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Share Name | Share Symbol | Market | Type |
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Usaa Treasury Money Market Trust (MM) | NASDAQ:UATXX | NASDAQ | Ordinary Share |
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0.00 | 0.00% | 0.00 | - |
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 BALANCED STRATEGY FUND] =============================================== ANNUAL REPORT USAA BALANCED STRATEGY FUND MAY 31, 2010 =============================================== ================================================================================ <PAGE> ================================================================================ FUND OBJECTIVE HIGH TOTAL RETURN, WITH REDUCED RISK OVER TIME, THROUGH AN ASSET ALLOCATION STRATEGY THAT SEEKS A COMBINATION OF LONG-TERM GROWTH OF CAPITAL AND CURRENT INCOME. -------------------------------------------------------------------------------- TYPES OF INVESTMENTS Using preset target ranges, the Fund's strategy is to invest its assets in a combination of stocks on the one hand and bonds and money market instruments on the other. The Fund also may use alternative investment strategies from time to time, in an attempt to reduce the Fund's volatility over time, including an equity hedging strategy. IRA DISTRIBUTION WITHHOLDING DISCLOSURE We generally must withhold federal income tax at a rate of 10% of the taxable portion of your distribution and, if you live in a state that requires state income tax withholding, at your state's set rate. However, you may elect not to have withholding apply or to have income tax withheld at a higher rate. If you wish to make such an election, please call USAA Investment Management Company at (800) 531-USAA (8722). If you must pay estimated taxes, you may be subject to estimated tax penalties if your estimated tax payments are not sufficient and sufficient tax is not withheld from your distribution. For more specific information, please consult your tax adviser. ================================================================================ <PAGE> ================================================================================ TABLE OF CONTENTS -------------------------------------------------------------------------------- PRESIDENT'S MESSAGE 2 MANAGERS' COMMENTARY 4 INVESTMENT OVERVIEW 9 FINANCIAL INFORMATION Distributions to Shareholders 14 Report of Independent Registered Public Accounting Firm 15 Portfolio of Investments 16 Notes to Portfolio of Investments 40 Financial Statements 45 Notes to Financial Statements 48 EXPENSE EXAMPLE 69 ADVISORY AGREEMENTS 71 TRUSTEES' AND OFFICERS' INFORMATION 79 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. ================================================================================ <PAGE> ================================================================================ PRESIDENT'S MESSAGE "WHILE IT IS STILL TOO EARLY TO DECLARE THAT A SELF-SUSTAINING RECOVERY IS UNDERWAY, [PHOTO OF DANIEL S. McNAMARA] WE THINK MOST ECONOMIC INDICATORS ARE POINTED IN THE RIGHT DIRECTION." -------------------------------------------------------------------------------- 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 ================================================================================ 2 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ 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. ================================================================================ PRESIDENT'S MESSAGE | 3 <PAGE> ================================================================================ MANAGERS' COMMENTARY ON THE FUND USAA Investment Management Company Deutsche Investment Management Americas Inc. ARNOLD J. ESPE, CFA Bonds and Money Market Instruments JAMES B. FRANCIS, CFA Stocks JOHN P. TOOHEY, CFA WASIF A. LATIF Credit Suisse Securities (USA) LLC Stocks Volaris Volatility Management Group Deutsche Investment Management YIRONG LI, CFA Americas Inc. DEFINA MALUKI, CFA Index Options ROBERT WANG -------------------------------------------------------------------------------- o HOW DID THE USAA BALANCED STRATEGY