ITEM 1. SEMIANNUAL REPORT TO STOCKHOLDERS.
USAA MUTUAL FUNDS TRUST - SEMIANNUAL REPORT FOR PERIOD ENDED NOVEMBER 30, 2012
[LOGO OF USAA]
USAA(R)
[GRAPHIC OF USAA CORNERSTONE CONSERVATIVE FUND]
SEMIANNUAL REPORT
USAA CORNERSTONE CONSERVATIVE FUND
NOVEMBER 30, 2012
PRESIDENT'S MESSAGE
"DESPITE SOME SIGNS OF IMPROVEMENT, THE U.S. [PHOTO OF DANIEL S. McNAMARA]
ECONOMY REMAINS FRAGILE."
DECEMBER 2012
Despite considerable political and economic uncertainty, investor sentiment was
generally positive during the reporting period. Equities performed exceptionally
well, with international stocks leading the way. Riskier fixed-income asset
classes, such as investment-grade bonds and high-yield bonds, also posted solid
gains. The municipal bond market extended its rally, continuing to generate
strong returns.
Given the state of the global economy, these results might seem surprising.
Although emerging economies strengthened during the reporting period, global
economic conditions deteriorated. Europe was in recession, growth was slowing in
China, and the U.S. recovery was progressing in fits and starts. But investors
were optimistic, in my opinion, because they anticipated additional stimulative
action by global central banks. And indeed, the sluggish U.S. recovery prompted
the Federal Reserve (the Fed) to announce in September a third round of
quantitative easing (QE3) in which it made an open-ended commitment to continue
buying mortgage-backed securities for as long as it takes to meaningfully drop
the unemployment rate. The Fed also said that it planned to keep short-term
interest rates in a range between zero and 0.25% until at least mid-2015.
According to Fed chairman Ben Bernanke, the Fed was seeking to push stock prices
higher and boost the housing market in an aggressive effort to increase consumer
and business confidence and ultimately spending.
The European Central Bank previously had announced a quantitative easing program
of its own, extending a number of its liquidity operations to help the financial
markets deal with the effects of the European sovereign debt crisis. This action
also would give European Union (EU) policymakers time to address the problems of
the EU's weakest members. Many of these nations, including Greece, Spain, and
Italy, are weighed down by a staggering amount of debt. Nevertheless, a lasting
solution is yet to be found and major sticking points remain, particularly
enforcement mechanisms to keep these economies on track to fiscal balance.
Meanwhile, in the United States, the 2012 election campaign built to a
crescendo. Ultimately, the voters chose to maintain the status quo -- President
Barack Obama was re-elected to a second term, Republicans retained their
majority in the House of Representatives, and Democrats stayed in control of the
Senate. With the election over, investors shifted their attention to the
so-called "fiscal cliff." Unless Congress acts, $600 to $700 billion in tax
hikes and spending cuts will take effect on January 1, 2013. At the time of this
writing, negotiations were still ongoing and I am guardedly optimistic that some
kind of agreement will be reached before the deadline. Whatever happens, I
expect higher taxes and reduced spending at the federal level in 2013, which
could slow economic growth over the next few calendar quarters.
Overall, our outlook is cautious. Despite some signs of improvement, the U.S.
economy remains fragile. Though we have been encouraged by the strengthening
housing market, U.S. economic data continues to be a mixed bag, with positive
news frequently offset by negative reports. Furthermore, I think the economy has
yet to feel the full impact of Hurricane Sandy. I am troubled also about
corporate fundamentals. Revenues have been disappointing in recent calendar
quarters, and year-over-year earnings growth is near zero. Many companies
reduced their capital expenditures during 2012 because of political and economic
uncertainties.
At the time of this writing, we favored emerging markets stocks and precious
metals. Though emerging markets equities are likely to be volatile in the short
term, they should benefit over the long run from strong earnings growth, largely
because of demographic trends in the developing world. As for precious metals,
we believe they may add value to a long-term hedging strategy which seeks to
minimize the effects of rising inflation.
At USAA Asset Management Company, we believe we have some of the finest
investment professionals in the industry managing your investments. On behalf of
everyone here, thank you for allowing us to help you with your investment needs.
