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 INCOME FUND - SEMIANNUAL REPORT FOR PERIOD ENDED JANUARY 31, 2010
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA INCOME FUND]
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SEMIANNUAL REPORT
USAA INCOME FUND
FUND SHARES o INSTITUTIONAL SHARES
JANUARY 31, 2010
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FUND OBJECTIVE
MAXIMUM CURRENT INCOME WITHOUT UNDUE RISK TO PRINCIPAL.
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TYPES OF INVESTMENTS
Invests primarily in U.S. dollar-denominated debt securities that have been
selected for their high yields relative to the risk involved.
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
MANAGER'S COMMENTARY 4
FUND RECOGNITION 8
INVESTMENT OVERVIEW 10
FINANCIAL INFORMATION
Portfolio of Investments 19
Notes to Portfolio of Investments 38
Financial Statements 43
Notes to Financial Statements 46
EXPENSE EXAMPLE 61
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 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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MANAGER'S COMMENTARY ON THE FUND
MARGARET "DIDI" WEINBLATT, Ph.D., CFA [PHOTO OF MARGARET "DIDI" WEINBLATT]
USAA Investment Management Company
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o HOW DID THE USAA INCOME FUND (THE FUND SHARES) PERFORM?
For the six-month period ended January 31, 2010, the Fund Shares had a
total return of 8.13%. This compares to returns of 6.53% for the Lipper
Corporate Debt Funds A Rated Index, 6.62% for the Lipper Corporate Debt
Funds A Rated Average, and 3.87% for the Barclays Capital U.S. Aggregate
Bond Index.
As of January 31, 2010, the Fund Shares' 12-month dividend yield was 5.16%,
compared to 4.34% for the Lipper Corporate Debt Funds A Rated Average.
o PLEASE DESCRIBE THE MARKET ENVIRONMENT DURING THE REPORTING PERIOD.
One of our regular themes in discussing financial markets is their tendency
to swing between fear and greed. The fear that characterized the financial
crisis continued to wane in the reporting period, and by early 2010 the
market had almost fully made the transition back to greed.
Refer to pages 12 and 13 for benchmark definitions.
Past performance is no guarantee of future results.
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4 | USAA INCOME FUND
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o 10-YEAR BBB-RATED CORPORATE BOND o
SPREADS TO TREASURY
[CHART OF 10-YEAR BBB-RATED CORPORATE BOND SPREADS TO TREASURY]
BBB ALL 10 YR FITTED
OFF-THE-RUN TREASURY
CURVE SPREAD
1/2/2002 205.982
1/3/2002 202.338
1/7/2002 201.76
1/8/2002 201.931
1/9/2002 200.373
1/10/2002 201.546
1/11/2002 205.558
1/14/2002 204.474
1/15/2002 206.194
1/16/2002 207.67
1/17/2002 210.167
1/18/2002 211.239
1/22/2002 211.173
1/23/2002 212.319
1/24/2002 211.73
1/25/2002 211.649
1/28/2002 212.196
1/29/2002 214.212
1/30/2002 214.756
1/31/2002 211.568
2/1/2002 214.409
2/4/2002 215.677
2/5/2002 223.115
2/6/2002 224.724
2/7/2002 222.539
2/8/2002 221.642
2/11/2002 222.866
2/12/2002 214.76
2/13/2002 213.335
2/14/2002 214.562
2/15/2002 211.115
2/19/2002 213.572
2/20/2002 214.116
2/21/2002 215.994
2/22/2002 213.439
2/25/2002 213.752
2/26/2002 209.383
2/27/2002 209.944
2/28/2002 213.211
3/1/2002 212.561
3/4/2002 212.863
3/5/2002 208.536
3/6/2002 209.85
3/7/2002 204.415
3/8/2002 199.49
3/11/2002 202.269
3/12/2002 203.56
3/13/2002 203.206
3/14/2002 203.236
3/15/2002 203.099
3/18/2002 203.633
3/19/2002 203.581
3/20/2002 203.102
3/21/2002 204.722
3/22/2002 202.351
3/25/2002 200.924
3/26/2002 200.999
3/27/2002 201.926
3/28/2002 198.837
4/1/2002 199.747
4/2/2002 199.09
4/3/2002 199.783
4/4/2002 199.114
4/5/2002 199.934
4/8/2002 199.591
4/9/2002 199.83
4/10/2002 199.866
4/11/2002 200.97
4/12/2002 205.362
4/15/2002 201.606
4/16/2002 200.701
4/17/2002 197.956
4/18/2002 196.907
4/19/2002 196.084
4/22/2002 202.319
4/23/2002 204.161
4/24/2002 214.621
4/25/2002 209.7
4/26/2002 210.417
4/29/2002 220.268
4/30/2002 226.593
5/1/2002 233.442
5/2/2002 229.002
5/3/2002 229.001
5/6/2002 233.286
5/7/2002 237.459
5/8/2002 230.276
5/9/2002 227.005
5/10/2002 214.969
5/13/2002 221.078
5/14/2002 217.795
5/15/2002 212.764
5/16/2002 211.862
5/17/2002 210.974
5/20/2002 214.074
5/21/2002 212.091
5/22/2002 210.708
5/23/2002 204.673
5/24/2002 203.633
5/28/2002 201.147
5/29/2002 198.061
5/30/2002 200.933
5/31/2002 195.005
6/3/2002 194.484
6/4/2002 196.729
6/5/2002 196.122
6/6/2002 195.987
6/7/2002 201.88
6/10/2002 201.678
6/11/2002 201.911
6/12/2002 206.393
6/13/2002 206.92
6/14/2002 199.258
6/17/2002 197.326
6/18/2002 201.547
6/19/2002 200.091
6/20/2002 201.104
6/21/2002 201.391
6/24/2002 206.092
6/25/2002 205.369
6/26/2002 212.371
6/27/2002 214.734
6/28/2002 215.371
7/1/2002 221.278
7/2/2002 227.377
7/3/2002 229.013
7/5/2002 227.051
7/8/2002 226.605
7/9/2002 229.43
7/10/2002 229.836
7/11/2002 239.292
7/12/2002 235.685
7/15/2002 244.573
7/16/2002 248.636
7/17/2002 247.138
7/18/2002 254.203
7/19/2002 265.395
7/22/2002 280.973
7/23/2002 283.111
7/24/2002 338.45
7/25/2002 316.658
7/26/2002 323.593
7/29/2002 326.608
7/30/2002 300.611
7/31/2002 289.565
8/1/2002 280.855
8/2/2002 287.139
8/5/2002 303.064
8/6/2002 296.261
8/7/2002 300.483
8/8/2002 293.459
8/9/2002 294.968
8/12/2002 303.22
8/13/2002 308.936
8/14/2002 303.236
8/15/2002 304.376
8/16/2002 301.687
8/19/2002 298.494
8/20/2002 293.99
8/21/2002 286.215
8/22/2002 274.232
8/23/2002 276.378
8/26/2002 273.879
8/27/2002 269.482
8/28/2002 270.868
8/29/2002 272.09
8/30/2002 263.45
9/3/2002 272.966
9/4/2002 271.388
9/5/2002 273.614
9/6/2002 271.699
9/9/2002 272.292
9/10/2002 267.427
9/11/2002 268.428
9/12/2002 268.048
9/13/2002 269.347
9/16/2002 269.795
9/17/2002 267.984
9/18/2002 268.686
9/19/2002 268.861
9/20/2002 269.778
9/23/2002 283.441
9/24/2002 301.387
9/25/2002 295.463
9/26/2002 296.056
9/27/2002 298.941
9/30/2002 307.816
10/1/2002 307.039
10/2/2002 290.572
10/3/2002 292.061
10/4/2002 300.334
10/7/2002 315.026
10/8/2002 342.896
10/9/2002 350.518
10/10/2002 354.423
10/11/2002 346.831
10/15/2002 345.856
10/16/2002 347.251
10/17/2002 348.028
10/18/2002 349.273
10/21/2002 346.588
10/22/2002 345.427
10/23/2002 350.745
10/24/2002 347.702
10/25/2002 344.849
10/28/2002 341.989
10/29/2002 333.774
10/30/2002 327.438
10/31/2002 304.827
11/1/2002 306.421
11/4/2002 290.9
11/5/2002 284.948
11/6/2002 280.345
11/7/2002 282.519
11/8/2002 289.976
11/12/2002 296.677
11/13/2002 299.256
11/14/2002 283.01
11/15/2002 267.35
11/18/2002 263.635
11/19/2002 261.548
11/20/2002 258.693
11/21/2002 245.892
11/22/2002 244.339
11/25/2002 242.437
11/26/2002 242.62
11/27/2002 219.112
11/29/2002 223.185
12/2/2002 222.023
12/3/2002 221.672
12/4/2002 225.354
12/5/2002 227.175
12/6/2002 230.972
12/9/2002 233.146
12/10/2002 235.114
12/11/2002 236.402
12/12/2002 234.085
12/13/2002 224.956
12/16/2002 221.709
12/17/2002 218.749
12/18/2002 219.996
12/19/2002 222.233
12/20/2002 222.438
12/23/2002 221.314
12/24/2002 224.878
12/26/2002 226.154
12/27/2002 227.102
12/30/2002 229.55
12/31/2002 216.253
1/2/2003 209.596
1/3/2003 209.947
1/6/2003 206.213
1/7/2003 203.184
1/8/2003 202.899
1/9/2003 201.708
1/10/2003 201.155
1/13/2003 193.257
1/14/2003 194.578
1/15/2003 195.288
1/16/2003 196.849
1/17/2003 198.646
1/21/2003 200.842
1/22/2003 207.159
1/23/2003 205.342
1/24/2003 205.13
1/27/2003 206.985
1/28/2003 205.809
1/29/2003 203.375
1/30/2003 203.714
1/31/2003 195.685
2/3/2003 194.134
2/4/2003 194.039
2/5/2003 192.579
2/6/2003 192.08
2/7/2003 190.351
2/10/2003 190.254
2/11/2003 189.994
2/12/2003 191.001
2/13/2003 192.477
2/14/2003 192.1
2/18/2003 193.54
2/19/2003 192.764
2/20/2003 192.648
2/21/2003 190.324
2/24/2003 190.256
2/25/2003 189.134
2/26/2003 189.369
2/27/2003 190.046
2/28/2003 183.857
3/3/2003 182.631
3/4/2003 183.21
3/5/2003 183.715
3/6/2003 186.715
3/7/2003 188.785
3/10/2003 188.953
3/11/2003 187.853
3/12/2003 188.763
3/13/2003 185.396
3/14/2003 182.946
3/17/2003 182.574
3/18/2003 181.054
3/19/2003 180.743
3/20/2003 180.85
3/21/2003 179.555
3/24/2003 179.998
3/25/2003 178.413
3/26/2003 174.429
3/27/2003 174.739
3/28/2003 174.659
3/31/2003 173.234
4/1/2003 173.993
4/2/2003 174.642
4/3/2003 172.626
4/4/2003 172.177
4/7/2003 171.305
4/8/2003 172.597
4/9/2003 172.214
4/10/2003 172.66
4/11/2003 172.537
4/14/2003 170.045
4/15/2003 160.526
4/16/2003 158.849
4/17/2003 158.679
4/21/2003 156.106
4/22/2003 154.544
4/23/2003 151.185
4/24/2003 150.941
4/25/2003 151.307
4/28/2003 151.481
4/29/2003 151.125
4/30/2003 142.348
5/1/2003 142.853
5/2/2003 140.531
5/5/2003 139.129
5/6/2003 139.224
5/7/2003 138.045
5/8/2003 138.919
5/9/2003 138.763
5/12/2003 137.837
5/13/2003 139.078
5/14/2003 138.887
5/15/2003 141.294
5/16/2003 142.113
5/19/2003 142.558
5/20/2003 144.196
5/21/2003 142.83
5/22/2003 143.188
5/23/2003 142.163
5/27/2003 144.386
5/28/2003 144.324
5/29/2003 141.234
5/30/2003 136.095
6/2/2003 134.995
6/3/2003 135.393
6/4/2003 135.273
6/5/2003 135.223
6/6/2003 134.038
6/9/2003 131.822
6/10/2003 132.937
6/11/2003 131.72
6/12/2003 132.606
6/13/2003 135.694
6/16/2003 133.417
6/17/2003 131.023
6/18/2003 131.437
6/19/2003 132.684
6/20/2003 133.261
6/23/2003 134.478
6/24/2003 134.464
6/25/2003 133.604
6/26/2003 133.092
6/27/2003 133.749
6/30/2003 134.352
7/1/2003 135.077
7/2/2003 135.96
7/3/2003 136.808
7/7/2003 136.046
7/8/2003 134.485
7/9/2003 133.955
7/10/2003 133.475
7/11/2003 134.054
7/14/2003 133.428
7/15/2003 129.974
7/16/2003 127.409
7/17/2003 126.111
7/18/2003 125.601
7/21/2003 125.186
7/22/2003 125.032
7/23/2003 124.95
7/24/2003 125.95
7/25/2003 125.823
7/28/2003 126.435
7/29/2003 128.385
7/30/2003 127.816
7/31/2003 126.419
8/1/2003 120.581
8/4/2003 123.113
8/5/2003 122.873
8/6/2003 126.706
8/7/2003 126.41
8/8/2003 126.304
8/11/2003 124.613
8/12/2003 124.627
8/13/2003 123.222
8/14/2003 122.226
8/15/2003 131.431
8/18/2003 129.975
8/19/2003 129.946
8/20/2003 128.773
8/21/2003 125.156
9/3/2003 120.242
9/4/2003 120.894
9/5/2003 121.777
9/8/2003 122.749
9/9/2003 122.871
9/10/2003 122.565
9/11/2003 122.007
9/12/2003 121.326
9/15/2003 119.568
9/16/2003 120.99
9/17/2003 118.394
9/18/2003 118.173
9/19/2003 116.664
9/22/2003 119.189
9/23/2003 119.944
9/24/2003 118.086
9/25/2003 116.51
9/26/2003 116.783
9/29/2003 117.672
9/30/2003 115.514
10/1/2003 116.008
10/2/2003 116.574
10/3/2003 117.216
10/6/2003 118.09
10/7/2003 117.974
10/8/2003 117.444
10/9/2003 117.392
10/10/2003 117.078
10/14/2003 118.369
10/15/2003 111.427
10/16/2003 107.965
10/17/2003 107.958
10/20/2003 108.189
10/21/2003 107.899
10/22/2003 108.554
10/23/2003 109.897
10/24/2003 110.585
10/27/2003 111.234
10/28/2003 111.666
10/29/2003 111.326
10/30/2003 109.42
10/31/2003 105.998
11/3/2003 106.009
11/4/2003 106.807
11/5/2003 107.1
11/6/2003 106.533
11/7/2003 105.74
11/10/2003 105.56
11/12/2003 104.032
11/13/2003 105.079
11/14/2003 104.423
11/17/2003 104.355
11/18/2003 103.747
11/19/2003 104.439
11/20/2003 105.939
11/21/2003 105.774
11/24/2003 105.544
11/25/2003 106.284
11/26/2003 104.505
11/28/2003 100.252
12/1/2003 100.14
12/2/2003 100.764
12/3/2003 100.952
12/4/2003 101.186
12/5/2003 103.119
12/8/2003 103.304
12/9/2003 103.548
12/10/2003 104.628
12/11/2003 106.358
12/12/2003 106.589
12/15/2003 105.858
12/16/2003 106.167
12/17/2003 104.885
12/18/2003 104.25
12/19/2003 104.293
12/22/2003 104.254
12/23/2003 101.602
12/24/2003 101.978
12/26/2003 103.064
12/29/2003 102.603
12/30/2003 102.52
12/31/2003 102.902
1/2/2004 102.514
1/5/2004 102.833
1/6/2004 102.274
1/7/2004 102.613
1/8/2004 101.8
1/9/2004 102.141
1/12/2004 102.747
1/13/2004 103.952
1/14/2004 102.862
1/15/2004 100.041
1/16/2004 99.1676
1/20/2004 99.2893
1/21/2004 99.9004
1/22/2004 98.7192
1/23/2004 98.8882
1/26/2004 99.2819
1/27/2004 100.597
1/28/2004 99.9713
1/29/2004 99.9399
1/30/2004 99.291
2/2/2004 99.8112
2/3/2004 100.222
2/4/2004 100.53
2/5/2004 99.5476
2/9/2004 101.254
2/10/2004 100.503
2/11/2004 100.384
2/12/2004 100.744
2/17/2004 99.8444
2/18/2004 99.9672
2/19/2004 99.9198
2/20/2004 99.6456
2/23/2004 100.028
2/24/2004 100.224
2/25/2004 101.242
2/26/2004 101.26
2/27/2004 100.129
3/1/2004 101.133
3/2/2004 99.8177
3/3/2004 99.955
3/4/2004 99.9539
3/5/2004 99.813
3/8/2004 100.873
3/9/2004 102.046
3/10/2004 102.121
3/11/2004 103.127
3/12/2004 103.294
3/15/2004 104.992
3/16/2004 104.775
3/17/2004 104.898
3/18/2004 104.578
3/19/2004 104.751
3/22/2004 104.977
3/23/2004 105.137
3/24/2004 105.289
