UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-7852
Exact name of registrant as specified in charter: USAA MUTUAL FUNDS TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: CHRISTOPHER P. LAIA
USAA MUTUAL FUNDS TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2010
ITEM 1. REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2010
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA GNMA TRUST(R)]
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ANNUAL REPORT
USAA GNMA TRUST(R)
MAY 31, 2010
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FUND OBJECTIVE
HIGH LEVEL OF CURRENT INCOME CONSISTENT WITH PRESERVATION OF PRINCIPAL.
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TYPES OF INVESTMENTS
Normally invests at least 80% of the Fund's assets in GNMA securities backed by
the full faith and credit of the U.S. government.
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 9
INVESTMENT OVERVIEW 11
FINANCIAL INFORMATION
Distributions to Shareholders 16
Report of Independent Registered Public Accounting Firm 17
Portfolio of Investments 18
Notes to Portfolio of Investments 22
Financial Statements 24
Notes to Financial Statements 27
EXPENSE EXAMPLE 38
ADVISORY AGREEMENT 40
TRUSTEES' AND OFFICERS' INFORMATION 45
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA 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
"WHILE IT IS STILL TOO EARLY TO DECLARE THAT
A SELF-SUSTAINING RECOVERY IS UNDERWAY, WE [PHOTO OF DANIEL S. McNAMARA]
THINK MOST ECONOMIC INDICATORS ARE POINTED
IN THE RIGHT DIRECTION."
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JUNE 2010
As it turned out, the fiscal year ended May 31, 2010, was kind to patient,
long-term investors. With some zigs and zags along the way, the U.S. stock
market, as represented by the S&P 500 Index, was up nearly 21% for the period.
At the same time, high-quality bonds generated attractive returns (the U.S.
10-year Treasury returned 4.65% during the fiscal year) as investors continued
to search for income. Corporate and municipal bonds did even better.
However, investors suffered some setbacks in April and May of this year as
Greece's debt crisis unsettled the markets. As fears of contagion spread, many
of them abandoned stocks for the safety of Treasury securities and other liquid,
high-quality investments. The S&P 500 Index experienced its worst May since
1962.
Although the European Union (EU) crafted a rescue plan for Greece, a number of
troubling problems remain. Some European countries continue to live beyond their
means, threatening the EU's sustainability. What's more, no one knows how a
default or a debt restructuring by one of these countries would affect major
European banks, which are believed to be heavily invested in the debt securities
of the weaker nations. This uncertainty caused the euro to fall during the
fiscal year to a four-year low versus the U.S. dollar. At the time of this
writing, the dollar is once again the world's undisputed reserve currency.
Commodity prices, which had been rising for most of the fiscal year, dropped in
response to the turmoil in Europe and fears about its impact on the global
economy. The one exception -- gold, widely considered a safe haven.
Meanwhile, the U.S. economy seems to be improving. While it is still too early
to declare that a self-sustaining recovery is underway, we think most economic
indicators are pointed in the right direction. Corporate earnings, fueled by
surprisingly strong top-line revenue growth, have been better than expected. At
the same time, inflation has remained benign, giving the Federal Reserve Board
(the Fed) latitude to hold short-term rates in a range between zero and 0.25%.
There is no doubt that investor confidence was badly shaken by Greece's debt
problems, and at the time of this writing, market sentiment seems driven more by
headlines than by investment fundamentals. Perhaps as a result, many
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2 | USAA GNMA TRUST
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people are keeping large amounts of money in low-yielding money market funds. We
see no relief from these low yields until at least the fourth quarter of 2010.
In fact, we think the debt crisis in Europe could extend the time the Fed can
maintain its "easy money" stance.
Under the circumstances, investors may want to review how much they have in
their money market accounts. Inflation may be muted but as of this writing, it
is higher than money market yields. That isn't to say that investors should take
risks with their immediate or emergency spending needs. In such cases, we
believe a money market fund, a savings account or short-term certificate of
deposit should be considered. However, if the money isn't required for two or
three years, it could be earning higher yields in short- and intermediate-term
bond funds. For longer-term, future needs such as retirement, a diversified
portfolio of stock and bond funds might be most appropriate.
If timing is a concern, we recommend making gradual changes. However, this is
based on your individual immediate needs. Our USAA service representatives would
be happy to assist. They are available -- free of charge -- to help you update
your financial plan and answer any questions you might have.
At USAA Investment Management Company, we are proud of the long-term performance
we have provided to shareholders. In the months ahead, we will continue working
hard on your behalf. From all of us here, 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
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF
YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUND.
INVESTMENT/INSURANCE: NOT FDIC INSURED o NOT BANK ISSUED, GUARANTEED OR
UNDERWRITTEN o MAY LOSE VALUE
INVESTMENT AND INSURANCE PRODUCTS ARE NOT DEPOSITS, NOT INSURED BY FDIC OR ANY
GOVERNMENT AGENCY, NOT GUARANTEED BY THE BANK. INVESTMENTS AND CERTAIN INSURANCE
PRODUCTS MAY LOSE VALUE.
Diversification does not guarantee a profit or prevent a loss.
Gold is a volatile asset class and is subject to additional risks, such as
currency fluctuation, market liquidity, political instability and increased
price volatility. It may be more volatile than other asset classes that
diversify across many industries and companies.
Financial advice provided by USAA Financial Planning Services Insurance Agency,
Inc. (known as USAA Financial Insurance Agency in California, License #
0E36312), and USAA Financial Advisors, Inc., a registered broker dealer.
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
USAA Investment Management Company [PHOTO OF MARGARET "DIDI" WEINBLATT]
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o HOW DID THE USAA GNMA TRUST (THE FUND) PERFORM?
For the one-year period ended May 31, 1020, the Fund had a total return of
6.15%. This compares to returns of 8.29% for the Lipper GNMA Funds Index,
6.82% for the Barclays Capital GNMA Index, and 8.10% for the Lipper GNMA
Funds Average.
o HOW DID GNMAS PERFORM COMPARED TO THE OTHER MAJOR FIXED-INCOME ASSET
CLASSES?
GNMAs outperformed U.S. Treasuries, the only other asset class backed by
the full faith and credit of the U.S. government. GNMAs underperformed
corporate bonds and other risky asset classes, which experienced a
significant rebound from their severely oversold levels of the credit
crisis.
o WHAT LED TO THE FUND'S RELATIVE UNDERPERFORMANCE?
We manage the Fund in what we believe to be a conservative yet
opportunistic way. By opportunistic, we like to buy when prevailing
Refer to page 14 for benchmark definitions.
Past performance is no guarantee of future results.
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4 | USAA GNMA TRUST
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o HISTORICAL YIELD CURVES FOR TREASURIES o
[CHART OF HISTORICAL YIELD CURVES FOR TREASURIES]
5/29/09 5/28/10 CHANGE
--------- --------- ---------
3 MONTH 0.130% 0.155% 0.0254%
6 MONTH 0.279 0.218 -0.0610
1 YEAR 0.442 0.315 -0.1274
2 YEAR 0.915 0.766 -0.1488
3 YEAR 1.402 1.234 -0.1676
5 YEAR 2.340 2.092 -0.2480
7 YEAR 3.053 2.750 -0.3027
10 YEAR 3.459 3.292 -0.1672
30 YEAR 4.336 4.209 -0.1272
[END CHART]
Source: Bloomberg L.P.
rates are higher -- bond prices and yields move in opposite directions.
This has proven to be a solid strategy over time.
Throughout the reporting year, Federal Reserve Board (the Fed) policy was
the primary driver of mortgage interest rates. The private mortgage market
has been reduced to a very small part of the new issuance market ever since
the real estate market crashed. To support the housing market, the Fed
instituted a number of programs to drive mortgage interest rates lower. The
largest Fed quantitative
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MANAGER'S COMMENTARY ON THE FUND | 5
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easing program involved the Fed's buying $1.25 trillion in government
agency mortgage-backed securities (MBS).
The program was set to expire at the end of 2009. In our view the ending of
the program would have meant that interest rates would rise giving us a
much better opportunity to purchase GNMAs. Therefore, we allowed cash to
build up even though we were earning very little on that cash. This left us
vulnerable when the Fed announced that it was extending the program through
the end of March 2010. Although we did put some cash to work through
opportunistic buying, we still had the view that rates would rise when the
program ended. We were trying to protect shareholders from the negative
impact of rising rates. As the program was ending, Freddie Mac and Fannie
Mae announced that instead of just making principal and interest payments
when borrowers were delinquent on their mortgages, they would buy the
entire mortgage out of their MBS pools. This put cash into the hands of
mortgage buyers as the Fed ended its quantitative easing programs.
Additionally, when the problems with Greece's debt created worries of
contagion into other eurozone countries, the ensuing eurozone debt crisis
created a new flight to quality into U.S. government-backed securities like
GNMAs and U.S. Treasury bonds. In summary, we managed the Fund to protect
against rising rates, when in fact rates generally fell.
o HOW HAVE YOU ADJUSTED TO THIS NEW ENVIRONMENT IN THE MORTGAGE MARKET?
We reduced the Fund's cash levels, investing in GNMAs and U.S. Treasury
bonds. We then sold our U.S. Treasury bonds when their prices reached what
seemed to be an unreasonably high level. We
Shares of the USAA GNMA Trust are not individually backed by the full faith
and credit of the U.S. government.
You will find a complete list of securities that the Fund owns on pages
18-21.
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6 | USAA GNMA TRUST
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COUPON RATE COMPOSITION
o OF MORTGAGE OBLIGATIONS IN USAA GNMA TRUST o
[CHART OF COUPON RATE COMPOSITION OF
MORTGAGE OBLIGATIONS IN USAA GNMA TRUST]
PERCENT OF TOTAL
COUPON RATE(%) MARKET VALUE
4.50 25
5.00 12
5.50 34
6.00 22
6.50 4
6.75 0*
7.00 1
7.50 0*
8.00 0*
8.50 0*
9.00 0*
[END CHART]
*Represents less than 1%.
continue to believe that mortgage interest rates will ultimately rise from
today's historically low levels, but not until stability returns to the
markets.