Sincerely,
/S/ DANIEL S. MCNAMARA
Daniel S. McNamara
President
USAA Asset Management Company
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Past performance is no guarantee of future results. o Rebalancing and
diversification do not protect against losses or guarantee that an investor's
goal will be met. o Foreign investing is subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability. Emerging
market countries are most volatile. Emerging market countries are less diverse
and mature than other countries and tend to be politically less stable.
o Precious metals and minerals 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.
TABLE OF CONTENTS
FUND OBJECTIVE 1
MANAGERS' COMMENTARY 2
INVESTMENT OVERVIEW 5
FINANCIAL INFORMATION
Portfolio of Investments 8
Notes to Portfolio of Investments 10
Financial Statements 11
Notes to Financial Statements 14
EXPENSE EXAMPLE 23
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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 ASSET 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)2013, USAA. All rights reserved.
FUND OBJECTIVE
THE USAA CORNERSTONE CONSERVATIVE FUND (THE FUND) SEEKS CURRENT INCOME. THE FUND
ALSO CONSIDERS THE POTENTIAL FOR CAPITAL APPRECIATION.
TYPES OF INVESTMENTS
The Fund's principal investment strategy is to invest in a selection of USAA
mutual funds (underlying USAA Funds) consisting of a target asset class
allocation of approximately 20% equity securities and 80% fixed-income
securities. This is often referred to as a fund-of-funds investment strategy.
The actual asset class allocation can deviate from time to time from these
targets as market conditions warrant. The Fund may invest in investment-grade
and below-investment-grade securities.
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 Asset 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.
FUND OBJECTIVE | 1
MANAGERS' COMMENTARY ON THE FUND
--------------------------------------------------------------------------------
[PHOTO OF JOHN P. TOOHEY] [PHOTO OF WASIF A. LATIF]
JOHN P. TOOHEY, CFA WASIF A. LATIF
USAA Asset USAA Asset
Management Company Management Company
|
o HOW DID THE USAA CORNERSTONE CONSERVATIVE FUND (THE FUND) PERFORM DURING THE
REPORTING PERIOD?
For the reporting period of June 8, 2012, through November 30, 2012, the
Fund has returned 5.27%. This compares to returns of 2.24% for the Barclays
U.S. Aggregate Bond Index and 11.79% for the MSCI All-Country World Index.
o HOW DID THE FINANCIAL MARKETS PERFORM DURING THE REPORTING PERIOD?
Stocks and bonds both delivered positive returns during the Fund's reporting
period. The world equity markets rallied after global central banks pledged
an unprecedented level of support that sharply reduced investors' perception
of "tail risk" -- or in other words, the odds of a worst-case economic
scenario. European Central Bank (ECB) chief Mario Draghi took the boldest
steps, pledging in July that the ECB would do "whatever it takes" to keep the
euro zone together. This proved to be positive for the world market in
general, and Europe in particular. Investors also were emboldened by the
prospects for another round of quantitative easing here in the United States,
Refer to page 6 for benchmark definitions.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
2 | USAA CORNERSTONE CONSERVATIVE FUND
and the Federal Reserve offered a new, open-end version of its stimulative
policy. Stocks faltered somewhat toward the tail end of the period, however,
as investors grew increasingly concerned about the oncoming "fiscal cliff"
(i.e., the set of tax increases and government spending cuts set to go into
effect at year-end).
The bond market also finished the period with a healthy performance. U.S.
Treasuries produced a slightly positive return, and the generally positive
environment worked in favor of credit-sensitive segments of the market such
as investment-grade corporate and high-yield bonds.
o WHAT WERE THE PRIMARY FACTORS AFFECTING THE FUND'S PERFORMANCE?
The most important factor influencing performance was the Fund's asset
allocation. The Fund's performance was helped substantially by the strong
return of its fixed-income allocation amongst our fixed-income mutual funds.
We believe we have positioned the Fund's fixed-income portfolio to withstand
a wide range of potential outcomes in the financial markets. We believe
these positions can perform well if the credit environment stays positive
and/or rates rise.
