
whether within or outside the Funds, including to the Funds'
Trustees and auditors, and to government regulators and
self-regulatory organizations.
- Each Covered Officer should, to the extent appropriate within
his area of responsibility, consult with other officers and
employees of the Funds and IMCO with the goal of promoting
full, fair, accurate, timely and understandable disclosure in
the reports and documents filed by the Trust with, or
submitted to, the SEC, and in other public communications made
by the Funds.
- Each Covered Officer is responsible for promoting compliance
with the standards and restrictions imposed by applicable
laws, rules and regulations, and promoting compliance with the
USAA Funds' and IMCO's operating policies and procedures.
- A Covered Officer should not retaliate against any person
who reports a potential violation of this Code in good faith.
- A Covered Officer should notify the Chief Legal Officer
promptly if he knows of any violation of the Code. Failure
to do so itself is a violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of the Trust
is responsible for applying this Code to specific situations in
which questions are presented under it and has the authority to
interpret the Code in any particular situation. The Chief Legal
Officer should consult, if appropriate, the USAA Funds' outside
counsel or counsel for the Independent Trustees. However, any
approvals or waivers sought by a Covered Officer will be
reported initially to the CEO of USAA and will be considered by
the Trust's Board of Trustees.
B. REQUIRED REPORTS
- EACH COVERED OFFICER MUST:
- Upon adoption of the Code, affirm in writing to the
Board that he has received, read and understands the
Code.
- Annually thereafter affirm to the Chief Legal Officer
that he has complied with the requirements of the Code.
- THE CHIEF LEGAL OFFICER MUST:
- report to the Board about any matter or situation
submitted by a Covered Officer for interpretation under
the Code, and the advice given by the Chief Legal
Officer;
- report annually to the Board and the Corporate
Governance Committee describing any issues that arose
under the Code, or informing the Board and Corporate
Governance Committee that no reportable issues occurred
during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
- INITIAL COMPLAINT. All complaints or other inquiries
concerning potential violations of the Code must be reported
to the Chief Legal Officer. The Chief Legal Officer shall be
responsible for documenting any complaint. The Chief Legal
Officer also will report immediately to the President of the
Trust (if the complaint involves the Treasurer), the CEO of
USAA and the Chair of the Trust's Audit Committee (if the
complaint involves the President) any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints,
the Chief Legal Officer will report quarterly to the Board.
- INVESTIGATIONS. The Chief Legal Officer will take all
appropriate action to investigate any potential violation
unless the CEO of USAA directs another person to undertake
such investigation. The Chief Legal Officer may utilize USAA's
Office of Ethics to do a unified investigation under this Code
and USAA's Code of Conduct. The Chief Legal Officer may direct
the Trust's outside counsel or the counsel to the Independent
Trustees (if any) to participate in any investigation under
this Code.
- STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
- VIOLATIONS OF THE CODE. If after investigation, the Chief
Legal Officer, or other investigating person, believes that a
violation of the Code has occurred, he will report immediately
to the CEO of USAA the nature of the violation, and his
recommendation regarding the materiality of the violation. If,
in the opinion of the investigating person, the violation
could materially affect the Funds' financial condition or
reputation, the Chief Legal Officer also will notify the Chair
of the Trust's Audit Committee. The Chief Legal Officer will
inform, and make a recommendation to, the Board, which will
consider what further action is appropriate. Appropriate
action could include: (1) review of, and modifications to, the
Code or other applicable policies or procedures;
(2) notifications to appropriate personnel of IMCO or USAA;
(3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
- The Board of Trustees understands that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates
USAA's Code of Business Conduct, these procedures do
not limit or restrict USAA's ability to discipline
such Covered Officer under USAA's Code of Business
Conduct. In that event, the Chairman of the Board of
Trustees will report to the Board the action taken by
USAA with respect to a Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of the Trust, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The Investment Code of Ethics (designated to
address 1940 Act and Advisers Act requirements) and IMCO's more detailed
compliance policies and procedures (including its Insider Trading Policy) are
separate requirements applying to Covered Officers and other IMCO employees, and
are not part of this Code. Also, USAA's Code of Conduct imposes separate
requirements on Covered Officers and all employees of USAA, and also is not part
of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the Trust's
Board of Trustees and counsel for the Independent Trustees (if any), the Trust
and its counsel, IMCO, and other personnel of USAA as determined by the Trust's
Chief Legal Officer or the Chair of the Trust's Board of Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003.
Approved and adopted by the Boards of Directors/Trustees of USAA Mutual Fund,
Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free
Trust: June 25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 15,
2005.
Approved and adopted as amended by the Boards of Directors/Trustees of USAA
Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA
State Tax-Free Trust: September 14, 2005.
Approved and adopted as amended by the Board of Trustees of USAA Life Investment
Trust: December 8, 2005.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 16,
2006.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 13, 2006.
Approved and adopted by IMCO's Code of Ethics Committee: August 28, 2007.
Approved and adopted by the Investment Code of Ethics Committee: August 29,
2008.
Approved and adopted as amended by the Board of Trustees of USAA Mutual Funds
Trust: September 19, 2008.
Approved and adopted by the Investment Code of Ethics Committee: August 17,
2009.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 24, 2009.
<PAGE>
APPENDIX A
COVERED OFFICERS
PRESIDENT
TREASURER
<PAGE>
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA MUTUAL FUNDS TRUST, Period Ended December 31, 2009
By:* /s/ CHRISTOPHER P. LAIA
--------------------------------------------------------------
Signature and Title: Christopher P. Laia, Assistant Secretary
Date: 02/26/2010
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
-----------------------------------------------------
Signature and Title: Christopher W. Claus, President
Date: 02/26/2010
------------------------------
By:* /s/ ROBERTO GALINDO, JR.
-----------------------------------------------------
Signature and Title: Roberto Galindo, Jr., Treasurer
Date: 02/26/2010
------------------------------
*Print the name and title of each signing officer under his or her signature.
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