However, our time horizon has been pushed out by the eurozone debt crisis
and its potentially deflationary impact on the global economy. The housing
market is showing signs of additional softening in the wake of the
expiration of the home-buyers tax credit and the back-log of delinquent
mortgages that have yet to enter foreclosure proceedings. We are now
watching Fed language about when the Fed will start to sell its $1 trillion
in MBS. As always, we are trying to protect shareholders from the many
uncertainties.
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MANAGER'S COMMENTARY ON THE FUND | 7
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o WHAT'S YOUR MESSAGE TO SHAREHOLDERS?
In the depths of the financial crisis, when "return of capital" was more
important than "return on capital," the Fund performed well. Its long-term
record shows it has provided good returns with relatively low volatility.
We continue to provide steady income as we manage against numerous risks
and look for opportunities to invest at moreadvantageous yields. We thank
you for your investment in the Fund and for the opportunity to serve you.
While the value of the GNMA Trust's shares is not guaranteed by the U.S.
Government, the Trust endeavors to maintain low-to-moderate fluctuation of share
price.
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8 | USAA GNMA TRUST
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FUND RECOGNITION
USAA GNMA TRUST
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OVERALL MORNINGSTAR RATING(TM)
out of 330 intermediate government funds
for the period ended May 31, 2010:
OVERALL RATING
* * * *
3-YEAR
* * * *
out of 330 funds
5-YEAR
* * * *
out of 310 funds
10-YEAR
* * * *
out of 230 funds
The Overall Morningstar Rating for a fund is derived from a weighted average of
the performance figures associated with its three-, five-, and 10-year (if
applicable) Morningstar Rating metrics. Ratings are based on risk-adjusted
returns.
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. For each fund with at least
a three-year history, Morningstar calculates a Morningstar Rating(TM) based on a
Morningstar Risk-Adjusted Return measure that accounts for variation in a fund's
monthly performance (including the effects of sales charges, loads, and
redemption fees), placing more emphasis on downward variations and rewarding
consistent performance. The top 10% of the funds in each broad asset class
receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars,
the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.
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FUND RECOGNITION | 9
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LIPPER LEADER (OVERALL)
[5]
PRESERVATION
The Fund is listed as a Lipper Leader for Preservation among 4,222 fixed-income
funds within the Lipper U.S. Mortgage category for the overall period ended May
31, 2010. The Fund received a Lipper Leader rating for Preservation among 4,222,
3,663 and 2,487 fixed-income funds for the three-, five-, and 10-year periods,
respectively. Lipper ratings for Preservation reflect funds' historical loss
avoidance relative to other funds within the same asset class, as of May 31,
2010. Preservation ratings are relative, rather than absolute, measures, and
funds named Lipper Leaders for Preservation may still experience losses
periodically; those losses may be larger for equity and mixed equity funds than
for fixed-income funds.
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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.
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10 | USAA GNMA TRUST
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INVESTMENT OVERVIEW
USAA GNMA TRUST (Ticker Symbol: USGNX)
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5/31/10 5/31/09
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Net Assets $609.9 Million $564.3 Million
Net Asset Value Per Share $10.19 $9.97
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/10
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1 Year 5 Years 10 Years
6.15% 5.52% 6.01%
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30-DAY SEC YIELD* AS OF 5/31/10 EXPENSE RATIO**
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4.12% 0.55%
*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'S PROSPECTUS DATED OCTOBER 1, 2009, AND IS
CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. THIS EXPENSE RATIO MAY DIFFER
FROM THE EXPENSE RATIO DISCLOSED IN THE FINANCIAL HIGHLIGHTS.
Total return measures the price change in a share assuming the reinvestment of
all net investment income and realized capital gain distributions. The total
returns quoted do not reflect adjustments made to the enclosed financial
statements in accordance with U.S. generally accepted accounting principles or
the deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
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INVESTMENT OVERVIEW | 11
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AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS -- PERIODS
ENDED MAY 31, 2010
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TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
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10 Years 6.01% = 5.17% + 0.84%
5 Years 5.52% = 4.65% + 0.87%
1 Year 6.15% = 3.94% + 2.21%
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 THE 10-YEAR PERIOD
ENDED MAY 31, 2010
[CHART OF ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS]
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TOTAL RETURN DIVIDEND RETURN CHANGE IN SHARE PRICE
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5/31/2001 12.91% 7.36% 5.55%
5/31/2002 7.83% 5.91% 1.92%
5/31/2003 6.49% 5.70% 0.79%
5/31/2004 0.39% 4.72% -4.33%
5/31/2005 5.33% 4.92% 0.41%
5/31/2006 0.40% 4.91% -4.51%
5/31/2007 6.25% 4.86% 1.39%
5/31/2008 6.94% 4.93% 2.01%
5/31/2009 8.05% 4.63% 3.42%
5/31/2010 6.15% 3.94% 2.21%
[ENE CHART]
NOTE THE ROLE THAT DIVIDEND RETURNS PLAY IN THE FUND'S 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.
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o 12-MONTH DIVIDEND YIELD COMPARISON o
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
LIPPER GNMA
USAA GNMA TRUST FUNDS AVERAGE
5/31/2001 6.64% 6.00%
5/31/2002 5.58 5.21
5/31/2003 5.54 4.32
5/31/2004 4.93 4.07
5/31/2005 4.80 3.97
5/31/2006 5.15 4.52
5/31/2007 4.70 4.70
5/31/2008 4.71 4.60
5/31/2009 4.29 4.18
5/31/2010 3.74 3.68
[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 distributed during the previous nine months. The graph
represents data for periods ending 5/31/01 to 5/31/10.
The Lipper GNMA Funds Average is an average performance level of all GNMA
funds, reported by Lipper Inc., an independent organization that monitors
the performance of mutual funds.
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INVESTMENT OVERVIEW | 13
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o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
BARCLAYS CAPITAL LIPPER GNMA
GNMA INDEX FUNDS INDEX USAA GNMA TRUST
05/31/00 $10,000.00 $10,000.00 $10,000.00
06/30/00 10,184.48 10,169.94 10,198.57
07/31/00 10,238.21 10,211.86 10,248.00
08/31/00 10,392.90 10,362.14 10,416.55
09/30/00 10,489.92 10,451.24 10,485.22
10/31/00 10,567.93 10,516.56 10,570.52
11/30/00 10,716.55 10,677.02 10,753.11
12/31/00 10,868.43 10,830.08 10,931.54
01/31/01 11,045.48 10,994.81 11,096.41
02/28/01 11,094.95 11,050.44 11,178.54
03/31/01 11,161.27 11,105.27 11,258.65
04/30/01 11,180.27 11,105.57 11,228.70
05/31/01 11,272.57 11,181.05 11,289.15
06/30/01 11,305.62 11,208.21 11,303.69
07/31/01 11,499.09 11,416.32 11,525.89
08/31/01 11,583.18 11,501.44 11,628.90
09/30/01 11,740.23 11,654.32 11,794.25
10/31/01 11,895.92 11,803.12 11,969.49
11/30/01 11,796.88 11,690.53 11,817.84
12/31/01 11,761.59 11,633.54 11,712.93
01/31/02 11,879.51 11,751.87 11,833.48
02/28/02 12,000.92 11,878.18 11,979.65
03/31/02 11,887.27 11,754.29 11,807.27
04/30/02 12,096.25 11,959.75 12,053.57
05/31/02 12,175.73 12,038.12 12,173.23
06/30/02 12,273.20 12,132.27 12,261.26
07/31/02 12,416.30 12,270.68 12,397.08
08/31/02 12,502.98 12,366.56 12,524.75
09/30/02 12,605.62 12,466.17 12,626.31
10/31/02 12,646.31 12,493.35 12,648.27
11/30/02 12,658.00 12,495.69 12,647.48
12/31/02 12,784.02 12,630.16 12,794.67
01/31/03 12,816.85 12,660.62 12,825.83
02/28/03 12,881.94 12,730.57 12,890.67
03/31/03 12,890.93 12,725.08 12,889.25
04/30/03 12,921.62 12,755.68 12,932.49
05/31/03 12,922.07 12,770.36 12,961.31
06/30/03 12,961.31 12,791.79 12,972.98
07/31/03 12,747.60 12,535.15 12,703.14
08/31/03 12,830.45 12,610.98 12,781.41
09/30/03 13,015.83 12,819.06 12,986.98
10/31/03 12,981.77 12,766.44 12,937.51
11/30/03 13,026.17 12,807.12 12,959.76
12/31/03 13,148.71 12,896.43 13,052.08
01/31/04 13,214.36 12,964.23 13,117.56
02/29/04 13,302.27 13,044.17 13,194.74
03/31/04 13,357.02 13,086.45 13,248.06
04/30/04 13,146.57 12,868.82 13,052.16
05/31/04 13,119.03 12,836.32 13,010.39
06/30/04 13,235.83 12,926.69 13,117.62
07/31/04 13,343.08 13,034.91 13,211.19
08/31/04 13,528.68 13,211.04 13,368.59
09/30/04 13,556.78 13,200.42 13,392.71
10/31/04 13,663.80 13,286.89 13,472.71
11/30/04 13,631.54 13,250.02 13,443.59
12/31/04 13,721.02 13,321.19 13,500.56
01/31/05 13,798.82 13,398.52 13,564.93
02/28/05 13,754.97 13,350.17 13,522.48
03/31/05 13,728.56 13,322.94 13,493.88
04/30/05 13,867.95 13,449.62 13,620.82
05/31/05 13,968.12 13,536.83 13,703.20