Our weighting in high-yield bonds, through our position in the High Income
Fund, performed well as increased investor risk appetites and the continued
thirst for yield fueled robust demand. Here, we are taking a relatively
conservative stance given that the asset class isn't offering compelling
values following its strong performance in the past two years.
o WHAT OTHER KEY FACTORS AFFECTED THE FUND'S PERFORMANCE?
We held a position in European stocks, through our holding in the
International Fund. European equities indeed performed very well
MANAGERS' COMMENTARY ON THE FUND | 3
during the past six months and this element of our positioning made a
positive contribution to performance.
Our allocation in the Emerging Markets Fund also added value, as the asset
class recovered from its underperformance in 2011 to deliver returns ahead
of the U.S. market in the past six months.
We believe the positive performance impact of these decisions illustrate two
key points. First, it helps underscore the value of active management over a
passive, index-based approach. Second, it shows the importance of a global
investment strategy. While investing overseas inevitably leads to periods of
short-term underperformance, we believe it can add value versus a
domestic-only strategy over time.
o DO YOU HAVE ANY CLOSING THOUGHTS FOR INVESTORS?
In a highly uncertain environment, we will look to mitigate the impact of
potentially volatile market conditions by maintaining our steady, long-term
approach and continuing to emphasize diversification. We also are placing a
particular focus on guiding the portfolios into market segments that offer
attractive valuations and away from those that appear to be over priced. We
believe this strategy -- rather than one that is reactive to headlines and
short-term market movements -- is the best approach to achieving an
effective balance of risk and return.
Thank you for your investment in the Fund.
Non-investment-grade securities are considered speculative and are subject
to significant credit risk. They are sometimes referred to as junk bonds
since they represent a greater risk of default than more creditworthy
investment-grade securities.
Foreign investing is subject to additional risks, such as currency
fluctuations, market illiquidity, and political instability. Emerging market
countries are most volatile. Emerging market countries are less diverse and
mature than other countries and tend to be politically less stable.
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4 | USAA CORNERSTONE CONSERVATIVE FUND
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INVESTMENT OVERVIEW
USAA CORNERSTONE CONSERVATIVE FUND (FUND)
(Ticker Symbol: USCCX)
--------------------------------------------------------------------------------
11/30/12
--------------------------------------------------------------------------------
Net Assets $33.0 Million
Net Asset Value Per Share $10.47
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AVERAGE ANNUAL TOTAL RETURN AS OF 11/30/12
Since Inception 6/8/12*
5.27%
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/12
Since Inception 6/8/12*
5.80%
EXPENSE RATIOS**
Before Reimbursement 0.84% After Reimbursement 0.68%
(Includes acquired fund fees and expenses of 0.58%)
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.
*Total returns for periods of less than one year are not annualized. This return
is cumulative.
**The expense ratios are reported in the Fund's prospectus dated October 1,
2012, and are based on estimated expenses for the current fiscal year. USAA
Asset Management company (the Manager) has agreed, through October 1, 2013, to
make payments or waive management, administration, and other fees to limit the
expenses of the Fund so that the total annual operating expenses (exclusive of
commission recapture, expense offset arrangements, acquired fund fees and
expenses, and extraordinary expenses) do not exceed an annual rate of 0.10%, of
the Fund's average net assets. This reimbursement arrangement may not be changed
or terminated during this time period without approval of the Fund's Board of
Trustees and may be changed or terminated by the Manager at any time after
October 1, 2013. If the total annual operating expense ratio of the Fund is
lower than 0.10%, the Fund will operate at the lower expense ratio. These
estimated expense ratios may differ from the expense ratios disclosed in the
Financial Highlights, which excludes acquired fund fees and expenses.
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 distributions or the
redemption of shares.
INVESTMENT OVERVIEW | 5
o CUMULATIVE PERFORMANCE COMPARISON o
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
MSCI ALL-COUNTRY USAA CORNERSTONE BARCLAYS U.S. AGGREGATE
WORLD INDEX CONSERVATIVE FUND BOND INDEX
05/31/12 $10,000.00 $10,000.00 $10,000.00
06/30/12 10,493.89 10,095.03 10,003.92
07/31/12 10,637.55 10,205.08 10,141.91
08/31/12 10,868.84 10,305.13 10,148.53
09/30/12 11,211.17 10,426.25 10,162.50
10/31/12 11,136.45 10,476.52 10,182.49
11/30/12 11,278.85 10,526.79 10,198.56
|
[END CHART]
*Data from 5/31/12 to 11/30/12.
