UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/S
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-7852
Exact name of registrant as specified in charter: USAA MUTUAL FUNDS TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: CHRISTOPHER P. LAIA
USAA MUTUAL FUNDS TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: JULY 31,
Date of reporting period: JANUARY 31, 2010
ITEM 1. SEMIANNUAL REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - SEMIANNUAL REPORT FOR PERIOD ENDED JANUARY 31, 2010
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA INCOME STOCK FUND]
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SEMIANNUAL REPORT
USAA INCOME STOCK FUND
FUND SHARES o INSTITUTIONAL SHARES
JANUARY 31, 2010
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FUND OBJECTIVE
CURRENT INCOME WITH THE PROSPECT OF INCREASING DIVIDEND INCOME AND THE POTENTIAL
FOR CAPITAL APPRECIATION.
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TYPES OF INVESTMENTS
Normally invests at least 80% of the Fund's assets in common stocks, with at
least 65% of the Fund's assets normally invested in common stocks of companies
that pay dividends.
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 9
INVESTMENT OVERVIEW 10
FINANCIAL INFORMATION
Portfolio of Investments 16
Notes to Portfolio of Investments 33
Financial Statements 35
Notes to Financial Statements 38
EXPENSE EXAMPLE 55
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
"I EXPECT THIS RECOVERY TO PROCEED AT
A SLOWER PACE THAN THOSE IN RECENT [PHOTO OF DANIEL S. McNAMARA]
MEMORY."
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FEBRUARY 2010
The U.S. economy appears to be on the mend. As the reporting period ended, the
federal government announced that the U.S. gross domestic product grew 5.9%
during the fourth quarter of 2009. The strong showing followed a 2.2% expansion
in the third quarter. While these numbers are encouraging, it is still too early
to declare that a long-term sustainable recovery has begun. Much of the growth
has been the result of inventory reduction, driven largely by the government's
"cash for clunkers" auto rebate program and its first-time homebuyer tax credit.
Consumers took advantage of the incentives to make purchases they might have put
off for a few years, but when the programs ended so did most of the spending.
There are also other obstacles to a sustained recovery. Although housing prices
have stabilized, the residential real estate market is fragile. Unemployment
remains high. Companies are making do with less, delaying hiring, and continuing
to lay off workers. While this may increase productivity and the financial
bottom line of individual businesses, it also acts as a drag on consumer
spending and on the speed at which the economy will return to more historically
normal levels of growth. As a result, I expect this recovery to proceed at a
slower pace than those in recent memory.
Nevertheless, I am cautiously optimistic. Improved economic conditions may give
the Federal Reserve Board (the Fed) the flexibility to pull back at least some
of the stimulus money it pumped into the financial system. Caution is
essential. If the Fed governors unwind the stimulus too soon,
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2 | USAA INCOME STOCK FUND
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they could stall the recovery. An inordinate delay could unleash inflation. At
the very least, the Fed is likely to keep short-term interest rates low until
the recovery is well underway. As I write to you, inflation does not appear to
be an immediate threat because employment remains weak and excess capacity
remains high. As a result, most businesses lack pricing power. However, I am
concerned about the projections for continued deficit spending, which could feed
inflation as the decade progresses.
So, how do we invest in this challenging environment? Money market yields are at
record lows. Bonds have experienced a remarkable rally, but their prices have
moved close to historic norms. Equities, which rebounded from their March 2009
lows, gave back some of their gains toward the end of the reporting period.
Under the circumstances, I plan to keep my guard up and stay focused on my
investment plan. During the market decline, many investors were not
appropriately positioned relative to their time horizon or risk tolerance. With
this in mind, I recently took some time to reflect on my own goals, reconsider
my risk tolerance, make a few changes to my investment strategy, and reposition
my portfolio. I encourage you to do the same. If you would like assistance,
please call one of our trained service representatives. They are available to
help you -- free of charge.
At USAA Investment Management Company, we are proud to provide you with what we
consider an exceptional value -- outstanding service, world-class investment
talent, and a broad array of 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. o As interest rates rise, bond prices fall.
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PRESIDENT'S MESSAGE | 3
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MANAGERS' COMMENTARY ON THE FUND
Grantham, Mayo, Van Otterloo & Co. LLC Epoch
SAM WILDERMAN, CFA DAVID N. PEARL
MICHAEL A. WELHOELTER, CFA
OFI Institutional Asset Management, Inc. WILLIAM W. PRIEST, CFA, CPA
DAVID SCHMIDT, CFA
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o HOW DID THE USAA INCOME STOCK FUND (THE FUND SHARES) PERFORM?
For the six-month period ended January 31, 2010, the Fund Shares had a total
return of 9.89%. This compares to returns of 10.70% for the Russell 1000 Value
Index (the Index) and 9.96% for the Lipper Equity Income Funds Index.
The Fund's Board of Trustees hired a new subadviser, Epoch Investment
Partners, Inc. (Epoch), replacing OFI Institutional Asset Management, Inc.
(OFII) for a portion of the Fund's assets. Epoch began managing assets on
January 11, 2010. Grantham, Mayo, Van Otterloo & Co. LLC (GMO) continues to
serve as the Fund's other co-subadviser.
o HOW DID THE GMO PORTION OF THE FUND PERFORM?
For the six months, we slightly lagged the Russell 1000 Value Index. However,
since the start of the recession in December 2007, the GMO portion has
significantly outperformed the Index, largely due
Refer to page 11 for benchmark definitions.
Past performance is no guarantee of future results.
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4 | USAA INCOME STOCK FUND
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to the defensive positioning of the portfolio in high-quality stocks, which
helped preserve capital.
For the reporting period, sector allocation added modestly to Index-relative
returns, while stock selection detracted. An overweight position in health
care helped, led by holdings in Pfizer, Inc. and WellPoint, Inc. An
underweight stance in telecommunications services was also positive, as was a
below-market weighting in utilities, where we didn't hold laggards Exelon or
FPL Group.
Sectors that most detracted from performance included industrials, where we
were underweight, and information technology, where we were overweight. Our
below-market holdings in General Electric Co. and Burlington Northern Santa Fe
were the major detractors among industrials, while our overweights to
QUALCOMM, Inc., Oracle Corp., and Cisco Systems, Inc. detracted most in
technology.
In terms of the three major tools that drive the GMO process, our quality tool
detracted, intrinsic valuation was positive, and momentum detracted. However,
we believe each of these tools is well prepared for the stock-picker's market
that we anticipate will replace the risk-driven, low-quality market that
dominated for most of 2009.
o WHAT'S GMO'S OUTLOOK?
Quality stocks -- those with strong balance sheets and sustainable earnings
power -- are still trading at a steep discount when compared to the rest of
the market. In GMO's view, the recovery will likely be volatile yet muted.
After last year's risk rally, investors are taking a closer look at companies
that can deliver earnings through stable revenue growth, not simply via cost
cutting. We are well positioned for such an environment, and look forward to
helping shareholders achieve strong, risk-adjusted returns for many years to
come.
You will find a complete list of securities that the Fund owns on pages 16-32.
Burlington Northern Santa Fe was sold out of the Fund prior to January 31,
2010.
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MANAGERS' COMMENTARY ON THE FUND | 5
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o PLEASE DESCRIBE EPOCH'S INVESTMENT PHILOSOPHY.
At Epoch, we desire to produce superior risk-adjusted returns by building a
portfolio of businesses with outstanding risk/reward profiles. We analyze a
business in the same manner a private investor would in looking to purchase
the entire company. We invest in those businesses we understand and where we
have confidence in the company's management and financial strength. Emphasis
is placed on those companies we believe are most likely to prosper under
various economic conditions. We may sell or reduce a position in a security
that otherwise meets its objectives but is deemed less attractive relative to
another security on a return/risk basis. We also will sell or reduce a
position in a security when we see the objectives of its investment thesis
failing to materialize or when we believe those objectives have been met and
the valuation of the company's shares fully reflect the opportunities once
thought unrecognized in the share price.
Our security selection process is focused on free-cash-flow metrics as opposed
to traditional accounting-based metrics, such as price-to-earnings ratios or
price-to-book values. We seek to understand the reliability of the cash flow
stream, and determine what we would do with it if we owned the company. We
look for companies run by management teams who are committed to intelligently
deploying that free cash flow to enhance future growth through acquisitions or
reinvestment in the business, or giving it back to shareholders in the form of
dividends, cash buy-backs, or debt reduction.
o HOW IS THE EPOCH PORTION POSITIONED?
We have a very significant overweight in information technology, especially in
business service-oriented companies such as Western Union Co., Visa, Inc. "A",
Oracle Corp., and Microsoft Corp., which we expect to benefit as business
investment selectively re-emerges. We continue to own Apple, Inc. and have
recently purchased Corning Inc., which produces LCD glass, which is used in
LCD TVs, notebook PCs, and desktop monitors. We have more modest overweight
positions
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6 | USAA INCOME STOCK FUND
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in health care, holding Aetna Inc., kidney dialysis provider DaVita Inc., and
Lab Corp., the second largest independent clinical laboratory company in the
United States, which is creating cutting-edge tests to help accurately
forecast diseases earlier.
o MANY OF THESE STOCKS ARE NOT IN THE RUSSELL 1000 VALUE INDEX.
As we mentioned earlier, our view of value is primarily based on free cash
flow generation and profitability -- we look at price-to-free cash flow. All
investment decisions are based on fundamental analysis of each company.
In terms of sectors where we're underweight relative to the Index, energy
stands out, although we do have exposure to Diamond Offshore Drilling, Inc.,
National-Oilwell Varco, Inc., Weatherford International Ltd., and Cameron
International Corp. in the service area, as well as Exxon Mobil Corp.,
ConocoPhillips, and Anadarko Petroleum Corp. among the producers. In
financials, we continue to avoid the large commercial banks, but have exposure
to life insurers, reinsurers, and some asset managers. We have no exposure to
telecom, preferring cable. Finally, we've been very hesitant on the consumer
discretionary sector, leading us to be underweight in consumer discretionary
stocks. We did, however, recently add TJX Companies, Inc. and continue to hold
International Game Technology.
o WHAT'S EPOCH'S MARKET OUTLOOK?
We think we're witnessing a return of profitability, with muted demand growth
as the recession draws to an end. This calls for a cautious approach. We
expect that there will be significant differentiation among companies moving
forward, creating a good backdrop for our bottom-up stock selection
capabilities to distinguish winners from losers. We appreciate the privilege
we've been given to serve USAA members in the Fund.
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MANAGERS' COMMENTARY ON THE FUND | 7
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o HOW DID THE PORTION OF THE FUND MANAGED BY OFII PERFORM?
We slightly lagged the Russell 1000 Value Index for the full six-month period.