06/30/05 14,009.15 13,566.19 13,731.39
07/31/05 13,956.31 13,511.60 13,689.11
08/31/05 14,071.65 13,624.22 13,802.48
09/30/05 14,015.56 13,553.35 13,735.06
10/31/05 13,954.74 13,486.66 13,674.97
11/30/05 13,983.97 13,524.36 13,704.41
12/31/05 14,160.80 13,674.89 13,866.35
01/31/06 14,207.12 13,707.53 13,906.14
02/28/06 14,235.90 13,732.10 13,920.13
03/31/06 14,144.73 13,639.50 13,850.44
04/30/06 14,097.06 13,585.66 13,787.84
05/31/06 14,068.62 13,549.70 13,758.25
06/30/06 14,085.26 13,551.01 13,756.48
07/31/06 14,284.57 13,729.43 13,941.15
08/31/06 14,504.01 13,928.17 14,130.27
09/30/06 14,590.13 14,014.53 14,231.90
10/31/06 14,690.63 14,105.90 14,330.08
11/30/06 14,830.25 14,237.70 14,461.17
12/31/06 14,813.05 14,205.12 14,444.98
01/31/07 14,813.16 14,200.75 14,436.70
02/28/07 14,992.92 14,373.06 14,615.57
03/31/07 15,025.41 14,391.98 14,628.56
04/30/07 15,105.33 14,461.35 14,699.40
05/31/07 15,029.34 14,373.66 14,618.14
06/30/07 14,943.00 14,297.93 14,539.50
07/31/07 15,064.75 14,424.09 14,643.50
08/31/07 15,238.55 14,575.46 14,817.39
09/30/07 15,352.32 14,678.11 14,902.32
10/31/07 15,520.38 14,823.97 15,040.61
11/30/07 15,833.13 15,102.14 15,342.76
12/31/07 15,846.50 15,113.49 15,353.85
01/31/08 16,116.76 15,355.99 15,619.57
02/29/08 16,188.82 15,434.35 15,699.68
03/31/08 16,239.52 15,457.60 15,755.81
04/30/08 16,230.18 15,436.34 15,735.12
05/31/08 16,137.21 15,349.42 15,635.19
06/30/08 16,137.78 15,356.98 15,644.05
07/31/08 16,137.78 15,361.75 15,638.65
08/31/08 16,338.33 15,476.67 15,782.14
09/30/08 16,417.36 15,476.45 15,884.29
10/31/08 16,199.49 15,183.99 15,684.68
11/30/08 16,780.81 15,572.95 16,203.99
12/31/08 17,094.23 15,902.91 16,465.36
01/31/09 17,081.07 15,952.47 16,474.46
02/28/09 17,184.16 16,082.30 16,583.94
03/31/09 17,456.55 16,390.39 16,827.26
04/30/09 17,500.62 16,488.68 16,851.45
05/31/09 17,528.61 16,572.98 16,891.01
06/30/09 17,510.96 16,621.58 16,897.21
07/31/09 17,701.73 16,852.29 17,058.93
08/31/09 17,815.05 16,986.25 17,177.86
09/30/09 17,948.27 17,117.17 17,266.63
10/31/09 18,060.12 17,256.38 17,372.93
11/30/09 18,294.85 17,466.36 17,551.07
12/31/09 18,012.23 17,253.38 17,366.49
01/31/10 18,238.64 17,490.98 17,551.35
02/28/10 18,323.74 17,550.83 17,586.04
03/31/10 18,352.75 17,573.28 17,603.82
04/30/10 18,479.89 17,714.90 17,716.78
05/31/10 18,724.29 17,947.14 17,929.30
[END CHART]
Data from 5/31/00 to 5/31/10.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA GNMA Trust to the following benchmarks:
o The unmanaged Barclays Capital GNMA Index covers the mortgage-backed
pass-through securities of the Government National Mortgage Association
(GNMA).
o The unmanaged Lipper GNMA Funds Index tracks the total return performance
of the 10 largest funds within the Lipper GNMA Funds category.
Past performance is no guarantee of future results, and the cumulative
performance quoted does not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
================================================================================
14 | USAA GNMA TRUST
<PAGE>
================================================================================
o ASSET ALLOCATION -- 5/31/2010 o
[PIE CHART OF ASSET ALLOCATION]
30-YEAR FIXED-RATE SINGLE-FAMILY MORTGAGES* 77.5%
15-YEAR FIXED-RATE SINGLE-FAMILY MORTGAGES* 9.2%
MONEY MARKET INSTRUMENTS 6.4%
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES 4.8%
COLLATERALIZED MORTGAGE OBLIGATIONS 1.7%
[END CHART]
* Combined in the portfolio of investments under mortgage-backed pass-through
securities, single-family.
Percentages are of the net assets of the Fund and may not equal 100%.
You will find a complete list of securities that the Fund owns on pages 18-21.
================================================================================
INVESTMENT OVERVIEW | 15
<PAGE>
================================================================================
DISTRIBUTIONS TO SHAREHOLDERS
--------------------------------------------------------------------------------
The following federal tax information related to the Fund's fiscal year ended
May 31, 2010, is provided for information purposes only and should not be used
for reporting to federal or state revenue agencies. Federal tax information for
the calendar year will be reported to you on Form 1099-DIV in January 2011.
For the fiscal year ended May 31, 2010, certain dividends paid by the Fund
qualify as interest-related dividends. The Fund designates $23,326,000 as
qualifying interest income.
================================================================================
16 | USAA GNMA TRUST
<PAGE>
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA GNMA TRUST:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the USAA GNMA Trust (one of the portfolios
constituting USAA Mutual Funds Trust) (the "Fund") as of May 31, 2010, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of May 31, 2010, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA GNMA Trust at May 31, 2010, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 23, 2010
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 17
<PAGE>
================================================================================
PORTFOLIO OF INVESTMENTS
May 31, 2010
--------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (93.2%)(a)
MORTGAGE-BACKED PASS-THROUGH SECURITIES,
SINGLE-FAMILY (86.7%)
$ 5,361 Government National Mortgage Assn. I 4.50% 5/15/2024 $ 5,670
8,306 Government National Mortgage Assn. I 4.50 9/15/2024 8,785
6,530 Government National Mortgage Assn. I 4.50 10/15/2024 6,907
6,290 Government National Mortgage Assn. I 4.50 10/15/2024 6,652
9,878 Government National Mortgage Assn. I 4.50 11/15/2039 10,166
14,837 Government National Mortgage Assn. I 4.50 12/15/2039 15,271
49,787 Government National Mortgage Assn. I 4.50 2/15/2040 51,243
14,748 Government National Mortgage Assn. I 4.50 3/15/2040 15,179
6,506 Government National Mortgage Assn. I 5.00 2/15/2039 6,876
2,698 Government National Mortgage Assn. I 5.50 12/15/2018 2,922
15,348 Government National Mortgage Assn. I 5.50 10/15/2033 16,602
6,327 Government National Mortgage Assn. I 5.50 12/15/2033 6,844
3,050 Government National Mortgage Assn. I 5.50 7/15/2034 3,296
12,243 Government National Mortgage Assn. I 5.50 10/15/2035 13,215
7,073 Government National Mortgage Assn. I 5.50 3/15/2038 7,605
9,050 Government National Mortgage Assn. I 5.50 4/15/2038 9,731
20,009 Government National Mortgage Assn. I 5.50 6/15/2039 21,513
2,407 Government National Mortgage Assn. I 6.00 12/15/2016 2,600
2,598 Government National Mortgage Assn. I 6.00 8/15/2022 2,806
1,637 Government National Mortgage Assn. I 6.00 4/15/2028 1,791
548 Government National Mortgage Assn. I 6.00 11/15/2028 602
1,300 Government National Mortgage Assn. I 6.00 2/15/2029 1,428
972 Government National Mortgage Assn. I 6.00 7/15/2029 1,069
1,329 Government National Mortgage Assn. I 6.00 5/15/2032 1,461
4,300 Government National Mortgage Assn. I 6.00 1/15/2033 4,713
1,272 Government National Mortgage Assn. I 6.00 2/15/2033 1,395
1,512 Government National Mortgage Assn. I 6.00 7/15/2033 1,658
893 Government National Mortgage Assn. I 6.00 9/15/2033 979
3,816 Government National Mortgage Assn. I 6.00 3/15/2037 4,136
6,284 Government National Mortgage Assn. I 6.00 9/15/2037 6,812
4,145 Government National Mortgage Assn. I 6.00 5/15/2038 4,492
8,598 Government National Mortgage Assn. I 6.00 5/15/2038 9,318
3,414 Government National Mortgage Assn. I 6.00 9/15/2038 3,700
6,345 Government National Mortgage Assn. I 6.00 10/15/2038 6,876
5,620 Government National Mortgage Assn. I 6.00 12/15/2038 6,091
================================================================================
18 | USAA GNMA TRUST
<PAGE>
================================================================================
--------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------
$ 375 Government National Mortgage Assn. I 6.50% 5/15/2028 $ 419
355 Government National Mortgage Assn. I 6.50 5/15/2028 397
385 Government National Mortgage Assn. I 6.50 7/15/2028 430
326 Government National Mortgage Assn. I 6.50 9/15/2028 364
1,061 Government National Mortgage Assn. I 6.50 11/15/2028 1,186
49 Government National Mortgage Assn. I 6.50 1/15/2029 54
46 Government National Mortgage Assn. I 6.50 1/15/2029 52
929 Government National Mortgage Assn. I 6.50 3/15/2031 1,034
1,003 Government National Mortgage Assn. I 6.50 10/15/2031 1,117
689 Government National Mortgage Assn. I 6.50 1/15/2032 763
298 Government National Mortgage Assn. I 6.50 3/15/2032 330
999 Government National Mortgage Assn. I 6.50 8/15/2032 1,107
4,433 Government National Mortgage Assn. I 6.50 9/15/2032 4,934
72 Government National Mortgage Assn. I 6.75 5/15/2028 81
144 Government National Mortgage Assn. I 6.75 5/15/2028 162
76 Government National Mortgage Assn. I 7.00 4/15/2027 86
672 Government National Mortgage Assn. I 7.00 5/15/2027 760
61 Government National Mortgage Assn. I 7.00 6/15/2028 69
45 Government National Mortgage Assn. I 7.00 7/15/2028 51
187 Government National Mortgage Assn. I 7.00 8/15/2028 212
106 Government National Mortgage Assn. I 7.00 8/15/2028 120
200 Government National Mortgage Assn. I 7.00 9/15/2028 226
1,004 Government National Mortgage Assn. I 7.00 5/15/2029 1,137
1,021 Government National Mortgage Assn. I 7.00 6/15/2029 1,157
527 Government National Mortgage Assn. I 7.00 8/15/2031 598
281 Government National Mortgage Assn. I 7.00 9/15/2031 318
378 Government National Mortgage Assn. I 7.00 10/15/2031 429