3/25/2004 106.179
3/26/2004 105.191
3/29/2004 105.118
3/30/2004 105.288
3/31/2004 105.989
4/1/2004 105.576
4/2/2004 103.996
4/5/2004 103.794
4/6/2004 104.199
4/7/2004 103.572
4/8/2004 103.391
4/12/2004 102.911
4/13/2004 102.204
4/14/2004 99.8617
4/15/2004 101.704
4/16/2004 102.452
4/19/2004 101.771
4/20/2004 101.142
4/21/2004 100.816
4/22/2004 101.162
4/23/2004 99.6817
4/26/2004 99.5595
4/27/2004 100.734
4/28/2004 100.685
4/29/2004 101.78
4/30/2004 102.101
5/3/2004 102.293
5/4/2004 103.121
5/5/2004 103.243
5/6/2004 106.426
5/7/2004 104.185
5/10/2004 106.11
5/11/2004 106.564
5/12/2004 107.683
5/13/2004 108.01
5/14/2004 111.674
5/17/2004 111.635
5/18/2004 111.602
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5/4/2007 120
5/7/2007 120.061
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7/20/2007 129.144
7/23/2007 129.888
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7/25/2007 133.69
7/26/2007 138.774
7/27/2007 142.104
7/30/2007 147.354
7/31/2007 147.025
8/1/2007 148.436
8/2/2007 147.489
8/3/2007 147.977
8/6/2007 148.801
8/7/2007 149.165
8/8/2007 144.257
8/9/2007 143.484
8/10/2007 146.35
8/13/2007 145.523
8/14/2007 146.08
8/15/2007 151.095
8/16/2007 156.666
8/17/2007 155.847
8/20/2007 156.234
8/21/2007 157.799
8/22/2007 157.857
8/23/2007 156.149
8/24/2007 156.609
8/27/2007 156.525
8/28/2007 157.451
8/29/2007 159.244
8/30/2007 162.477
8/31/2007 160.517
9/4/2007 160.919
9/5/2007 160.851
9/6/2007 162.623
9/7/2007 165.27
9/10/2007 168.031
9/11/2007 168.955
9/12/2007 171.093
9/13/2007 170.471
9/14/2007 172.702
9/17/2007 172.14
9/18/2007 169.413
9/19/2007 167.329
9/20/2007 164.825
9/21/2007 160.889
9/24/2007 160.229
9/25/2007 162.66
9/26/2007 162.381
9/27/2007 161.755
9/28/2007 166.587
10/1/2007 165.717
10/2/2007 164.113
10/3/2007 162.274
10/4/2007 159.316
10/5/2007 157.436
10/9/2007 156.229
10/10/2007 153.013
10/11/2007 151.709
10/12/2007 150.97
10/15/2007 152.093
10/16/2007 153.742
10/17/2007 155.986
10/18/2007 157.402
10/19/2007 158.486
10/22/2007 161.843
10/23/2007 159.495
10/24/2007 160.48
10/25/2007 160.383
10/26/2007 160.709
10/29/2007 160.1
10/30/2007 160.279
10/31/2007 156.394
11/1/2007 158.347
11/5/2007 163.047
11/6/2007 162.885
11/7/2007 164.989
11/8/2007 166.328
11/9/2007 169.471
11/13/2007 170.772
11/14/2007 172.215
11/15/2007 177.019
11/16/2007 179.862
11/19/2007 181.164
11/20/2007 181.912
11/21/2007 182.492
11/23/2007 182.87
11/26/2007 182.609
11/27/2007 184.254
11/28/2007 185.928
11/29/2007 188.082
11/30/2007 200.081
12/3/2007 200.63
12/4/2007 201.68
12/6/2007 204.606
12/7/2007 204.442
12/10/2007 202.295
12/11/2007 202.007
12/12/2007 202.161
12/13/2007 201.747
12/14/2007 198.187
12/17/2007 198.93
12/18/2007 198.805
12/19/2007 198.76
12/20/2007 197.927
12/21/2007 197.592
12/24/2007 197.919
12/26/2007 196.839
12/27/2007 196.812
12/28/2007 196.888
12/31/2007 198.307
1/2/2008 197.821
1/3/2008 201.944
1/4/2008 203.875
1/7/2008 203.841
1/8/2008 206.554
1/9/2008 209.206
1/10/2008 212.962
1/11/2008 213.48
1/14/2008 214.282
1/15/2008 219.62
1/16/2008 221.696
1/17/2008 222.298
1/18/2008 223.542
1/22/2008 232.051
1/23/2008 229.612
1/24/2008 230.24
1/25/2008 226.218
1/28/2008 227.689
1/29/2008 227.134
1/30/2008 226.957
1/31/2008 231.212
2/1/2008 230.653
2/4/2008 230.919
2/5/2008 230.208
2/6/2008 232.338
2/7/2008 234.921
2/8/2008 234.991
2/11/2008 235.134
2/12/2008 238.106
2/13/2008 239.94
2/14/2008 243.292
2/15/2008 245.802
2/19/2008 245.265
2/20/2008 246.471
2/21/2008 246.513
2/22/2008 248.089
2/25/2008 246.455
2/26/2008 246.489
2/27/2008 246.311
2/28/2008 246.867
2/29/2008 258.707
3/3/2008 261.202
3/4/2008 262.327
3/5/2008 266.495
3/6/2008 269.117
3/7/2008 273.495
3/10/2008 271.898
3/11/2008 275.376
3/12/2008 273.456
3/13/2008 280.617
3/14/2008 291.277
3/17/2008 296.461
3/18/2008 297.92
3/19/2008 295.18
3/20/2008 293.898
3/24/2008 294.364
3/25/2008 290.302
3/26/2008 289.143
3/27/2008 290.829
3/28/2008 291.261
3/31/2008 293.085
4/1/2008 293.057
4/2/2008 291.457
4/3/2008 289.633
4/4/2008 285.471
4/7/2008 282.04
4/8/2008 280.065
4/9/2008 279.612
4/10/2008 281.495
4/11/2008 282.072
4/14/2008 283.22
4/15/2008 281.182
4/16/2008 279.606
4/17/2008 275.535
4/18/2008 271.373
4/21/2008 266.886
4/22/2008 264.357
4/23/2008 264.23
4/24/2008 263.303
4/25/2008 261.538
4/28/2008 258.112
4/29/2008 253.951
4/30/2008 253.605
5/1/2008 251.379
5/2/2008 246.14
5/5/2008 245.315
5/6/2008 248.866
5/7/2008 249.791
5/8/2008 252.454
5/9/2008 253.947
5/12/2008 253.446
5/13/2008 254.416
5/14/2008 254.374
5/15/2008 247.726
5/16/2008 246.249
5/19/2008 246.172
5/20/2008 247.578
5/21/2008 251.381
5/22/2008 254.012
5/23/2008 254.582
5/27/2008 252.456
5/28/2008 250.03
5/29/2008 248.362
5/30/2008 245.666
6/2/2008 247.371
6/3/2008 249.526
6/4/2008 250.883
6/5/2008 248.324
6/6/2008 245.986
6/9/2008 245.837
6/10/2008 247.395
6/11/2008 248.784
6/12/2008 248.5
6/13/2008 248.413
6/16/2008 249.449
6/17/2008 251.15
6/18/2008 252.026
6/19/2008 253.32
6/20/2008 256.239
6/23/2008 257.392
6/24/2008 262.615
6/25/2008 260.568
6/26/2008 266.177
6/27/2008 270.956
6/30/2008 268.724
7/1/2008 272.214
7/2/2008 273.783
7/3/2008 273.757
7/7/2008 274.379
7/8/2008 275.387
7/9/2008 275.55
7/10/2008 276.207
7/11/2008 279.184
7/14/2008 276.373
7/15/2008 282.101
7/16/2008 285.34
7/17/2008 284.205
7/18/2008 287.445
7/21/2008 286.991
7/22/2008 286.921
7/23/2008 283.138
7/24/2008 282.691
7/25/2008 281.916
7/28/2008 282.756
7/29/2008 284.427
7/30/2008 285.58
7/31/2008 288.697
8/1/2008 288.264
8/4/2008 288.863
8/5/2008 289.86
8/6/2008 290.256
8/7/2008 291.219
8/8/2008 290.368
8/11/2008 289.975
8/12/2008 290.35
8/13/2008 291.199
8/14/2008 293.127
8/15/2008 293.285
8/18/2008 292.63
8/19/2008 295.293
8/20/2008 296.731
8/21/2008 296.575
8/22/2008 298.939
8/25/2008 299.321
8/26/2008 297.831
8/27/2008 300.988
8/28/2008 300.896
8/29/2008 295.896
9/2/2008 298.539
9/3/2008 298.002
9/4/2008 297.995
9/5/2008 302.179
9/8/2008 298.018
9/9/2008 300.215
9/10/2008 304.349
9/11/2008 307.451
9/12/2008 310.841
9/15/2008 319.119
9/16/2008 320.862
9/17/2008 323.906
9/18/2008 339.495
9/19/2008 340.299
9/22/2008 337.775
9/23/2008 337.668
9/24/2008 332.672
9/25/2008 334.482
9/26/2008 345.078
9/29/2008 360.418
9/30/2008 331.956
10/1/2008 371.883
10/2/2008 375.777
10/3/2008 378.826
10/6/2008 414.672
10/7/2008 410.777
10/8/2008 436.301
10/9/2008 437.565
10/10/2008 447.865
10/14/2008 460.113
10/15/2008 534.393
10/16/2008 539.938
10/17/2008 578.087
10/20/2008 586.139
10/21/2008 576.585
10/22/2008 574.914
10/23/2008 573.438
10/24/2008 581.824
10/27/2008 579.612
10/28/2008 585.927
10/29/2008 587.572
10/30/2008 582.621
10/31/2008 648.291
11/3/2008 656.32
11/4/2008 658.869
11/5/2008 658.899
11/6/2008 664.254
11/7/2008 664.694
11/10/2008 638.854
11/12/2008 648.589
11/13/2008 653.717
11/14/2008 715.654
11/17/2008 721.407
11/18/2008 733.24
11/19/2008 755.132
11/20/2008 775.016
11/21/2008 798.616
11/24/2008 800.427
11/25/2008 785.532
11/26/2008 790.857
11/28/2008 810.328
12/1/2008 811.943
12/2/2008 809.582
12/3/2008 815.803
12/4/2008 822.475
12/5/2008 820.774
12/8/2008 816.389
12/9/2008 816.761
12/10/2008 808.983
12/11/2008 803.726
12/12/2008 805.186
12/15/2008 803.135
12/16/2008 804.658
12/17/2008 806.326
12/18/2008 815.436
12/19/2008 819.636
12/22/2008 824.527
12/23/2008 825.781
12/24/2008 827.789
12/26/2008 829.587
12/29/2008 823.339
12/30/2008 823.429
12/31/2008 802.946
1/2/2009 807.92
1/5/2009 804.142
1/6/2009 792.975
1/7/2009 785.021
1/8/2009 781.581
1/9/2009 775.281
1/12/2009 774.573
1/13/2009 775.317
1/14/2009 774.547
1/15/2009 779.776
1/16/2009 777.211
1/20/2009 769.069
1/21/2009 765.129
1/22/2009 763.287
1/23/2009 767.232
1/26/2009 768.767
1/27/2009 772.606
1/28/2009 764.286
1/29/2009 754.868
1/30/2009 749.574
2/2/2009 762.021
2/3/2009 762.127
2/4/2009 772.315
2/5/2009 764.435
2/6/2009 773.332
2/9/2009 766.109
2/10/2009 750.77
2/11/2009 750.831
2/12/2009 748.891
2/13/2009 733.285
2/17/2009 742.788
2/18/2009 777.862
2/19/2009 771.494
2/20/2009 776.109
2/23/2009 784.564
2/24/2009 788.259
2/25/2009 792.766
2/26/2009 792.466
2/27/2009 746.157
3/2/2009 748.645
3/3/2009 772.804
3/4/2009 778.051
3/5/2009 789.852
3/6/2009 794.482
3/9/2009 796.642
3/10/2009 794.442
3/11/2009 792.232
3/12/2009 790.255
3/13/2009 794.234
3/16/2009 792.66
3/17/2009 792.524
3/18/2009 805.014
3/19/2009 803.245
3/20/2009 805.884
3/23/2009 800.96
3/24/2009 798.712
3/25/2009 795.422
3/26/2009 792.975
3/27/2009 792.196
3/30/2009 788.617
3/31/2009 787.111
4/1/2009 791.528
4/2/2009 789.994
4/3/2009 789.573
4/6/2009 788.046
4/7/2009 786.881
4/8/2009 787.857
4/9/2009 783.036
4/13/2009 774.923
4/14/2009 762.329
4/15/2009 753.791
4/16/2009 735.701
4/17/2009 721.083
4/20/2009 715.083
4/21/2009 716.321
4/22/2009 700.193
4/23/2009 697.926
4/24/2009 689.055
4/27/2009 655.414
4/28/2009 656.875
4/29/2009 642.256
4/30/2009 561.748
5/1/2009 555.372
5/4/2009 550.719
5/5/2009 536.781
5/6/2009 519.952
5/7/2009 499.939
5/8/2009 491.665
5/11/2009 494.355
5/12/2009 495.57
5/13/2009 501.64
5/14/2009 507.124
5/15/2009 489.945
5/18/2009 477.756
5/19/2009 467.809
5/20/2009 463.419
5/21/2009 458.72
5/22/2009 455.79
5/26/2009 453.503
5/27/2009 450.017
5/28/2009 442.706
5/29/2009 421.868
6/1/2009 415.255
6/2/2009 400.819
6/3/2009 392.726
6/4/2009 394.979
6/5/2009 392.653
6/8/2009 392.71
6/9/2009 390.456
6/10/2009 379.454
6/11/2009 372.638
6/12/2009 368.044
6/15/2009 362.851
6/16/2009 357.359
6/17/2009 363.943
6/18/2009 365.542
6/19/2009 363.352
6/22/2009 362.898
6/23/2009 364.027
6/24/2009 367.132
6/25/2009 365.688
6/26/2009 363.915
6/29/2009 365.921
6/30/2009 359.79
7/1/2009 358.307
7/2/2009 356.986
7/6/2009 357.319
7/7/2009 355.597
7/8/2009 357.669
7/9/2009 356.231
7/10/2009 354.982
7/13/2009 354.655
7/14/2009 354.771
7/15/2009 353.863
7/16/2009 348.069
7/17/2009 341.439
7/20/2009 335.853
7/21/2009 327.643
7/22/2009 322.24
7/23/2009 322.352
7/24/2009 317.386
7/27/2009 315.46
7/28/2009 307.954
7/29/2009 303.693
7/30/2009 295.592
7/31/2009 287.701
8/3/2009 280.038
8/4/2009 280.122
8/5/2009 277.801
8/6/2009 275.555
8/7/2009 273.931
8/10/2009 267.242
8/11/2009 271.014
8/12/2009 271.273
8/13/2009 264.088
8/14/2009 264.47
8/17/2009 267.718
8/18/2009 273.511
8/19/2009 273.137
8/20/2009 269.092
8/21/2009 267.075
8/24/2009 263.568
8/25/2009 259.987
8/26/2009 260.211
8/27/2009 258.012
8/28/2009 252.664
8/31/2009 249.301
9/1/2009 252.769
9/2/2009 256.397
9/3/2009 257.968
9/4/2009 253.984
9/8/2009 250.05
9/9/2009 247.067
9/10/2009 246.244
9/11/2009 244.487
9/14/2009 241.072
9/15/2009 244.014
9/16/2009 235.651
9/17/2009 235.087
9/18/2009 234.965
9/21/2009 233.574
9/22/2009 232.396
9/23/2009 232.978
9/24/2009 232.572
9/25/2009 228.537
9/28/2009 231.147
9/29/2009 232.754
9/30/2009 233.686
10/1/2009 235.974
10/2/2009 239.935
10/5/2009 240.298
10/6/2009 241.003
10/7/2009 237.691
10/8/2009 238.462
10/9/2009 237.778
10/13/2009 236.865
10/14/2009 235.406
10/15/2009 232.857
10/16/2009 230.858
10/19/2009 229.942
10/20/2009 227.595
10/21/2009 226.344
10/22/2009 226.758
10/23/2009 224.593
10/26/2009 222.708
10/27/2009 224.04
10/28/2009 225.448
10/29/2009 224.259
10/30/2009 224.886
11/2/2009 224.475
11/3/2009 226.079
11/4/2009 226.119
11/5/2009 224.074
11/6/2009 221.174
11/9/2009 218.246
11/10/2009 216.741
11/12/2009 215.745
11/13/2009 215.712
11/16/2009 215.877
11/17/2009 215.142
11/18/2009 216.018
11/19/2009 218.279
11/20/2009 219.059
11/23/2009 219.192
11/24/2009 222.724
11/25/2009 228.823
11/27/2009 218.855
11/30/2009 223.071
12/1/2009 223.305
12/2/2009 222.27
12/3/2009 220.915
12/4/2009 218.738
12/7/2009 217.091
12/8/2009 212.709
12/9/2009 210.199
12/10/2009 207.527
12/11/2009 204.401
12/14/2009 202.923
12/15/2009 196.287
12/16/2009 195.346
12/17/2009 194.064
12/18/2009 192.651
12/21/2009 193.426
12/22/2009 191.56
12/23/2009 186.166
12/24/2009 187.529
12/28/2009 187.043
12/29/2009 185.914
12/30/2009 185.175
12/31/2009 181.801
1/4/2010 180.213
1/5/2010 174.327
1/6/2010 170.776
1/7/2010 169.185
1/8/2010 169.706
1/11/2010 168.505
1/12/2010 168.318
1/13/2010 168.172
1/14/2010 167.129
1/15/2010 167.036
1/19/2010 167.851
1/20/2010 167.971
1/21/2010 167.974
1/22/2010 171.532
1/25/2010 174.292
1/26/2010 176.764
1/27/2010 174.481
1/28/2010 173.585
1/29/2010 169.15
[END CHART]
Source: Barclays Capital
One way to measure fear in the market is the difference in yield (the
"spread") between BBB-rated, 10-year corporate bonds and 10-year U.S.