The biggest detractor relative to the Index came from the consumer
discretionary sector, where Penske Automotive Group, Inc., Lowe's Companies,
Inc., and J.C. Penney Company, Inc. underperformed on a relative basis. In
each of these stocks, investors took profits after run-ups even though the
companies' earnings outlooks were increasing. Two other sectors that detracted
to a lesser degree were telecommunications services, where SprintNextel was
the major culprit, and energy, where our holdings in Halliburton and Valero
disappointed.
Materials was the best sector in our portion of the Fund, led by Huntsman
Corp., a small chemical company, paper company MeadWestvaco, and U.S. Steel
Corp. We also did well in health care, led by Humana, Inc., the large HMO;
AmerisourceBergen Corp., a wholesale pharmaceutical distributor, and; Boston
Scientific Corp., a maker of minimally invasive medical supplies. Industrials
was another sector where we outperformed the Index, led by R.R. Donnelley &
Sons Co. and good trading decisions within our ongoing exposure to General
Electric Co.
R.R. Donnelley & Sons Co. was sold out of the Fund prior to January 31, 2010.
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8 | USAA INCOME STOCK FUND
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FUND RECOGNITION
USAA INCOME STOCK FUND SHARES
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LIPPER LEADER (OVERALL)
[5]
EXPENSE
The Income Stock Fund Shares are listed as a Lipper Leader for Expense of 94
funds within the Lipper Equity Income Funds category for the overall period
ended January 31, 2010. The Fund Shares received a Lipper Leader rating for
Expense among 94, 74, and 48 funds for the three-, five-, and 10-year periods,
respectively. Lipper ratings for Expense reflect funds' expense minimization
relative to peers with similar load structures as of January 31, 2010.
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Ratings are subject to change every month and are based on an equal-weighted
average of percentile ranks for the 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 INCOME STOCK FUND SHARES (Symbol: USISX)
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1/31/10 7/31/09
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Net Assets $1,248.9 Million $1,190.3 Million
Net Asset Value Per Share $10.38 $9.53
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AVERAGE ANNUAL TOTAL RETURNS AS OF 1/31/10
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7/31/09 to 1/31/10* 1 Year 5 Years 10 Years
9.89% 25.68% -1.92% 1.02%
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EXPENSE RATIO**
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0.89%
*Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT
USAA.COM.
**THE EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING EXPENSES, BEFORE
REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY ACQUIRED FUND FEES
AND EXPENSES, AS REPORTED IN THE FUND SHARES' PROSPECTUS DATED DECEMBER 1, 2009,
AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. THIS EXPENSE RATIO MAY
DIFFER FROM THE EXPENSE RATIO DISCLOSED IN THE FINANCIAL HIGHLIGHTS.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions. 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 INCOME STOCK FUND
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
RUSSELL 1000 LIPPER EQUITY USAA INCOME
VALUE INDEX INCOME FUNDS INDEX STOCK FUND SHARES
1/31/2000 $10,000.00 $10,000.00 $10,000.00
2/29/2000 9,257.04 9,437.02 9,220.55
3/31/2000 10,386.52 10,310.16 10,387.52
4/30/2000 10,265.66 10,231.96 10,352.61
5/31/2000 10,373.89 10,386.65 10,690.13
6/30/2000 9,899.77 10,163.14 10,351.47
7/31/2000 10,023.75 10,222.02 10,339.74
8/31/2000 10,581.49 10,821.53 10,891.03
9/30/2000 10,678.38 10,797.50 10,818.73
10/31/2000 10,940.68 11,024.57 11,061.98
11/30/2000 10,534.58 10,637.05 10,824.81
12/31/2000 11,062.36 11,169.91 11,408.62
1/31/2001 11,104.91 11,262.26 11,402.50
2/28/2001 10,796.11 10,886.58 11,126.93
3/31/2001 10,414.61 10,488.32 10,956.54
4/30/2001 10,925.36 11,033.12 11,486.50
5/31/2001 11,170.78 11,224.68 11,714.50
6/30/2001 10,923.02 10,945.98 11,271.11
7/31/2001 10,899.80 10,934.08 11,432.31
8/31/2001 10,463.21 10,573.17 11,097.52
9/30/2001 9,726.79 9,844.79 10,337.17
10/31/2001 9,643.08 9,895.31 10,212.32
11/30/2001 10,203.69 10,406.01 10,649.28
12/31/2001 10,444.02 10,588.87 10,932.05
1/31/2002 10,363.55 10,484.97 10,828.12
2/28/2002 10,380.19 10,500.40 10,867.10
3/31/2002 10,871.28 10,898.32 11,335.18
4/30/2002 10,498.44 10,526.94 10,949.94
5/31/2002 10,551.07 10,535.99 11,034.83
6/30/2002 9,945.26 9,874.91 10,354.45
7/31/2002 9,020.76 9,081.88 9,377.37
8/31/2002 9,088.87 9,149.00 9,331.46
9/30/2002 8,078.29 8,196.79 8,270.50
10/31/2002 8,676.78 8,693.46 8,632.95
11/30/2002 9,223.40 9,192.20 9,153.56
12/31/2002 8,822.78 8,848.75 8,854.85
1/31/2003 8,609.19 8,602.49 8,589.99
2/28/2003 8,379.67 8,389.93 8,389.56
3/31/2003 8,393.58 8,401.97 8,356.33
4/30/2003 9,132.42 9,045.51 8,910.53
5/31/2003 9,721.92 9,588.65 9,443.15
6/30/2003 9,843.48 9,688.88 9,533.48
7/31/2003 9,990.05 9,796.99 9,497.34
8/31/2003 10,145.72 9,942.56 9,663.58
9/30/2003 10,046.74 9,875.81 9,663.71
10/31/2003 10,661.58 10,367.78 10,288.11
11/30/2003 10,806.22 10,497.08 10,491.40
12/31/2003 11,472.30 11,133.98 11,136.26
1/31/2004 11,674.04 11,306.99 11,406.10
2/29/2004 11,924.24 11,521.05 11,588.42
3/31/2004 11,819.86 11,390.51 11,484.48
4/30/2004 11,530.99 11,199.43 11,177.06
5/31/2004 11,648.59 11,271.11 11,191.70
6/30/2004 11,923.82 11,528.87 11,468.63
7/31/2004 11,755.87 11,284.52 11,248.22
8/31/2004 11,923.05 11,399.39 11,395.16
9/30/2004 12,107.87 11,563.42 11,523.03
10/31/2004 12,309.14 11,690.48 11,515.65
11/30/2004 12,931.47 12,213.49 12,128.34
12/31/2004 13,364.51 12,583.72 12,475.05
1/31/2005 13,127.28 12,356.32 12,190.50
2/28/2005 13,562.34 12,721.02 12,609.83
3/31/2005 13,376.24 12,524.66 12,326.55
4/30/2005 13,136.67 12,295.00 12,017.63
5/31/2005 13,452.90 12,584.76 12,484.77
6/30/2005 13,600.19 12,692.11 12,722.73
7/31/2005 13,993.68 13,100.02 13,139.00
8/31/2005 13,932.82 13,024.46 12,972.49
9/30/2005 14,128.44 13,126.94 13,069.89
10/31/2005 13,769.61 12,869.19 12,765.76
11/30/2005 14,222.25 13,251.41 13,130.71
12/31/2005 14,307.21 13,314.15 13,197.21
1/31/2006 14,862.87 13,730.81 13,709.47
2/28/2006 14,953.59 13,792.83 13,770.24
3/31/2006 15,156.18 13,963.65 13,895.65
4/30/2006 15,541.33 14,272.19 14,157.17
5/31/2006 15,148.75 13,906.21 13,712.58
6/30/2006 15,245.66 13,955.30 13,793.15
7/31/2006 15,616.18 14,136.71 14,108.42
8/31/2006 15,877.56 14,408.35 14,371.15
9/30/2006 16,194.06 14,713.54 14,718.79
10/31/2006 16,724.14 15,183.59 15,140.83
11/30/2006 17,105.93 15,479.02 15,378.23
12/31/2006 17,489.91 15,764.21 15,705.77
1/31/2007 17,713.59 15,976.12 15,919.77
2/28/2007 17,437.44 15,793.85 15,566.21
3/31/2007 17,707.03 15,971.00 15,735.79
4/30/2007 18,361.35 16,636.13 16,324.48
5/31/2007 19,023.63 17,229.26 16,894.48
6/30/2007 18,579.12 16,942.40 16,485.12
7/31/2007 17,719.95 16,292.24 15,621.93
8/31/2007 17,918.51 16,469.14 15,800.20
9/30/2007 18,533.97 16,954.19 16,240.33
10/31/2007 18,536.02 17,137.63 16,193.20
11/30/2007 17,630.09 16,381.97 15,326.04
12/31/2007 17,459.61 16,233.51 15,186.54
1/31/2008 16,760.30 15,494.72 14,594.99
2/29/2008 16,058.08 14,991.19 13,942.25
3/31/2008 15,937.34 14,841.26 13,750.34
4/30/2008 16,714.21 15,514.69 14,375.82
5/31/2008 16,687.68 15,653.40 14,324.55
6/30/2008 15,090.32 14,248.12 12,960.57
7/31/2008 15,035.84 14,140.01 12,919.33
8/31/2008 15,291.27 14,293.15 13,156.47
9/30/2008 14,167.80 13,163.96 12,303.37
10/31/2008 11,715.18 11,015.11 10,197.48
11/30/2008 10,875.09 10,275.99 9,564.68
12/31/2008 11,026.04 10,486.30 9,776.43
1/31/2009 9,758.16 9,539.56 8,804.02
2/28/2009 8,454.37 8,489.52 7,706.13
3/31/2009 9,177.24 9,183.71 8,263.57
4/30/2009 10,160.97 10,053.63 8,979.39
5/31/2009 10,789.28 10,647.25 9,432.05
6/30/2009 10,709.61 10,626.00 9,370.55
7/31/2009 11,586.20 11,433.55 10,068.58
8/31/2009 12,192.22 11,943.41 10,491.63
9/30/2009 12,663.28 12,300.69 10,818.68
10/31/2009 12,275.72 12,101.22 10,616.96
11/30/2009 12,967.62 12,743.63 11,179.66
12/31/2009 13,197.10 12,987.68 11,395.03
1/31/2010 12,825.95 12,572.32 11,064.58
[END CHART]
Data from 1/31/00 to 1/31/10.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Stock Fund Shares to the following benchmarks:
o The unmanaged Russell 1000(R) Value Index measures the performance of those
Russell 1000 companies with lower price-to-book ratios and lower forecasted
growth values.
o The unmanaged Lipper Equity Income Funds Index tracks the total return
performance of the 30 largest funds within the Lipper Equity Income Funds
category.
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.
Indexes are unmanaged and you cannot invest directly in an index.