FUND (THE FUND) PERFORM DURING THE REPORTING PERIOD? For the one-year period ended May 31, 2010, the Fund had a total return of 26.76%. This compares to a return of 16.40% for the Lipper Balanced Funds Index, 23.20% for the Russell 3000 Index, and 8.42% for the Barclays Capital U.S. Aggregate Bond Index. USAA Investment Management Company (IMCO) serves as the Fund's overall adviser and manages certain portions of the Fund, including the US bond portion. Deutsche Investment Management Americas (DIMA) manages the U.S. stock portion of the Fund, using a quantitative approach to active stock selection. Credit Suisse Securities (USA) LLC's Volaris Volatility Management Group (Volaris Group) is responsible for managing a strategy that involves purchasing index put options or corresponding exchange-traded fund (ETF) options or put spread options and selling index call or corresponding ETF options against a Refer to page 11 for benchmark definitions. Past performance is no guarantee of future results. ================================================================================ 4 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ highly-correlated stock portfolio in an attempt to reduce the Fund's volatility. This strategy is also referred to as an "equity hedging strategy." o WHAT LED TO THE FUND'S STRONG PERFORMANCE DURING THE REPORTING YEAR? Most instrumental in the strong performance was the outstanding absolute and relative returns of the U.S. bond portion of the Fund, which is managed by IMCO. DIMA implemented our U.S. stock market allocation using a diversified, quantitative approach to individual stock selection. DIMA's stock selection had a mildly negative impact on performance. The equity hedging strategy moderately detracted from performance for the full reporting year as global equity markets generally rallied sharply, but proved its worth by helping offset the volatility late in the reporting year. Given the high degree of uncertainty that has existed in global financial markets for several years, and is expected to persist, the equity hedging strategy remains an essential element of the Fund's ability to achieve its objectives. The Fund had roughly 10% of assets in non-U.S. developed markets within the Morgan Stanley Capital International-Europe, Australasia and Far East Index (the MSCI-EAFE Index) through an exchange-traded fund for diversification purposes. This exposure had a negative impact on performance as the MSCI-EAFE lagged the U.S. stock market, especially late in the reporting year in response to the eurozone debt crisis. o WHAT LED TO THE STRONG PERFORMANCE BY THE FUND'S U.S. BOND PORTION? For the reporting year, the bond portion had a total return of 48.15%, compared to 12.59% for the Lipper Intermediate Investment Grade ================================================================================ MANAGERS' COMMENTARY ON THE FUND | 5 <PAGE> ================================================================================ Debt Funds Average. This performance reflected a continuation of the trends that started to take hold in March 2009, when bonds with any credit risk at all were trading at what we believed were extremely oversold levels. We maintained and added to our positions back then when there was virtually no confidence in the credit markets, and subsequently have benefited as the markets normalized and many investors re-embraced risk assets. While our best absolute and relative performance came in the first half of the reporting year, it's important to note that we continued to outperform our peers in the second half, with a total return of 12.31% for the six months ended May 31, 2010. o ISN'T THERE SUBSTANTIALLY MORE RISK IN THE BOND MARKET TODAY? Compared to a year ago, yes. We're in a low absolute-yield environment and there is a significant risk of inflation longer term. That's why we continually adjust the portfolio to reflect both the opportunities and the risks. As the reporting year progressed, we gradually reduced our exposure to riskier assets while still maintaining a significant yield advantage over the peer group. Specifically, we reduced