Treasury bonds. The spread measures how much additional yield investors
demand to purchase corporate bonds. Since bond prices and yields move in
opposite directions, a widening spread means that corporate bonds will
underperform U.S. Treasury securities. When the spread narrows, investors
have less fear of owning corporate bonds and they outperform U.S. Treasury
securities. The chart above tracks that spread, and the rapid narrowing of
spreads clearly illustrates that investors have re-embraced risk. The good
news is that the Fund continued to benefit from very strong capital
appreciation on bonds we bought at the height of the credit crisis when
others were so fearful.
At the same time, today's much tighter yield spreads (and higher prices)
mean there are fewer opportunities for us to find the assets at the low
prices that led the Fund to have such stellar performance in this reporting
period.
================================================================================
MANAGER'S COMMENTARY ON THE FUND | 5
<PAGE>
================================================================================
o FOCUSING SPECIFICALLY ON THE PAST SIX MONTHS, HOW DID THE FUND ACHIEVE
STRONG PERFORMANCE RELATIVE TO ITS PEERS AND THE BARCLAYS CAPITAL U.S.
AGGREGATE BOND INDEX?
Our best performance came from commercial mortgage-backed securities, real
estate investment trust bonds and preferred securities, and corporate
bonds, especially within the financial sector. We not only enjoyed price
appreciation, but continued to collect the high income from these bonds. We
had exited our positions in regular U.S. Treasury securities well before
the period began, keeping only our positions in Treasury Inflation
Protected Securities, also known as "TIPS," so we weren't held back by
their lower relative returns.
o HOW HAVE YOU MANAGED THE FUND AS THE PENDULUM HAS SWUNG FROM FEAR TO GREED?
In the beginning of the period, we continued to invest in well-priced
assets where we believed we were being compensated for the risk. Toward the
end of the period, there was hardly any incentive to chase what little
yield advantage was available on higher-risk assets. We are now wary of how
assets will perform as the government continues to exit from the multitude
of quantitative easing programs that buttressed the rally in risk assets.
We've built up cash to be in a position to re-deploy to what we expect will
be substantially better opportunities as 2010 unfolds. Holding cash,
floating-rate securities, and shorter-term bonds has brought our
distribution yield down, but we feel that it will stabilize the Fund as the
end of quantitative easing is priced into the market. We want to protect
the performance advantage shareholders in the Fund booked during, and
since, the financial crisis.
o IT SOUNDS LIKE YOU'RE BEING OPPORTUNISTIC, YET CAUTIOUS.
The volatility we've seen in the bond market since the credit crisis began
in 2007 has given us plenty of opportunity, but our job is to
You will find a complete list of securities that the Fund owns on pages
19-37.
================================================================================
6 | USAA INCOME FUND
<PAGE>
================================================================================
balance opportunity against the risks. The Fund can invest in many
different sectors. As the economy adjusts to the end of quantitative
easing, we may see renewed opportunities in U.S. Treasuries and
mortgage-backed securities. We will continue to work hard to provide
competitive income to shareholders while buying only those bonds where we
think we're being paid for the risks.
As interest rates rise, existing bond prices fall.
================================================================================
MANAGER'S COMMENTARY ON THE FUND | 7
<PAGE>
================================================================================
FUND RECOGNITION
USAA INCOME FUND SHARES
--------------------------------------------------------------------------------
OVERALL MORNINGSTAR RATING(TM)
out of 986 intermediate-term bond funds
for the period ended January 31, 2010:
OVERALL RATING
* * * *
3-YEAR
* * * *
out of 986 funds
5-YEAR
* * * *
out of 862 funds
10-YEAR
* * * *
out of 495 funds
The Overall Morningstar Rating for a fund is derived from a weighted average of
the performance figures associated with its three-, five-, and 10-year (if
applicable) Morningstar Rating metrics. Ratings are based on risk-adjusted
returns.
--------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. For each fund with at least
a three-year history, Morningstar calculates a Morningstar Rating(TM) based on a
Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's
monthly performance (including the effects of sales charges, loads, and
redemption fees), placing more emphasis on downward variations and rewarding
consistent performance. The top 10% of the funds in each broad asset class
receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars,
the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.
================================================================================
8 | USAA INCOME FUND
<PAGE>
================================================================================
LIPPER LEADER (OVERALL)
[5]
TOTAL RETURN
The Income Fund Shares are listed as a Lipper Leader for Total Return among 145
funds within the Lipper Corporate Debt Funds A Rated Funds category for the
period ending January 31, 2010, and received a Lipper Leader rating among 145,
134, and 69 funds for the three-, five-, and 10-year periods, respectively.
Lipper ratings for Total Return reflect funds' historical total return
performance relative to peers as of January 31, 2010.
--------------------------------------------------------------------------------
Ratings are subject to change every month and are based on an equal-weighted
average of percentile ranks for the Preservation 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.
================================================================================
FUND RECOGNITION | 9
<PAGE>
================================================================================
INVESTMENT OVERVIEW
USAA INCOME FUND SHARES (Symbol: USAIX)
--------------------------------------------------------------------------------
1/31/10 7/31/09
--------------------------------------------------------------------------------
Net Assets $2,439.6 Million $2,081.0 Million
Net Asset Value Per Share $12.51 $11.86
--------------------------------------------------------------------------------
SIX-MONTH TOTAL RETURN 30-DAY SEC YIELD** EXPENSE RATIO***
--------------------------------------------------------------------------------
7/31/09 to 1/31/10* As of 1/31/10 0.65%
8.13% 3.87%
*Total returns for periods of less than one year are not annualized. This
six-month return is cumulative.
**Calculated as prescribed by the Securities and Exchange Commission.
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.
================================================================================
10 | USAA INCOME FUND
<PAGE>
================================================================================
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS -- PERIODS
ENDED JANUARY 31, 2010
--------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
--------------------------------------------------------------------------------
10 Years 6.59% = 5.52% + 1.07%
5 Years 5.32% = 5.24% + 0.08%
1 Year 22.04% = 6.53% + 15.51%
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.
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR ONE-YEAR PERIODS ENDED
JANUARY 31, 2001 -- JANUARY 31, 2010
[CHART OF TOTAL RETURN, DIVIDEND RETURN AND CHANGE IN SHARE PRICE]
TOTAL RETURN DIVIDEND RETURN CHANGE IN SHARE PRICE
1/31/2001 15.46% 7.64% 7.82%
1/31/2002 6.33% 6.66% -0.33%
1/31/2003 8.08% 5.68% 2.40%
1/31/2004 5.45% 4.64% 0.81%
1/31/2005 4.39% 4.55% -0.16%
1/31/2006 2.23% 4.72% -2.49%
1/31/2007 4.23% 4.89% -0.66%
1/31/2008 6.75% 5.26% 1.49%
1/31/2009 -6.65% 4.94% -11.59%
1/31/2010 22.04% 6.53% 15.51%
[END CHART]
NOTE THE ROLE THAT DIVIDEND RETURNS PLAY IN THE FUND SHARES' TOTAL RETURN
OVER TIME. WHILE SHARE PRICES TEND TO VARY, DIVIDEND RETURNS GENERALLY ARE A
RELATIVELY STABLE COMPONENT OF TOTAL RETURNS.
Total return equals dividend return plus share price change and assumes
reinvestment of all net investment income and realized capital gain
distributions. Dividend return is the net investment income dividends received
over the period, assuming reinvestment of all dividends. Share price change is
the change in net asset value over the period adjusted for 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.
================================================================================
INVESTMENT OVERVIEW | 11
<PAGE>
================================================================================
o 12-MONTH DIVIDEND YIELD COMPARISON o
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
LIPPER CORPORATE DEBT
USAA INCOME FUND SHARES FUNDS A RATED AVERAGE
1/31/2000 6.72% 6.12%
1/31/2001 6.58 6.03
1/31/2002 6.55 5.53
1/31/2003 5.31 4.89
1/31/2004 4.49 4.05
1/31/2005 4.42 3.88
1/31/2006 4.79 4.12
1/31/2007 4.79 4.38
1/31/2008 4.98 4.59
1/31/2009 5.80 5.46
1/31/2010 5.16 4.34
[END CHART]
The 12-month dividend yield is computed by dividing net investment income
dividends paid during the previous 12 months by the latest adjusted month-end
net asset value. The net asset value is adjusted for a portion of the capital
gains, if any, distributed during the previous nine months. The graph represents
data for periods ending 7/31/01 to 1/31/10.
The Lipper Corporate Debt Funds A Rated Average is the average performance level
of all corporate A rated debt funds, reported by Lipper Inc., an independent
organization that monitors the performance of mutual funds.