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INVESTMENT OVERVIEW | 11
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USAA INCOME STOCK FUND INSTITUTIONAL SHARES*
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1/31/10 7/31/09
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Net Assets $62.4 Million $34.2 Million
Net Asset Value Per Share $10.37 $9.52
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AVERAGE ANNUAL TOTAL RETURN AS OF 1/31/10
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7/31/09 to 1/31/10** 1 Year Since Inception 8/01/08
9.88% 25.85% -9.50%
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EXPENSE RATIO***
--------------------------------------------------------------------------------
Before Reimbursement 0.64% After Reimbursement 0.62%
*The USAA Income Stock Fund Institutional Shares (Institutional Shares)
commenced operations on August 1, 2008, and are not offered for sale directly to
the general public. The Institutional Shares are available only to the USAA
Target Retirement Funds.
**Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF
FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE
DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO
THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
***THE BEFORE REIMBURSEMENT EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING
EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY
ACQUIRED FUND FEES AND EXPENSES, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE
NET ASSETS. THE AFTER REIMBURSEMENT EXPENSE RATIO REPRESENTS TOTAL ANNUAL
OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND
EXCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AFTER REIMBURSEMENT FROM USAA
INVESTMENT MANAGEMENT COMPANY (IMCO). BEFORE AND AFTER REIMBURSEMENT EXPENSE
RATIOS ARE REPORTED IN THE INSTITUTIONAL SHARES' PROSPECTUS DATED DECEMBER 1,
2009. IMCO HAS AGREED, THROUGH DECEMBER 1, 2010, TO MAKE PAYMENTS OR WAIVE
MANAGEMENT, ADMINISTRATION, AND OTHER FEES TO LIMIT THE EXPENSES OF THE
INSTITUTIONAL SHARES SO THAT THE TOTAL ANNUAL OPERATING EXPENSES OF THE
INSTITUTIONAL SHARES (EXCLUSIVE OF COMMISSION RECAPTURE, EXPENSE OFFSET
ARRANGEMENTS, ACQUIRED FUND FEES AND EXPENSES, AND EXTRAORDINARY EXPENSES) DO
NOT EXCEED AN ANNUAL RATE OF 0.62% OF THE INSTITUTIONAL SHARES' AVERAGE DAILY
NET ASSETS. THIS REIMBURSEMENT ARRANGEMENT MAY NOT BE CHANGED OR TERMINATED
DURING THIS TIME PERIOD WITHOUT APPROVAL OF THE FUND'S BOARD OF TRUSTEES AND MAY
BE CHANGED OR TERMINATED BY IMCO AT ANY TIME AFTER DECEMBER 1, 2010. THESE
EXPENSE RATIOS MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL
HIGHLIGHTS.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions. The total
return quoted does 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.
================================================================================
12 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER EQUITY USAA INCOME STOCK FUND RUSSELL 1000
INCOME FUNDS INDEX INSTITUTIONAL SHARES VALUE INDEX
7/31/2008 $10,000.00 $10,000.00 $10,000.00
8/31/2008 10,108.31 10,208.00 10,169.88
9/30/2008 9,309.73 9,549.79 9,422.68
10/31/2008 7,790.03 7,915.22 7,791.50
11/30/2008 7,267.31 7,424.04 7,232.78
12/31/2008 7,416.05 7,586.24 7,333.17
1/31/2009 6,746.50 6,838.98 6,489.93
2/28/2009 6,003.90 5,986.14 5,622.81
3/31/2009 6,494.84 6,424.15 6,103.58
4/30/2009 7,110.06 6,972.46 6,757.83
5/31/2009 7,529.88 7,332.54 7,175.71
6/30/2009 7,514.85 7,281.29 7,122.72
7/31/2009 8,085.95 7,832.53 7,705.72
8/31/2009 8,446.54 8,153.40 8,108.77
9/30/2009 8,699.21 8,412.89 8,422.06
10/31/2009 8,558.14 8,264.14 8,164.31
11/30/2009 9,012.47 8,702.14 8,624.47
12/31/2009 9,185.06 8,872.17 8,777.09
1/31/2010 8,891.31 8,606.58 8,530.25
[END CHART]
*Data from 7/31/08 to 1/31/10.
See page 11 for benchmark definitions.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Stock Fund Institutional Shares to the benchmarks.
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 Equity Income Funds Index and the Russell 1000
Value Index is calculated from the end of the month, July 31, 2008, while the
Institutional Shares' inception date is August 1, 2008. There may be a slight
variation of performance numbers because of this difference.
================================================================================
INVESTMENT OVERVIEW | 13
<PAGE>
================================================================================
TOP 10 EQUITY HOLDINGS
AS OF 1/31/10
(% of Net Assets of the Fund)
Exxon Mobil Corp. ............................................. 5.5%
Pfizer, Inc. .................................................. 3.6%
ConocoPhillips ................................................ 2.5%
Microsoft Corp. ............................................... 2.5%
UnitedHealth Group, Inc. ...................................... 2.4%
Chevron Corp. ................................................. 2.2%
Oracle Corp. .................................................. 1.9%
Johnson & Johnson.............................................. 1.7%
WellPoint, Inc. ............................................... 1.4%
Merck & Co., Inc. ............................................. 1.3%
You will find a complete list of securities that the Fund owns on pages 16-32.
================================================================================
14 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
o SECTOR ASSET ALLOCATION* -- 1/31/2010 o
[PIE CHART OF SECTOR ASSET ALLOCATION]
FINANCIALS 18.0%
HEALTH CARE 17.2%
ENERGY 16.1%
INFORMATION TECHNOLOGY 14.6%
CONSUMER STAPLES 8.1%
INDUSTRIALS 7.7%
CONSUMER DISCRETIONARY 7.6%
MATERIALS 3.8%
UTILITIES 2.5%
TELECOMMUNICATION SERVICES 2.2%
MONEY MARKET INSTRUMENTS 2.6%
[END CHART]
*Excludes short-term investments purchased with cash collateral from securities
loaned.
Percentages are of the net assets of the Fund and may not equal 100%.
================================================================================
INVESTMENT OVERVIEW | 15
<PAGE>
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2010 (unaudited)
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
COMMON STOCKS (97.8%)
CONSUMER DISCRETIONARY (7.6%)
-----------------------------
ADVERTISING (0.1%)
16,200 Clear Channel Outdoor Holdings, Inc. "A"* $ 165
166,000 Interpublic Group of Companies, Inc.* 1,072
----------
1,237
----------
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
15,100 Columbia Sportswear Co. 625
49,000 Jones Apparel Group, Inc. 708
18,000 Phillips-Van Heusen Corp. 707
----------
2,040
----------
APPAREL RETAIL (0.7%)
24,800 AnnTaylor Stores Corp.* 311
77,600 Gap, Inc. 1,481
97,100 Limited Brands, Inc. 1,847
145,067 TJX Companies, Inc. 5,514
----------
9,153
----------
AUTO PARTS & EQUIPMENT (0.3%)
38,800 Autoliv, Inc. 1,661
67,500 Johnson Controls, Inc. 1,879
----------
3,540
----------
AUTOMOBILE MANUFACTURERS (0.1%)
96,000 Ford Motor Co.* 1,041
----------
AUTOMOTIVE RETAIL (0.2%)
72,100 AutoNation, Inc.*(a) 1,298
114,301 Penske Automotive Group, Inc.* 1,607
----------
2,905
----------
BROADCASTING (0.7%)
223,000 CBS Corp. "B" 2,884
380,600 Comcast Corp. "A" 5,762
----------
8,646
----------
CABLE & SATELLITE (0.4%)
23,600 Comcast Corp. "A" 373
43,600 DISH Network Corp. "A" 796
================================================================================
16 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
86,000 Liberty Global, Inc. "A"* $ 2,183
102,600 Virgin Media, Inc.(a) 1,456
----------
4,808
----------
CASINOS & GAMING (0.4%)
259,550 International Game Technology 4,760
32,000 Penn National Gaming, Inc.* 863
----------
5,623
----------
CATALOG RETAIL (0.1%)
124,400 Liberty Media Corp. Interactive "A"* 1,291
----------
COMPUTER & ELECTRONICS RETAIL (0.1%)
28,100 RadioShack Corp. 548
20,400 Rent-A-Center, Inc.* 408
----------
956
----------
DEPARTMENT STORES (0.7%)
137,800 J.C. Penney Co., Inc. 3,422
205,300 Macy's, Inc. 3,270
23,600 Sears Holdings Corp.*(a) 2,201
----------
8,893
----------
DISTRIBUTORS (0.1%)
54,280 Genuine Parts Co. 2,045
----------
GENERAL MERCHANDISE STORES (0.0%)
8,700 Target Corp. 446
----------
HOME FURNISHINGS (0.2%)
84,600 Leggett & Platt, Inc. 1,545
20,500 Mohawk Industries, Inc.* 849
----------
2,394
----------
HOME IMPROVEMENT RETAIL (0.9%)
284,400 Home Depot, Inc. 7,966
104,900 Lowe's Companies, Inc. 2,271
18,000 Sherwin-Williams Co. 1,140
----------
11,377
----------
HOMEBUILDING (0.0%)
284 NVR, Inc.* 194
19,100 Pulte Homes, Inc.* 201
----------
395
----------
HOMEFURNISHING RETAIL (0.1%)
69,900 Williams-Sonoma, Inc. 1,327
----------
HOTELS, RESORTS, & CRUISE LINES (0.0%)
2,200 Starwood Hotels & Resorts Worldwide, Inc. 73
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 17
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
HOUSEHOLD APPLIANCES (0.3%)
19,900 Black & Decker Corp. $ 1,287
15,100 Stanley Works 774
20,900 Whirlpool Corp. 1,571
----------
3,632
----------
HOUSEWARES & SPECIALTIES (0.2%)
17,400 Fortune Brands, Inc. 723
53,900 Jarden Corp. 1,643
13,300 Newell Rubbermaid, Inc. 181
----------
2,547
----------
MOTORCYCLE MANUFACTURERS (0.1%)
63,100 Harley-Davidson, Inc. 1,435
----------
MOVIES & ENTERTAINMENT (1.4%)
5,427 AOL, Inc.* 130
24,600 DreamWorks Animation SKG, Inc. "A"* 958
40,100 Liberty Media Corp. - Capital "A"* 1,038
314,300 News Corp. "A" 3,963
176,933 Time Warner, Inc. 4,857
208,800 Viacom, Inc. "B"* 6,085
39,300 Walt Disney Co. 1,161
----------
18,192
----------
PUBLISHING (0.2%)
130,300 Gannett Co., Inc. 2,105
20,700 Meredith Corp. 641
28,800 New York Times Co. "A"* 372
----------
3,118
----------
RESTAURANTS (0.1%)
17,900 McDonald's Corp. 1,117
----------
SPECIALIZED CONSUMER SERVICES (0.1%)
50,700 Service Corp. International 389
16,700 Weight Watchers International, Inc. 482
----------
871
----------
SPECIALTY STORES (0.0%)
14,400 Office Depot, Inc.* 82
----------
Total Consumer Discretionary 99,184
----------
CONSUMER STAPLES (8.1%)
-----------------------