The graph illustrates the comparison of a $10,000 hypothetical investment in the
USAA Cornerstone Conservative Fund to the following benchmarks:
o The unmanaged MSCI All-Country Index is a free float-adjusted market
capitalization weighted index that is designed to measure the equity market
performance of developed and emerging markets.
o The unmanaged Barclays U.S. Aggregate Bond Index covers the U.S.
investment-grade fixed-rate bond market, including government and credit
securities, agency mortgage pass-through securities, asset-backed
securities, and commercial mortgage-backed securities that have remaining
maturities of more than one year.
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 distributions or the redemption of shares.
*The performance of the MSCI All-Country World Index and the Barclays U.S.
Aggregate Bond Index is calculated from the end of the month, May 31, 2012,
while the Cornerstone Conservative Fund's inception date is June 8, 2012. There
may be a slight variation of the performance numbers because of this difference.
6 | USAA CORNERSTONE CONSERVATIVE FUND
o ASSET ALLOCATION -- 11/30/2012 o
INVESTMENT ALLOCATION
--------------------------------------------------------------------------------
USAA FUND:
Aggressive Growth ..................................................... 1.0%
Emerging Markets ...................................................... 1.3%
Growth ................................................................ 1.2%
Income Stock .......................................................... 1.8%
International ......................................................... 3.9%
Precious Metals and Minerals .......................................... 0.8%
S&P 500 Index ......................................................... 1.1%
Small Cap Stock ....................................................... 1.3%
Value ................................................................. 1.1%
Total Equity ...................................................... 13.5%
High Income ........................................................... 5.9%
Income ................................................................ 32.2%
Intermediate-Term Bond ................................................ 22.7%
Short-Term Bond ....................................................... 22.7%
Total Fixed-Income ................................................ 83.5%
CASH:
Money Market Instruments .............................................. 3.2%
|
Percentages are of the net assets of the Fund and may not equal 100%.
INVESTMENT OVERVIEW | 7
PORTFOLIO OF INVESTMENTS
November 30, 2012 (unaudited)
----------------------------------------------------------------------------------------------
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
----------------------------------------------------------------------------------------------
EQUITY MUTUAL FUNDS (13.5%)
9,392 USAA Aggressive Growth Fund* $ 343
26,269 USAA Emerging Markets Fund 442
24,181 USAA Growth Fund 407
43,818 USAA Income Stock Fund 594
50,918 USAA International Fund 1,286
9,378 USAA Precious Metals and Minerals Fund 264
16,735 USAA S&P 500 Index Fund 356
28,288 USAA Small Cap Stock Fund 423
23,090 USAA Value Fund 344
------
Total Equity Mutual Funds (cost: $4,265) 4,459
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FIXED-INCOME MUTUAL FUNDS (83.5%)
222,519 USAA High Income Fund 1,929
782,966 USAA Income Fund 10,625
678,434 USAA Intermediate-Term Bond Fund 7,490
804,665 USAA Short-Term Bond Fund 7,475
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Total Fixed-Income Mutual Funds (cost: $27,170) 27,519
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MONEY MARKET INSTRUMENTS (3.2%)
MONEY MARKET FUNDS (3.2%)
1,052,678 State Street Institutional Liquid Reserve Fund, 0.18%(a) (cost: $1,053) 1,053
-------
TOTAL INVESTMENTS (COST: $32,488) $33,031
=======
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8 | USAA CORNERSTONE CONSERVATIVE FUND
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($ 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
-------------------------------------------------------------------------------------------
Equity Mutual Funds $ 4,459 $- $- $ 4,459
Fixed-Income Mutual Funds 27,519 - - 27,519
Money Market Instruments:
Money Market Funds 1,053 - - 1,053
-------------------------------------------------------------------------------------------
Total $33,031 $- $- $33,031
-------------------------------------------------------------------------------------------
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For the period of June 8, 2012, through November 30, 2012, there were no
transfers of securities between levels. The Fund's policy is to recognize any
transfers into and out of the levels as of the beginning of the period in which
the event or circumstance that caused the transfer occurred.