================================================================================
12 | USAA INCOME FUND
<PAGE>
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS CAPITAL
USAA INCOME U.S. AGGREGATE BOND LIPPER A RATED BOND
FUND SHARES INDEX FUNDS INDEX
01/31/00 $10,000.00 $10,000.00 $10,000.00
02/29/00 10,153.28 10,120.94 10,105.90
03/31/00 10,316.94 10,254.27 10,242.97
04/30/00 10,282.99 10,224.90 10,159.42
05/31/00 10,321.59 10,220.21 10,120.22
06/30/00 10,543.54 10,432.84 10,345.83
07/31/00 10,656.79 10,527.54 10,433.54
08/31/00 10,807.60 10,680.13 10,572.15
09/30/00 10,913.06 10,747.27 10,630.73
10/31/00 10,944.54 10,818.39 10,675.39
11/30/00 11,095.27 10,995.28 10,833.16
12/31/00 11,321.94 11,199.25 11,054.99
01/31/01 11,545.76 11,382.40 11,260.68
02/28/01 11,647.07 11,481.55 11,362.34
03/31/01 11,729.59 11,539.19 11,402.63
04/30/01 11,686.99 11,491.30 11,338.07
05/31/01 11,780.29 11,560.61 11,412.77
06/30/01 11,853.80 11,604.29 11,458.91
07/31/01 12,133.78 11,863.73 11,719.02
08/31/01 12,257.62 11,999.59 11,851.18
09/30/01 12,352.78 12,139.42 11,897.32
10/31/01 12,577.85 12,393.44 12,153.82
11/30/01 12,324.64 12,222.57 12,006.35
12/31/01 12,180.33 12,144.96 11,916.09
01/31/02 12,277.12 12,243.27 11,999.49
02/28/02 12,364.73 12,361.92 12,088.76
03/31/02 12,135.85 12,156.27 11,895.66
04/30/02 12,322.67 12,392.00 12,106.81
05/31/02 12,438.29 12,497.29 12,198.98
06/30/02 12,533.31 12,605.35 12,251.50
07/31/02 12,582.36 12,757.45 12,324.75
08/31/02 12,865.55 12,972.85 12,550.66
09/30/02 13,082.83 13,182.96 12,745.11
10/31/02 12,914.45 13,122.91 12,617.11
11/30/02 12,944.98 13,119.42 12,661.92
12/31/02 13,231.98 13,390.41 12,937.29
01/31/03 13,269.52 13,401.84 12,964.92
02/28/03 13,457.25 13,587.28 13,153.87
03/31/03 13,431.72 13,576.81 13,144.18
04/30/03 13,533.44 13,688.84 13,291.19
05/31/03 13,832.05 13,944.07 13,568.80
06/30/03 13,839.75 13,916.39 13,537.95
07/31/03 13,335.00 13,448.53 13,073.57
08/31/03 13,436.08 13,537.82 13,160.38
09/30/03 13,791.70 13,896.18 13,520.34
10/31/03 13,714.39 13,766.58 13,411.14
11/30/03 13,764.12 13,799.55 13,453.65
12/31/03 13,881.01 13,939.98 13,586.41
01/31/04 13,992.88 14,052.13 13,700.71
02/29/04 14,135.38 14,204.23 13,830.99
03/31/04 14,247.96 14,310.61 13,937.00
04/30/04 13,854.98 13,938.29 13,595.03
05/31/04 13,802.90 13,882.46 13,525.60
06/30/04 13,877.12 13,960.92 13,594.86
07/31/04 14,032.76 14,099.30 13,724.77
08/31/04 14,279.46 14,368.25 13,982.75
09/30/04 14,333.36 14,407.23 14,027.92
10/31/04 14,454.76 14,528.05 14,142.38
11/30/04 14,368.81 14,412.17 14,056.72
12/31/04 14,508.66 14,544.78 14,199.34
01/31/05 14,606.95 14,636.11 14,297.43
02/28/05 14,544.69 14,549.71 14,240.80
03/31/05 14,491.95 14,474.98 14,154.65
04/30/05 14,694.01 14,670.89 14,342.69
05/31/05 14,835.38 14,829.61 14,507.33
06/30/05 14,904.48 14,910.47 14,591.37
07/31/05 14,781.33 14,774.74 14,458.63
08/31/05 14,991.64 14,964.14 14,653.75
09/30/05 14,856.63 14,810.00 14,479.87
10/31/05 14,747.89 14,692.79 14,346.03
11/30/05 14,803.44 14,757.77 14,418.61
12/31/05 14,938.74 14,898.08 14,558.45
01/31/06 14,932.62 14,898.92 14,550.47
02/28/06 14,986.83 14,948.38 14,604.32
03/31/06 14,851.10 14,801.69 14,438.80
04/30/06 14,784.40 14,774.86 14,380.86
05/31/06 14,784.24 14,759.09 14,374.29
06/30/06 14,814.58 14,790.38 14,384.27
07/31/06 15,002.79 14,990.38 14,574.37
08/31/06 15,228.24 15,219.85 14,806.55
09/30/06 15,368.47 15,353.54 14,937.05
10/31/06 15,480.40 15,455.11 15,044.38
11/30/06 15,644.91 15,634.40 15,226.47
12/31/06 15,560.63 15,543.67 15,125.72
01/31/07 15,564.72 15,537.29 15,118.73
02/28/07 15,816.42 15,776.88 15,373.21
03/31/07 15,800.83 15,777.36 15,341.20
04/30/07 15,851.72 15,862.44 15,421.88
05/31/07 15,708.21 15,742.22 15,301.25
06/30/07 15,645.38 15,695.65 15,230.52
07/31/07 15,766.54 15,826.58 15,313.60
08/31/07 15,939.87 16,020.56 15,431.01
09/30/07 16,042.31 16,142.09 15,555.19
10/31/07 16,166.04 16,287.10 15,671.26
11/30/07 16,377.92 16,579.99 15,852.85
12/31/07 16,343.22 16,626.56 15,814.19
01/31/08 16,614.82 16,905.85 16,015.71
02/29/08 16,600.68 16,929.32 15,971.84
03/31/08 16,617.37 16,987.08 15,893.25
04/30/08 16,639.70 16,951.58 15,951.99
05/31/08 16,597.05 16,827.28 15,846.44
06/30/08 16,535.03 16,813.68 15,790.92
07/31/08 16,456.17 16,799.96 15,667.29
08/31/08 16,571.09 16,959.40 15,711.50
09/30/08 16,102.18 16,731.61 15,184.09
10/31/08 15,215.56 16,336.67 14,383.83
11/30/08 15,210.16 16,868.43 14,533.85
12/31/08 15,519.44 17,497.78 15,071.58
01/31/09 15,510.39 17,343.39 15,030.15
02/28/09 15,486.82 17,277.93 14,852.24
03/31/09 15,727.34 17,518.12 15,028.90
04/30/09 16,090.86 17,601.87 15,328.48
05/31/09 16,724.28 17,729.54 15,739.91
06/30/09 17,031.60 17,830.38 16,015.77
07/31/09 17,505.62 18,117.98 16,498.71
08/31/09 17,925.03 18,305.58 16,698.83
09/30/09 18,257.37 18,497.87 17,111.12
10/31/09 18,423.20 18,589.21 17,249.86
11/30/09 18,669.82 18,829.88 17,453.77
12/31/09 18,582.99 18,535.54 17,291.04
01/31/10 18,928.60 18,818.68 17,575.30
[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 Fund Shares to the following benchmarks:
o The unmanaged Barclays Capital U.S. Aggregate Bond Index covers the U.S.
investment-grade rated bond market, including government and credit
securities, agency mortgage pass-through securities, asset-backed securities,
and commercial mortgage-backed securities that have remaining maturities of
more than one year.
o The unmanaged Lipper A Rated Bond Funds Index tracks the total return
performance of the 30 largest funds within the Lipper Corporate Debt Funds A
Rated 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 into an index.
================================================================================
INVESTMENT OVERVIEW | 13
<PAGE>
================================================================================
USAA INCOME FUND INSTITUTIONAL SHARES*
--------------------------------------------------------------------------------
1/31/10 7/31/09
--------------------------------------------------------------------------------
Net Assets $127.6 Million $59.7 Million
Net Asset Value Per Share $12.51 $11.86
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN AS OF 1/31/10
--------------------------------------------------------------------------------
7/31/09 to 1/31/10** 1 Year Since Inception 8/01/08
8.25% 22.47% 9.94%
--------------------------------------------------------------------------------
EXPENSE RATIO***
--------------------------------------------------------------------------------
0.38%
*The USAA Income 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 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 INSTITUTIONAL SHARES' PROSPECTUS DATED DECEMBER
1, 2009, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. USAA
INVESTMENT MANAGEMENT COMPANY (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 0.40% OF THE INSTITUTIONAL SHARES' AVERAGE DAILY
NET ASSETS. IF THE INSTITUTIONAL SHARES' TOTAL ANNUAL OPERATING EXPENSE RATIO IS
LOWER THAN 0.40%, THE INSTITUTIONAL SHARES WILL OPERATE AT THE LOWER EXPENSE
RATIO. 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. THIS EXPENSE
RATIO 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.
================================================================================
14 | USAA INCOME FUND
<PAGE>
================================================================================
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA INCOME FUND LIPPER A RATED BARCLAYS CAPITAL U.S.
INSTITUTIONAL SHARES BOND FUNDS INDEX AGGREGATE BOND INDEX
07/31/08 $10,000.00 $10,000.00 $10,000.00
08/31/08 10,055.01 10,028.22 10,094.91
09/30/08 9,773.05 9,691.59 9,959.32
10/31/08 9,237.79 9,180.80 9,724.23
11/30/08 9,236.65 9,276.55 10,040.76
12/31/08 9,427.63 9,619.78 10,415.37
01/31/09 9,415.64 9,593.33 10,323.47
02/28/09 9,411.92 9,479.78 10,284.50
03/31/09 9,560.51 9,592.54 10,427.47
04/30/09 9,783.97 9,783.75 10,477.33
05/31/09 10,171.39 10,046.35 10,553.32
06/30/09 10,360.57 10,222.43 10,613.35
07/31/09 10,652.16 10,530.67 10,784.54
08/31/09 10,900.47 10,658.41 10,896.20
09/30/09 11,105.20 10,921.56 11,010.66
10/31/09 11,217.48 11,010.12 11,065.03
11/30/09 11,370.44 11,140.26 11,208.28
12/31/09 11,309.79 11,036.39 11,033.08
01/31/10 11,531.30 11,217.83 11,201.62
[END CHART]
*Data from 7/31/08 to 1/31/10.
See page 13 for benchmark definitions.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Income Fund Institutional Shares to the benchmarks.
*The performance of the Barclays Capital U.S. Aggregate Bond Index and the
Lipper A Rated Bond Funds 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.
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.
================================================================================
INVESTMENT OVERVIEW | 15
<PAGE>
================================================================================
o PORTFOLIO RATINGS MIX -- 1/31/2010 o
[PIE CHART OF PORTFOLIO RATINGS MIX]
AAA 37%
AA 9%
A 20%
BBB 25%
BELOW INVESTMENT-GRADE 1%
SECURITIES WITH SHORT-TERM INVESTMENT-GRADE RATINGS 8%
[END CHART]
The four highest long-term credit ratings, in descending order of credit
quality, are AAA, AA, A, and BBB. These categories represent investment-grade
quality. This chart reflects the highest rating of either Moody's Investors
Service, Standard & Poor's Ratings, Fitch Ratings, Dominion Bond Rating Service
Ltd., or A.M. Best Co., Inc., and includes any related credit enhancements. If
any of the Fund's securities are unrated by these agencies, USAA Investment
Management Company must determine that the securities are of equivalent
investment quality.
Percentages are of the total market value of the Fund's investments.
You will find a complete list of securities that the Fund owns on pages 19-37.
================================================================================
16 | USAA INCOME FUND
<PAGE>
================================================================================
TOP 10 SECURITIES* -- 1/31/2010
--------------------------------------------------------------------------------
COUPON RATE % % OF NET ASSETS
------------------------------------
U.S. Treasury
Inflation-Indexed Notes .............. 2.38% 2.1%
U.S. Treasury
Inflation-Indexed Notes .............. 1.75% 1.4%
Household Finance Corp. ................. 6.38% 1.0%
ConocoPhillips .......................... 8.75% 0.9%
Region of Lombardy ...................... 5.80% 0.9%
Fannie Mae Mortgage-Backed
Pass-Through ......................... 5.50% 0.8%
Fannie Mae Mortgage-Backed
Pass-Through ......................... 5.00% 0.8%
Landesbank
Baden-Wuerttemberg.................... 6.35% 0.8%
New Jersey Turnpike Auth. ............... 4.25% 0.8%
Fannie Mae Mortgage-Backed
Pass-Through ......................... 6.00% 0.7%
* Excludes short-term investments purchased with cash collateral from securities
loaned.
================================================================================
INVESTMENT OVERVIEW | 17
<PAGE>
================================================================================
o PORTFOLIO MIX* -- 1/31/2010 o
[PIE CHART OF PORTFOLIO MIX]
CORPORATE OBLIGATIONS 34.8%
EURODOLLAR AND YANKEE OBLIGATIONS 15.4%
COMMERCIAL MORTGAGE SECURITIES 13.8%
U.S. GOVERNMENT AGENCY ISSUES 12.7%
ASSET-BACKED SECURITIES 5.3%
PREFERRED SECURITIES 4.2%
U.S. TREASURY SECURITIES 3.5%
MUNICIPAL BONDS 1.9%
MONEY MARKET INSTRUMENTS 8.0%
[END CHART]
* Excludes short-term investments purchased with cash collateral from securities
loaned.
Percentage are of net assets of the Fund and may not equal 100%.