154 Government National Mortgage Assn. I 7.00 6/15/2032 175
581 Government National Mortgage Assn. I 7.00 7/15/2032 659
278 Government National Mortgage Assn. I 7.50 2/15/2028 316
57 Government National Mortgage Assn. I 7.50 3/15/2029 65
152 Government National Mortgage Assn. I 7.50 4/15/2029 174
73 Government National Mortgage Assn. I 7.50 7/15/2029 83
410 Government National Mortgage Assn. I 7.50 10/15/2029 467
157 Government National Mortgage Assn. I 7.50 10/15/2029 179
57 Government National Mortgage Assn. I 7.50 12/15/2030 66
64 Government National Mortgage Assn. I 7.50 1/15/2031 73
104 Government National Mortgage Assn. I 7.50 11/15/2031 119
15 Government National Mortgage Assn. I 8.00 1/15/2022 17
172 Government National Mortgage Assn. I 8.00 6/15/2023 199
275 Government National Mortgage Assn. I 8.00 5/15/2027 319
161 Government National Mortgage Assn. I 8.00 7/15/2030 187
86 Government National Mortgage Assn. I 8.00 9/15/2030 99
33 Government National Mortgage Assn. I 8.50 6/15/2021 38
================================================================================
PORTFOLIO OF INVESTMENTS | 19
<PAGE>
================================================================================
--------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------
$ 10 Government National Mortgage Assn. I 8.50% 7/15/2022 $ 12
107 Government National Mortgage Assn. I 9.00 7/15/2021 124
13,235 Government National Mortgage Assn. II 4.50 4/20/2024 13,947
7,271 Government National Mortgage Assn. II 5.00 5/20/2033 7,733
8,337 Government National Mortgage Assn. II 5.00 7/20/2033 8,866
5,647 Government National Mortgage Assn. II 5.00 6/20/2034 5,999
16,604 Government National Mortgage Assn. II 5.00 9/20/2035 17,612
7,506 Government National Mortgage Assn. II 5.00 2/20/2037 7,941
1,744 Government National Mortgage Assn. II 5.50 4/20/2033 1,890
6,193 Government National Mortgage Assn. II 5.50 3/20/2034 6,702
23,513 Government National Mortgage Assn. II 5.50 2/20/2035 25,416
20,271 Government National Mortgage Assn. II 5.50 4/20/2035 21,911
11,574 Government National Mortgage Assn. II 5.50 7/20/2035 12,511
8,138 Government National Mortgage Assn. II 5.50 1/20/2037 8,768
874 Government National Mortgage Assn. II 6.00 3/20/2031 964
2,141 Government National Mortgage Assn. II 6.00 8/20/2032 2,361
1,736 Government National Mortgage Assn. II 6.00 9/20/2032 1,914
1,812 Government National Mortgage Assn. II 6.00 10/20/2033 1,996
1,731 Government National Mortgage Assn. II 6.00 12/20/2033 1,901
5,528 Government National Mortgage Assn. II 6.00 2/20/2034 6,061
5,152 Government National Mortgage Assn. II 6.00 3/20/2034 5,649
4,340 Government National Mortgage Assn. II 6.00 9/20/2034 4,761
10,557 Government National Mortgage Assn. II 6.00 10/20/2034 11,575
2,277 Government National Mortgage Assn. II 6.00 11/20/2034 2,493
5,983 Government National Mortgage Assn. II 6.00 5/20/2036 6,519
336 Government National Mortgage Assn. II 6.50 5/20/2031 374
272 Government National Mortgage Assn. II 6.50 7/20/2031 303
774 Government National Mortgage Assn. II 6.50 8/20/2031 862
1,175 Government National Mortgage Assn. II 6.50 4/20/2032 1,307
1,105 Government National Mortgage Assn. II 6.50 6/20/2032 1,229
3,868 Government National Mortgage Assn. II 6.50 8/20/2034 4,279
969 Government National Mortgage Assn. II 7.00 9/20/2030 1,095
138 Government National Mortgage Assn. II 7.50 4/20/2031 157
45 Government National Mortgage Assn. II 8.00 12/20/2022 52
962 Government National Mortgage Assn. II 8.00 8/20/2030 1,114
8,994 Fannie Mae(+) 5.00 12/01/2035 9,449
6,422 Fannie Mae(+) 5.50 11/01/2037 6,853
507 Fannie Mae(+) 6.00 2/01/2017 548
11,369 Fannie Mae(+) 6.00 5/01/2038 12,265
419 Fannie Mae(+) 6.50 10/01/2016 452
2,807 Fannie Mae(+) 6.50 12/01/2016 3,035
1,905 Freddie Mac(+) 5.00 1/01/2021 2,040
6,050 Freddie Mac(+) 5.50 12/01/2035 6,470
--------
528,742
--------
================================================================================
20 | USAA GNMA TRUST
<PAGE>
================================================================================
--------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
--------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (1.7%)
$ 9,950 Government National Mortgage Assn. I 5.50% 3/16/2032 $ 10,460
--------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (4.8%)
5,000 Bank of America Corp., FDIC TLGP 0.47(b) 6/22/2012 5,033
5,000 JPMorgan Chase & Co., FDIC TLGP 0.53(b) 12/26/2012 5,042
5,000 JPMorgan Chase & Co., FDIC TLGP 0.65(b) 6/22/2012 5,042
4,000 MetLife, Inc., FDIC TLGP 0.61(b) 6/29/2012 4,034
5,000 State Street Corp., FDIC TLGP 0.46(b) 9/15/2011 5,013
5,000 Union Bank N.A., FDIC TLGP 0.46(b) 3/16/2012 5,024
--------
29,188
--------
Total U.S. Government Agency Issues (cost: $537,625) 568,390
--------
MONEY MARKET INSTRUMENTS (6.4%)
REPURCHASE AGREEMENTS (6.4%)
39,012 Credit Suisse First Boston, LLC, 0.20%,
acquired on 5/28/2010 and due on 6/01/2010
at $39,012 (collateralized by $36,786 of
Government National Mortgage Assn. I(a),
5.50%, due 12/15/2039; market value
$39,795) (cost: $39,012) 39,012
--------
TOTAL INVESTMENTS (COST: $576,637) $607,402
========
----------------------------------------------------------------------------------------------------------
($ IN 000s) VALUATION HIERARCHY
----------------------------------------------------------------------------------------------------------
(LEVEL 1) (LEVEL 2) (LEVEL 3)
QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT
IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE
ASSETS FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL
----------------------------------------------------------------------------------------------------------
U.S. Government Agency Issues $- $568,390 $- $568,390
Money Market Instruments:
Repurchase Agreements - 39,012 - 39,012
----------------------------------------------------------------------------------------------------------
Total $- $607,402 $- $607,402
----------------------------------------------------------------------------------------------------------
================================================================================
PORTFOLIO OF INVESTMENTS | 21
<PAGE>
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS
May 31, 2010
--------------------------------------------------------------------------------
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.
o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
FDIC TLGP The FDIC Temporary Liquidity Guarantee Program provides a
guarantee of payment of principal and 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.
o SPECIFIC NOTES
(a) 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
================================================================================
22 | USAA GNMA TRUST
<PAGE>
================================================================================
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.
(b) Variable-rate or floating-rate security -- interest rate is adjusted
periodically. The interest rate disclosed represents the current rate
at May 31, 2010.
See accompanying notes to financial statements.
================================================================================
NOTES TO PORTFOLIO OF INVESTMENTS | 23
<PAGE>
================================================================================
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
May 31, 2010
--------------------------------------------------------------------------------
ASSETS
Investments in securities, at market value (cost of $576,637) $607,402
Cash 1
Receivables:
Capital shares sold 969
Interest 2,286
--------
Total assets 610,658
--------
LIABILITIES
Payables:
Capital shares redeemed 383
Dividends on capital shares 226
Accrued management fees 41
Accrued transfer agent's fees 14
Other accrued expenses and payables 75
--------
Total liabilities 739
--------
Net assets applicable to capital shares outstanding $609,919
========
NET ASSETS CONSIST OF:
Paid-in capital $598,956
Accumulated net realized loss on investments (19,802)
Net unrealized appreciation of investments 30,765
--------
Net assets applicable to capital shares outstanding $609,919
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 59,872
========
Net asset value, redemption price, and offering price per share $ 10.19
========
See accompanying notes to financial statements.
================================================================================
24 | USAA GNMA TRUST
<PAGE>
================================================================================
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Year ended May 31, 2010
--------------------------------------------------------------------------------
INVESTMENT INCOME
Interest income $24,935
-------
EXPENSES
Management fees 562
Administration and servicing fees 887
Transfer agent's fees 765
Custody and accounting fees 100
Postage 42
Shareholder reporting fees 25
Trustees' fees 10
Registration fees 45
Professional fees 84
Other 16
-------
Total expenses 2,536
Transfer agent's fees reimbursed (Note 5C) (31)
-------
Net expenses 2,505
-------
NET INVESTMENT INCOME 22,430
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain 284
Change in net unrealized appreciation/depreciation 12,312
-------
Net realized and unrealized gain 12,596
-------
Increase in net assets resulting from operations $35,026
=======
See accompanying notes to financial statements.