PORTFOLIO OF INVESTMENTS | 9
NOTES TO PORTFOLIO OF INVESTMENTS
November 30, 2012 (unaudited)
o GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net assets.
The equity and fixed-income mutual funds in which the Fund invests are
managed by USAA Asset Management Company, an affiliate of the Funds. The
USAA Cornerstone Conservative Fund invests in the Reward Shares of the USAA
S&P 500 Index Fund and the Institutional Shares of the other USAA mutual
funds.
o SPECIFIC NOTES
(a) Rate represents the money market fund annualized seven-day yield at
November 30, 2012.
* Non-income-producing security.
See accompanying notes to financial statements.
10 | USAA CORNERSTONE CONSERVATIVE FUND
STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS)
November 30, 2012 (unaudited)
ASSETS
Investments in affiliated underlying funds, at value (cost of $31,435) $31,978
Investments in other securities, at value (cost of $1,053) 1,053
Receivables:
Capital shares sold 286
USAA Asset Management Company (Note 5C) 26
Dividends from affiliated underlying funds 41
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Total assets 33,384
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LIABILITIES
Payables:
Securities purchased 359
Capital shares redeemed 20
Other accrued expenses and payables 26
-------
Total liabilities 405
-------
Net assets applicable to capital shares outstanding $32,979
=======
NET ASSETS CONSIST OF:
Paid-in capital $32,252
Accumulated undistributed net investment income 181
Accumulated net realized gain on investments 3
Net unrealized appreciation of investments 543
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Net assets applicable to capital shares outstanding $32,979
=======
Capital shares outstanding, unlimited number of shares authorized,
no par value 3,150
=======
Net asset value, redemption price, and offering price per share $ 10.47
=======
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See accompanying notes to financial statements.
FINANCIAL STATEMENTS | 11
STATEMENT OF OPERATIONS (IN THOUSANDS)
Period ended November 30, 2012* (unaudited)
INVESTMENT INCOME
Income distributions from affiliated underlying funds $296
----
EXPENSES
Custody and accounting fees 14
Postage 3
Shareholder reporting fees 3
Trustees' fees 6
Registration fees 27
Professional fees 19
Other 1
----
Total expenses 73
----
Expenses reimbursed (65)
----
Net expenses 8
----
NET INVESTMENT INCOME 288
----
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on sales of affiliated underlying funds 3
Change in net unrealized appreciation/depreciation of affiliated
underlying funds 543
----
Net realized and unrealized gain 546
----
Increase in net assets resulting from operations $834
====
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*Fund commenced operations on June 8, 2012.
See accompanying notes to financial statements.
12 | USAA CORNERSTONE CONSERVATIVE FUND
STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS)
Period ended November 30, 2012* (unaudited)
11/30/2012
--------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income $ 288
Net realized gain on sales of affiliated underlying funds 3
Change in net unrealized appreciation/depreciation of
affiliated underlying funds 543
-------
Increase in net assets resulting from operations 834
-------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (107)
-------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 34,597
Reinvested dividends 78
Cost of shares redeemed (2,423)
-------
Increase in net assets from capital share transactions 32,252
-------
Net increase in net assets 32,979
-------
NET ASSETS
End of period $32,979
=======
Accumulated undistributed net investment income:
End of period $ 181
=======
CHANGE IN SHARES OUTSTANDING
Shares sold 3,377
Shares issued for dividends reinvested 7
Shares redeemed (234)
-------
Increase in shares outstanding 3,150
=======
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*Fund commenced operations on June 8, 2012.
See accompanying notes to financial statements.
FINANCIAL STATEMENTS | 13
NOTES TO FINANCIAL STATEMENTS
November 30, 2012 (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the Investment Company Act
of 1940 (the 1940 Act), as amended, is an open-end management investment company
organized as a Delaware statutory trust consisting of 50 separate funds. The
information presented in this semiannual report pertains only to the USAA
Cornerstone Conservative Fund (the Fund), which is classified as diversified
under the 1940 Act. The Fund's investment objective is to seek current income
with the potential for capital appreciation. The Fund commenced operations on
June 8, 2012.