================================================================================
18 | USAA INCOME FUND
<PAGE>
================================================================================
PORTFOLIO OF INVESTMENTS
January 31, 2010 (unaudited)
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS (34.8%)
CONSUMER DISCRETIONARY (2.0%)
-----------------------------
AUTOMOBILE MANUFACTURERS (1.0%)
$15,000 Daimler Finance N.A., LLC 8.00% 6/15/2010 $ 15,381
10,000 Toyota Motor Credit Corp. 4.85 2/27/2015 10,170
----------
25,551
----------
BROADCASTING (0.4%)
10,000 Time Warner Cable, Inc. 6.75 7/01/2018 11,157
----------
CASINOS & GAMING (0.1%)
3,000 International Game Technology 7.50 6/15/2019 3,379
----------
SPECIALTY STORES (0.5%)
5,000 Staples, Inc. 7.75 4/01/2011 5,368
5,000 Staples, Inc. 9.75 1/15/2014 6,105
----------
11,473
----------
Total Consumer Discretionary 51,560
----------
CONSUMER STAPLES (3.0%)
-----------------------
AGRICULTURAL PRODUCTS (0.2%)
4,000 Bunge Ltd. Finance Co. 8.50 6/15/2019 4,703
----------
DRUG RETAIL (0.6%)
9,259 CVS Caremark Corp. 6.04 12/10/2028 9,332
5,000 CVS Pass-Through Trust(a) 7.51 1/10/2032 5,403
----------
14,735
----------
FOOD RETAIL (0.2%)
5,000 Kroger Co. 5.50 2/01/2013 5,381
----------
HOUSEHOLD PRODUCTS (0.7%)
17,000 Clorox Co.(b) 6.13 2/01/2011 17,856
----------
HYPERMARKETS & SUPER CENTERS (0.2%)
5,000 Costco Wholesale Corp. 5.30 3/15/2012 5,422
----------
PACKAGED FOODS & MEAT (0.6%)
15,000 Kellogg Co.(b) 6.60 4/01/2011 15,962
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 19
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
SOFT DRINKS (0.5%)
$ 2,000 PepsiAmericas, Inc. 4.50% 3/15/2013 $ 2,127
5,000 PepsiCo, Inc. 0.28(c) 7/15/2011 5,003
5,000 PepsiCo, Inc. 7.90 11/01/2018 6,201
----------
13,331
----------
Total Consumer Staples 77,390
----------
ENERGY (5.0%)
-------------
INTEGRATED OIL & GAS (1.1%)
21,000 ConocoPhillips 8.75 5/25/2010 21,570
5,000 Hess Corp. 8.13 2/15/2019 6,110
----------
27,680
----------
OIL & GAS DRILLING (0.6%)
3,000 Nabors Industries, Inc. 9.25 1/15/2019 3,791
5,000 Rowan Companies, Inc. 7.88 8/01/2019 5,855
5,000 Transocean, Inc. 5.25 3/15/2013 5,387
----------
15,033
----------
OIL & GAS EQUIPMENT & SERVICES (0.7%)
5,000 Baker Hughes, Inc. 7.50 11/15/2018 6,084
5,000 Smith International, Inc. 8.63 3/15/2014 5,914
5,000 Weatherford International Ltd. 9.63 3/01/2019 6,357
----------
18,355
----------
OIL & GAS EXPLORATION & PRODUCTION (0.2%)
5,000 Noble Energy, Inc. 8.25 3/01/2019 6,078
----------
OIL & GAS REFINING & MARKETING (0.6%)
5,000 Plains All American Pipeline, LP 6.50 5/01/2018 5,524
3,000 Plains All American Pipeline, LP 8.75 5/01/2019 3,740
5,000 Valero Energy Corp. 9.38 3/15/2019 6,099
----------
15,363
----------
OIL & GAS STORAGE & TRANSPORTATION (1.8%)
5,000 DCP Midstream, LLC(a) 9.70 12/01/2013 5,964
5,000 Enbridge Energy Partners, LP 5.35 12/15/2014 5,288
4,000 Enbridge Energy Partners, LP 8.05 10/01/2037 3,987
3,000 Energy Transfer Partners, LP 9.00 4/15/2019 3,704
10,000 Enterprise Products Operating, LLC 6.30 9/15/2017 11,035
5,000 Nustar Logistics, LP 7.65 4/15/2018 5,671
5,000 Sunoco Logistics Partners Operations, LP 8.75 2/15/2014 5,622
3,000 Transcontinental Gas Pipeline Corp. 8.88 7/15/2012 3,448
----------
44,719
----------
Total Energy 127,228
----------
================================================================================
20 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
FINANCIALS (9.9%)
-----------------
ASSET MANAGEMENT & CUSTODY BANKS (0.2%)
$ 5,000 State Street Capital Trust III 8.25% -(d) $ 5,120
----------
CONSUMER FINANCE (1.6%)
10,000 American Honda Finance Corp.(a) 7.63 10/01/2018 11,618
3,000 ERAC USA Finance Co.(a) 6.38 10/15/2017 3,282
25,200 Household Finance Corp.(b) 6.38 10/15/2011 26,948
----------
41,848
----------
DIVERSIFIED BANKS (0.4%)
5,000 Wells Fargo Capital XIII 7.70 -(d) 4,875
5,000 Wells Fargo Capital XV 9.75 -(d) 5,350
----------
10,225
----------
LIFE & HEALTH INSURANCE (0.8%)
5,000 Great-West Life & Annuity Insurance Co.(a) 7.15 5/16/2046 4,500
5,000 MetLife Global Funding I(a) 0.65(c) 7/13/2011 5,000
10,000 New York Life Global Funding 0.38(c) 6/16/2011 9,953
----------
19,453
----------
MULTI-LINE INSURANCE (0.5%)
5,000 AIG Sunamerica Global Financing(a) 6.30 5/10/2011 5,006
5,000 HCC Insurance Holdings, Inc. 6.30 11/15/2019 5,216
3,000 Oil Insurance Ltd.(a) 7.56 -(d) 2,377
----------
12,599
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.4%)
6,000 Bank of America Corp. 8.00 -(d) 5,705
10,000 Bank One Corp. 7.88 8/01/2010 10,365
5,000 Countrywide Financial Corp. 5.80 6/07/2012 5,364
3,000 JPMorgan Chase & Co. 7.90 -(d) 3,083
10,000 Societe Generale NY 0.60(c) 2/03/2012 10,000
----------
34,517
----------
PROPERTY & CASUALTY INSURANCE (1.0%)
15,000 Berkshire Hathaway Finance Corp. 4.85 1/15/2015 16,348
5,000 Progressive Corp. 6.70 6/15/2037 4,607
5,000 Travelers Companies, Inc. 6.25 3/15/2037 4,708
----------
25,663
----------
REGIONAL BANKS (0.5%)
5,000 Chittenden Corp. 5.80 2/14/2017 4,982
8,000 Hudson United Bank 7.00 5/15/2012 8,594
----------
13,576
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
REITs - DIVERSIFIED (0.2%)
$ 5,000 Liberty Property, LP 6.63% 10/01/2017 $ 5,094
----------
REITs - INDUSTRIAL (0.4%)
5,000 AMB Property, LP 6.30 6/01/2013 5,317
5,000 ProLogis 7.38 10/30/2019 5,190
----------
10,507
----------
REITs - OFFICE (0.6%)
10,000 Boston Properties, Inc. 5.88 10/15/2019 10,431
1,681 Mack-Cali Realty, LP 5.80 1/15/2016 1,663
3,000 Mack-Cali Realty, LP 7.75 8/15/2019 3,346
----------
15,440
----------
REITs - RESIDENTIAL (0.2%)
4,860 AvalonBay Communities, Inc. 5.50 1/15/2012 5,109
----------
REITs - RETAIL (1.9%)
2,500 Developers Diversified Realty Corp. 7.50 7/15/2018 2,375
10,000 Equity One, Inc. 6.25 12/15/2014 10,295
5,000 National Retail Properties, Inc. 6.88 10/15/2017 5,141
15,000 Pan Pacific Retail Properties, Inc. 7.95 4/15/2011 15,579
3,000 Regency Centers, LP 8.45 9/01/2010 3,075
6,185 Regency Centers, LP 7.95 1/15/2011 6,495
5,000 Weingarten Realty Investors 4.86 1/15/2014 5,014
----------
47,974
----------
REITs - SPECIALIZED (0.2%)
5,000 Nationwide Health Properties, Inc. 6.25 2/01/2013 5,296
----------
SPECIALIZED FINANCE (0.0%)
1,000 Assured Guaranty U.S. Holdings, Inc. 6.40 12/15/2066 710
----------
Total Financials 253,131
----------
HEALTH CARE (1.1%)
------------------
BIOTECHNOLOGY (0.4%)
10,000 Genentech, Inc. 4.75 7/15/2015 10,901
----------
HEALTH CARE EQUIPMENT (0.2%)
4,000 Hospira, Inc. 6.40 5/15/2015 4,491
----------
LIFE SCIENCES TOOLS & SERVICES (0.1%)
2,500 Thermo Fisher Scientific, Inc. 5.00 6/01/2015 2,664
----------
MANAGED HEALTH CARE (0.2%)
5,000 Highmark, Inc.(a) 6.80 8/15/2013 5,415
----------
================================================================================
22 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
PHARMACEUTICALS (0.2%)
$ 5,000 Roche Holdings, Inc.(a) 6.00% 3/01/2019 $ 5,532
----------
Total Health Care 29,003
----------
INDUSTRIALS (3.3%)
------------------
AIRLINES (0.3%)
2,483 American Airlines Pass-Through Trust 10.38 7/02/2019 2,818
4,899 Continental Airlines, Inc. Pass-Through Trust 9.00 7/08/2016 5,291
233 United Airlines Pass-Through Trust 7.73 7/01/2010 233
----------
8,342
----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (1.0%)
10,000 Caterpillar Financial Services Corp. 0.50(c) 12/16/2011 10,036
10,000 John Deere Capital Corp. 5.10 1/15/2013 10,834
5,000 Paccar, Inc. 6.88 2/15/2014 5,754
----------
26,624
----------
ENVIRONMENTAL & FACILITIES SERVICES (0.4%)
10,000 Waste Management, Inc. 7.38 8/01/2010 10,320
----------
INDUSTRIAL MACHINERY (0.7%)
10,000 Danaher Corp. 5.63 1/15/2018 11,014
1,500 Ingersoll Rand Co. 9.00 8/15/2021 1,711
3,000 Ingersoll-Rand GL Holding Co. 9.50 4/15/2014 3,673
----------
16,398
----------
RAILROADS (0.9%)
2,058 CSX Transportation, Inc. 9.75 6/15/2020 2,745
2,842 Norfolk Southern Railway Co. 9.75 6/15/2020 3,872
10,000 TTX Co.(a) 5.40 2/15/2016 9,695
5,000 Union Pacific Corp. 7.88 1/15/2019 6,144
----------
22,456
----------
Total Industrials 84,140
----------
INFORMATION TECHNOLOGY (0.6%)
-----------------------------
COMMUNICATIONS EQUIPMENT (0.2%)
5,000 Harris Corp. 5.95 12/01/2017 5,455
----------
COMPUTER HARDWARE (0.4%)
5,000 IBM Corp. 0.31(c) 11/04/2011 5,004
5,000 IBM Corp. 7.63 10/15/2018 6,190
----------
11,194
----------
Total Information Technology 16,649
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 23
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
MATERIALS (1.8%)
----------------
DIVERSIFIED CHEMICALS (0.5%)
$ 5,000 Chevron Phillips Chemical Co., LP(a) 7.00% 6/15/2014 $ 5,567
5,000 Dow Chemical Co. 7.60 5/15/2014 5,758
----------
11,325
----------
PAPER PRODUCTS (0.4%)
10,000 International Paper Co. 7.40 6/15/2014 11,313
----------
SPECIALTY CHEMICALS (0.7%)
5,000 Cytec Industries, Inc. 8.95 7/01/2017 6,012
5,000 Lubrizol Corp. 8.88 2/01/2019 6,313
5,000 RPM International, Inc. 6.13 10/15/2019 5,257
----------
17,582
----------
STEEL (0.2%)
5,000 Allegheny Technologies, Inc. 9.38 6/01/2019 5,979
----------
Total Materials 46,199
----------
TELECOMMUNICATION SERVICES (0.7%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.3%)
4,000 Qwest Communications International, Inc. 7.25 2/15/2011 4,000
5,000 Qwest Communications International, Inc.(a) 7.13 4/01/2018 4,900
----------
8,900
----------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
3,000 AT&T Wireless Services, Inc. 7.88 3/01/2011 3,224
5,000 Verizon Wireless Capital, LLC 8.50 11/15/2018 6,319
----------
9,543
----------
Total Telecommunication Services 18,443
----------
UTILITIES (7.4%)
----------------
ELECTRIC UTILITIES (4.3%)
5,000 Cleveland Electric Illuminating Co. 8.88 11/15/2018 6,349
1,500 FPL Energy American Wind(a) 6.64 6/20/2023 1,552
5,000 FPL Group Capital, Inc. 0.68(c) 11/09/2012 5,028
5,000 FPL Group Capital, Inc. 7.30 9/01/2067 5,032
5,000 Gulf Power Co. 4.90 10/01/2014 5,324
5,000 Illinois Power Co. 9.75 11/15/2018 6,430
5,000 Nevada Power Co. 7.13 3/15/2019 5,737
10,000 Northern States Power Co. 8.00 8/28/2012 11,587
5,000 Oglethorpe Power Corp. 6.10 3/15/2019 5,501
5,000 Otter Tail Corp. 9.00 12/15/2016 5,238
1,036 Power Contract Financing, LLC(a) 6.26 2/01/2010 1,036
================================================================================
24 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
$ 5,000 PPL Energy Supply, LLC 6.20% 5/15/2016 $ 5,423
8,690 Southern Co. 0.65(c) 10/21/2011 8,741
7,621 Tristate General & Transport Association(a) 6.04 1/31/2018 7,799
9,000 Union Electric Co. 6.70 2/01/2019 10,143
8,667 UtiliCorp Canada Finance Corp. 7.75 6/15/2011 9,212
10,000 West Penn Power Co. 6.63 4/15/2012 10,868
----------
111,000
----------
GAS UTILITIES (1.7%)
8,000 AGL Capital Corp. 6.38 7/15/2016 8,809
4,000 Atmos Energy Corp. 8.50 3/15/2019 4,970
4,000 EQT Corp. 8.13 6/01/2019 4,828
8,000 Gulfstream Natural Gas Systems, LLC(a) 5.56 11/01/2015 8,684
5,000 Oneok Partners, LP 8.63 3/01/2019 6,254
5,000 Questar Pipeline Co. 5.83 2/01/2018 5,206
5,000 Southern Star Central Gas Pipeline, Inc.(a) 6.00 6/01/2016 5,238
----------
43,989
----------
MULTI-UTILITIES (1.1%)
5,000 Black Hills Corp. 9.00 5/15/2014 5,807
5,000 CenterPoint Energy Houston Electric, LLC 7.00 3/01/2014 5,791
5,000 NiSource, Inc. 10.75 3/15/2016 6,402
5,000 Northwestern Corp. 6.34 4/01/2019 5,268
5,000 South Carolina Electric & Gas Co. 5.30 5/15/2033 4,816
----------
28,084
----------
WATER UTILITIES (0.3%)
5,475 American Water Capital Corp. 6.09 10/15/2017 5,927
----------
Total Utilities 189,000
----------
Total Corporate Obligations (cost: $817,045) 892,743
----------
EURODOLLAR AND YANKEE OBLIGATIONS (15.4%)
ENERGY (1.6%)
-------------
INTEGRATED OIL & GAS (0.2%)
4,000 Husky Energy, Inc. 7.25 12/15/2019 4,683
----------
OIL & GAS DRILLING (0.1%)
2,141 Delek & Avner-Yam Tethys Ltd.(a) 1.38(c) 8/01/2013 2,140
----------
OIL & GAS EXPLORATION & PRODUCTION (0.9%)
5,000 Canadian Natural Resources Ltd. 5.70 5/15/2017 5,412
3,500 Talisman Energy, Inc. 7.75 6/01/2019 4,149
10,000 Woodside Finance Ltd.(a) 8.75 3/01/2019 12,416
----------
21,977
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 25
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
OIL & GAS REFINING & MARKETING (0.4%)
$ 5,000 GS Caltex Corp. 7.25% 7/02/2013 $ 5,528
5,000 GS Caltex Corp.(a) 5.50 10/15/2015 5,259
----------
10,787
----------
Total Energy 39,587
----------
FINANCIALS (6.7%)
-----------------
DIVERSIFIED BANKS (5.4%)
6,000 Banco Santander(a) 5.38 12/09/2014 6,495
5,180 Barclays Bank plc(a) 7.38 -(d) 4,947
5,000 Barclays Bank plc(a) 6.05 12/04/2017 5,178
10,000 BBVA US Senior SA Uniper(a) 0.44(c) 5/24/2011 9,999
5,000 BNP Paribas(a) 7.20 -(d) 4,875
2,000 BOI Capital Funding No. 2, LP(a),(l) 5.57 -(d) 1,160
5,000 Canadian Imperial Bank Corp.(a) 7.26 4/10/2032 5,282
10,000 Commonwealth Bank Australia(a) 0.58(c) 11/04/2011 10,002
20,000 Landesbank Baden-Wuerttemberg 6.35 4/01/2012 21,563
10,000 LBG Capital No.1 plc 8.00 -(d) 8,150
10,000 Lloyds TSB Bank plc 0.45(c) 6/17/2011 9,984
5,000 Mizuho Capital Investment 1 Ltd.(a) 6.69 -(d) 4,265
10,000 MUFG Capital Finance 1 Ltd. 6.35 -(d) 9,692
15,000 Nordea Bank AB(a) 5.25 11/30/2012 15,943
5,000 Standard Chartered Bank(a) 6.40 9/26/2017 5,379
5,000 Sumitomo Mitsui Financial Group(e) 6.08 -(d) 4,772
10,000 Westpac Banking Corp.(a) 0.55(c) 10/21/2011 9,997
----------
137,683
----------
INVESTMENT BANKING & BROKERAGE (0.2%)
5,000 Credit Suisse Group AG 5.50 5/01/2014 5,471
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.2%)
5,000 ZFS Finance USA Trust II(a) 6.45 12/15/2065 4,550
----------
PROPERTY & CASUALTY INSURANCE (0.2%)
5,000 Catlin Insurance Co. Ltd.(a) 7.25 -(d) 4,075
----------
REGIONAL BANKS (0.2%)
5,000 Canadian Imperial Bank(a),(f) 2.00 2/04/2013 5,018
5,000 Glitnir Banki hf, acquired 9/20/2007;
cost $4,991(a),(g),(h) 6.38 9/25/2012 1,275
5,000 Kaupthing Bank hf, acquired 6/22/2006;
cost $4,952(a),(g),(h) 7.13 5/19/2016 13
----------
6,306
----------
REITs - RETAIL (0.4%)
10,000 Westfield Capital Corp.(a) 5.13 11/15/2014 10,546
----------