exposure to asset-backed securities when they achieved full value, but are maintaining substantial holdings of commercial mortgage-backed securities as well as subordinated financial debt, both of which have played a large role in our strong performance. Investing based on inflation fears is not a straightforward proposition. Longer term, we believe that the unprecedented government spending will very likely result in significant inflation. However, there is little Past performance is no guarantee of future results. o High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently. o Mortgage-backed securities have prepayment, credit, interest rate, and extension risks. Generally, when interest rates decline, prepayments accelerate beyond the initial pricing assumptions and may cause the average life of the securities to shorten. Also the market value may decline when interest rates rise because prepayments decrease beyond the initial pricing assumptions and may cause the average life of the securities to extend. ================================================================================ 6 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ evidence of inflation today, and so far in 2010 the risk of deflation has grown with the eurozone debt crisis and its potential to slow the global economic recovery. We have been adding recently Treasury Inflation-Protected Securities (TIPS), which tend to perform adequately in both deflationary and inflationary periods. We remain vigilant for any signs of inflationary pressure. o WHAT'S USAA'S OUTLOOK? Well before U.S. economic growth (as measured by gross domestic product) turned positive, we took the view that the lingering effects of the financial crisis would make this recovery muted by historical standards, with trend economic growth more volatile and lower than we've enjoyed in recent decades. Unprecedented monetary and fiscal stimulus has been the primary driver of the economic recovery, while very strong corporate profit growth from the depressed levels of the Great Recession drove stock prices much higher off the market low of March 9, 2009. Some of our macroeconomic themes, however, have remained remarkably stable over the past year. Bank lending continues to contract as banks work to heal their balance sheets and some borrowers remain hesitant to incur additional debt. Households are also slowly rebuilding their balance sheets, choosing saving over borrowing and spending. Unemployment remains structurally higher. The process of higher taxes and re-regulation is moving ahead. The good news is at the corporate level, where corporate treasurers took advantage of a period of extremely cheap credit to prepare their balance sheets for an uncertain future. The question now is whether the economy can move from a now waning stimulus-driven recovery to one that depends on consumer and corporate spending. Both corporations and consumers appear hesitant to embrace the recovery, and headwinds are increasing. The most recent news comes from the eurozone, where the sovereign ================================================================================ MANAGERS' COMMENTARY ON THE FUND | 7 <PAGE> ================================================================================ debt crisis is most likely to lead to a new period of austerity that will further weigh on the global recovery. We have adjusted the strategic allocations in your Fund, putting more emphasis on U.S. large-cap stocks and reducing our base allocation to U.S. small-cap stocks. On a tactical level, we have further increased exposure to U.S. large-cap stocks given their stronger balance sheets. As the managers of your assets, we continue to focus on risk management and tactical asset allocation in these volatile markets. We are pleased that our efforts provided outstanding returns during the reporting year, and we are committed to redoubling our efforts given the uncertainty ahead. ================================================================================ 8 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ INVESTMENT OVERVIEW USAA BALANCED STRATEGY FUND (Ticker Symbol: USBSX) -------------------------------------------------------------------------------- 5/31/10 5/31/09 -------------------------------------------------------------------------------- Net Assets $592.1 Million $450.0 Million Net Asset Value Per Share $12.26 $10.08 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/10 -------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 26.76% 1.59% 3.12% -------------------------------------------------------------------------------- EXPENSE RATIO* -------------------------------------------------------------------------------- Before Reimbursement 1.47% After Reimbursement 1.00% 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 BEFORE REIMBURSEMENT EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. THE AFTER REIMBURSEMENT EXPENSE RATIO REPRESENTS TOTAL ANNUAL OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND EXCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AFTER REIMBURSEMENT FROM USAA INVESTMENT MANAGEMENT COMPANY (IMCO). BEFORE AND AFTER REIMBURSEMENT EXPENSE RATIOS ARE REPORTED IN THE FUND'S PROSPECTUS DATED OCTOBER 1, 2009. IMCO HAS VOLUNTARILY AGREED TO LIMIT THE FUND'S TOTAL ANNUAL OPERATING EXPENSES TO 1.00%, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND EXCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AND TO REIMBURSE THE FUND FOR EXPENSES IN EXCESS OF THIS AMOUNT. IMCO CAN MODIFY OR TERMINATE THIS ARRANGEMENT AT ANY TIME. THESE EXPENSE RATIOS MAY DIFFER FROM THE EXPENSE RATIOS DISCLOSED IN THE FINANCIAL HIGHLIGHTS. Total return measures the price change in a share assuming the reinvestment of all net investment income and realized capital gain distributions. The total returns quoted do not reflect adjustments made to the enclosed financial statements in accordance with U.S. generally accepted accounting principles or the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. ================================================================================ INVESTMENT OVERVIEW | 9 <PAGE> ================================================================================ o CUMULATIVE PERFORMANCE COMPARISON o [CHART OF CUMULATIVE PERFORMANCE COMPARISON] BARCLAYS CAPITAL U.S. USAA BALANCED LIPPER BALANCED RUSSELL 3000 AGGREGATE BOND INDEX STRATEGY FUND FUNDS INDEX INDEX 05/31/00 $10,000.00 $10,000.00 $10,000.00 $10,000.00 06/30/00 10,208.05 10,222.97 10,159.61 10,296.08 07/31/00 10,300.71 10,100.23 10,131.92 10,114.09 08/31/00 10,450.01 10,495.37 10,584.17 10,864.17 09/30/00 10,515.71 10,142.17 10,361.43 10,372.27 10/31/00 10,585.29 10,037.61 10,352.26 10,224.59 11/30/00 10,758.37 9,570.58 9,976.48 9,282.17 12/31/00 10,957.94 9,751.78 10,224.44 9,438.16 01/31/01 11,137.14 10,473.36 10,441.44 9,761.02 02/28/01 11,234.16 10,228.16 10,036.13 8,869.18 03/31/01 11,290.56 10,060.39 9,712.03 8,291.04 04/30/01 11,243.70 10,483.39 10,119.62 8,955.94 05/31/01 11,311.52 10,737.19 10,209.75 9,027.87 06/30/01 11,354.26 10,639.30 10,053.31 8,861.40 07/31/01 11,608.11 10,788.35 10,046.04 8,715.36 08/31/01 11,741.04 10,568.32 9,760.14 8,200.84 09/30/01 11,877.86 9,895.52 9,291.11 7,477.32 10/31/01 12,126.41 10,095.43 9,446.61 7,651.28 11/30/01 11,959.21 10,695.16 9,822.71 8,240.61 12/31/01 11,883.27 10,820.83 9,893.55 8,356.76 01/31/02 11,979.47 10,723.14 9,806.77 8,251.97 02/28/02 12,095.56 10,520.25 9,740.14 8,083.22 03/31/02 11,894.34 10,821.13 9,953.10 8,437.64 04/30/02 12,124.99 10,647.33 9,714.25 7,994.96 05/31/02 12,228.02 10,730.45 9,709.72 7,902.33 06/30/02 12,333.75 10,126.38 9,295.49 7,333.49 07/31/02 12,482.57 9,631.85 8,819.07 6,750.45 08/31/02 12,693.33 9,730.76 8,909.55 6,782.34 09/30/02 12,898.91 9,296.19 8,377.61 6,069.72 10/31/02 12,840.15 9,602.24 8,726.83 6,553.03 11/30/02 12,836.74 10,023.05 9,080.86 6,949.56 12/31/02 13,101.89 9,727.34 8,836.08 6,556.67 01/31/03 13,113.08 9,548.35 8,703.72 6,396.23 02/28/03 13,294.52 9,509.44 8,638.45 6,291.00 03/31/03 13,284.28 9,540.00 8,673.70 6,357.15 04/30/03 13,393.89 10,001.36 9,143.08 6,876.27 05/31/03 13,643.62 10,439.27 9,547.47 7,291.35 06/30/03 13,616.54 10,559.36 9,619.87 7,389.74 07/31/03 13,158.76 10,614.35 9,642.16 7,559.26 08/31/03 13,246.13 10,763.63 