The Fund is a "fund of funds" in that it invests in a portfolio of underlying
USAA equity and fixed-income mutual funds (underlying USAA Funds) managed by
USAA Asset Management Company (the Manager), an affiliate of the Fund.
A. SECURITY VALUATION -- The Trust's Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to Board
oversight, the Committee administers and oversees the Fund's valuation
policies and procedures which are approved by the Board. Among other things,
these policies and procedures allow the Fund to utilize independent pricing
services, quotations from securities dealers, and a wide variety of sources
and information to establish and adjust the fair value of securities as
events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services used
by the Fund and presents additional information to the
14 | USAA CORNERSTONE CONSERVATIVE FUND
Board regarding application of the pricing and fair valuation policies and
procedures during the preceding quarter.
The Committee meets as often as necessary to make pricing and fair value
determinations. In addition, the Committee holds regular monthly meetings to
review prior actions taken by the Committee and the Manager. Among other
things, these monthly meetings include a review and analysis of back testing
reports, pricing service quotation comparisons, illiquid securities and fair
value determinations, pricing movements, and daily stale price monitoring.
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. Investments in the underlying USAA Funds and other open-end investment
companies, other than exchange-traded funds (ETFs) are valued at their
net asset value (NAV) at the end of each business day.
2. The underlying USAA Funds have specific valuation procedures. Securities
held by an underlying USAA Fund for which market quotations are not
readily available or are considered unreliable, or whose values have
been materially affected by events occurring after the close of their
primary markets but before the pricing of a fund, are valued in good
faith at fair value, using methods determined by the Manager in
consultation with a fund's subadvisers, if applicable, under valuation
procedures approved by the Board. 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 a
fund's NAV to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not limited to,
obtaining market quotations from secondary pricing
NOTES TO FINANCIAL STATEMENTS | 15
services, broker-dealers, or widely used quotation systems. General
factors considered in determining the fair value of securities include
fundamental analytical data, the nature and duration of any restrictions
on disposition of the securities, and an evaluation of the forces that
influenced the market in which the securities are purchased and sold.
B. FAIR VALUE MEASUREMENTS -- Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The
three-level valuation hierarchy disclosed in the portfolio of investments is
based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as
follows:
Level 1 -- inputs to the valuation methodology are quoted prices
(unadjusted) in active markets for identical securities.
Level 2 -- inputs to the valuation methodology are other significant
observable inputs, including quoted prices for similar securities, inputs
that are observable for the securities, either directly or indirectly, and
market-corroborated inputs such as market indices.
Level 3 -- inputs to the valuation methodology are unobservable and
significant to the fair value measurement, including the Manager's own
assumptions in determining the fair value.
The inputs or methodologies used for valuing securities are not necessarily
an indication of the risks associated with investing in those securities.
C. FEDERAL TAXES -- The Fund's policy is to comply with the requirements of the
Internal Revenue Code applicable to regulated investment 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
16 | USAA CORNERSTONE CONSERVATIVE FUND
identified cost basis. Dividend income and capital gain distributions from
the underlying USAA Funds are recorded on the ex-dividend date. Interest
income is recorded daily on the accrual basis. Discounts and premiums on
short-term securities are amortized on a straight-line basis over the life
of the respective securities.
E. 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. Effective January 1,
2013, the Fund's custodian will suspend the bank credit arrangement. For the
period ended November 30, 2012, custodian and other bank credits reduced the
Fund's expenses by less than $500.
F. 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.
G. 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 $500 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
NOTES TO FINANCIAL STATEMENTS | 17
to 5% of the Fund's total assets at a rate per annum equal to the rate at which
CAPCO obtains funding in the capital markets, with no markup.
The USAA Funds that are party to the loan agreement are assessed facility fees
by CAPCO in the amount of 7.0 basis points 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 period ended November 30, 2012, the Fund paid CAPCO facility fees of
less than $500, which represents less than 0.1% of the total fees paid to CAPCO
by the USAA Funds. The Fund had no borrowings under this agreement during the
period ended November 30, 2012.
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund's tax year-end of May 31, 2013, in
accordance with applicable tax law. The Fund commenced operations on June 8,
2012.
Distributions of net investment income are made quarterly or as otherwise
required to avoid the payment of federal taxes. 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.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the period ended November 30, 2012, were $32,305,000
and $872,000, respectively.