================================================================================
26 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
SPECIALIZED FINANCE (0.1%)
$ 5,000 XL Capital Ltd. 6.50% -(d) $ 3,850
----------
Total Financials 172,481
----------
GOVERNMENT (2.8%)
-----------------
FOREIGN GOVERNMENT (2.8%)
10,000 Danske Bank A/S 0.61(c) 5/24/2012 9,973
10,000 Dexia Credit Local 0.90(c) 9/23/2011 10,086
7,000 Finance For Danish Industry A/S(a) 0.52(c) 8/17/2012 7,068
25,000 Region of Lombardy(b) 5.80 10/25/2032 24,752
10,000 Republic of Poland 5.25 1/15/2014 10,704
10,000 Royal Bank of Scotland Group plc(a) 0.52(c) 3/30/2012 9,976
----------
Total Government 72,559
----------
INDUSTRIALS (1.2%)
------------------
AEROSPACE & DEFENSE (0.4%)
10,000 BAE Systems Holdings, Inc.(a) 4.75 8/15/2010 10,142
----------
BUILDING PRODUCTS (0.8%)
10,000 CRH America, Inc. 6.00 9/30/2016 10,655
10,000 Holcim US Finance 6.00 12/30/2019 10,546
----------
21,201
----------
Total Industrials 31,343
----------
MATERIALS (2.2%)
----------------
DIVERSIFIED METALS & MINING (0.7%)
5,000 Glencore Funding, LLC(a) 6.00 4/15/2014 5,182
3,000 Noranda, Inc. 6.00 10/15/2015 3,249
5,000 Rio Tinto Finance (USA) Ltd. 9.00 5/01/2019 6,395
2,034 Xstrata Canada Corp. 5.38 6/01/2015 2,168
----------
16,994
----------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.8%)
10,000 Agrium, Inc. 8.25 2/15/2011 10,764
8,000 Yara International ASA(a) 5.25 12/15/2014 8,484
2,000 Yara International ASA(a) 7.88 6/11/2019 2,391
----------
21,639
----------
GOLD (0.5%)
10,000 Barrick NA Finance, LLC 6.80 9/15/2018 11,494
----------
STEEL (0.2%)
5,000 ArcelorMittal 9.00 2/15/2015 6,058
----------
Total Materials 56,185
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 27
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
TELECOMMUNICATION SERVICES (0.2%)
---------------------------------
INTEGRATED TELECOMMUNICATION SERVICES (0.2%)
$ 5,416 Deutsche Telekom International Finance 8.50% 6/15/2010 $ 5,568
----------
UTILITIES (0.7%)
----------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.5%)
10,200 Transalta Corp. 6.65 5/15/2018 11,067
----------
MULTI-UTILITIES (0.2%)
5,000 Veolia Environnement 6.00 6/01/2018 5,406
----------
Total Utilities 16,473
----------
Total Eurodollar and Yankee
Obligations (cost: $387,618) 394,196
----------
ASSET-BACKED SECURITIES (5.3%)
FINANCIALS (5.3%)
-----------------
ASSET-BACKED FINANCING (5.3%)
6,000 AESOP Funding II, LLC 5.68 2/20/2013 6,284
10,000 AESOP Funding II, LLC(a) 9.31 10/20/2013 11,273
790 AmeriCredit Automobile Receivables Trust 1.98(c) 1/12/2012 791
4,000 Banc of America Securities Auto Trust 5.51 2/19/2013 4,007
2,500 Bank of America Securities Auto Trust(a) 2.13 9/15/2013 2,540
5,000 Bank One Issuance Trust 1.03(c) 2/15/2017 4,755
1,226 Capital One Auto Finance Trust (INS) 4.71 6/15/2012 1,232
4,305 Capital One Auto Finance Trust 0.26(c) 5/15/2013 4,255
5,475 Capital One Multi-Asset Execution Trust 0.52 4/15/2013 5,446
5,000 Capital One Multi-Asset Execution Trust 6.00 8/15/2013 5,145
5,000 Chase Issuance Trust 5.12 10/15/2014 5,442
3,000 Citibank Credit Card Issuance Trust 5.70 5/15/2013 3,128
5,000 Citibank Credit Card Issuance Trust 5.10 11/20/2017 5,449
2,000 Citibank Credit Card Issuance Trust 5.35 2/07/2020 2,168
5,000 CPS Auto Receivables Trust (INS) 6.48 7/15/2013 5,167
5,000 Credit Acceptance Auto Loan Trust(a) 5.68 5/15/2017 5,100
3,000 Ford Credit Auto Owner Trust 1.98(c) 4/15/2013 3,071
8,339 GE Capital Credit Card Master Note Trust 0.50(c) 3/15/2013 8,339
5,000 Hertz Vehicle Financing, LLC(a) 5.08 11/25/2011 5,103
11,500 HSBC Private Label Credit Card Master Note Trust 0.34 12/16/2013 11,493
5,000 Huntington Auto Trust(a) 5.64 2/15/2013 5,146
7,318 Prestige Auto Receivables Trust "A"(a) 5.67 4/15/2017 7,322
10,000 Rental Car Finance Corp.(a) 0.37 7/25/2013 8,970
4,618 SLM Student Loan Trust 0.80(c) 10/25/2038 4,016
5,250 SLM Student Loan Trust 0.48(c) 1/25/2041 4,192
================================================================================
28 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
$ 741 USXL Funding, LLC (INS)(a) 5.38% 4/15/2014 $ 742
5,000 Volkswagen Auto Loan Enhanced Trust 6.24 7/20/2015 5,573
----------
Total Financials 136,149
----------
Total Asset-Backed Securities (cost: $124,854) 136,149
----------
COMMERCIAL MORTGAGE SECURITIES (13.8%)
FINANCIALS (13.8%)
------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES (13.8%)
8,781 Banc of America Commercial Mortgage, Inc. 5.79 5/11/2035 8,936
2,800 Banc of America Commercial Mortgage, Inc. 6.33 5/11/2035 2,852
10,000 Banc of America Commercial Mortgage, Inc. 4.65 9/11/2036 10,210
5,125 Banc of America Commercial Mortgage, Inc. 5.10 11/10/2042 3,996
5,738 Banc of America Commercial Mortgage, Inc. 4.16 12/10/2042 5,757
10,000 Banc of America Commercial Mortgage, Inc. 5.72 5/10/2045 10,391
11,000 Banc of America Commercial Mortgage, Inc. 5.18 9/10/2047 11,076
5,008 Bear Stearns Commercial Mortgage Securities,
Inc.(a) 6.00 6/16/2030 3,747
11,545 Bear Stearns Commercial Mortgage Securities, Inc. 5.46 3/11/2039 12,267
5,000 Citigroup Commercial Mortgage Trust(a) 4.83 9/20/2051 4,197
12,000 Commercial Mortgage Trust 5.12 6/10/2044 11,761
8,000 Credit Suisse First Boston Mortgage Capital 5.55 2/15/2039 7,993
8,053 Credit Suisse First Boston Mortgage Securities
Corp. 6.38 12/18/2035 8,232
10,000 Credit Suisse First Boston Mortgage Securities
Corp. 4.81 2/15/2038 9,878
5,000 Credit Suisse First Boston Mortgage Securities
Corp. 5.10 8/15/2038 3,974
11,100 Credit Suisse First Boston Mortgage Securities
Corp. 5.23 12/15/2040 11,195
10,000 GE Commercial Mortgage Corp. 5.34 3/10/2044 10,360
3,000 GE Commercial Mortgage Corp. 4.86 7/10/2045 2,987
3,009 Greenwich Capital Commercial Funding Corp. 4.31 8/10/2042 3,026
12,215 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 4.82 9/12/2037 12,338
10,000 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 4.99 9/12/2037 7,636
10,000 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 5.49 4/15/2043 10,522
3,000 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 5.81 6/12/2043 3,031
10,000 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 5.18 12/15/2044 10,216
10,000 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 5.87 4/15/2045 10,316
3,150 J.P. Morgan Chase Commercial Mortgage Securities
Corp. 4.63 3/15/2046 3,157
7,000 LB-UBS Commercial Mortgage Trust 4.58 8/15/2029 6,847
================================================================================
PORTFOLIO OF INVESTMENTS | 29
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
$ 2,000 LB-UBS Commercial Mortgage Trust 4.51% 12/15/2029 $ 1,963
10,000 LB-UBS Commercial Mortgage Trust 4.95 9/15/2030 10,219
7,000 LB-UBS Commercial Mortgage Trust 5.34 9/15/2039 7,261
7,000 Merrill Lynch Mortgage Trust 5.62 7/12/2034 7,060
10,000 Merrill Lynch Mortgage Trust 5.02 7/12/2038 10,475
12,550 Morgan Stanley Capital I, Inc. 4.59 4/14/2040 12,477
7,000 Morgan Stanley Capital I, Inc. 5.80 8/12/2041 7,582
5,350 Morgan Stanley Capital I, Inc. 5.17 1/14/2042 5,433
10,000 Morgan Stanley Capital I, Inc. 5.69 7/12/2044 10,100
7,000 Morgan Stanley Capital I, Inc. 4.85 6/12/2047 7,302
11,425 Morgan Stanley Capital I, Inc. 5.17 10/12/2052 12,010
5,000 Morgan Stanley Capital I, Inc. 4.66 7/15/2056 4,918
5,000 Timberstar Trust(a) 5.88 10/15/2036 4,531
10,000 Wachovia Bank Commercial Mortgage Trust 5.08 3/15/2042 10,020
4,119 Wachovia Bank Commercial Mortgage Trust 4.66 4/15/2042 4,146
10,500 Wachovia Bank Commercial Mortgage Trust 4.81 4/15/2042 10,933
10,000 Wachovia Bank Commercial Mortgage Trust 4.61 5/15/2044 10,058
10,350 Wachovia Bank Commercial Mortgage Trust 5.17 10/15/2044 10,846
----------
354,232
----------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.0%)
22,651 Wachovia Bank Commercial Mortgage Trust,
acquired 8/06/2003; cost $1,145(a),(g) 1.00 4/15/2035 262
----------
Total Financials 354,494
----------
Total Commercial Mortgage Securities
(cost: $348,159) 354,494
----------
U.S. GOVERNMENT AGENCY ISSUES (12.7%)(i)
MORTGAGE-BACKED PASS-THROUGH SECURITIES (11.8%)
18,713 Fannie Mae(+) 5.00 6/01/2033 19,558
8,687 Fannie Mae(+) 5.50 7/01/2021 9,312
14,854 Fannie Mae(+) 5.50 9/01/2035 15,779
7,740 Fannie Mae(+) 5.50 10/01/2035 8,222
9,760 Fannie Mae(+) 5.50 1/01/2036 10,367
14,526 Fannie Mae(+) 5.50 4/01/2036 15,430
13,264 Fannie Mae(+) 5.50 2/01/2037 14,077
16,645 Fannie Mae(+) 5.50 3/01/2037 17,658
10,378 Fannie Mae(+) 5.50 11/01/2037 11,009
19,294 Fannie Mae(+) 5.50 5/01/2038 20,467
16,314 Fannie Mae(+) 6.00 5/01/2036 17,511
13,607 Fannie Mae(+) 6.00 6/01/2036 14,606
16,670 Fannie Mae(+) 6.00 8/01/2037 17,860
1,563 Fannie Mae(+) 6.50 4/01/2031 1,708
25 Fannie Mae(+) 6.50 7/01/2031 28
================================================================================
30 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
$ 2,829 Fannie Mae(+) 6.50% 3/01/2032 $ 3,085
70 Fannie Mae(+) 7.00 10/01/2022 78
50 Fannie Mae(+) 7.00 3/01/2023 55
291 Fannie Mae(+) 7.00 4/01/2023 326
3,890 Freddie Mac(+) 5.00 6/01/2020 4,138
10,778 Freddie Mac(+) 5.00 1/01/2021 11,465
9,901 Freddie Mac(+) 5.50 11/01/2020 10,647
4,768 Freddie Mac(+) 5.50 12/01/2020 5,128
7,483 Freddie Mac(+) 5.50 12/01/2035 7,956
12,673 Freddie Mac(+) 5.50 4/01/2036 13,461
10,649 Government National Mortgage Assn. I 5.00 8/15/2033 11,180
669 Government National Mortgage Assn. I 6.00 8/15/2028 723
1,163 Government National Mortgage Assn. I 6.00 9/15/2028 1,256
6,584 Government National Mortgage Assn. I 6.00 9/15/2028 7,107
680 Government National Mortgage Assn. I 6.00 9/15/2028 734
1,640 Government National Mortgage Assn. I 6.00 10/15/2028 1,771
874 Government National Mortgage Assn. I 6.00 1/15/2029 943
895 Government National Mortgage Assn. I 6.00 1/15/2029 966
149 Government National Mortgage Assn. I 6.00 1/15/2029 161
1,192 Government National Mortgage Assn. I 6.00 1/15/2033 1,286
29 Government National Mortgage Assn. I 6.50 6/15/2023 31
68 Government National Mortgage Assn. I 6.50 7/15/2023 73
394 Government National Mortgage Assn. I 6.50 7/15/2023 423
228 Government National Mortgage Assn. I 6.50 9/15/2023 245
316 Government National Mortgage Assn. I 6.50 10/15/2023 340
427 Government National Mortgage Assn. I 6.50 10/15/2023 459
56 Government National Mortgage Assn. I 6.50 10/15/2023 60
966 Government National Mortgage Assn. I 6.50 12/15/2023 1,037
484 Government National Mortgage Assn. I 6.50 12/15/2023 519
215 Government National Mortgage Assn. I 6.50 1/15/2024 232
407 Government National Mortgage Assn. I 6.50 2/15/2024 440
201 Government National Mortgage Assn. I 6.50 4/15/2026 218
1,121 Government National Mortgage Assn. I 6.50 5/15/2028 1,223
2,376 Government National Mortgage Assn. I 6.50 10/15/2031 2,596
143 Government National Mortgage Assn. I 7.00 5/15/2023 158
123 Government National Mortgage Assn. I 7.00 5/15/2023 136
130 Government National Mortgage Assn. I 7.00 5/15/2023 144
96 Government National Mortgage Assn. I 7.00 5/15/2023 107
215 Government National Mortgage Assn. I 7.00 6/15/2023 239
213 Government National Mortgage Assn. I 7.00 6/15/2023 236
75 Government National Mortgage Assn. I 7.00 6/15/2023 83
747 Government National Mortgage Assn. I 7.00 8/15/2023 829
108 Government National Mortgage Assn. I 7.00 8/15/2023 120
================================================================================
PORTFOLIO OF INVESTMENTS | 31
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
$ 68 Government National Mortgage Assn. I 7.00% 8/15/2023 $ 76
400 Government National Mortgage Assn. I 7.00 8/15/2023 444
221 Government National Mortgage Assn. I 7.00 9/15/2023 245
96 Government National Mortgage Assn. I 7.00 1/15/2026 107
38 Government National Mortgage Assn. I 7.00 3/15/2026 42
29 Government National Mortgage Assn. I 7.00 3/15/2026 33
679 Government National Mortgage Assn. I 7.00 10/15/2027 756
342 Government National Mortgage Assn. I 7.00 6/15/2029 382
584 Government National Mortgage Assn. I 7.00 6/15/2029 652
309 Government National Mortgage Assn. I 7.00 7/15/2029 344
579 Government National Mortgage Assn. I 7.00 8/15/2031 646
366 Government National Mortgage Assn. I 7.00 7/15/2032 406
543 Government National Mortgage Assn. I 7.50 7/15/2023 613
450 Government National Mortgage Assn. I 7.50 6/15/2026 507
230 Government National Mortgage Assn. I 7.50 6/15/2026 259
348 Government National Mortgage Assn. I 7.50 7/15/2026 392
266 Government National Mortgage Assn. I 7.50 5/15/2027 300
461 Government National Mortgage Assn. I 7.50 2/15/2028 521
450 Government National Mortgage Assn. I 7.50 12/15/2028 508
368 Government National Mortgage Assn. I 7.50 8/15/2029 416
2,772 Government National Mortgage Assn. II 5.50 4/20/2033 2,959
2,755 Government National Mortgage Assn. II 6.00 8/20/2032 2,982
1,866 Government National Mortgage Assn. II 6.00 9/20/2032 2,020
755 Government National Mortgage Assn. II 6.50 8/20/2031 825
----------
302,441
----------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.9%)
5,000 Bank of America Corp., FDIC TLGP 0.63 6/22/2012 5,054
2,400 Perforadora Centrale S.A. de C.V. "A," Title XI 5.24 12/15/2018 2,623
5,000 SunTrust Banks, Inc., FDIC TLGP 0.90 12/16/2010 5,033
10,000 Totem Ocean Trailer Express, Inc., Title XI 6.37 4/15/2028 11,572
----------
24,282
----------
Total U.S. Government Agency Issues
(cost: $304,219) 326,723
----------
U.S. TREASURY SECURITIES (3.5%)
INFLATION-INDEXED NOTES (3.5%)
51,643 2.38%, 1/15/2025 55,674
36,141 1.75%, 1/15/2028 35,350
----------
Total U.S. Treasury Securities (cost: $86,929) 91,024
----------
MUNICIPAL BONDS (1.9%)
APPROPRIATED DEBT (0.1%)
2,305 New Jersey EDA 5.18 11/01/2015 2,419
----------
================================================================================
32 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
CASINOS & GAMING (0.1%)
$ 5,000 Mashantucket (Western) Pequot Tribe,
acquired 7/29/2005; cost $5,000(a),(g) 5.91% 9/01/2021 $ 2,775
----------
ELECTRIC UTILITIES (0.4%)
5,000 Air Quality Dev. Auth. 4.75 8/01/2029 5,125
5,000 Maricopa County 5.50 5/01/2029 5,240
----------
Total Electric Utilities 10,365
----------
ELECTRIC/GAS UTILITIES (0.1%)