================================================================================
FINANCIAL STATEMENTS | 25
<PAGE>
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Years ended May 31,
--------------------------------------------------------------------------------
2010 2009
---------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 22,430 $ 23,456
Net realized gain on investments 284 115
Change in net unrealized appreciation/depreciation of
investments 12,312 17,975
------------------------
Increase in net assets resulting from operations 35,026 41,546
------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (22,430) (23,456)
------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 181,320 201,308
Reinvested dividends 19,609 20,049
Cost of shares redeemed (167,859) (188,861)
------------------------
Increase in net assets from capital
share transactions 33,070 32,496
------------------------
Capital contribution from USAA Transfer Agency
Company - 2
------------------------
Net increase in net assets 45,666 50,588
NET ASSETS
Beginning of year 564,253 513,665
------------------------
End of year $ 609,919 $ 564,253
========================
CHANGE IN SHARES OUTSTANDING
Shares sold 18,029 20,513
Shares issued for dividends reinvested 1,947 2,052
Shares redeemed (16,690) (19,267)
------------------------
Increase in shares outstanding 3,286 3,298
========================
See accompanying notes to financial statements.
================================================================================
26 | USAA GNMA TRUST
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
May 31, 2010
--------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940 (the 1940 Act), as amended, is an open-end management investment company
organized as a Delaware statutory trust consisting of 46 separate funds. The
information presented in this annual report pertains only to the USAA GNMA Trust
(the Fund), which is classified as diversified under the 1940 Act. The Fund's
investment objective is to provide a high level of current income consistent
with preservation of principal.
A. SECURITY VALUATION -- The value of each security is determined (as of the
close of trading on the New York Stock Exchange (NYSE) on each business day
the NYSE is open) as set forth below:
1. 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. Debt securities purchased with original or remaining maturities of 60
days or less may be valued at amortized cost, which approximates market
value.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 27
<PAGE>
================================================================================
3. Repurchase agreements are valued at cost, which approximates market
value.
4. 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 USAA Investment Management Company (the Manager),
an affiliate of the Fund, 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
net asset value (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,
================================================================================
28 | USAA GNMA TRUST
<PAGE>
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inputs that are observable for the securities, either directly or indirectly,
and market-corroborated inputs such as market indices.
Level 3 -- inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. FEDERAL TAXES -- The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its income to its shareholders. Therefore, no
federal income tax provision is required.
D. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses from
sales of investment securities are computed on the identified cost basis.
Interest income is recorded daily on the accrual basis. Premiums and
discounts are amortized over the life of the respective securities, using the
effective yield method for long-term securities and the straight-line method
for short-term securities.
E. 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 a month or more after the trade
date. During the period prior to settlement,
================================================================================
NOTES TO FINANCIAL STATEMENTS | 29
<PAGE>
================================================================================
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.
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 year ended May 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.
(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
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30 | USAA GNMA TRUST
<PAGE>
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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 year ended May 31, 2010, the Fund paid CAPCO facility fees of $3,000,
which represents 1.5% of the total fees paid to CAPCO by the USAA funds. The
Fund had no borrowings under this agreement during the year ended May 31, 2010.
(3) DISTRIBUTIONS
The character of any distributions made during the year from net investment
income or net realized gains is determined in accordance with federal tax
regulations and may differ from those determined in accordance with U.S.
generally accepted accounting principles. Also, due to the timing of
distributions, the fiscal year in which amounts are distributed may differ from
the year that the income or realized gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-basis and
tax-basis accounting for the expiration of capital loss carryovers resulted in
reclassifications to the statement of assets and liabilities to decrease paid-in
capital and decrease accumulated net realized loss on investments by $893,000.
These reclassifications had no effect on net assets.
The tax character of distributions paid during the years ended May 31, 2010, and
2009, was as follows:
2010 2009
-------------------------------------
Ordinary income* $22,430,000 $23,456,000
* Includes distribution of short-term realized capital gains, if any, which are
taxable as ordinary income.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 31
<PAGE>
================================================================================
As of May 31, 2010, the components of net assets representing distributable
earnings on a tax basis were as follows:
Undistributed ordinary income $ 226,000
Accumulated capital and other losses (19,802,000)
Unrealized appreciation 30,765,000
The difference between book-basis and tax-basis unrealized appreciation of
investments is attributable to the tax deferral of losses on wash sales.
Net investment income is accrued daily as dividends and distributed to
shareholders 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. For the year ended
May 31, 2010, the Fund utilized capital loss carryovers of $283,000 to offset
capital gains. At May 31, 2010, the Fund had capital loss carryovers of
$19,802,000, for federal income tax purposes which, if not offset by subsequent
capital gains, will expire between 2012 and 2015, as shown below. It is unlikely
that the Trust's Board of Trustees will authorize a distribution of capital
gains realized in the future until the capital loss carryovers have been used or
expire.
CAPITAL LOSS CARRYOVERS
------------------------------------------
EXPIRES BALANCE
-------- -----------
2012 $ 9,577,000
2013 4,814,000
2014 3,887,000
2015 1,524,000
-----------
Total $19,802,000
===========
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
================================================================================
32 | USAA GNMA TRUST
<PAGE>
================================================================================
the tax positions were deemed to not meet the more-likely-than-not threshold.
For the year ended May 31, 2010, the Fund did not incur any income tax,
interest, or penalties. As of May 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 year ended May 31, 2010, and each of the three
preceding fiscal years, 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 year ended May 31, 2010, were $165,096,000 and
$148,191,000, respectively.
As of May 31, 2010, the cost of securities, including short-term securities, for
federal income tax purposes, was $576,637,000.
Gross unrealized appreciation and depreciation of investments as of May 31,
2010, for federal income tax purposes, were $30,765,000 and $0, respectively,
resulting in net unrealized appreciation of $30,765,000.
(5) 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 0.125% of its average net assets for the fiscal
year.
The performance adjustment is calculated monthly by comparing the Fund's
performance to that of the Lipper GNMA Funds Index over the performance
period. The Lipper GNMA Funds Index tracks the total return performance of
the 10 largest funds in the Lipper GNMA Funds category. The performance
period for the Fund consists of the current
================================================================================
NOTES TO FINANCIAL STATEMENTS | 33
<PAGE>
================================================================================
month plus the previous 35 months. The following table is utilized to
determine the extent of the performance adjustment:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS(1)
-----------------------------------------------------------------------------
+/- 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.
The annual performance adjustment rate is multiplied by the average net
assets of the Fund over the entire performance period, which is then
multiplied by a fraction, the numerator of which is the number of days in the
month and the denominator of which is 365 (366 in leap years). The resulting
amount is the performance adjustment; a positive adjustment in the case of
overperformance, or a negative adjustment in the case of underperformance.
Under the performance fee arrangement, the Fund will pay a positive
performance fee adjustment for a performance period whenever the Fund
outperforms the Lipper GNMA Funds Index over that period, even if the Fund
had overall negative returns during the performance period.
For the year ended May 31, 2010, the Fund incurred total management fees,
paid or payable to the Manager, of $562,000, which included a (0.03)%
performance adjustment of $(177,000).
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% of the Fund's average net assets. For the year
ended May 31, 2010, the Fund incurred administration and servicing fees, paid
or payable to the Manager, of $887,000.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain
================================================================================
34 | USAA GNMA TRUST
<PAGE>
================================================================================
compliance and legal services for the benefit of the Fund. The Trust's Board
of Trustees has approved the reimbursement of a portion of these expenses
incurred by the Manager. For the year ended May 31, 2010, the Fund reimbursed
the Manager $26,000 for these compliance and legal services. These expenses
are included in the professional fees on the Fund's statement of operations.
C. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA Shareholder
Account Services (SAS), an affiliate of the Manager, provides transfer agent
services to the Fund based on an annual charge of $25.50 per shareholder
account plus out-of-pocket expenses. The Fund also pays SAS fees that are
related to the administration and servicing of accounts that are traded on an
omnibus basis. For the year ended May 31, 2010, the Fund incurred transfer
agent's fees, paid or payable to SAS, of $765,000. During the year ended May
31, 2010, SAS reimbursed the Fund $31,000 for corrections in fees paid for
the administration and servicing of certain accounts. Additionally, the Fund
recorded a capital contribution and receivable from SAS of less than $500 at
May 31, 2010, for adjustments related to corrections to shareholder
transactions.
D. UNDERWRITING SERVICES -- The Manager provides exclusive underwriting and
distribution of the Fund's shares on a continuing best-efforts basis. The
Manager receives no commissions or fees for this service.
(6) TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(7) SUBSEQUENT EVENTS
Events or transactions that occur after the balance sheet date, but before the
financial statements are issued are categorized as recognized or non-recognized
for financial statement purposes. The Manager has evaluated subsequent events
through the date the financial statements were issued, and has determined there
were no events that require
================================================================================
NOTES TO FINANCIAL STATEMENTS | 35
<PAGE>
================================================================================
recognition or disclosure in the Fund's financial statements. The following
subsequent event will affect the Fund's future financial statements.
Effective August 1, 2010, the Fund will offer a new class of shares, Adviser
Shares, which are intended for persons purchasing shares through financial
intermediaries, banks, broker-dealers, insurance companies, investment advisers,
plan sponsors, and financial professionals that provide various administrative
and distribution services.
(8) NEW ACCOUNTING PRONOUNCEMENTS
FAIR VALUE MEASUREMENTS -- In January 2010, the Financial Accounting
Standards Board issued amended guidance for improving disclosures about
fair value measurements that adds new disclosure requirements about
significant transfers between Level 1, Level 2, and Level 3, 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.