AGRICULTURAL PRODUCTS (0.3%)
81,000 Archer-Daniels-Midland Co. 2,427
24,300 Bunge Ltd. 1,429
----------
3,856
----------
================================================================================
18 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
DRUG RETAIL (0.7%)
255,800 Walgreen Co. $ 9,221
----------
FOOD RETAIL (0.3%)
57,700 Safeway, Inc. 1,295
134,042 SUPERVALU, Inc. 1,972
----------
3,267
----------
HOUSEHOLD PRODUCTS (1.8%)
29,300 Clorox Co. 1,734
104,450 Colgate-Palmolive Co. 8,359
22,400 Kimberly-Clark Corp. 1,330
204,300 Procter & Gamble Co. 12,575
----------
23,998
----------
HYPERMARKETS & SUPER CENTERS (1.0%)
255,900 Wal-Mart Stores, Inc. 13,673
----------
PACKAGED FOODS & MEAT (1.4%)
28,100 ConAgra Foods, Inc. 639
72,900 Del Monte Foods Co. 830
36,500 General Mills, Inc. 2,603
27,900 Hershey Co. 1,016
16,100 Hormel Foods Corp. 623
297,679 Kraft Foods, Inc. "A" 8,234
11,600 Ralcorp Holdings, Inc.* 717
85,200 Smithfield Foods, Inc.* 1,283
3,100 TreeHouse Foods, Inc.* 120
194,800 Tyson Foods, Inc. "A" 2,692
----------
18,757
----------
SOFT DRINKS (1.8%)
277,800 Coca-Cola Co. 15,071
72,900 Coca-Cola Enterprises, Inc. 1,472
123,400 PepsiCo, Inc. 7,357
----------
23,900
----------
TOBACCO (0.8%)
143,900 Altria Group, Inc. 2,858
160,500 Philip Morris International, Inc. 7,304
----------
10,162
----------
Total Consumer Staples 106,834
----------
ENERGY (16.1%)
--------------
COAL & CONSUMABLE FUELS (0.1%)
33,200 Arch Coal, Inc. 699
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
INTEGRATED OIL & GAS (11.0%)
394,001 Chevron Corp. $ 28,415
681,977 ConocoPhillips 32,735
1,116,050 Exxon Mobil Corp. 71,907
169,100 Marathon Oil Corp. 5,041
17,700 Murphy Oil Corp. 904
59,800 Occidental Petroleum Corp. 4,685
69,100 SandRidge Energy, Inc.* 585
----------
144,272
----------
OIL & GAS DRILLING (0.6%)
54,850 Diamond Offshore Drilling, Inc. 5,020
85,100 Nabors Industries Ltd.* 1,898
36,300 Patterson-UTI Energy, Inc. 557
6,700 Rowan Companies, Inc.* 144
23,400 Unit Corp.* 1,066
----------
8,685
----------
OIL & GAS EQUIPMENT & SERVICES (1.9%)
36,500 Baker Hughes, Inc. 1,653
83,800 BJ Services Co. 1,732
71,500 Cameron International Corp.* 2,693
30,500 Global Industries Ltd.* 213
110,200 Halliburton Co. 3,219
32,000 Helix Energy Solutions Group, Inc.* 339
149,950 National-Oilwell Varco, Inc. 6,133
69,100 Oil States International, Inc.* 2,546
35,000 Schlumberger Ltd. 2,221
34,800 Superior Energy Services, Inc.* 799
19,600 Tidewater, Inc. 918
171,450 Weatherford International Ltd.* 2,688
----------
25,154
----------
OIL & GAS EXPLORATION & PRODUCTION (1.5%)
94,650 Anadarko Petroleum Corp. 6,037
50,850 Apache Corp. 5,022
54,500 Chesapeake Energy Corp. 1,350
18,100 Cimarex Energy Co. 891
48,400 Denbury Resources, Inc.* 656
33,100 Newfield Exploration Co.* 1,620
20,700 Noble Energy, Inc. 1,531
23,500 Pioneer Natural Resources Co. 1,033
10,500 Whiting Petroleum Corp.* 699
24,200 XTO Energy, Inc. 1,079
----------
19,918
----------
================================================================================
20 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
OIL & GAS REFINING & MARKETING (0.5%)
70,800 Sunoco, Inc. $ 1,776
232,000 Valero Energy Corp. 4,274
37,700 Western Refining, Inc.*(a) 172
----------
6,222
----------
OIL & GAS STORAGE & TRANSPORTATION (0.5%)
156,200 El Paso Corp. 1,585
32,200 Frontline Ltd.(a) 968
8,900 Overseas Shipholding Group, Inc. 397
45,300 Spectra Energy Corp. 963
137,300 Williams Companies, Inc. 2,861
----------
6,774
----------
Total Energy 211,724
----------
FINANCIALS (18.0%)
------------------
ASSET MANAGEMENT & CUSTODY BANKS (2.2%)
252,300 Ameriprise Financial, Inc. 9,648
209,900 Bank of New York Mellon Corp. 6,106
5,590 BlackRock, Inc. "A" 1,195
106,590 Franklin Resources, Inc. 10,555
54,500 Invesco Ltd. ADR 1,052
34,400 Legg Mason, Inc. 887
----------
29,443
----------
CONSUMER FINANCE (0.8%)
187,800 American Express Co. 7,073
62,400 Capital One Financial Corp. 2,300
67,300 Discover Financial Services 921
1,600 Student Loan Corp. 72
----------
10,366
----------
DIVERSIFIED BANKS (0.9%)
37,500 Comerica, Inc. 1,294
200,149 U.S. Bancorp 5,020
175,300 Wells Fargo & Co. 4,984
----------
11,298
----------
DIVERSIFIED REAL ESTATE ACTIVITIES (0.1%)
12,900 Jones Lang LaSalle, Inc. 735
----------
INVESTMENT BANKING & BROKERAGE (1.4%)
97,360 Goldman Sachs Group, Inc. 14,479
133,900 Morgan Stanley 3,586
38,700 Raymond James Financial, Inc. 980
----------
19,045
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
LIFE & HEALTH INSURANCE (2.2%)
334,850 MetLife, Inc. $ 11,827
126,900 Protective Life Corp. 2,138
184,600 Prudential Financial, Inc. 9,228
30,600 StanCorp Financial Group, Inc. 1,315
35,100 Torchmark Corp. 1,576
122,100 Unum Group 2,390
----------
28,474
----------
MULTI-LINE INSURANCE (0.9%)
124,000 American Financial Group, Inc. 3,076
3,400 American National Insurance Co. 362
86,400 Assurant, Inc. 2,716
91,900 Genworth Financial, Inc. "A"* 1,272
113,000 Hartford Financial Services Group, Inc. 2,711
53,300 HCC Insurance Holdings, Inc. 1,444
14,200 Loews Corp. 508
5,800 Unitrin, Inc. 126
----------
12,215
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.5%)
731,438 Bank of America Corp. 11,103
965,900 Citigroup, Inc.* 3,207
148,500 JPMorgan Chase & Co. 5,782
----------
20,092
----------
PROPERTY & CASUALTY INSURANCE (2.5%)
22,300 Allied World Assurance Co. Holdings Ltd. 998
163,000 Allstate Corp. 4,879
20,700 Aspen Insurance Holdings Ltd. 551
10,100 Axis Capital Holdings Ltd. 291
132,900 Chubb Corp. 6,645
28,000 Cincinnati Financial Corp. 739
22,500 CNA Financial Corp.* 529
13,700 Fidelity National Financial, Inc. "A" 177
34,800 First American Corp. 1,029
1,180 Markel Corp.* 383
2,500 Mercury General Corp. 96
900 Navigators Group, Inc.* 38
73,175 Old Republic International Corp. 775
13,400 ProAssurance Corp.* 680
33,600 Progressive Corp. 557
259,600 Travelers Companies, Inc. 13,154
19,900 W.R. Berkley Corp. 484
28,700 XL Capital Ltd. "A" 481
================================================================================
22 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
11,600 Zenith National Insurance Corp. $ 324
----------
32,810
----------
REGIONAL BANKS (0.9%)
55,900 Associated Banc Corp. 711
29,200 BancorpSouth, Inc. 668
53,900 BB&T Corp. 1,502
14,100 City National Corp. 696
118,800 Fifth Third Bancorp 1,478
66,287 First Horizon National Corp.* 858
107,900 KeyCorp 775
12,300 M&T Bank Corp. 907
2,000 Prosperity Bancshares, Inc. 81
41,300 SunTrust Banks, Inc. 1,005
4,200 SVB Financial Group* 182
61,600 TCF Financial Corp.(a) 902
20,100 Trustmark Corp. 458
23,000 Webster Financial Corp. 356
5,600 Whitney Holding Corp. 70
24,100 Wilmington Trust Corp. 316
26,100 Zions Bancorp(a) 495
----------
11,460
----------
REINSURANCE (1.3%)
23,000 Arch Capital Group Ltd.* 1,645
41,900 Endurance Specialty Holdings Ltd. 1,509
84,250 Everest Reinsurance Group Ltd. 7,224
24,200 PartnerRe Ltd. 1,805
53,100 Reinsurance Group of America, Inc. "A" 2,587
19,100 RenaissanceRe Holdings Ltd. 1,035
25,100 Transatlantic Holdings, Inc. 1,247
----------
17,052
----------
REITs - DIVERSIFIED (0.3%)
70,000 Liberty Property Trust, Inc. 2,128
27,700 Vornado Realty Trust 1,792
----------
3,920
----------
REITs - INDUSTRIAL (0.2%)
173,000 ProLogis 2,180
----------
REITs - MORTGAGE (0.1%)
103,100 Annaly Capital Management, Inc. 1,792
----------
REITs - OFFICE (0.3%)
42,300 Douglas Emmett, Inc. 585
83,800 Duke Realty Corp. 949
================================================================================
PORTFOLIO OF INVESTMENTS | 23
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
238,300 HRPT Properties Trust $ 1,589
15,000 Kilroy Realty Corp. 433
----------
3,556
----------
REITs - RESIDENTIAL (0.2%)
21,200 Camden Property Trust 822
56,100 Equity Residential Properties Trust 1,798
----------
2,620
----------
REITs - RETAIL (0.5%)
205,863 CBL & Associates Properties, Inc.(a) 2,059
241,100 Developers Diversified Realty Corp. 1,989
45,200 Macerich Co. 1,394
39,600 Taubman Centers, Inc. 1,254
----------
6,696
----------
REITs - SPECIALIZED (0.8%)
101,800 Hospitality Properties Trust 2,252
186,400 Ventas, Inc. 7,866
----------
10,118
----------
SPECIALIZED FINANCE (0.6%)
6,380 CME Group, Inc. 1,830
252,100 NYSE Euronext 5,901
9,500 PHH Corp.* 166
----------
7,897
----------
THRIFTS & MORTGAGE FINANCE (0.3%)
18,100 Astoria Financial Corp. 239
243,400 Hudson City Bancorp, Inc. 3,230
4,300 NewAlliance Bancshares, Inc. 50
53,400 TFS Financial Corp. 687
----------
4,206
----------
Total Financials 235,975
----------
HEALTH CARE (17.2%)
-------------------
BIOTECHNOLOGY (0.4%)
73,600 Amgen, Inc.* 4,304
----------
HEALTH CARE DISTRIBUTORS (1.2%)
96,700 AmerisourceBergen Corp. 2,636
131,800 Cardinal Health, Inc. 4,359
146,600 McKesson Corp. 8,623
----------
15,618
----------
HEALTH CARE EQUIPMENT (0.9%)
356,750 Boston Scientific Corp.* 3,079
49,300 Medtronic, Inc. 2,114
================================================================================
24 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
116,100 Zimmer Holdings, Inc.* $ 6,539
----------
11,732
----------
HEALTH CARE FACILITIES (0.0%)
2,400 LifePoint Hospitals, Inc.* 72
----------
HEALTH CARE SERVICES (1.1%)
140,700 DaVita, Inc.* 8,408
80,450 Laboratory Corp. of America Holdings* 5,720
----------
14,128
----------
HEALTH CARE SUPPLIES (0.0%)
2,700 Cooper Companies, Inc. 96
----------
LIFE SCIENCES TOOLS & SERVICES (0.5%)
149,000 Thermo Fisher Scientific, Inc.* 6,876
----------
MANAGED HEALTH CARE (4.9%)
214,000 Aetna, Inc. 6,414
99,600 CIGNA Corp. 3,364
14,700 Coventry Health Care, Inc.* 336
52,100 Health Net, Inc.* 1,264
50,600 Humana, Inc.* 2,460
955,695 UnitedHealth Group, Inc. 31,538
298,169 WellPoint, Inc.* 18,999
----------
64,375
----------
PHARMACEUTICALS (8.2%)
114,150 Abbott Laboratories 6,043
59,600 Bristol-Myers Squibb Co. 1,452
200,500 Eli Lilly and Co. 7,058
35,800 Endo Pharmaceuticals Holdings, Inc.* 720