2,795 North Carolina Eastern Municipal Power Agency 5.55 1/01/2013 3,016
----------
ENVIRONMENTAL & FACILITIES SERVICES (0.2%)
4,500 Mission EDC 2.00 12/01/2018 4,502
----------
ESCROWED BONDS (0.0%)
1,000 New Jersey Turnpike Auth. (INS)(PRE) 4.25 1/01/2016 1,061
----------
GENERAL OBLIGATION (0.1%)
2,200 Marin County (INS) 4.89 8/01/2016 2,287
----------
SPECIAL ASSESSMENT/TAX/FEE (0.1%)
2,000 New York Housing Finance Agency 5.18 9/15/2010 2,060
----------
TOLL ROADS (0.8%)
19,000 New Jersey Turnpike Auth. (INS) 4.25 1/01/2016 19,369
----------
Total Municipal Bonds (cost: $48,800) 47,854
----------
-----------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
$(000)/SHARES
-----------------------------------------------------------------------------------------------------
PREFERRED SECURITIES (4.2%)
CONSUMER STAPLES (0.2%)
-----------------------
AGRICULTURAL PRODUCTS (0.2%)
70,000 Dairy Farmers of America, Inc., 7.88%,
cumulative redeemable, perpetual(a) 5,519
----------
FINANCIALS (4.0%)
-----------------
REINSURANCE (0.2%)
$ 5,000 Swiss Re Capital I, LP, 6.85%, perpetual(a) 4,303
----------
REITs - INDUSTRIAL (0.8%)
120,000 AMB Property Corp., Series C, 7.00%,
cumulative redeemable, perpetual 2,722
18,000 AMB Property Corp., Series P, 6.85%,
cumulative redeemable, perpetual 389
================================================================================
PORTFOLIO OF INVESTMENTS | 33
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
$(000)/SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------
344,500 ProLogis Trust, Inc., Series C, 8.54%,
cumulative redeemable, perpetual $ 17,591
----------
20,702
----------
REITs - OFFICE (0.7%)
$51,050 Duke Realty Corp. depositary shares, Series N, 7.25%,
cumulative redeemable, perpetual 1,129
614,000 Duke Realty Corp., Series M, 6.95%,
cumulative redeemable, perpetual 12,980
200,000 HRPT Properties Trust, Series C, 7.13%,
cumulative redeemable, perpetual 4,122
----------
18,231
----------
REITs - RESIDENTIAL (1.0%)
203,000 BRE Properties, Inc., Series C, 6.75%,
cumulative redeemable, perpetual 4,515
142,500 Equity Residential Properties Trust, depositary shares,
Series K, 8.29%, cumulative redeemable, perpetual 8,287
250,000 Post Properties, Inc., Series A, 8.50%,
cumulative redeemable, perpetual 12,446
----------
25,248
----------
REITs - RETAIL (1.0%)
200,000 Developers Diversified Realty Corp., Series I, 7.50%,
cumulative redeemable, perpetual 4,020
415,000 Kimco Realty Corp., depositary shares, Series F, 6.65%,
cumulative redeemable, perpetual 8,845
400,000 Realty Income Corp., Class D, 7.38%,
cumulative redeemable, perpetual 10,041
201,500 Weingarten Realty Investors, depositary shares,
Series D, 6.75%, cumulative redeemable, perpetual 4,378
----------
27,284
----------
REITs - SPECIALIZED (0.3%)
350,000 Public Storage, Inc., Series Z, 6.25%,
cumulative redeemable, perpetual(j) 7,865
----------
Total Financials 103,633
----------
U.S. GOVERNMENT (0.0%)
----------------------
80,000 Fannie Mae, 8.25%, perpetual* 92
----------
Total Preferred Securities (cost: $117,912) 109,244
----------
================================================================================
34 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (8.0%)
COMMERCIAL PAPER (6.5%)
CONSUMER DISCRETIONARY (1.1%)
-----------------------------
AUTOMOBILE MANUFACTURERS (0.8%)
$10,000 BMW US Capital, LLC(a),(k) 0.22% 2/01/2010 $ 10,000
3,892 BMW US Capital, LLC(a),(k) 0.23 2/03/2010 3,892
6,700 BMW US Capital, LLC(a),(k) 0.21 2/05/2010 6,700
----------
20,592
----------
BROADCASTING (0.3%)
5,000 Time Warner Cable, Inc.(a),(k) 0.22 2/02/2010 5,000
3,000 Time Warner Cable, Inc.(a),(k) 0.20 2/24/2010 2,999
----------
7,999
----------
Total Consumer Discretionary 28,591
----------
CONSUMER STAPLES (0.6%)
-----------------------
PACKAGED FOODS & MEAT (0.6%)
10,000 Kraft Foods, Inc. 0.25 2/16/2010 9,999
5,659 Kraft Foods, Inc. 0.21 2/18/2010 5,658
----------
Total Consumer Staples 15,657
----------
ENERGY (1.0%)
-------------
OIL & GAS EQUIPMENT & SERVICES (0.2%)
7,099 FMC Technologies, Inc.(a) 0.30 2/16/2010 7,098
----------
OIL & GAS EXPLORATION & PRODUCTION (0.8%)
20,000 Devon Energy Corp.(a),(k) 0.22 2/10/2010 19,999
----------
Total Energy 27,097
----------
FINANCIALS (1.2%)
-----------------
ASSET-BACKED FINANCING (1.2%)
2,812 Hannover Funding Co., LLC(a),(k) 0.28 2/10/2010 2,812
4,648 Hannover Funding Co., LLC(a),(k) 0.40 2/12/2010 4,647
14,292 Hannover Funding Co., LLC(a),(k) 0.35 2/04/2010 14,292
8,000 Working Capital Management Co.(a),(k) 0.30 2/02/2010 8,000
----------
Total Financials 29,751
----------
INDUSTRIALS (0.6%)
------------------
INDUSTRIAL MACHINERY (0.6%)
15,378 Eaton Corp.(a),(k) 0.22 2/22/2010 15,376
----------
MUNICIPAL BONDS (0.3%)
----------------------
MUNICIPAL FINANCE (0.3%)
7,295 California 0.35 3/03/2010 7,295
----------
================================================================================
PORTFOLIO OF INVESTMENTS | 35
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
-----------------------------------------------------------------------------------------------------
UTILITIES (1.7%)
----------------
ELECTRIC UTILITIES (0.5%)
$13,081 Pacific Gas & Electric Co.(a),(k) 0.23% 2/05/2010 $ 13,081
----------
GAS UTILITIES (1.2%)
8,093 AGL Capital Corp.(a),(k) 0.22 2/03/2010 8,093
1,328 AGL Capital Corp.(a),(k) 0.23 2/10/2010 1,328
4,000 AGL Capital Corp.(a),(k) 0.24 2/17/2010 4,000
7,000 Oneok, Inc.(a),(k) 0.23 2/02/2010 7,000
9,679 Oneok, Inc.(a),(k) 0.23 2/08/2010 9,678
----------
30,099
----------
Total Utilities 43,180
----------
Total Commercial Paper 166,947
----------
VARIABLE-RATE DEMAND NOTES (1.5%)
FINANCIALS (0.1%)
-----------------
REAL ESTATE SERVICES (0.1%)
3,000 District of Columbia (LOC - SunTrust Bank) 0.40 4/01/2024 3,000
----------
MUNICIPAL BONDS (1.4%)
----------------------
GENERAL OBLIGATION (0.4%)
10,000 Southern Ute Indian Tribe(a) 0.55 1/01/2027 10,000
----------
HOSPITAL (0.7%)
15,000 Johnson City Health and Educational Facilities
Board (LOC - Regions Bank) 1.45 7/01/2033 15,000
2,300 Russell County IDA (LOC - Regions Bank) 0.60 7/01/2038 2,300
----------
17,300
----------
NURSING/CCRC (0.3%)
8,300 Langhorne Manor (LOC - Citizens Bank of
Pennsylvania) 0.30 10/01/2032 8,300
----------
Total Municipal Bonds 35,600
----------
Total Variable-Rate Demand Notes 38,600
----------
Total Money Market Instruments (cost: $205,547) 205,547
----------
================================================================================
36 | USAA INCOME FUND
<PAGE>
================================================================================
-----------------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
-----------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (0.0%)
MONEY MARKET FUNDS (0.0%)
1,712 BlackRock Liquidity Funds TempFund, 0.11%(m) (cost: $2) $ 2
----------
TOTAL INVESTMENTS (COST: $2,441,085) $2,557,976
==========
----------------------------------------------------------------------------------------------------------------
($ 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
----------------------------------------------------------------------------------------------------------------
Corporate Obligations $ - $ 892,743 $- $ 892,743
Eurodollar and Yankee Obligations - 394,196 - 394,196
Asset-Backed Securities - 136,149 - 136,149
Commercial Mortgage Securities - 354,494 - 354,494
U.S. Government Agency Issues - 326,723 - 326,723
U.S. Treasury Securities - 91,024 - 91,024
Municipal Bonds - 47,854 - 47,854
Equity Securities:
Preferred Securities 17,102 92,142 - 109,244
Money Market Instruments:
Commercial Paper - 166,947 - 166,947
Variable-Rate Demand Notes - 38,600 - 38,600
Short-Term Investments Purchased With
Cash Collateral From Securities Loaned:
Money Market Funds 2 - - 2
----------------------------------------------------------------------------------------------------------------
Total $17,104 $2,540,872 $- $2,557,976
----------------------------------------------------------------------------------------------------------------
Reconciliation of investments in which significant unobservable inputs (Level 3)
were used in determining value:
----------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
----------------------------------------------------------------------------------------------------
Balance as of July 31, 2009 $ 10,075
Net realized gain (loss)
Change in net unrealized appreciation/depreciation 1,197
Net purchases (sales)
Transfers in and/or out of Level 3 (11,272)
----------------------------------------------------------------------------------------------------
Balance as of January 31, 2010 $ -
----------------------------------------------------------------------------------------------------
================================================================================
PORTFOLIO OF INVESTMENTS | 37
<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. Investments in foreign securities were 15.5% of net assets at
January 31, 2010.
o CATEGORIES AND DEFINITIONS
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES -- Asset-backed
securities represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets. Commercial
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. The weighted average life is
likely to be substantially shorter than the stated final maturity as a
result of scheduled and unscheduled principal repayments. Rates on
commercial mortgage-backed securities may change slightly over time as
underlying mortgages pay down.
EURODOLLAR AND YANKEE OBLIGATIONS -- Eurodollar obligations are
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee
obligations are dollar-denominated instruments that are issued by foreign
issuers in the U.S. capital markets.
================================================================================
38 | USAA INCOME FUND
<PAGE>
================================================================================
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS IOs) -- represent
the right to receive only the interest payments on an underlying pool of
commercial mortgage loans. The purchase yield reflects an anticipated yield
based upon interest rates at the time of purchase and the estimated timing
and amount of future cash flows. Coupon rates after purchase vary from
period to period. The principal amount represents the notional amount of
the underlying pool on which current interest is calculated. CMBS IOs are
backed by loans that have various forms of prepayment protection, which
include lock-out provisions, yield maintenance provisions, and prepayment
penalties. This serves to moderate their prepayment risk. CMBS IOs are
subject to default-related prepayments that may have a negative impact on
yield.
U.S. TREASURY INFLATION-INDEXED NOTES -- designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
VARIABLE-RATE DEMAND NOTES (VRDNs) -- provide the right to sell the
security at face value on either that day or within the rate-reset period.
The interest rate is adjusted at a stipulated daily, weekly, monthly,
quarterly, or other specified time interval to reflect current market
conditions. VRDNs will normally trade as if the maturity is the earlier put
date, even though stated maturity is longer.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
EDA Economic Development Authority
EDC Economic Development Corp.
FDIC TLGP The FDIC Temporary Liquidity Guarantee Program provides a
guarantee of payment of principal and
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 39
<PAGE>
================================================================================
interest on certain newly issued senior unsecured
debt through the program's expiration date on December 31, 2012.
The guarantee carries the full faith and credit of the U.S.
government.
IDA Industrial Development Authority/Agency
PRE Prerefunded to a date prior to maturity
REIT Real estate investment trust
CREDIT ENHANCEMENTS -- add the financial strength of the provider of the
enhancement to support the issuer's ability to repay the principal and
interest payments when due. The enhancement may be provided by a
high-quality bank, insurance company or other corporation, or a collateral
trust. The enhancements do not guarantee the market values of the
securities.
(INS) Principal and interest payments are insured by one of
the following: AMBAC Assurance Corp., Assured Guaranty Municipal
Corp., Financial Guaranty Insurance Co., or National Public
Finance Guarantee Corp. Although bond insurance reduces the risk
of loss due to default by an issuer, such bonds remain subject
to the risk that value may fluctuate for other reasons, and
there is no assurance that the insurance company will meet its
obligations.
(LOC) Principal and interest payments are guaranteed by a
bank letter of credit or other bank credit agreement.
o SPECIFIC NOTES
(a) Restricted security that is not registered under the Securities Act of
1933. A resale of this security in the United States may occur in an
exempt transaction to a qualified institutional buyer as defined by
Rule 144A, and as such has been deemed liquid by USAA Investment
Management Company (the Manager) under liquidity guidelines approved by
the Board of Trustees, unless otherwise noted as illiquid.
================================================================================
40 | USAA INCOME FUND
<PAGE>
================================================================================
(b) At January 31, 2010, portions of these securities were segregated to
cover delayed-delivery and/or when-issued purchases.
(c) Variable-rate or floating-rate security -- interest rate is adjusted
periodically. The interest rate disclosed represents the current rate
at January 31, 2010.
(d) Security is perpetual and has no final maturity date but may be subject
to calls at various dates in the future.
(e) Security was fair valued at January 31, 2010, by the Manager in
accordance with valuation procedures approved by the Board of Trustees.
(f) At January 31, 2010, the aggregate market value of securities purchased
on a when-issued basis was $5,018,000.