9,804.94 7,726.78 09/30/03 13,596.76 10,758.22 9,817.38 7,642.89 10/31/03 13,469.95 11,176.25 10,141.28 8,105.43 11/30/03 13,502.21 11,294.55 10,231.07 8,217.08 12/31/03 13,639.62 11,613.17 10,597.66 8,592.93 01/31/04 13,749.35 11,739.83 10,755.90 8,772.18 02/29/04 13,898.18 11,898.16 10,902.50 8,890.36 03/31/04 14,002.26 11,808.08 10,850.49 8,784.83 04/30/04 13,637.97 11,593.68 10,622.46 8,603.19 05/31/04 13,583.34 11,673.09 10,669.36 8,728.22 06/30/04 13,660.11 11,902.04 10,836.17 8,901.69 07/31/04 13,795.51 11,607.28 10,632.17 8,565.07 08/31/04 14,058.66 11,623.21 10,696.85 8,600.35 09/30/04 14,096.81 11,760.38 10,855.76 8,732.55 10/31/04 14,215.02 11,864.31 10,973.15 8,875.98 11/30/04 14,101.64 12,208.09 11,268.73 9,288.59 12/31/04 14,231.39 12,548.76 11,550.03 9,619.55 01/31/05 14,320.75 12,378.19 11,401.24 9,363.34 02/28/05 14,236.21 12,508.15 11,562.54 9,569.46 03/31/05 14,163.10 12,355.99 11,403.34 9,407.60 04/30/05 14,354.78 12,233.65 11,266.32 9,203.21 05/31/05 14,510.08 12,568.04 11,524.66 9,551.93 06/30/05 14,589.20 12,630.59 11,607.48 9,618.65 07/31/05 14,456.39 12,925.47 11,865.41 10,013.26 08/31/05 14,641.71 12,974.62 11,899.74 9,917.80 09/30/05 14,490.89 12,982.35 11,946.91 10,004.57 10/31/05 14,376.21 12,719.08 11,759.33 9,817.20 11/30/05 14,439.79 13,023.48 12,044.82 10,199.09 12/31/05 14,577.08 13,095.10 12,150.32 10,208.24 01/31/06 14,577.90 13,320.43 12,440.36 10,549.31 02/28/06 14,626.29 13,285.77 12,424.79 10,568.07 03/31/06 14,482.76 13,329.76 12,545.78 10,750.74 04/30/06 14,456.51 13,408.22 12,682.57 10,867.38 05/31/06 14,441.09 13,050.78 12,431.11 10,519.44 06/30/06 14,471.70 13,074.22 12,423.67 10,538.06 07/31/06 14,667.38 13,039.12 12,481.66 10,528.19 08/31/06 14,891.92 13,214.62 12,721.71 10,785.74 09/30/06 15,022.73 13,489.22 12,905.10 11,027.18 10/31/06 15,122.10 13,753.88 13,205.75 11,424.13 11/30/06 15,297.53 13,965.62 13,460.13 11,672.70 12/31/06 15,208.76 14,060.10 13,559.67 11,812.49 01/31/07 15,202.52 14,277.43 13,705.91 12,037.33 02/28/07 15,436.94 14,211.28 13,653.60 11,839.87 03/31/07 15,437.41 14,297.47 13,770.75 11,963.10 04/30/07 15,520.65 14,658.47 14,166.81 12,440.99 05/31/07 15,403.03 14,914.97 14,471.21 12,894.37 06/30/07 15,357.46 14,766.77 14,336.00 12,652.88 07/31/07 15,485.57 14,432.47 14,091.62 12,221.38 08/31/07 15,675.37 14,566.19 14,205.53 12,396.81 09/30/07 15,794.29 14,915.03 14,606.86 12,848.76 10/31/07 15,936.16 15,174.34 14,863.72 13,084.46 11/30/07 16,222.75 14,703.74 14,515.26 12,495.41 12/31/07 16,268.31 14,580.97 14,444.75 12,419.80 01/31/08 16,541.59 14,133.26 13,967.22 11,667.02 02/29/08 16,564.55 13,868.71 13,785.50 11,304.64 03/31/08 16,621.06 13,699.74 13,680.15 11,237.67 04/30/08 16,586.33 14,068.34 14,133.68 11,799.65 05/31/08 16,464.70 14,344.79 14,289.81 12,041.38 06/30/08 16,451.40 13,539.85 13,534.33 11,047.72 07/31/08 16,437.97 13,302.49 13,362.93 10,959.61 08/31/08 16,593.98 13,343.77 13,413.74 11,129.82 09/30/08 16,371.10 12,198.48 12,400.32 10,083.35 10/31/08 15,984.67 10,357.79 10,811.04 8,294.97 11/30/08 16,504.97 9,671.43 10,318.54 7,640.17 12/31/08 17,120.76 9,848.08 10,663.81 7,786.33 01/31/09 16,969.70 9,279.92 10,170.18 7,132.90 02/28/09 16,905.64 8,511.86 9,512.34 6,385.69 03/31/09 17,140.66 8,949.79 10,041.41 6,945.04 04/30/09 17,222.60 9,727.57 10,733.07 7,675.89 05/31/09 17,347.53 10,729.09 11,271.54 8,085.45 06/30/09 17,446.20 11,001.98 11,298.46 8,113.00 07/31/09 17,727.60 11,616.80 11,977.31 8,744.48 08/31/09 17,911.16 12,059.04 12,297.84 9,056.94 09/30/09 18,099.31 12,706.10 12,691.06 9,436.39 10/31/09 18,188.67 12,738.79 12,542.68 9,193.69 11/30/09 18,424.15 13,120.19 13,009.60 9,716.11 12/31/09 18,136.16 13,396.53 13,154.07 9,992.99 01/31/10 18,413.20 13,319.48 12,929.11 9,632.76 02/28/10 18,481.96 13,561.65 13,159.08 9,959.33 03/31/10 18,459.24 14,076.81 13,659.54 10,587.04 04/30/10 18,651.39 14,320.86 13,827.19 10,815.51 05/31/10 18,808.34 13,599.83 13,120.17 9,961.12 [END CHART] Data from 5/31/00 to 5/31/10. See next page for benchmark definitions. 