As of November 30, 2012, the cost of securities, including short-term
securities, for federal income tax purposes, was approximately the same as that
reported in the financial statements.
Gross and net unrealized appreciation of investments as of November 30, 2012,
was $543,000, resulting in net unrealized appreciation of $543,000.
18 | USAA CORNERSTONE CONSERVATIVE FUND
(5) AGREEMENTS WITH MANAGER
A. ADVISORY AGREEMENT -- The Manager carries out the Fund's investment policies
and manages the Fund's portfolios pursuant to an Advisory Agreement. The
Manager does not receive any management fees from the Fund for these
services.
B. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain
administration and shareholder servicing functions for the Fund. The Manager
does not receive any fees from the Fund for these services.
In addition to the services provided under its Administration and Servicing
Agreement with the Fund, the Manager also provides certain compliance and
legal services for the benefit of the Fund. The Board has approved the
billing of these expenses to the Fund. These expenses are included in the
professional fees on the Fund's statements of operations and, for the period
ended November 30, 2012, were less than $500 for the Fund.
C. EXPENSE LIMITATION -- The Manager has agreed, through October 1, 2013, to
limit the annual expenses of the Fund to 0.10% of its average net assets,
excluding extraordinary expenses and before reductions of any expenses paid
indirectly, and will reimburse the Fund for all expenses in excess of that
amount. This expense limitation arrangement may not be changed or terminated
through October 1, 2013, without approval of the Board, and may be changed
or terminated by the Manager at any time after that date. For the period
ended November 30, 2012, the Fund incurred reimbursable expenses of $65,000,
of which $26,000 was receivable from the Manager.
D. TRANSFER AGENCY AGREEMENT -- USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager, provides
transfer agent services to the Fund. SAS does not receive any fees from the
Fund for these services.
E. UNDERWRITING SERVICES -- USAA Investment Management Company provides
exclusive underwriting and distribution of the Fund's shares on a continuing
best-efforts basis and receives no commissions or fees for this service.
NOTES TO FINANCIAL STATEMENTS | 19
(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.
The Manager is indirectly wholly owned by United Services Automobile Association
(USAA), a large, diversified financial services institution. At November 30,
2012, USAA and its affiliates owned 500,000 shares (15.9%) of the Fund.
(7) TRANSACTIONS WITH AFFILIATED FUNDS
A. SHARE OWNERSHIP -- The Fund does not invest in the underlying USAA Funds for
the purpose of exercising management or control; however, investments by the
Fund may represent a significant portion of the underlying USAA Funds' net
assets. At November 30, 2012, the Fund owned the following percentages of
the total outstanding shares of each of the underlying USAA Funds:
AFFILIATED USAA FUND OWNERSHIP %
----------------------------------------------------------------------------
Aggressive Growth 0.0%*
Emerging Markets 0.0%*
Growth 0.0%*
High Income 0.1%
Income 0.2%
Income Stock 0.0%*
Intermediate-Term Bond 0.3%
International 0.1%
Precious Metals and Minerals 0.0%*
S&P 500 Index 0.0%*
Short-Term Bond 0.3%
Small Cap Stock 0.0%*
Value 0.1%
|
* Represents less than 0.1%.
20 | USAA CORNERSTONE CONSERVATIVE FUND
B. TRANSACTIONS WITH AFFILIATED FUNDS -- The following table provides details
related to the Fund's investment in the underlying USAA Funds for the period
ended November 30, 2012 (in thousands):
PURCHASE SALES DIVIDEND REALIZED GAIN MARKET VALUE
AFFILIATED USAA FUND COST(a) PROCEEDS INCOME (LOSS)(b) NOVEMBER 30, 2012
------------------------------------------------------------------------------------------------
Aggressive Growth $ 394 $ 61 $ - $ 1 $ 343
Emerging Markets 467 37 - (1) 442
Growth 454 73 - 1 407
High Income 2,139 246 39 1 1,929
Income 10,540 28 113 - 10,625
Income Stock 676 92 2 - 594
Intermediate-Term Bond 7,353 21 91 - 7,490
International 1,287 96 - 1 1,286
Precious Metals and Minerals 294 30 - (1) 264
S&P 500 Index 406 61 2 1 356
Short-Term Bond 7,452 21 49 - 7,475
Small Cap Stock 454 47 - - 423
Value 389 59 - - 344
|
(a) Includes reinvestment of distributions from dividend income and realized
gain.