197,100 Forest Laboratories, Inc.* 5,842
350,500 Johnson & Johnson 22,032
37,000 King Pharmaceuticals, Inc.* 444
430,500 Merck & Co., Inc. 16,436
2,558,602 Pfizer, Inc. 47,744
2,000 Watson Pharmaceuticals, Inc.* 77
----------
107,848
----------
Total Health Care 225,049
----------
INDUSTRIALS (7.7%)
------------------
AEROSPACE & DEFENSE (2.5%)
67,200 Alliant Techsystems, Inc.* 5,307
123,050 Boeing Co. 7,457
100,900 General Dynamics Corp. 6,745
43,400 ITT Corp. 2,096
================================================================================
PORTFOLIO OF INVESTMENTS | 25
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
24,300 L-3 Communications Holdings, Inc. $ 2,025
54,500 Northrop Grumman Corp. 3,085
27,500 Raytheon Co. 1,442
59,500 Rockwell Collins, Inc. 3,165
25,700 United Technologies Corp. 1,734
----------
33,056
----------
AIR FREIGHT & LOGISTICS (0.3%)
50,500 FedEx Corp. 3,956
5,500 United Parcel Service, Inc. "B" 318
----------
4,274
----------
AIRLINES (0.0%)
15,900 SkyWest, Inc. 233
----------
BUILDING PRODUCTS (0.1%)
121,100 Masco Corp. 1,642
----------
COMMERCIAL PRINTING (0.2%)
128,000 R.R. Donnelley & Sons Co. 2,537
----------
CONSTRUCTION & ENGINEERING (0.2%)
50,200 KBR, Inc. 940
19,700 Shaw Group, Inc.* 636
7,500 URS Corp.* 337
----------
1,913
----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.7%)
14,000 Caterpillar, Inc. 731
46,200 Cummins, Inc. 2,087
69,650 Deere & Co. 3,479
50,100 Manitowoc Co., Inc. 546
23,400 Oshkosh Corp. 844
48,000 Terex Corp.* 939
37,100 Trinity Industries, Inc. 580
----------
9,206
----------
DIVERSIFIED SUPPORT SERVICES (0.1%)
33,700 Cintas Corp.* 846
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.1%)
24,500 General Cable Corp.* 713
9,700 Rockwell Automation, Inc. 468
----------
1,181
----------
ENVIRONMENTAL & FACILITIES SERVICES (0.5%)
206,250 Waste Management, Inc. 6,610
----------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.2%)
38,100 Manpower, Inc. 1,973
----------
================================================================================
26 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES (1.2%)
27,000 3M Co. $ 2,173
14,800 Carlisle Companies, Inc. 496
739,900 General Electric Co. 11,898
77,900 Textron, Inc. 1,521
----------
16,088
----------
INDUSTRIAL MACHINERY (0.9%)
78,300 Danaher Corp. 5,587
11,100 Eaton Corp. 680
18,300 Gardner Denver, Inc. 729
25,900 Illinois Tool Works, Inc. 1,129
16,000 Parker-Hannifin Corp. 895
13,080 SPX Corp. 712
88,000 Timken Co. 1,972
----------
11,704
----------
OFFICE SERVICES & SUPPLIES (0.1%)
52,000 Pitney Bowes, Inc. 1,088
12,700 Steelcase, Inc. "A" 90
----------
1,178
----------
RAILROADS (0.4%)
25,400 CSX Corp. 1,088
48,400 Norfolk Southern Corp. 2,278
37,800 Union Pacific Corp. 2,287
----------
5,653
----------
SECURITY & ALARM SERVICES (0.0%)
9,700 Corrections Corp. of America* 182
----------
TRADING COMPANIES & DISTRIBUTORS (0.0%)
24,300 United Rentals, Inc.* 195
----------
TRUCKING (0.2%)
51,300 Ryder System, Inc. 1,867
----------
Total Industrials 100,338
----------
INFORMATION TECHNOLOGY (14.6%)
------------------------------
COMMUNICATIONS EQUIPMENT (2.1%)
491,500 Cisco Systems, Inc.* 11,044
23,800 CommScope, Inc.* 648
846,802 Motorola, Inc.* 5,208
240,800 QUALCOMM, Inc. 9,437
143,900 Tellabs, Inc.* 925
----------
27,262
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
COMPUTER HARDWARE (1.6%)
59,030 Apple, Inc.* $ 11,341
23,100 Dell, Inc.* 298
100,700 Hewlett-Packard Co. 4,740
33,390 International Business Machines Corp. 4,086
----------
20,465
----------
COMPUTER STORAGE & PERIPHERALS (0.5%)
125,300 EMC Corp.* 2,089
51,500 Lexmark International, Inc. "A"* 1,328
62,685 SanDisk Corp.* 1,594
33,200 Western Digital Corp.* 1,261
----------
6,272
----------
DATA PROCESSING & OUTSOURCED SERVICES (2.1%)
102,100 Automatic Data Processing, Inc. 4,164
95,450 Fiserv, Inc.* 4,299
163,000 Visa, Inc. "A" 13,371
318,550 Western Union Co. 5,906
----------
27,740
----------
ELECTRONIC COMPONENTS (0.6%)
426,700 Corning, Inc. 7,715
----------
ELECTRONIC MANUFACTURING SERVICES (0.0%)
15,900 Molex, Inc. 320
----------
HOME ENTERTAINMENT SOFTWARE (0.2%)
158,600 Electronic Arts, Inc.* 2,582
----------
INTERNET SOFTWARE & SERVICES (2.2%)
615,200 eBay, Inc.* 14,162
22,610 Google, Inc. "A"* 11,970
180,650 Yahoo!, Inc.* 2,712
----------
28,844
----------
OFFICE ELECTRONICS (0.1%)
172,500 Xerox Corp. 1,504
----------
SEMICONDUCTOR EQUIPMENT (0.2%)
25,000 KLA-Tencor Corp. 705
182,400 MEMC Electronic Materials, Inc.* 2,295
----------
3,000
----------
SEMICONDUCTORS (0.3%)
41,600 Advanced Micro Devices, Inc.* 310
33,500 Fairchild Semiconductor International, Inc.* 301
19,700 Intel Corp. 382
================================================================================
28 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
155,200 LSI Corp.* $ 774
54,000 Micron Technology, Inc.* 471
70,500 PMC-Sierra, Inc.* 561
32,400 Texas Instruments, Inc. 728
----------
3,527
----------
SYSTEMS SOFTWARE (4.4%)
1,162,750 Microsoft Corp. 32,766
1,067,100 Oracle Corp. 24,608
----------
57,374
----------
TECHNOLOGY DISTRIBUTORS (0.3%)
4,800 Anixter International, Inc.* 200
124,300 Ingram Micro, Inc. "A"* 2,101
48,600 Tech Data Corp.* 1,980
----------
4,281
----------
Total Information Technology 190,886
----------
MATERIALS (3.8%)
----------------
ALUMINUM (0.0%)
36,500 Alcoa, Inc. 465
----------
COMMODITY CHEMICALS (0.0%)
19,900 Westlake Chemical Corp. 409
----------
DIVERSIFIED CHEMICALS (1.5%)
22,700 Ashland, Inc. 917
2,900 Cabot Corp. 75
294,000 Dow Chemical Co. 7,964
219,000 E.I. du Pont de Nemours & Co. 7,142
21,000 Eastman Chemical Co. 1,187
235,200 Huntsman Corp. 2,867
----------
20,152
----------
DIVERSIFIED METALS & MINING (0.2%)
32,100 Freeport-McMoRan Copper & Gold, Inc. 2,141
59,700 Titanium Metals Corp.* 694
----------
2,835
----------
INDUSTRIAL GASES (0.6%)
98,700 Praxair, Inc. 7,434
----------
PAPER PACKAGING (0.1%)
7,900 Bemis Co., Inc. 222
10,100 Packaging Corp. of America 222
33,400 Temple-Inland, Inc. 580
----------
1,024
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 29
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
PAPER PRODUCTS (0.4%)
96,900 International Paper Co. $ 2,220
113,565 MeadWestvaco Corp. 2,734
----------
4,954
----------
SPECIALTY CHEMICALS (0.4%)
12,200 Albemarle Corp. 436
22,100 Cytec Industries, Inc. 825
86,500 RPM International, Inc. 1,617
90,400 Valspar Corp. 2,394
----------
5,272
----------
STEEL (0.6%)
30,400 Allegheny Technologies, Inc. 1,242
11,000 Carpenter Technology Corp. 295
142,300 Commercial Metals Co. 1,955
29,900 Nucor Corp. 1,220
31,200 Reliance Steel & Aluminum Co. 1,271
36,600 Steel Dynamics, Inc. 555
21,650 United States Steel Corp. 962
----------
7,500
----------
Total Materials 50,045
----------
TELECOMMUNICATION SERVICES (2.2%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (1.9%)
631,470 AT&T, Inc. 16,014
30,500 CenturyTel, Inc. 1,037
269,888 Verizon Communications, Inc. 7,940
----------
24,991
----------
WIRELESS TELECOMMUNICATION SERVICES (0.3%)
56,800 NII Holdings, Inc. "B"* 1,860
472,200 Sprint Nextel Corp.* 1,549
9,500 Telephone & Data Systems, Inc. 300
6,900 U.S. Cellular Corp.* 252
----------
3,961
----------
Total Telecommunication Services 28,952
----------
UTILITIES (2.5%)
----------------
ELECTRIC UTILITIES (0.5%)
9,100 Cleco Corp. 236
58,750 Entergy Corp. 4,483
10,700 IdaCorp, Inc. 336
13,900 Northeast Utilities 352
================================================================================
30 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
17,700 Pinnacle West Capital Corp. $ 634
13,600 Portland General Electric Co. 265
----------
6,306
----------
GAS UTILITIES (0.6%)
48,000 Atmos Energy Corp. 1,326
16,600 Energen Corp. 729
1,900 Nicor, Inc. 77
133,400 ONEOK, Inc. 5,628
----------
7,760
----------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.1%)
59,400 Mirant Corp.* 836
20,500 NRG Energy, Inc.* 494
76,200 RRI Energy, Inc.* 377
----------
1,707
----------
MULTI-UTILITIES (1.2%)
43,600 CMS Energy Corp. 661
17,300 Consolidated Edison, Inc. 757
38,300 Integrys Energy Group, Inc. 1,603
102,600 NiSource, Inc. 1,462
120,050 NSTAR 4,122
21,000 PG&E Corp. 887
139,450 Wisconsin Energy Corp. 6,825
----------
16,317
----------
WATER UTILITIES (0.1%)
42,600 Aqua America, Inc. 707
----------
Total Utilities 32,797
----------
Total Common Stocks (cost: $1,245,587) 1,281,784
----------
----------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
----------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.6%)
U.S. TREASURY BILLS (0.7%)
$9,900 1.01% - 1.05%, 3/18/2010 9,899
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 31
<PAGE>
================================================================================
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
MONEY MARKET FUNDS (1.9%)
24,766,804 State Street Institutional Liquid Reserve Fund, 0.13%(b) $ 24,767
----------
Total Money Market Instruments (cost: $34,666) 34,666
----------
SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (0.7%)
MONEY MARKET FUNDS (0.7%)
2,538 AIM Short-Term Investment Co. Liquid Assets Portfolio, 0.15%(b) 3
9,047,822 BlackRock Liquidity Funds TempFund Portfolio, 0.11%(b) 9,048
----------
Total Money Market Funds 9,051
----------
----------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000)
----------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (0.0%)
$100 Deutsche Bank Securities, Inc., 0.11%, acquired on 1/29/2010
and due 2/01/2010 at $100 (collateralized by $103 of
Fannie Mae(c), 0.09%(d), due 5/10/2010; market value $103) 100
----------
Total Short-Term Investments Purchased With Cash Collateral
From Securities Loaned (cost: $9,151) 9,151
----------
TOTAL INVESTMENTS (COST: $1,289,404) $1,325,601
==========
---------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
---------------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