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. ================================================================================ 10 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ The graph on page 10 illustrates the comparison of a $10,000 hypothetical investment in the USAA Balanced Strategy Fund to the following benchmarks: o The unmanaged Barclays Capital 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. o The unmanaged Lipper Balanced Funds Index tracks the total return performance of the 30 largest funds within the Lipper Balanced Funds category. o The unmanaged Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. ================================================================================ INVESTMENT OVERVIEW | 11 <PAGE> ================================================================================ TOP 5 STOCK HOLDINGS AS OF 5/31/10 (% of Net Assets) iShares MSCI EAFE Index ETF* ..................................... 10.2% SPDR Trust Series 1 ETF* ......................................... 5.0% Microsoft Corp. .................................................. 1.0% International Business Machines Corp. ............................ 1.0% Bank of America Corp. ............................................ 0.9% TOP 5 BOND HOLDINGS AS OF 5/31/10 (% of Net Assets) U.S. Treasury Inflation-Indexed Notes 2.13%, 2/15/2040 ............................................... 3.5% U.S. Treasury Inflation-Indexed Notes 2.50%, 1/15/2029 ............................................... 1.0% Nationwide Mutual Insurance Co. .................................. 0.6% TransCanada Pipelines Ltd. ....................................... 0.6% Credit Suisse Commercial Mortgage Trust .......................... 0.5% * Pursuant to a Securities and Exchange Commission (SEC) exemptive order, the Fund may invest in an amount that exceeds the Fund's limitations as set forth in the Investment Company Act of 1940 that would otherwise be applicable. You will find a complete list of securities that the Fund owns on pages 16-39. ================================================================================ 12 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ o ASSET ALLOCATION -- 5/31/2010* o [PIE CHART OF ASSET ALLOCATION] STOCKS 56.8% BONDS 42.1% MONEY MARKET INSTRUMENTS 0.6% [END CHART] * Excludes futures, options, and short-term investments purchased with cash collateral from securities loaned. Percentages are of the net assets of the Fund and may not equal 100%. ================================================================================ INVESTMENT OVERVIEW | 13 <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. 27.79% of ordinary income distributions qualify for the dividends-received deductions eligible to corporations. For the fiscal year ended May 31, 2010, the Fund hereby designates 100%, or the maximum amount allowable, of its net taxable income as qualified dividends taxed at individual net capital gain rates. For the fiscal year ended May 31, 2010, certain dividends paid by the Fund qualify as interest-related dividends. The Fund designates $14,942,000 as qualifying interest income. ================================================================================ 14 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA BALANCED STRATEGY FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the USAA Balanced Strategy Fund (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 Balanced Strategy Fund 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 | 15 <PAGE> ================================================================================ PORTFOLIO OF INVESTMENTS May 31, 2010 ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- EQUITY SECURITIES (56.8%) COMMON STOCKS (39.9%) CONSUMER DISCRETIONARY (4.8%) ----------------------------- APPAREL & ACCESSORIES & LUXURY GOODS (0.1%) 8,700 Coach, Inc. $ 358 15,600 Jones Apparel Group, Inc.(m) 306 1,800 Perry Ellis International, Inc.* 43 -------- 707 -------- APPAREL RETAIL (0.4%) 5,300 Finish Line, Inc. "A" 88 57,300 Gap, Inc. 1,249 15,800 Ross Stores, Inc. 828 3,100 Stage Stores, Inc. 44 -------- 2,209 -------- AUTO PARTS & EQUIPMENT (0.2%) 51,100 Johnson Controls, Inc. 1,458 -------- CABLE & SATELLITE (0.4%) 116,300 Comcast Corp. "A" 2,104 -------- CATALOG RETAIL (0.1%) 24,000 Liberty Media Corp. Interactive "A"* 311 -------- COMPUTER & ELECTRONICS RETAIL (0.0%) 8,600 Rent-A-Center, Inc.