(b) Includes capital gain distributions received, if any.
NOTES TO FINANCIAL STATEMENTS | 21
(8) FINANCIAL HIGHLIGHTS
Per share operating performance for a share outstanding throughout each period
is as follows:
PERIOD ENDED
NOVEMBER 30,
2012***
------------
Net asset value at beginning of period $ 10.00
-------
Income from investment operations:
Net investment income(a) .17
Net realized and unrealized gain(a) .36
-------
Total from investment operations(a) .53
-------
Less distributions from:
Net investment income (.06)
-------
Net asset value at end of period $ 10.47
=======
Total return (%)* 5.27
Net assets at end of period (000) $32,979
Ratios to average net assets:**
Expenses (%)(b),(c) .10
Expenses, excluding reimbursements (%)(b),(c) .84
Net investment income (%)(b) 3.30
Portfolio turnover (%) 5
|
* Assumes reinvestment of all net investment income and realized capital gain
distributions, if any, during the period. Includes adjustments in accordance
with U.S. generally accepted accounting principles and could differ from the
Lipper reported return. Total returns for periods of less than one year are
not annualized.
** For the period ended November 30, 2012, average net assets were $18,093,000.
*** Fund commenced operations on June 8, 2012.
(a) Calculated using average shares. For the period ended November 30, 2012,
average shares were 1,672,000.
(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) 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%.
22 | USAA CORNERSTONE CONSERVATIVE FUND
EXPENSE EXAMPLE
November 30, 2012 (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 on the Fund's inception date of June 8, 2012, and held for the entire
period ended November 30, 2012.
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
EXPENSE EXAMPLE | 23
ending account balance 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 JUNE 8, 2012 -
JUNE 8, 2012 NOVEMBER 30, 2012 NOVEMBER 30, 2012
---------------------------------------------------
Actual $1,000.00 $1,052.70 $0.49
Hypothetical
(5% return before expenses) 1,000.00 1,023.63 0.49
|
* Expenses are equal to the Fund's annualized expense ratio of 0.10%, which is
net of any reimbursements and expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 176 days/365 days (to
reflect the current period beginning with the Fund's inception date). The
Fund's ending account value on the first line in the table is based on its
actual total return of 5.27% for the period of June 8, 2012, through
November 30, 2012.
24 | USAA CORNERSTONE CONSERVATIVE FUND
TRUSTEES Daniel S. McNamara
Robert L. Mason, Ph.D.
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
Paul L. McNamara
Patrick T. Bannigan*
*Effective October 31, 2012, Patrick T. Bannigan
resigned from his position as Trustee.
--------------------------------------------------------------------------------
ADMINISTRATOR AND USAA Asset Management Company
INVESTMENT ADVISER P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
UNDERWRITER AND USAA Investment Management Company
DISTRIBUTOR P.O. Box 659453
San Antonio, Texas 78265-9825
--------------------------------------------------------------------------------
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 "My Accounts" on
SELF-SERVICE 24/7 usaa.com select "Investments,"
AT USAA.COM then "Mutual Funds"
OR CALL Under "Investments" view
(800) 531-USAA account balances, or click
(8722) "I want to...," and select
the desired action.
--------------------------------------------------------------------------------
|
Copies of the Manager's proxy voting policies and procedures, approved by the
Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are
available without charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. Information regarding how
the Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge (i) at USAA.COM; and
(ii) on the SEC's website at HTTP://WWW.SEC.GOV.
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are
available at no charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM;
and (iii) on the SEC's website at HTTP://WWW.SEC.GOV. These Forms N-Q also may
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be obtained by
calling (800) 732-0330.
USAA
9800 Fredericksburg Road --------------
San Antonio, TX 78288 PRSRT STD
U.S. Postage
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USAA
--------------
>> SAVE PAPER AND FUND COSTS
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Set your DOCUMENT PREFERENCES to USAA DOCUMENTS ONLINE.
|
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