---------------------------------------------------------------------------------------------------------
Equity Securities:
Common Stocks $1,281,784 $ - $- $1,281,784
Money Market Instruments:
U.S. Treasury Bills - 9,899 - 9,899
Money Market Funds 24,767 - - 24,767
Short-Term Investments
Purchased with Cash Collateral
from Securities Loaned:
Money Market Funds 9,051 - - 9,051
Repurchase Agreements - 100 - 100
---------------------------------------------------------------------------------------------------------
Total $1,315,602 $9,999 $- $1,325,601
---------------------------------------------------------------------------------------------------------
================================================================================
32 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
January 31, 2010 (unaudited)
--------------------------------------------------------------------------------
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
ADR American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
REIT Real estate investment trust
o SPECIFIC NOTES
(a) The security or a portion thereof was out on loan as of January 31, 2010.
(b) Rate represents the money market fund annualized seven-day yield at
January 31, 2010.
(c) Securities issued by government-sponsored enterprises are supported only
by the right of the government-sponsored enterprise to borrow from the
U.S. Treasury, the discretionary authority of the U.S. government to
purchase the government-sponsored enterprises' obligations, or by the
credit of the issuing
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 33
<PAGE>
================================================================================
agency, instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. Treasury.
(d) Zero-coupon security. Rate represents the effective yield at the date of
purchase.
* Non-income-producing security. As of January 31, 2010, 81.7% of the Fund's
net assets were invested in dividend-paying stocks.
See accompanying notes to financial statements.
================================================================================
34 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
January 31, 2010 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (including securities on
loan of $8,519) (cost of $1,289,404) $1,325,601
Receivables:
Capital shares sold:
Affiliated transactions (Note 8) 151
Nonaffiliated transactions 695
Dividends and interest 1,413
Securities sold 6,613
Other 22
----------
Total assets 1,334,495
----------
LIABILITIES
Payables:
Upon return of securities loaned 9,151
Securities purchased 12,400
Capital shares redeemed (nonaffiliated transactions) 955
Accrued management fees 523
Accrued transfer agent's fees 43
Other accrued expenses and payables 135
----------
Total liabilities 23,207
----------
Net assets applicable to capital shares outstanding $1,311,288
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,861,927
Accumulated undistributed net investment income 914
Accumulated net realized loss on investments (587,750)
Net unrealized appreciation of investments 36,197
----------
Net assets applicable to capital shares outstanding $1,311,288
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $1,248,913/120,315 shares outstanding) $ 10.38
==========
Institutional Shares (net assets of $62,375/6,013 shares outstanding) $ 10.37
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 35
<PAGE>
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2010 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 14,630
Interest 23
Securities lending (net) 171
--------
Total income 14,824
--------
EXPENSES
Management fees 2,960
Administration and servicing fees:
Fund Shares 962
Institutional Shares 12
Transfer agent's fees:
Fund Shares 1,182
Institutional Shares 12
Custody and accounting fees:
Fund Shares 130
Institutional Shares 4
Postage:
Fund Shares 64
Shareholder reporting fees:
Fund Shares 28
Trustees' fees 5
Registration fees:
Fund Shares 18
Professional fees 67
Other 19
--------
Total expenses 5,463
Expenses paid indirectly (53)
Transfer agent's fees reimbursed (Note 7E):
Fund Shares (233)
--------
Net expenses 5,177
--------
NET INVESTMENT INCOME 9,647
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain 29,260
Change in net unrealized appreciation/depreciation 81,621
--------
Net realized and unrealized gain 110,881
--------
Increase in net assets resulting from operations $120,528
========
See accompanying notes to financial statements.
================================================================================
36 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended January 31, 2010 (unaudited), and year ended
July 31, 2009
--------------------------------------------------------------------------------
1/31/2010 7/31/2009
-------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 9,647 $ 31,188
Net realized gain (loss) on investments 29,260 (530,417)
Change in net unrealized appreciation/depreciation of
investments 81,621 112,630
-------------------------
Increase (decrease) in net assets resulting
from operations 120,528 (386,599)
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares (10,095) (31,698)
Institutional Shares* (409) (499)
-------------------------
Distributions to shareholders (10,504) (32,197)
-------------------------
NET INCREASE (DECREASE) IN NET ASSETS
FROM CAPITAL SHARE TRANSACTIONS (NOTE 6)
Fund Shares (48,583) (148,247)
Institutional Shares* 25,400 33,359
-------------------------
Total net decrease in net assets from
capital share transactions (23,183) (114,888)
-------------------------
Capital contribution from USAA Transfer Agency
Company:
Fund Shares - 33
Institutional Shares* - 15
-------------------------
Net increase (decrease) in net assets 86,841 (533,636)
NET ASSETS
Beginning of period 1,224,447 1,758,083
-------------------------
End of period $1,311,288 $1,224,447
=========================
Accumulated undistributed net investment income:
End of period $ 914 $ 1,771
=========================
* Institutional Shares were initiated on August 1, 2008
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 37
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
January 31, 2010 (unaudited)
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940 (the 1940 Act), as amended, is an open-end management investment company
organized as a Delaware statutory trust consisting of 46 separate funds. The
information presented in this semiannual report pertains only to the USAA Income
Stock Fund (the Fund), which is classified as diversified under the 1940 Act.
The Fund's investment objective is current income with the prospect of
increasing dividend income and the potential for capital appreciation.
The Fund has two classes of shares: Income Stock Fund Shares (Fund Shares) and
Income Stock Fund Institutional Shares (Institutional Shares). Each class of
shares has equal rights to assets and earnings, except that each class bears
certain class-related expenses specific to the particular class. These expenses
include administration and servicing fees, transfer agent fees, postage,
shareholder reporting fees, and certain registration and custodian fees.
Expenses not attributable to a specific class, income, and realized gains or
losses on investments are allocated to each class of shares based on each
class's relative net assets. Each class has exclusive voting rights on matters
related solely to that class and separate voting rights on matters that relate
to both classes. The Institutional Shares are currently offered for sale only to
the USAA Target Retirement Funds (Target Funds) and not to the general public.
The Target Funds are managed by USAA Investment Management Company (the
Manager), an affiliate of the 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:
================================================================================
38 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
1. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange or
the Nasdaq over-the-counter markets are valued at the last sales price or
official closing price on the exchange or primary market on which they
trade. Equity securities traded primarily on foreign securities exchanges
or markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated according to local
market convention, available at the time the Fund is valued. If no last
sale or official closing price is reported or available, the average of
the bid and asked prices generally is used.
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, the
Manager 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
================================================================================
NOTES TO FINANCIAL STATEMENTS | 39
<PAGE>
================================================================================
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.
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. 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, if applicable, 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
================================================================================
40 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
these securities at fair value is intended to cause the Fund's NAV to be
more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing services,
broker-dealers, or widely used quotation systems. General factors
considered in determining the fair value of securities include
fundamental analytical data, the nature and duration of any restrictions
on disposition of the securities, and an evaluation of the forces that
influenced the market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS -- Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the portfolio of investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 -- inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
Level 2 -- inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indices.