* 208 -------- DEPARTMENT STORES (0.5%) 22,400 Dillard's, Inc. "A" 643 51,300 J.C. Penney Co., Inc. 1,410 1,500 Kohl's Corp.* 76 9,300 Sears Holdings Corp.*(a) 819 -------- 2,948 -------- DISTRIBUTORS (0.0%) 1,500 Core-Mark Holding Co., Inc.* 41 -------- ================================================================================ 16 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- EDUCATION SERVICES (0.3%) 23,600 Career Education Corp.* $ 661 70,500 Corinthian Colleges, Inc.*(a) 944 -------- 1,605 -------- GENERAL MERCHANDISE STORES (0.3%) 5,300 Fred's, Inc. "A" 73 33,400 Target Corp. 1,821 23,700 Tuesday Morning Corp.* 134 -------- 2,028 -------- HOME IMPROVEMENT RETAIL (0.7%) 5,400 Home Depot, Inc. 183 126,200 Lowe's Companies, Inc. 3,123 11,300 Sherwin-Williams Co. 866 -------- 4,172 -------- HOUSEWARES & SPECIALTIES (0.0%) 3,700 American Greetings Corp. "A" 87 700 Blyth, Inc. 35 -------- 122 -------- INTERNET RETAIL (0.4%) 18,200 Amazon.com, Inc.* 2,283 -------- LEISURE PRODUCTS (0.2%) 4,300 JAKKS Pacific, Inc.* 64 51,000 Mattel, Inc. 1,104 -------- 1,168 -------- MOVIES & ENTERTAINMENT (0.0%) 6,800 Cinemark Holdings, Inc. 109 -------- PUBLISHING (0.1%) 11,300 Scholastic Corp. 296 -------- RESTAURANTS (0.9%) 12,400 Dominos Pizza, Inc.* 161 50,300 McDonald's Corp. 3,364 8,100 Ruth's Hospitality Group, Inc.* 39 76,300 Starbucks Corp. 1,976 -------- 5,540 -------- SPECIALTY STORES (0.2%) 33,400 Barnes & Noble, Inc.(a) 676 7,200 Signet Jewelers Ltd.* 223 -------- 899 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 17 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- TIRES & RUBBER (0.0%) 4,300 Cooper Tire & Rubber Co. $ 81 -------- Total Consumer Discretionary 28,289 -------- CONSUMER STAPLES (3.0%) ----------------------- AGRICULTURAL PRODUCTS (0.2%) 41,500 Archer-Daniels-Midland Co. 1,049 7,700 Fresh Del Monte Produce, Inc.* 154 -------- 1,203 -------- DRUG RETAIL (0.1%) 21,100 CVS Caremark Corp. 731 -------- FOOD DISTRIBUTORS (0.0%) 4,700 Andersons, Inc. 154 -------- FOOD RETAIL (0.3%) 45,400 Whole Foods Market, Inc.* 1,836 6,800 Winn Dixie Stores, Inc.* 76 -------- 1,912 -------- HOUSEHOLD PRODUCTS (0.7%) 3,700 Central Garden & Pet Co. "A"* 35 33,800 Colgate-Palmolive Co. 2,639 19,800 Procter & Gamble Co. 1,210 -------- 3,884 -------- HYPERMARKETS & SUPER CENTERS (0.1%) 9,000 Wal-Mart Stores, Inc. 455 -------- PACKAGED FOODS & MEAT (1.0%) 2,200 American Italian Pasta Co.* 86 8,300 Campbell Soup Co. 297 28,200 Del Monte Foods Co. 411 33,700 Hershey Co. 1,577 1,400 J.M. Smucker Co. 77 500 Lancaster Colony Corp. 27 16,900 Sanderson Farms, Inc. 927 6,600 Sara Lee Corp. 94 9,300 Smart Balance, Inc.* 56 141,200 Tyson Foods, Inc. "A" 2,482 -------- 6,034 -------- PERSONAL PRODUCTS (0.0%) 3,800 China Biotics, Inc.* 54 2,000 China Sky One Medical, Inc.* 25 2,100 Elizabeth Arden, Inc.* 36 -------- 115 -------- ================================================================================ 18 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- SOFT DRINKS (0.3%) 1,000 Coca-Cola Co. $ 51 44,300 Dr. Pepper Snapple Group, Inc. 1,677 -------- 1,728 -------- TOBACCO (0.3%) 19,100 Lorillard, Inc. 1,365 2,100 Reynolds American, Inc. 110 -------- 1,475 -------- Total Consumer Staples 17,691 -------- ENERGY (4.3%) ------------- INTEGRATED OIL & GAS (2.5%) 68,400 Chevron Corp. 5,052 73,600 ConocoPhillips 3,817 58,300 Exxon Mobil Corp. 3,525 88,000 Marathon Oil Corp. 2,736 -------- 15,130 -------- OIL & GAS DRILLING (0.5%) 114,000 Patterson-UTI Energy, Inc. 1,600 47,300 Rowan Companies, Inc.* 1,171 -------- 2,771 -------- OIL & GAS EQUIPMENT & SERVICES (0.9%) 6,700 Complete Production Services, Inc.* 87 64,800 National-Oilwell Varco, Inc. 2,471 53,600 Oil States International, Inc.* 2,092 7,900 Schlumberger Ltd. 444 1,700 Seacor Holdings, Inc.* 124 -------- 5,218 -------- OIL & GAS EXPLORATION & PRODUCTION (0.4%) 15,700 Cimarex Energy Co. 1,154 20,300 Newfield Exploration Co.* 1,057 -------- 2,211 -------- OIL & GAS REFINING & MARKETING (0.0%) 33,300 Western Refining, Inc.