================================================================================
36 | USAA GNMA TRUST
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(9) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------
2010 2009 2008 2007 2006
--------------------------------------------------------------------
Net asset value at beginning of period $ 9.97 $ 9.64 $ 9.45 $ 9.32 $ 9.76
--------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income (loss) .38 .43 .45 .44 .48
Net realized and unrealized
gain (loss) .22 .33 .19 .13 (.44)
--------------------------------------------------------------------
Total from investment operations .60 .76 .64 .57 .04
--------------------------------------------------------------------
Less distributions from:
Net investment income (.38) (.43) (.45) (.44) (.48)
--------------------------------------------------------------------
Net asset value at end of period $ 10.19 $ 9.97 $ 9.64 $ 9.45 $ 9.32
====================================================================
Total return (%)* 6.15(c) 8.05 6.94 6.25(a) .40
Net assets at end of period (000) $609,919 $564,253 $513,665 $504,626 $521,176
Ratios to average net assets:**
Expenses (%)(b) .43(c) .55 .51 .52(a) .49
Net investment income (%) 3.79 4.38 4.74 4.69 4.46
Portfolio turnover (%) 27 20 11 14 26
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return.
** For the year ended May 31, 2010, average net assets were $591,553,000.
(a) For the year ended May 31, 2007, SAS voluntarily reimbursed the Fund for a
portion of the transfer agent's fees incurred.The reimbursement had no
effect on the Fund's total return or ratio of expenses to average net
assets.
(b) Reflects total operating expenses of the Fund before reductions of any
expenses paid indirectly. The Fund's expenses paid indirectly decreased the
expense ratios by less than 0.01%.
(c) During the year ended May 31, 2010, SAS reimbursed the Fund $31,000 for
corrections in fees paid for the administration and servicing of certain
accounts. The effect of this reimbursement on the Fund's total return was
less than 0.01%. The reimbursement decreased the Fund's expense ratios by
less than 0.01%. This decrease is excluded from the expense ratios above.
================================================================================
NOTES TO FINANCIAL STATEMENTS | 37
<PAGE>
================================================================================
EXPENSE EXAMPLE
May 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 December 1, 2009, through May
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 second line of the table provides information about hypothetical account
values and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses, which is not the Fund's
actual return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance
================================================================================
38 | USAA GNMA TRUST
<PAGE>
================================================================================
or expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any direct costs, such as wire fees,
redemption fees, or low balance fees. Therefore, the 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 DECEMBER 1, 2009 -
DECEMBER 1, 2009 MAY 31, 2010 MAY 31, 2010
-------------------------------------------------------
Actual $1,000.00 $1,021.60 $2.07
Hypothetical
(5% return before expenses) 1,000.00 1,022.89 2.07
* Expenses are equal to the Fund's annualized expense ratio of 0.41%, which is
net of any expenses paid indirectly, multiplied by the average account value
over the period, multiplied by 182 days/365 days (to reflect the one-half-year
period). The Fund's ending account value on the first line in the table is
based on its actual total return of 2.16% for the six-month period of December
1, 2009, through May 31, 2010.
================================================================================
EXPENSE EXAMPLE | 39
<PAGE>
================================================================================
ADVISORY AGREEMENT
May 31, 2010
--------------------------------------------------------------------------------
At a meeting of the Board of Trustees (the Board) held on April 9, 2010, the
Board, including the Trustees who are not "interested persons" of the Trust (the
Independent Trustees), approved the continuance of the Advisory Agreement
between the Trust and the Manager with respect to the Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were given
the opportunity to ask questions and request additional information from
management. The information provided to the Board included, among other things:
(i) a separate report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance, expenses, and
fees to comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the Manager's
revenues and costs of providing services to the Fund and compensation paid to
affiliates of the Manager; and (iii) information about the Manager's operations
and personnel. Prior to voting, the Independent Trustees reviewed the proposed
continuance of the Advisory Agreement with management and with experienced
independent counsel and received materials from such counsel discussing the
legal standards for their consideration of the proposed continuation of the
Advisory Agreement with respect to the Fund. The Independent Trustees also
reviewed the proposed continuation of the Advisory Agreement with respect to the
Fund in private sessions with their counsel at which no representatives of
management were present.
At each regularly scheduled meeting of the Board and its committees, the Board
receives and reviews, among other things, information concerning the Fund's
performance and related services provided by the Manager. At the meeting at
which the renewal of the Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, comparability of fees and
total expenses and profitability. However, the
================================================================================
40 | USAA GNMA TRUST
<PAGE>
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Board noted that the evaluation process with respect to the Manager is an
ongoing one. In this regard, the Board's and its committees' consideration of
the Advisory Agreement included certain information previously received at such
meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In approving the
Advisory Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee may have attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES -- In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating to
its operations and personnel. The Board also took into account its familiarity
with the Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the Manager and
the services provided to the Fund by the Manager under the Advisory Agreement,
as well as other services provided by the Manager and its affiliates under other
agreements, and the personnel who provide these services. In addition to the
investment advisory services provided to the Fund, the Manager and its
affiliates provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and regulatory
requirements, and other services necessary for the operation of the Fund and the
Trust.
The Board considered the Manager's management style and the performance of its
duties under the Advisory Agreement. The Board considered the level and depth of
knowledge of the Manager, including the professional experience and
qualifications of its senior and investment personnel, as well as current
staffing levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," also was considered. The Manager's role
in coordinating the activities of the
================================================================================
ADVISORY AGREEMENT | 41
<PAGE>
================================================================================
Fund's other service providers also was considered. The Board considered the
Manager's financial condition and that it had the financial wherewithal to
continue to provide the same scope and high quality of services under the
Advisory Agreement. In reviewing the Advisory Agreement, the Board focused on
the experience, resources, and strengths of the Manager and its affiliates in
managing investment companies, including the Fund.
The Board also reviewed the compliance and administrative services provided to
the Fund by the Manager, including oversight of the Fund's day-to-day operations
and oversight of Fund accounting. The Manager and its affiliates provide
compliance and administrative services to the Fund. The Trustees, guided also
by information obtained from their experiences as directors/trustees of the Fund
and other investment companies managed by the Manager, also focused on the
quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE -- In connection with its consideration of the Advisory
Agreement, the Board evaluated the Fund's advisory fees and total expense ratio
as compared to other open-end investment companies deemed to be comparable to
the Fund as determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain factors,
including fund type, comparability of investment objective and classifications,
sales load type (in this case, investment companies with no sales loads and
front-end-loads), asset size, and expense components (the "expense group") and
(ii) a larger group of investment companies that includes all no-load and
front-end load retail open-end investment companies in the same investment
classification/objective as the Fund regardless of asset size, excluding
outliers (the "expense universe"). Among other data, the Board noted that the
Fund's management fee rate -- which includes advisory and administrative
services and the effects of any performance adjustment -- was below the median
of its expense group and its expense universe. The data indicated that the
Fund's total expenses were below the median of its expense group and its expense
universe. The Board took into account the various services provided to the Fund
by the Manager and its affiliates. The Board also noted the level and method of
================================================================================
42 | USAA GNMA TRUST
<PAGE>
================================================================================
computing the management fee, including the performance adjustment to such fee.
In considering the Fund's performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund's performance results.
The Trustees also reviewed various comparative data provided to them in
connection with their consideration of the renewal of the Advisory Agreement,
including, among other information, a comparison of the Fund's average annual
total return with its Lipper index and with that of other mutual funds deemed to
be in its peer group by the independent third party in its report (the
"performance universe"). The Fund's performance universe consisted of the Fund
and all retail and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or primary channel
of distribution. This comparison indicated that, among other data, the Fund's
performance was lower than the average of its performance universe and its
Lipper index for the one- and three-year periods ended December 31, 2009, was
above the average of its performance universe and lower than its Lipper index
for the five-year period ended December 31, 2009, and was above the average of
its performance universe and Lipper index for the ten-year period ended December
31, 2009. The Board also noted that the Fund's percentile performance ranking
was in the bottom 50% of its performance universe for the one-year period ended
December 31, 2009, and in the top 50% of its performance universe for the
three-, and five-year periods ended December 31, 2009. The Board took into
account Management's discussion of the Fund's performance, including factors
that contributed to the Fund's more recent underperformance.
COMPENSATION AND PROFITABILITY -- The Board took into consideration the level
and method of computing the management fee. The information considered by the
Board included operating profit margin information for the Manager's business as
a whole. The Board also received and considered profitability information
related to the management revenues from the Fund. This consideration included a
broad review of the methodology used in the allocation of certain costs to the
Fund. The Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax
================================================================================
ADVISORY AGREEMENT | 43
<PAGE>
================================================================================
expenses. In reviewing the overall profitability of the management fee to the
Manager, the Board also considered the fact that affiliates provide shareholder
servicing and administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and indirect
benefits to the Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association with the
Fund. The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it provides to
the Fund and the entrepreneurial risk that it assumes as Manager. The Trustees
also noted the relatively low management fee and total expenses of the Fund as
compared to its peer group and peer universe.
ECONOMIES OF SCALE -- The Board considered whether there should be changes in
the management fee rate or structure in order to enable the Fund to participate
in any economies of scale. The Board noted that the Fund's contractual
management fee is below the asset-weighted average of funds at all asset levels
in its peer group as set forth in the report prepared by the independent third
party. The Board also took into account management's discussions of the current
advisory fee structure. The Board also considered the effect of the Fund's
growth and size on its performance and fees, noting that if the Fund's assets
increase over time, the Fund may realize other economies of scale if assets
increase proportionally more than some expenses. The Board determined that the
current investment management fee structure was reasonable.
CONCLUSIONS -- The Board reached the following conclusions regarding the Fund's
Advisory Agreement with the Manager, among others: (i) the Manager has
demonstrated that it possesses the capability and resources to perform the
duties required of it under the Advisory Agreement; (ii) the Manager maintains
an appropriate compliance program; (iii) the Fund's performance is being
addressed; (iv) the Fund's advisory expenses are reasonable in relation to those
of similar funds and to the services to be provided by the Manager; and (v) the
Manager's level of profitability from its relationship with the Fund is
reasonable. Based on its conclusions, the Board determined that continuation of
the Advisory Agreement would be in the best interests of the Fund and its
shareholders.