Level 3 -- inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. FEDERAL TAXES -- The Fund's policy is to comply with the requirements of
the Internal Revenue Code applicable to regulated investment
================================================================================
NOTES TO FINANCIAL STATEMENTS | 41
<PAGE>
================================================================================
companies and to distribute substantially all of its income to its
shareholders. Therefore, no federal income tax provision is required.
D. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are computed on the identified cost basis.
Dividend income, less foreign taxes, if any, is recorded on the ex-dividend
date. If the ex-dividend date has passed, certain dividends from foreign
securities are recorded upon notification. Interest income is recorded daily
on the accrual basis. Discounts and premiums on short-term securities are
amortized on a straight-line basis over the life of the respective
securities.
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. FOREIGN CURRENCY TRANSLATIONS -- The Fund's assets may be invested in the
securities of foreign issuers and may be traded in foreign currency. Since
the Fund's accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following bases:
1. Purchases and sales of securities, income, and expenses at the exchange
rate obtained from an independent pricing service on the respective dates
of such transactions.
2. Market value of securities, other assets, and liabilities at the exchange
rate obtained from an independent pricing service on a daily basis.
================================================================================
42 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations
are included with the net realized and unrealized gain or loss from
investments.
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference between
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts received. At the
end of the Fund's fiscal year, these net realized foreign currency
gains/losses are reclassified from accumulated net realized gain/loss to
accumulated undistributed net investment income on the statement of assets
and liabilities as such amounts are treated as ordinary income/loss for tax
purposes. Net unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities, other than investments in
securities, resulting from changes in the exchange rate.
G. EXPENSES PAID INDIRECTLY -- A portion of the brokerage commissions that the
Fund pays may be recaptured as a credit that is tracked and used by the
custodian to directly reduce expenses paid by the Fund. In addition, through
arrangements with the Fund's custodian and other banks utilized by the Fund
for cash management purposes, realized credits, if any, generated from cash
balances in the Fund's bank accounts may be used to directly reduce the
Fund's expenses. For the six-month period ended January 31, 2010, brokerage
commission recapture credits and custodian and other bank credits reduced the
Fund's expenses by $53,000 and less than $500, respectively.
H. INDEMNIFICATIONS -- Under the Trust's organizational documents, its officers
and trustees are indemnified against certain liabilities arising out of the
performance of their duties to the Trust. In addition, in the normal course
of business the Trust enters into contracts that contain a variety of
representations and warranties that provide general
================================================================================
NOTES TO FINANCIAL STATEMENTS | 43
<PAGE>
================================================================================
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of loss
to be remote.
I. USE OF ESTIMATES -- The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
(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 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 six-month period ended January 31, 2010, the Fund paid CAPCO facility
fees of $3,000, which represents 3.1% of the total fees paid to CAPCO by the
USAA funds. The Fund had no borrowings under this agreement during the six-month
period ended January 31, 2010.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of July 31, 2010,
in accordance with applicable tax law.
================================================================================
44 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
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 July 31, 2009, the Fund had capital loss carryovers
of $227,190,000, for federal income tax purposes, which, if not offset by
subsequent capital gains, will expire in 2017. It is unlikely that the Trust's
Board of Trustees will authorize a distribution of capital gains realized in the
future until the capital loss carryovers have been used or expire.
The Fund is required to evaluate tax positions taken or expected to be taken in
the course of preparing the Fund's tax returns to determine whether the tax
positions are "more-likely-than-not" of being sustained by the applicable tax
authority. Income tax and related interest and penalties would be recognized by
the Fund as tax expense in the statement of operations if the tax positions were
deemed to not meet the more-likely-than-not threshold. For the six-month period
ended January 31, 2010, the Fund did not incur any income tax, interest, or
penalties. As of January 31, 2010, the Manager has reviewed all open tax years
and concluded that there was no impact to the Fund's net assets or results of
operations. Tax years ended July 31, 2006, through July 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.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended January 31, 2010, were
$449,976,000 and $732,137,000, respectively.
As of January 31, 2010, the cost of securities, including short-term securities,
for federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of January 31,
2010, were $110,653,000 and $74,456,000, respectively, resulting in net
unrealized appreciation of $36,197,000.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 45
<PAGE>
================================================================================
(5) LENDING OF PORTFOLIO SECURITIES
The Fund, through its third-party securities-lending agent, Wachovia Global
Securities Lending (Wachovia), may lend its securities to qualified financial
institutions, such as certain broker-dealers, to earn additional income. The
borrowers are required to secure their loans continuously with cash collateral
in an amount at least equal to the fair value of the securities loaned,
initially in an amount at least equal to 102% of the fair value of domestic
securities loaned and 105% of the fair value of international securities loaned.
Cash collateral is invested in high-quality short-term investments. Cash
collateral requirements are determined daily based on the prior business day's
ending value of securities loaned. Imbalances in cash collateral may occur on
days where market volatility causes security prices to change significantly, and
are adjusted the next business day. The Fund and Wachovia retain 80% and 20%,
respectively, of the income earned from the investment of cash received as
collateral, net of any expenses associated with the lending transaction.
Wachovia receives no other fees from the Fund for its services as
securities-lending agent. Risks to the Fund in securities-lending transactions
are that the borrower may not provide additional collateral when required or
return the securities when due, and that the value of the short-term investments
will be less than the amount of cash collateral required to be returned to the
borrower. Wachovia Bank, N.A., parent company of Wachovia, has agreed to
indemnify the Fund against any losses due to counterparty default in
securities-lending transactions. For the six-month period ended January 31,
2010, the Fund received securities-lending income of $171,000, which is net of
the 20% income retained by Wachovia. As of January 31, 2010, the Fund loaned
securities having a fair market value of approximately $8,519,000 and received
cash collateral of $9,151,000 for the loans, which was invested in short-term
investments, as noted in the Fund's portfolio of investments
(6) CAPITAL SHARE TRANSACTIONS
At January 31, 2010, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
================================================================================
46 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
Capital share transactions for the Institutional Shares resulted from purchases
and sales by the affiliated Target Funds. Capital share transactions were as
follows, in thousands:
SIX-MONTH PERIOD ENDED YEAR ENDED
1/31/2010 7/31/2009
--------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------
FUND SHARES:
Shares sold 6,869 $ 71,428 16,114 $ 151,475
Shares issued from
reinvested dividends 913 9,574 3,130 30,029
Shares redeemed (12,414) (129,585) (34,567) (329,751)
--------------------------------------------------
Net decrease from capital
share transactions (4,632) $ (48,583) (15,323) $(148,247)
==================================================
INSTITUTIONAL SHARES
(INITIATED ON AUGUST 1, 2008):
Shares sold 2,722 $ 28,505 4,408 $ 40,727
Shares issued from
reinvested dividends 39 409 57 499
Shares redeemed (339) (3,514) (874) (7,867)
--------------------------------------------------
Net increase from capital
share transactions 2,422 $ 25,400 3,591 $ 33,359
==================================================
(7) 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, subject to the
authority of and supervision by the Trust's Board of Trustees. The Manager is
authorized to select (with approval of the Trust's Board of Trustees and
without shareholder approval) one or more subadvisers to manage the actual
day-to-day investment of the Fund's assets. The Manager monitors each
subadviser's performance through quantitative and qualitative analysis, and
periodically recommends to the Trust's Board of Trustees as to whether each
subadviser's agreement should be renewed, terminated, or modified. The
Manager also is responsible for allocating
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
<PAGE>
================================================================================
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 fee is accrued daily and paid monthly
at an annualized rate of 0.50% of the Fund's average net assets for the
fiscal year.
The performance adjustment is calculated separately for each share class on a
monthly basis by comparing each class's performance to that of the Lipper
Equity Income Funds Index over the performance period. The Lipper Equity
Income Funds Index tracks the total return performance of the 30 largest
funds in the Lipper Equity Income Funds category. The performance period for
each class consists of the current month plus the previous 35 months. The
performance adjustment for the Institutional Shares includes the performance
of the Fund Shares for periods prior to August 1, 2008. 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.
Each class's annual performance adjustment rate is multiplied by the average
net assets of each respective class 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.
================================================================================
48 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper Equity Income Funds Index over that period, even if
the class had overall negative returns during the performance period.
For the six-month period ended January 31, 2010, the Fund incurred total
management fees, paid or payable to the Manager, of $2,960,000, which
included a performance adjustment for the Fund Shares and Institutional
Shares of $(361,000) and $(2,000), respectively. For the Fund Shares and
Institutional Shares, the performance adjustments were (0.06)% and (0.01)%,
respectively.
B. SUBADVISORY ARRANGEMENT -- The Manager has entered into investment
subadvisory agreements with Grantham, Mayo, Van Otterloo & Co. LLC (GMO), OFI
Institutional Asset Management, Inc. (OFII), and, effective January 11, 2010,
Epoch Investment Partners, Inc. (Epoch), under which GMO, OFII, and Epoch
direct the investment and reinvestment of portions of the Fund's assets (as
allocated from time to time by the Manager).
The Manager (not the Fund) pays GMO a subadvisory fee in the annual amount of
0.18% of the portion of the Fund's average daily net assets that GMO manages.
For the six-month period ended January 31, 2010, the Manager incurred
subadvisory fees, paid or payable to GMO of $701,000.
The Manager (not the Fund) pays OFII a subadvisory fee on the Fund's average
daily net assets that OFII manages, in an annual amount of 0.085% on the
first $500 million of assets and 0.075% on assets over $500 million. For the
six-month period ended January 31, 2010, the Manager incurred subadvisory
fees, paid or payable to OFII of $219,000.
The Manager (not the Fund) pays Epoch a subadvisory fee on the Fund's average
daily net assets that Epoch manages, in the annual amount of 0.40% on the
first $200 million of assets and 0.35% on the next $400 million of assets.
Once assets that Epoch manages reach $600 million, the subadvisory fee
changes to an annual
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
<PAGE>
================================================================================
amount of 0.30% on the first $600 million of assets and 0.25% on the next
$400 million of assets. Once assets that Epoch manages reach $1 billion, fees
will be renegotiated. For the six-month period ended January 31, 2010, the
Manager incurred subadvisory fees, paid or payable to Epoch of $58,000.
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% and 0.05% of average net assets of the Fund Shares
and Institutional Shares, respectively. For the six-month period ended
January 31, 2010, the Fund Shares and Institutional Shares incurred
administration and servicing fees, paid or payable to the Manager, of
$962,000 and $12,000, respectively.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Trust's Board of Trustees has
approved the reimbursement of a portion of these expenses incurred by the
Manager. For the six-month period ended January 31, 2010, the Fund reimbursed
the Manager $31,000 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 has agreed, through December 1, 2010, to
limit the annual expenses of the Institutional shares to 0.62% of its average
annual net assets, excluding extraordinary expenses and before reductions of
any expenses paid indirectly, and will reimburse the Institutional Shares for
all expenses in excess of that amount. This expense limitation arrangement
may not be changed or terminated through December 1, 2010, without approval
of the Trust's Board of Trustees, and may be changed or terminated by the
Manager at any time after that date. For the six-month period ended January
31, 2010, the Institutional Shares did not incur any reimbursable expenses.
E. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the
================================================================================
50 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
Manager, provides transfer agent services to the Fund. Transfer agent's fees
for Fund Shares are paid monthly based on an annual charge of $23 per
shareholder account plus out-of-pocket expenses. The Fund Shares also pay SAS
fees that are related to the administration and servicing of accounts that
are traded on an omnibus basis. Transfer agent's fees for Institutional
Shares are paid monthly based on a fee accrued daily at an annualized rate of
0.05% of the Institutional Shares' average net assets, plus out-of-pocket
expenses. For the six-month period ended January 31, 2010, the Fund Shares
and Institutional Shares incurred transfer agent's fees, paid or payable to
SAS, of $1,182,000 and $12,000, respectively.
During the six-month period ended January 31, 2010, SAS reimbursed the Fund
Shares $233,000 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.
(8) TRANSACTIONS WITH AFFILIATES
The Fund is one of 13 USAA mutual funds in which the affiliated Target Funds may
invest. The Target Funds do not invest in the Fund for the purpose of exercising
management or control. As of January 31, 2010, the Fund recorded a receivable
for capital shares sold of $151,000 and a payable for capital shares redeemed of
less than $500 for the Target Funds' purchases and redemptions of Institutional
Shares. As of January 31, 2010, the Target Funds owned the following percent of
the total outstanding shares of the Fund:
OWNERSHIP %
--------------------------------------------------------------------------------
USAA Target Retirement Income Fund 0.3%
USAA Target Retirement 2020 Fund 0.6
USAA Target Retirement 2030 Fund 1.4
USAA Target Retirement 2040 Fund 1.7
USAA Target Retirement 2050 Fund 0.8
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
<PAGE>
================================================================================
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.
(9) SUBSEQUENT EVENTS
Events or transactions that occur after the balance sheet date but before the
financial statements are issued are categorized as recognized or non-recognized
for financial statement purposes. The Manager has evaluated subsequent events
through the date the financial statements were issued, and has determined there
were no events that required recognition or disclosure in the Fund's financial
statements. Subsequent events that will affect future financial statements are
as follows:
Effective February 17, 2010, OFII is no longer a subadviser for the Fund.
(10) NEW ACCOUNTING PRONOUNCEMENT
In January 2010, the Financial Accounting Standards Board issued amended
guidance for improving disclosure about fair value measurements that adds new
disclosure requirements about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements in the
reconciliation for fair value measurements using significant unobservable inputs
(Level 3). It also clarifies existing disclosure requirements relating to the
levels of disaggregation for fair value measurement and inputs and valuation
techniques used to measure fair value. The amended guidance is effective for
financial statements for fiscal years and interim periods beginning after
December 15, 2009 except for disclosures about purchases, sales, issuances and
settlements in the rollforward of activity in Level 3 fair value measurements,
which are effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. The Manager is in the process of
evaluating the impact of this guidance on the Fund's financial statement
disclosures.
================================================================================
52 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
(11) FINANCIAL HIGHLIGHTS -- FUND SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
JANUARY 31, YEAR ENDED JULY 31,
--------------------------------------------------------------------------------------------
2010 2009 2008 2007 2006 2005
--------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 9.53 $ 12.53 $ 16.64 $ 16.11 $ 17.36 $ 15.31
--------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .08 .24 .30 .30 .30 .32
Net realized and
unrealized gain (loss) .85 (3.00) (2.95) 1.42 .86 2.22
--------------------------------------------------------------------------------------------
Total from investment
operations .93 (2.76) (2.65) 1.72 1.16 2.54
--------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.08) (.24) (.31) (.30) (.31) (.32)
Realized capital gains - - (1.15) (.89) (2.10) (.17)
--------------------------------------------------------------------------------------------
Total distributions (.08) (.24) (1.46) (1.19) (2.41) (.49)
--------------------------------------------------------------------------------------------
Net asset value at end
of period $ 10.38 $ 9.53 $ 12.53 $ 16.64 $ 16.11 $ 17.36
============================================================================================
Total return (%)* 9.78(d) (21.98) (17.25) 10.66(a) 7.38 16.81
Net assets at end
of period (000) $1,248,913 $1,190,258 $1,758,083 $2,296,206 $2,158,950 $2,088,535
Ratios to average
net assets:**
Expenses (%)(b) .83(c)(d) .89 .80 .82(a) .83 .78
Net investment
income (%) 1.45(c) 2.50 2.06 1.77 1.87 1.99
Portfolio turnover (%) 36 85 91 74 108 73
* Assumes reinvestment of all net investment income and realized capital gain distributions, if any, during the period.
Includes adjustments in accordance with U.S. generally accepted accounting principles and could differ from the
Lipper reported return.
** For the six-month period ended January 31, 2010, average net assets were $1,271,613,000.
(a) For the year ended July 31, 2007, SAS voluntarily reimbursed the Fund Shares for a portion of the transfer agent's fees
incurred. The reimbursement had no effect on the Fund Shares' total return or ratio of expenses to average net assets.
(b) Reflects total operating expenses of the Fund Shares before reductions of any expenses paid indirectly. The Fund Shares'
expenses paid indirectly decreased the expense ratios as follows:
(.01%) (.01%) (.02%) (.01%) (.02%) (.00%)(+)
(+) Represents less than 0.01% of average net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of operations.
(d) During the period ended January 31, 2010, SAS reimbursed the Fund Shares $233,000 for corrections in fees paid for the
administration and servicing of certain accounts. The effect of this reimbursement on the Fund Shares' total return was
less than 0.01%. The reimbursement decreased the Fund Shares' expense ratios by 0.03%. This decrease is excluded from the
expense ratios in the Financial Highlights table.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
<PAGE>
================================================================================
(11) FINANCIAL HIGHLIGHTS (CONTINUED) -- INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED PERIOD ENDED
JANUARY 31, JULY 31,
2010 2009***
-----------------------------
Net asset value at beginning of period $ 9.52 $ 12.50
------------------------
Income (loss) from investment operations:
Net investment income .09 .22(a)
Net realized and unrealized gain (loss) .85 (2.93)(a)
------------------------
Total from investment operations .94 (2.71)(a)
------------------------
Less distributions from:
Net investment income (.09) (.27)
------------------------
Net asset value at end of period $ 10.37 $ 9.52
========================
Total return (%)* 9.88 (21.67)
Net assets at end of period (000) $62,375 $34,189
Ratios to average net assets:**(b)
Expenses (%)(c) .62 .62
Expenses, excluding reimbursements (%)(c) .62 .64
Net investment income (%) 1.55 2.55
Portfolio turnover (%) 36 85
* Assumes reinvestment of all net investment income and realized capital
gain distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return.
** For the six-month period ended January 31, 2010, average net assets were
$46,222,000.
*** Institutional Shares were initiated on August 1, 2008.
(a) Calculated using average shares.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Reflects total operating expenses of the Institutional Shares before
reductions of any expenses paid indirectly. The Institutional Shares'
expenses paid indirectly decreased the expense ratios by less than 0.01%.
================================================================================
54 | USAA INCOME STOCK FUND
<PAGE>
================================================================================
EXPENSE EXAMPLE
January 31, 2010 (unaudited)
--------------------------------------------------------------------------------
EXAMPLE
As a shareholder of the Fund, you incur two types of costs: direct costs, such
as wire fees, redemption fees, and low balance fees; and indirect costs,
including management fees, transfer agency fees, and other Fund operating
expenses. This example is intended to help you understand your indirect costs,
also referred to as "ongoing costs" (in dollars), of investing in the Fund and
to compare these costs with the ongoing costs of investing in other mutual
funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire six-month period of August 1, 2009, through
January 31, 2010.
ACTUAL EXPENSES
The first line of the table on the next page provides information about actual
account values and actual expenses. You may use the information in this line,
together with the amount you invested at the beginning of the period, to
estimate the expenses that you paid over the period. Simply divide your account
value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6),
then multiply the result by the number in the first line under the heading
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The line labeled "hypothetical" under each share class in the table provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratios for each class and an assumed rate of return of
5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or
================================================================================
EXPENSE EXAMPLE | 55
<PAGE>
================================================================================
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the 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 AUGUST 1, 2009 -
AUGUST 1, 2009 JANUARY 31, 2010 JANUARY 31, 2010
---------------------------------------------------------
FUND SHARES
Actual $1,000.00 $1,097.80 $4.18
Hypothetical
(5% return before expenses) 1,000.00 1,021.22 4.02
INSTITUTIONAL SHARES
Actual 1,000.00 1,098.80 3.28
Hypothetical
(5% return before expenses) 1,000.00 1,022.08 3.16
* Expenses are equal to the annualized expense ratio of 0.79% for Fund Shares
and 0.62% for Institutional Shares, which are net of any reimbursements and
expenses paid indirectly, multiplied by the average account value over the
period, multiplied by 184 days/365 days (to reflect the one-half-year
period). The Fund's actual ending account values are based on its actual total
returns of 9.78% for Fund Shares and 9.88% for Institutional Shares for the
six-month period of August 1, 2009, through January 31, 2010.
================================================================================
56 | USAA INCOME STOCK 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 website at HTTP://WWW.SEC.GOV. Information regarding how
the Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge (i) at USAA.COM; and
(ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These Forms N-Q also may
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) 732-0330.
================================================================================
<PAGE>
USAA
9800 Fredericksburg Road --------------
San Antonio, TX 78288 PRSRT STD
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23422-0310 (C)2010, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 11. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA Mutual
Funds Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR/S was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. The only change to the
procedures was to document the annual disclosure controls and procedures
established for the new section of the shareholder reports detailing the factors
considered by the Funds' Board in approving the Funds' advisory agreements.
ITEM 12. EXHIBITS.
(a)(1). NOT APPLICABLE. This item must be disclosed only in annual reports.
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA MUTUAL FUNDS TRUST, Period Ended January 31, 2010
By:* /S/ CHRISTOPHER P. LAIA
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Signature and Title: Christopher P. Laia, Assistant Secretary
Date: March 31, 2010
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /S/ CHRISTOPHER W. CLAUS
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Signature and Title: Christopher W. Claus, President
Date: April 1, 2010
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By:* /S/ ROBERTO GALINDO, JR.
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Signature and Title: Roberto Galindo, Jr., Treasurer
Date: March 31, 2010
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*Print the name and title of each signing officer under his or her signature.
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