(g) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board of Trustees. The aggregate market value of these
securities at January 31, 2010, was $4,325,000, which represented 0.1%
of the Fund's net assets.
(h) Currently the issuer is in default with respect to interest and/or
principal payments.
(i) U.S. government agency issues -- mortgage-backed securities issued by
Government National Mortgage Association (GNMA) and certain other U.S.
government guaranteed securities are supported by the full faith and
credit of the U.S. government. Securities issued by government-sponsored
enterprises, indicated with "+", are supported only by the right of the
government-sponsored enterprise to borrow from the U.S. Treasury, the
discretionary authority of the U.S. government to purchase the
government-sponsored enterprises' obligations, or by the credit of the
issuing agency, instrumentality, or corporation, and are neither issued
nor guaranteed by the U.S. Treasury.
(j) The security or a portion thereof was out on loan as of January 31,
2010.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 41
<PAGE>
================================================================================
(k) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the Securities
Act of 1933. Unless this commercial paper is subsequently registered, a
resale of this commercial paper in the United States must be effected
in a transaction exempt from registration under the Securities Act of
1933. Section 4(2) commercial paper is normally resold to other
investors through or with the assistance of the issuer or an investment
dealer who makes a market in this security, and as such has been deemed
liquid by the Manager under liquidity guidelines approved by the Board
of Trustees, unless otherwise noted as illiquid.
(l) Security is currently trading without accrued interest.
(m) Rate represents the money market fund annualized seven-day yield at
January 31, 2010.
* Non-income-producing security.
See accompanying notes to financial statements.
================================================================================
42 | USAA INCOME 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 $2) (cost of $2,441,085) $2,557,976
Cash 301
Receivables:
Capital shares sold:
Affiliated transactions (Note 8) 200
Nonaffiliated transactions 2,412
Dividends and interest 23,444
----------
Total assets 2,584,333
----------
LIABILITIES
Payables:
Upon return of securities loaned 2
Securities purchased 14,999
Capital shares redeemed:
Affiliated transactions (Note 8) 2
Nonaffiliated transactions 1,271
Accrued management fees 616
Accrued transfer agent's fees 95
Other accrued expenses and payables 111
----------
Total liabilities 17,096
----------
Net assets applicable to capital shares outstanding $2,567,237
==========
NET ASSETS CONSIST OF:
Paid-in capital $2,502,187
Accumulated undistributed net investment income 4,129
Accumulated net realized loss on investments (55,970)
Net unrealized appreciation of investments 116,891
----------
Net assets applicable to capital shares outstanding $2,567,237
==========
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $2,439,628/195,004
shares outstanding) $ 12.51
==========
Institutional Shares (net assets of $127,609/10,204
shares outstanding) $ 12.51
==========
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 43
<PAGE>
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended January 31, 2010 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 4,232
Interest 65,209
Securities lending (net) 4
--------
Total income 69,445
--------
EXPENSES
Management fees 3,460
Administration and servicing fees:
Fund Shares 1,723
Institutional Shares 25
Transfer agent's fees:
Fund Shares 1,968
Institutional Shares 25
Custody and accounting fees:
Fund Shares 156
Institutional Shares 8
Postage:
Fund Shares 88
Shareholder reporting fees:
Fund Shares 37
Trustees' fees 5
Registration fees:
Fund Shares 27
Professional fees 82
Other 21
--------
Total expenses 7,625
Transfer agent's fees reimbursed (Note 7D):
Fund Shares (419)
--------
Net expenses 7,206
--------
NET INVESTMENT INCOME 62,239
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss (4,379)
Change in net unrealized appreciation/depreciation 125,436
--------
Net realized and unrealized gain 121,057
--------
Increase in net assets resulting from operations $183,296
========
See accompanying notes to financial statements.
================================================================================
44 | USAA INCOME 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 $ 62,239 $ 109,621
Net realized loss on investments (4,379) (13,305)
Change in net unrealized appreciation/depreciation of
investments 125,436 26,346
---------------------------
Increase in net assets resulting from operations 183,296 122,662
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares (56,928) (107,995)
Institutional Shares* (2,689) (1,680)
---------------------------
Distributions to shareholders (59,617) (109,675)
---------------------------
NET INCREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 6)
Fund Shares 239,625 88,134
Institutional Shares* 63,280 56,607
---------------------------
Total net increase in net assets from capital
share transactions 302,905 144,741
---------------------------
Capital contribution from USAA Transfer Agency
Company:
Fund Shares - 1
---------------------------
Net increase in net assets 426,584 157,729
NET ASSETS
Beginning of period 2,140,653 1,982,924
---------------------------
End of period $2,567,237 $2,140,653
===========================
Accumulated undistributed net investment income:
End of period $ 4,129 $ 1,507
===========================
* Institutional Shares were initiated on August 1, 2008.
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 45
<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
Fund (the Fund), which is classified as diversified under the 1940 Act. The
Fund's investment objective is maximum current income without undue risk to
principal.
The Fund has two classes of shares: Income Fund Shares (Fund Shares) and Income
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:
================================================================================
46 | USAA INCOME FUND
<PAGE>
================================================================================
1. 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.
2. 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.
3. Investments in open-end investment companies, hedge, or other funds,
other than ETFs, are valued at their net asset value (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. Repurchase agreements are valued at cost, which approximates market
value.
6. Futures are valued based upon the last sale price at the close of
market on the principal exchange on which they are traded.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 47
<PAGE>
================================================================================
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 under valuation procedures approved
by the Trust's Board of Trustees. The effect of fair value pricing is
that securities may not be priced on the basis of quotations from the
primary market in which they are traded and the actual price realized
from the sale of a security may differ materially from the fair value
price. Valuing these securities at fair value is intended to cause the
Fund's NAV to be more reliable than it otherwise would be.
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.
================================================================================
48 | USAA INCOME FUND
<PAGE>
================================================================================
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 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 is recorded on the ex-dividend date; interest
income is recorded daily on the accrual basis. Discounts and premiums on
securities are amortized over the life of the respective securities, using
the effective yield method for long-term securities and the straight-line
method for short-term securities.
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. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS --
Delivery and payment for securities that have been purchased by the Fund
on a delayed-delivery or when-issued basis can take place
================================================================================
NOTES TO FINANCIAL STATEMENTS | 49
<PAGE>
================================================================================
a month or more after the trade date. During the period prior to
settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their
delivery. The Fund maintains segregated assets with a market value equal
to or greater than the amount of its purchase commitments. The purchase of
securities on a delayed-delivery or when-issued basis may increase the
volatility of the Fund's NAV to the extent that the Fund makes such
purchases while remaining substantially fully invested. As of January 31,
2010, the Fund's outstanding delayed-delivery commitments, including
interest purchased, were $4,999,000; all of which were when-issued
securities.
G. EXPENSES PAID INDIRECTLY -- Through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management purposes,
realized credits, if any, generated from cash balances in the Fund's bank
accounts may be used to directly reduce the Fund's expenses. For the
six-month period ended January 31, 2010, these custodian and other bank
credits reduced the Fund's expenses by less than $500.
H. INDEMNIFICATIONS -- Under the Trust's organizational documents, its
officers and trustees are indemnified against certain liabilities arising
out of the performance of their duties to the Trust. In addition, in the
normal course of business the Trust enters into contracts that contain a
variety of representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these arrangements is
unknown, as this would involve future claims that may be made against the
Trust that have not yet occurred. However, the Trust expects the risk of
loss to be remote.
I. USE OF ESTIMATES -- The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts in the
financial statements.
================================================================================
50 | USAA INCOME FUND
<PAGE>
================================================================================
(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 $6,000, which represents 5.6% of the total fees paid to CAPCO by the
USAA funds. The Fund had no borrowings under this agreement during the six-month
period ended 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.
Distributions of net investment income are made monthly. 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 $50,203,000, for federal income tax purposes, which, if not offset by
subsequent capital gains, will expire between 2011 and 2017, as shown below. It
is unlikely that the Trust's Board of Trustees
================================================================================
NOTES TO FINANCIAL STATEMENTS | 51
<PAGE>
================================================================================
will authorize a distribution of capital gains realized in the future until the
capital loss carryovers have been used or expire.
CAPITAL LOSS CARRYOVERS
------------------------------------------
EXPIRES BALANCE
----------- -----------
2011 $38,340,000
2017 11,863,000
-----------
Total $50,203,000
===========
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
$264,121,000 and $106,383,000, 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 $149,704,000 and $32,813,000, respectively, resulting in net
unrealized appreciation of $116,891,000.
================================================================================
52 | USAA INCOME FUND
<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 $4,000, 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 $2,000 and received cash
collateral of $3,000 for the loans. Of this amount, $2,000 was invested in
short-term investments, as noted in the Fund's portfolio of investments, and
$1,000 remained in cash.
(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.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 53
<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 29,246 $ 358,802 35,556 $ 399,269
Shares issued from reinvested
dividends 4,171 51,279 8,663 96,745
Shares redeemed (13,875) (170,456) (36,602) (407,880)
----------------------------------------------
Net increase from capital
share transactions 19,542 $ 239,625 7,617 $ 88,134
==============================================
INSTITUTIONAL SHARES
(INITIATED ON AUGUST 1, 2008):
Shares sold 5,873 $ 72,062 5,248 $ 58,888
Shares issued from reinvested
dividends 218 2,688 149 1,680
Shares redeemed (920) (11,470) (365) (3,961)
----------------------------------------------
Net increase from capital
share transactions 5,171 $ 63,280 5,032 $ 56,607
==============================================
(7) TRANSACTIONS WITH MANAGER
A. MANAGEMENT FEES -- The Manager carries out the Fund's investment policies
and manages the Fund's portfolio pursuant to an Advisory Agreement. 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 0.24% 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
A Rated Bond Funds Index over the performance period. The Lipper A Rated
Bond Funds Index tracks the total return performance of the 30 largest
funds in the Lipper Corporate Debt
================================================================================
54 | USAA INCOME FUND
<PAGE>
================================================================================
Funds A Rated 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)
---------------------------------------------------------------------------
+/- 0.20% to 0.50% +/- 0.04%
+/- 0.51% to 1.00% +/- 0.05%
+/- 1.01% 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.
Under the performance fee arrangement, each class will pay a positive
performance fee adjustment for a performance period whenever the class
outperforms the Lipper A Rated Bond 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 $3,460,000, which
included a performance adjustment for the Fund Shares and Institutional
Shares of $578,000 and $5,000, respectively. For the Fund Shares and
Institutional Shares, the performance adjustments were 0.05% and 0.01%,
respectively.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 55
<PAGE>
================================================================================
B. 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
$1,723,000 and $25,000, 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 $55,000 for these compliance and legal services.
These expenses are included in the professional fees on the Fund's
statement of operations.
C. EXPENSE LIMITATION -- The Manager has agreed, through December 1, 2010,
to limit the annual expenses of the Institutional Shares to 0.40% 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.
D. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund. Transfer agent's fees for Fund Shares
are paid monthly based on an annual charge of $25.50 per shareholder
account plus out-of-pocket expenses. The Fund Shares also pay SAS fees that
are related to the administration
================================================================================
56 | USAA INCOME FUND
<PAGE>
================================================================================
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 $1,968,000 and $25,000,
respectively.
During the six-month period ended January 31, 2010, SAS reimbursed the Fund
Shares $419,000 for corrections in fees paid for the administration and
servicing of certain accounts.
E. 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 $200,000 and a payable for capital shares redeemed of
$2,000 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 0.9%
USAA Target Retirement 2020 Fund 1.4
USAA Target Retirement 2030 Fund 1.8
USAA Target Retirement 2040 Fund 0.8
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 57
<PAGE>
================================================================================
(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.
(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.
================================================================================
58 | USAA INCOME 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 $ 11.86 $ 11.81 $ 11.92 $ 11.92 $ 12.32 $ 12.24
-----------------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .32 .64 .63 .60 .59 .56
Net realized and
unrealized gain (loss) .64 .05 (.11) (.00)(a) (.41) .08
-----------------------------------------------------------------------------------------------------
Total from investment
operations .96 .69 .52 .60 .18 .64
-----------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.31) (.64) (.63) (.60) (.58) (.56)
-----------------------------------------------------------------------------------------------------
Net asset value at
end of period $ 12.51 $ 11.86 $ 11.81 $ 11.92 $ 11.92 $ 12.32
=====================================================================================================
Total return (%)* 8.13(c) 6.38 4.37 5.09(b) 1.50 5.33
Net assets at
end of period (000) $2,439,628 $2,080,994 $1,982,924 $1,846,658 $1,751,433 $1,798,881
Ratios to average
net assets:**
Expenses (%)(d) .65(c),(e) .65 .63 .62(b) .59 .55
Net investment
income (%) 5.18(e) 5.76 5.19 4.98 4.81 4.38
Portfolio turnover (%) 5 17 16 28 36 24
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return.
** For the six-month period ended January 31, 2010, average net assets were
$2,281,596,000.
(a) Represents less than $0.01 per share.
(b) 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.
(c) During the period ended January 31, 2010, SAS reimbursed the Fund Shares
$419,000 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 0.04%. This decrease is excluded from the expense
ratios in the Financial Highlights table.
(d) 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 by less than 0.01%.
(e) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 59
<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 $ 11.86 $ 11.83
-----------------------------
Income from investment operations:
Net investment income .34 .67(a)
Net realized and unrealized gain .63 .04(a)
-----------------------------
Total from investment operations .97 .71(a)
-----------------------------
Less distributions from:
Net investment income (.32) (.68)
-----------------------------
Net asset value at end of period $ 12.51 $ 11.86
=============================
Total return (%)* 8.25 6.52
Net assets at end of period (000) $127,609 $59,659
Ratios to average net assets:**(b)
Expenses (%)(c) .38 .38
Net investment income (%) 5.34 5.99
Portfolio turnover (%) 5 17
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in
accordance with U.S. generally accepted accounting principles and could
differ from the Lipper reported return.
** For the six-month period ended January 31, 2010, average net assets were
$100,135,000.
*** 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%.
================================================================================
60 | USAA INCOME 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 | 61
<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 $1,081.30 $3.20
Hypothetical
(5% return before expenses) 1,000.00 1,022.13 3.11
INSTITUTIONAL SHARES
Actual 1,000.00 1,082.50 1.99
Hypothetical
(5% return before expenses) 1,000.00 1,023.29 1.94
* Expenses are equal to the annualized expense ratio of 0.61% for Fund Shares
and 0.38% 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 8.13% for Fund Shares and 8.25% for Institutional Shares
for the six-month period of August 1, 2009, through January 31, 2010.
================================================================================
62 | USAA INCOME 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
U.S. Postage
PAID
USAA
--------------
>> SAVE PAPER AND FUND COSTS
At USAA.COM click: MY DOCUMENTS
Set preferences to USAA DOCUMENTS ONLINE.
[LOGO OF USAA]
USAA WE KNOW WHAT IT MEANS TO SERVE.(R)
============================================================================
23424-0310 (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
-----------------------------------------------------------
Signature and Title: Christopher P. Laia, Assistant Secretary
Date: March 31, 2010
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /S/ CHRISTOPHER W. CLAUS
-----------------------------------------------------
Signature and Title: Christopher W. Claus, President
Date: April 1, 2010
------------------------------
By:* /S/ ROBERTO GALINDO, JR.
-----------------------------------------------------
Signature and Title: Roberto Galindo, Jr., Treasurer
Date: March 31, 2010
------------------------------
*Print the name and title of each signing officer under his or her signature.
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