================================================================================
44 | USAA GNMA TRUST
<PAGE>
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION
TRUSTEES AND OFFICERS OF THE TRUST
--------------------------------------------------------------------------------
The Board of Trustees of the Trust consists of six Trustees. These Trustees and
the Trust's Officers supervise the business affairs of the USAA family of funds.
The Board of Trustees is responsible for the general oversight of the funds'
business and for assuring that the funds are managed in the best interests of
each fund's respective shareholders. The Board of Trustees periodically reviews
the funds' investment performance as well as the quality of other services
provided to the funds and their shareholders by each of the fund's service
providers, including USAA Investment Management Company (IMCO) and its
affiliates. The term of office for each Trustee shall be 20 years or until the
Trustee reaches age 70. All members of the Board of Trustees shall be presented
to shareholders for election or re-election, as the case may be, at least once
every five years. Vacancies on the Board of Trustees can be filled by the action
of a majority of the Trustees, provided that at least two-thirds of the Trustees
have been elected by the shareholders.
Set forth below are the Trustees and Officers of the Trust, their respective
offices and principal occupations during the last five years, length of time
served, and information relating to any other directorships held. Each serves on
the Board of Trustees of the USAA family of funds consisting of one registered
investment company offering 46 individual funds as of May 31, 2010. Unless
otherwise indicated, the business address of each is 9800 Fredericksburg Road,
San Antonio, TX 78288.
If you would like more information about the funds' Trustees, you may call (800)
531-USAA (8722) to request a free copy of the funds' statement of additional
information (SAI).
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 45
<PAGE>
================================================================================
INTERESTED TRUSTEE(1)
--------------------------------------------------------------------------------
CHRISTOPHER W. CLAUS(2, 4)
Trustee, President, and Vice Chair of the Board of Trustees
Born: December 1960
Year of Election or Appointment: 2001
Chair of the Board of Directors, IMCO (11/04-present); President, IMCO
(2/08-10/09); Chief Investment Officer, IMCO (2/07-2/08); President and Chief
Executive Officer, IMCO (2/01-2/07); Chair of the Board of Directors, USAA
Financial Advisors, Inc. (FAI) (1/07-present); President, FAI (12/07-10/09);
President, Financial Advice and Solutions Group (FASG) USAA (9/09-present);
President, Financial Services Group, USAA (1/07-9/09). Mr. Claus serves as Chair
of the Board of Directors of USAA Shareholder Account Services (SAS), USAA
Financial Planning Services Insurance Agency, Inc. (FPS), and FAI. He also
serves as Vice Chair for USAA Life Insurance Company (USAA Life).
NON-INTERESTED (INDEPENDENT) TRUSTEES
--------------------------------------------------------------------------------
BARBARA B. DREEBEN(3, 4, 5, 6)
Trustee
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list management
service. Mrs. Dreeben holds no other directorships of any publicly held
corporations or other investment companies outside the USAA family of funds.
================================================================================
46 | USAA GNMA TRUST
<PAGE>
================================================================================
ROBERT L. MASON, PH.D.(3, 4, 5, 6)
Trustee
Born: June 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present), which focuses in
the fields of technological research. Dr. Mason holds no other directorships of
any publicly held corporations or other investment companies outside the USAA
family of funds.
BARBARA B. OSTDIEK, PH.D.(3, 4, 5, 6, 7)
Trustee
Born: March 1964
Year of Election or Appointment: 2007
Academic Director of the El Paso Corporation Finance Center at Jesse H. Jones
Graduate School of Business at Rice University (7/02-present); Associate
Professor of Finance at Jesse H. Jones Graduate School of Management at Rice
University (7/01-present). Dr. Ostdiek holds no other directorships of any
publicly held corporations or other investment companies outside the USAA family
of funds.
MICHAEL F. REIMHERR(3, 4, 5, 6)
Trustee
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an organization that
performs business valuations of large companies to include the development of
annual business plans, budgets, and internal financial reporting. Mr. Reimherr
holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 47
<PAGE>
================================================================================
RICHARD A. ZUCKER(2, 3, 4, 5, 6)
Trustee and Chair of the Board of Trustees
Born: July 1943
Year of Election or Appointment: 1992(+)
Vice President, Beldon Roofing Company (7/85-present). Mr. Zucker holds no other
directorships of any publicly held corporations or other investment companies
outside the USAA family of funds.
(1) Indicates the Trustee is an employee of IMCO or affiliated companies and
is considered an "interested person" under the Investment Company Act of
1940.
(2) Member of Executive Committee
(3) Member of Audit Committee
(4) Member of Pricing and Investment Committee
(5) Member of Corporate Governance Committee
(6) The address for all non-interested trustees is that of the USAA Funds,
P.O. Box 659430, San Antonio, TX 78265-9430.
(7) Dr. Ostdiek was appointed the Audit Committee Financial Expert for the
Funds' Board in November 2008.
(+) Mr. Zucker was elected as Chair of the Board in 2005.
================================================================================
48 | USAA GNMA TRUST
<PAGE>
================================================================================
INTERESTED OFFICERS(1)
--------------------------------------------------------------------------------
DANIEL S. McNAMARA
Vice President
Born: June 1966
Year of Appointment: 2009
President and Director, IMCO, FAI, FPS, and SAS (10/09-present); President, Banc
of America Investment Advisors (9/07-9/09); Managing Director, Planning and
Financial Products Group, Bank of America (9/01-9/09).
R. MATTHEW FREUND
Vice President
Born: July 1963
Year of Appointment: 2010
Senior Vice President, Investment Portfolio Management, IMCO (3/10-present);
Vice President, Fixed Income Investments, IMCO (2/04-3/10). Mr. Freund also
serves as a Director for SAS.
JOHN P. TOOHEY
Vice President
Born: March 1968
Year of Appointment: 2009
Vice President, Equity Investments, IMCO (2/09-present); Managing Director, AIG
Investments (12/00-1/09).
CHRISTOPHER P. LAIA
Secretary
Born: January 1960
Year of Appointment: 2010
Vice President, Financial Advice & Solutions Group General Counsel, USAA
(10/08-present); Vice President, Securities Counsel, USAA (6/07-10/08);
Assistant Secretary, USAA family of funds (11/08-4/10); General Counsel,
Secretary, and Partner, Brown Advisory (6/02-6/07). Mr. Laia also holds the
Officer positions of Vice President and Secretary of IMCO and SAS and Vice
President and Assistant Secretary of FAI and FPS.
================================================================================
TRUSTEES' AND OFFICERS' INFORMATION | 49
<PAGE>
================================================================================
JAMES G. WHETZEL
Assistant Secretary
Born: February 1978
Year of Appointment: 2010
Executive Attorney, Financial Advice & Solutions Group General Counsel, USAA
(11/08-present); Reed Smith, LLP, Associate (08/05-11/08).
ROBERTO GALINDO, JR.
Treasurer
Born: November 1960
Year of Appointment: 2008
Assistant Vice President, Portfolio Accounting/Financial Administration, USAA
(12/02-present); Assistant Treasurer, USAA family of funds (7/00-2/08).
WILLIAM A. SMITH
Assistant Treasurer
Born: June 1948
Year of Appointment: 2009
Vice President, Senior Financial Officer, and Treasurer, IMCO, FAI, FPS, SAS and
USAA Life (2/09-present); Vice President, Senior Financial Officer, USAA
(2/07-present); consultant, Robert Half/Accounttemps (8/06-1/07); Chief
Financial Officer, California State Automobile Association (8/04-12/05).
JEFFREY D. HILL
Chief Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA (9/04-present).
(1) Indicates those Officers who are employees of IMCO or affiliated companies
and are considered "interested persons" under the Investment Company
Act of 1940.
================================================================================
50 | USAA GNMA TRUST
<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
(800) 531-USAA Under "My Accounts" go to
(8722) "Investments." View account balances,
or click "I want to...," and select
the desired action.
--------------------------------------------------------------------------------
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's Web site at HTTP://WWW.SEC.GOV. These Forms N-Q also may
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) 732-0330.
================================================================================
<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)
=============================================================================
23413-0710 (C)2010, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On September 24, 2009, the Board of Trustees of USAA Mutual Funds Trust approved
a Code of Ethics (Sarbanes Code) applicable solely to its senior financial
officers, including its principal executive officer (President), as defined
under the Sarbanes-Oxley Act of 2002 and implementing regulations of the
Securities and Exchange Commission. A copy of the Sarbanes Code is attached as
an Exhibit to this Form N-CSR.
No waivers (explicit or implicit) have been granted from a provision of the
Sarbanes Code.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
On November 18, 2008, the Board of Trustees of USAA Mutual Funds Trust
designated Dr. Barbara B. Ostdiek, Ph.D. as the Board's audit committee
financial expert. Dr. Ostdiek has served as an Associate Professor of Management
at Rice University since 2001. Dr. Ostdiek also has served as an Academic
Director at El Paso Corporation Finance Center since 2002. Dr. Ostdiek is an
independent trustee who serves as a member of the Audit Committee, Pricing and
Investment Committee and the Corporate Governance Committee of the Board of
Trustees of USAA Mutual Funds Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Mutual Funds Trust, consists of 46 funds in
all. Only 10 funds of the Registrant have a fiscal year-end of May 31 and are
included within this report (the Funds). The aggregate fees accrued or billed by
the Registrant's independent auditor, Ernst & Young LLP, for professional
services rendered for the audit of the Registrant's annual financial statements
and services provided in connection with statutory and regulatory filings by the
Registrant for the Funds for fiscal years ended May 31, 2010 and 2009 were
$280,916 and $288,764, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid to Ernst & Young, LLP
by USAA Shareholder Account Services (SAS) for professional services rendered
for audit related services related to the annual study of internal controls of
the transfer agent for fiscal years ended May 31, 2010 and 2009 were $61,513 and
$63,500, respectively. All services were preapproved by the Audit Committee.
(c) TAX FEES. No such fees were billed by Ernst & Young LLP for the review of
federal, state and city income and tax returns and excise tax calculations for
fiscal years ended May 31, 2010 and 2009.
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2010 and 2009.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for May 31, 2010 and 2009 were $104,896 and
$108,000, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2010 and 2009 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
Funds. The Board of Trustees will consider Ernst & Young LLP's independence and
will consider whether the provision of these non-audit services to IMCO is
compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
Item 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 11. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA Mutual
Funds Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. The only change to the
procedures was to document the annual disclosure controls and procedures
established for the new section of the shareholder reports detailing the factors
considering by the Trust's Board in approving the Trust's advisory agreements.
ITEM 12. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUNDS TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Funds Trust (the Trust or the Funds) has adopted this code
of ethics (the Code) to comply with Section 406 of the Sarbanes-Oxley Act of
2002 (the Act) and implementing regulations of the Securities and Exchange
Commission (SEC). The Code applies to the Trust's Principal Executive Officer,
Principal Financial Officer and Principal Accounting Officer (each a Covered
Officer), as detailed in Appendix A.
The purpose of the Code is to promote:
- honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between the Covered
Officers' personal and professional relationships;
- full, fair, accurate, timely and understandable disclosure in
reports and documents that the Trust files with, or submits
to, the SEC and in other public communications made by the
Trust;
- compliance with applicable laws and governmental rules and
regulations;
- prompt internal reporting of violations of the Code to the
Chief Legal Officer of the Trust, the President of the Trust
(if the violation concerns the Treasurer), the CEO of USAA,
and if deemed material to the Funds' financial condition or
reputation, the Chair of the Trust's Board of Trustees; and
- accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically.
B. GENERAL RULE. Covered Officers Should Avoid Actual and Apparent
Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
- use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the
detriment of the Funds and their shareholders;
- cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
- accept gifts, gratuities, entertainment or any other benefit from
any person or entity that does business or is seeking to do
business with the Funds DURING CONTRACT NEGOTIATIONS.
- accept gifts, gratuities, entertainment or any other benefit with
a market value over $100 per person, per year, from or on behalf
of any person or entity that does, or seeks to do, business with
or on behalf of the Funds.
- EXCEPTION. Business-related entertainment such as meals,
and tickets to sporting or theatrical events, which are
infrequent and not lavish are excepted from this
prohibition. Such entertainment must be appropriate as to
time and place, reasonable and customary in nature, modest
in cost and value, incidental to the business, and not so
frequent as to raise any question of impropriety
(Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
- service as a director on the board or an officer of any public or
private company, other than a USAA company or the Trust, must be
approved by the USAA Funds' and Investment Code of Ethics
Committee and reported to the Trust.
- the receipt of any non-nominal (I.E., valued over $25) gifts from
any person or entity with which a Trust has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of
Secretary of the Trust shall be considered the Chief Legal Officer
of the Trust.
- the receipt of any business-related entertainment from any person
or entity with which the Funds have current or prospective
business dealings must be approved in advance by the Chief Legal
Officer unless such entertainment qualifies as Customary Business
Entertainment.
- any ownership interest in, or any consulting or employment
relationship with, any of the Trust's service providers, other
than IMCO or any other USAA company, must be approved by the CEO
of USAA and reported to the Trust's Board.
- any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other
than an interest arising from the Covered Officer's employment,
such as compensation or equity ownership should be approved by the
CEO of USAA and reported to the Trust's Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
- Each Covered Officer should familiarize himself with the
disclosure requirements applicable to the Funds, and the
procedures and policies implemented to promote full, fair,
accurate, timely and understandable disclosure by the Trust.
- Each Covered Officer should not knowingly misrepresent, or
cause others to misrepresent, facts about the Funds to others,
whether within or outside the Funds, including to the Funds'
Trustees and auditors, and to government regulators and
self-regulatory organizations.
- Each Covered Officer should, to the extent appropriate within
his area of responsibility, consult with other officers and
employees of the Funds and IMCO with the goal of promoting
full, fair, accurate, timely and understandable disclosure in
the reports and documents filed by the Trust with, or
submitted to, the SEC, and in other public communications made
by the Funds.
- Each Covered Officer is responsible for promoting compliance
with the standards and restrictions imposed by applicable
laws, rules and regulations, and promoting compliance with the
USAA Funds' and IMCO's operating policies and procedures.
- A Covered Officer should not retaliate against any person
who reports a potential violation of this Code in good faith.
- A Covered Officer should notify the Chief Legal Officer
promptly if he knows of any violation of the Code. Failure
to do so itself is a violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of the Trust
is responsible for applying this Code to specific situations in
which questions are presented under it and has the authority to
interpret the Code in any particular situation. The Chief Legal
Officer should consult, if appropriate, the USAA Funds' outside
counsel or counsel for the Independent Trustees. However, any
approvals or waivers sought by a Covered Officer will be
reported initially to the CEO of USAA and will be considered by
the Trust's Board of Trustees.
B. REQUIRED REPORTS
- EACH COVERED OFFICER MUST:
- Upon adoption of the Code, affirm in writing to the
Board that he has received, read and understands the
Code.
- Annually thereafter affirm to the Chief Legal Officer
that he has complied with the requirements of the Code.
- THE CHIEF LEGAL OFFICER MUST:
- report to the Board about any matter or situation
submitted by a Covered Officer for interpretation under
the Code, and the advice given by the Chief Legal
Officer;
- report annually to the Board and the Corporate
Governance Committee describing any issues that arose
under the Code, or informing the Board and Corporate
Governance Committee that no reportable issues occurred
during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
- INITIAL COMPLAINT. All complaints or other inquiries
concerning potential violations of the Code must be reported
to the Chief Legal Officer. The Chief Legal Officer shall be
responsible for documenting any complaint. The Chief Legal
Officer also will report immediately to the President of the
Trust (if the complaint involves the Treasurer), the CEO of
USAA and the Chair of the Trust's Audit Committee (if the
complaint involves the President) any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints,
the Chief Legal Officer will report quarterly to the Board.
- INVESTIGATIONS. The Chief Legal Officer will take all
appropriate action to investigate any potential violation
unless the CEO of USAA directs another person to undertake
such investigation. The Chief Legal Officer may utilize USAA's
Office of Ethics to do a unified investigation under this Code
and USAA's Code of Conduct. The Chief Legal Officer may direct
the Trust's outside counsel or the counsel to the Independent
Trustees (if any) to participate in any investigation under
this Code.
- STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
- VIOLATIONS OF THE CODE. If after investigation, the Chief
Legal Officer, or other investigating person, believes that a
violation of the Code has occurred, he will report immediately
to the CEO of USAA the nature of the violation, and his
recommendation regarding the materiality of the violation. If,
in the opinion of the investigating person, the violation
could materially affect the Funds' financial condition or
reputation, the Chief Legal Officer also will notify the Chair
of the Trust's Audit Committee. The Chief Legal Officer will
inform, and make a recommendation to, the Board, which will
consider what further action is appropriate. Appropriate
action could include: (1) review of, and modifications to, the
Code or other applicable policies or procedures;
(2) notifications to appropriate personnel of IMCO or USAA;
(3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
- The Board of Trustees understands that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates
USAA's Code of Business Conduct, these procedures do
not limit or restrict USAA's ability to discipline
such Covered Officer under USAA's Code of Business
Conduct. In that event, the Chairman of the Board of
Trustees will report to the Board the action taken by
USAA with respect to a Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of the Trust, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The Investment Code of Ethics (designated to
address 1940 Act and Advisers Act requirements) and IMCO's more detailed
compliance policies and procedures (including its Insider Trading Policy) are
separate requirements applying to Covered Officers and other IMCO employees, and
are not part of this Code. Also, USAA's Code of Conduct imposes separate
requirements on Covered Officers and all employees of USAA, and also is not part
of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the Trust's
Board of Trustees and counsel for the Independent Trustees (if any), the Trust
and its counsel, IMCO, and other personnel of USAA as determined by the Trust's
Chief Legal Officer or the Chair of the Trust's Board of Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003.
Approved and adopted by the Boards of Directors/Trustees of USAA Mutual Fund,
Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free
Trust: June 25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 15,
2005.
Approved and adopted as amended by the Boards of Directors/Trustees of USAA
Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA
State Tax-Free Trust: September 14, 2005.
Approved and adopted as amended by the Board of Trustees of USAA Life Investment
Trust: December 8, 2005.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 16,
2006.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 13, 2006.
Approved and adopted by IMCO's Code of Ethics Committee: August 28, 2007.
Approved and adopted by the Investment Code of Ethics Committee: August 29,
2008.
Approved and adopted as amended by the Board of Trustees of USAA Mutual Funds
Trust: September 19, 2008.
Approved and adopted by the Investment Code of Ethics Committee: August 17,
2009.
Approved and adopted by the Board of Trustees of USAA Mutual Funds Trust:
September 24, 2009.
<PAGE>
APPENDIX A
COVERED OFFICERS
PRESIDENT
TREASURER
<PAGE>
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA MUTUAL FUNDS TRUST, Period Ended May 31, 2010
By:* /s/ CHRISTOPHER P. LAIA
--------------------------------------------------------------
Signature and Title: Christopher P. Laia, Secretary
Date: August 6, 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: August 6, 2010
------------------------------
By:* /s/ ROBERTO GALINDO, JR.
-----------------------------------------------------
Signature and Title: Roberto Galindo, Jr., Treasurer
Date: August 6, 2010
------------------------------
*Print the name and title of each signing officer under his or her signature.
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