* 175 -------- Total Energy 25,505 -------- FINANCIALS (6.2%) ----------------- CONSUMER FINANCE (0.8%) 36,900 American Express Co. 1,471 4,800 AmeriCredit Corp.* 104 65,700 Capital One Financial Corp. 2,713 ================================================================================ PORTFOLIO OF INVESTMENTS | 19 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 2,800 Cash America International, Inc. $ 104 30,800 Discover Financial Services 414 4,600 Nelnet, Inc. "A" 91 1,100 Student Loan Corp. 32 -------- 4,929 -------- DIVERSIFIED BANKS (0.6%) 48,800 Comerica, Inc. 1,859 59,500 Wells Fargo & Co. 1,707 -------- 3,566 -------- INVESTMENT BANKING & BROKERAGE (1.0%) 18,200 Goldman Sachs Group, Inc. 2,625 116,000 Morgan Stanley 3,145 -------- 5,770 -------- LIFE & HEALTH INSURANCE (0.0%) 5,500 American Equity Investment Life Insurance Co. 52 1,800 Prudential Financial, Inc. 104 -------- 156 -------- MULTI-LINE INSURANCE (0.2%) 26,400 Assurant, Inc. 916 -------- OTHER DIVERSIFIED FINANCIAL SERVICES (1.7%) 343,300 Bank of America Corp. 5,404 997,200 Citigroup, Inc.* 3,949 23,300 JPMorgan Chase & Co. 922 -------- 10,275 -------- PROPERTY & CASUALTY INSURANCE (0.6%) 25,500 Allied World Assurance Co. Holdings Ltd. 1,145 35,600 Chubb Corp. 1,788 700 Infinity Property & Casualty Corp. 33 3,400 Meadowbrook Insurance Group, Inc. 30 9,000 Old Republic International Corp. 125 4,300 Progressive Corp. 84 4,400 Stewart Information Services Corp. 47 1,400 United Fire & Casualty Co. 30 -------- 3,282 -------- REGIONAL BANKS (0.9%) 87,500 CapitalSource, Inc. 397 3,025 Commerce Bancshares, Inc. 112 1,500 Community Bank System, Inc. 34 194,700 Fifth Third Bancorp 2,529 23,900 PNC Financial Services Group, Inc. 1,500 ================================================================================ 20 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 16,200 SunTrust Banks, Inc. $ 437 20,500 Zions Bancorp 491 -------- 5,500 -------- REINSURANCE (0.0%) 3,100 PartnerRe Ltd. 226 -------- REITs - DIVERSIFIED (0.0%) 14,300 Cousins Properties, Inc. 110 1,700 PS Business Parks, Inc. 92 2,100 Winthrop Realty Trust, Inc. 27 -------- 229 -------- REITs - MORTGAGE (0.1%) 11,900 American Capital Agency Corp. 312 15,800 Resource Capital Corp. 89 -------- 401 -------- REITs - OFFICE (0.0%) 2,300 Parkway Properties, Inc. 39 -------- REITs - RETAIL (0.0%) 1,300 Agree Realty Corp. 31 1,800 Urstadt Biddle Properties, Inc. "A" 30 -------- 61 -------- REITs - SPECIALIZED (0.2%) 20,000 Ashford Hospitality Trust, Inc.* 159 4,000 LaSalle Hotel Properties 90 6,600 Public Storage 612 11,900 Strategic Hotel Capital, Inc.* 58 -------- 919 -------- SPECIALIZED FINANCE (0.1%) 31,000 PHH Corp.* 684 -------- THRIFTS & MORTGAGE FINANCE (0.0%) 11,300 NewAlliance Bancshares, Inc. 133 -------- Total Financials 37,086 -------- HEALTH CARE (4.9%) ------------------ BIOTECHNOLOGY (0.3%) 27,400 Cephalon, Inc.* 1,613 2,700 Emergent BioSolutions, Inc.* 42 13,800 Incyte Corp.* 178 3,200 Martek Biosciences Corp.* 59 4,700 Nabi Biopharmaceuticals* 26 -------- 1,918 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 21 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- HEALTH CARE DISTRIBUTORS (1.0%) 82,200 AmerisourceBergen Corp. $ 2,571 77,600 Cardinal Health, Inc. 2,677 11,700 McKesson Corp. 819 -------- 6,067 -------- HEALTH CARE EQUIPMENT (0.1%) 4,600 American Medical Systems Holdings, Inc.* 104 2,200 Hospira, Inc.* 114 13,900 Sirona Dental Systems, Inc.* 492 -------- 710 -------- HEALTH CARE FACILITIES (0.1%) 10,500 LifePoint Hospitals, Inc.* 373 4,400 Sun Healthcare Group, Inc.* 40 -------- 413 -------- HEALTH CARE SERVICES (0.2%) 25,400 Amedisys, Inc.*(a) 1,263 7,600 CardioNet, Inc.* 59 3,200 Gentiva Health Services, Inc.* 88 -------- 1,410 -------- LIFE SCIENCES TOOLS & SERVICES (0.4%) 32,200 Life Technologies Corp.* 1,612 6,400 Waters Corp.* 438 -------- 2,050 -------- MANAGED HEALTH CARE (1.7%) 29,500 Aetna, Inc. 860 115,600 Coventry Health Care, Inc.* 2,393 18,200 Health Net, Inc.* 449 16,100 HealthSpring, Inc.* 280 33,500 Humana, Inc.* 1,543 5,400 Molina Healthcare, Inc.* 148 103,800 UnitedHealth Group, Inc. 3,017 3,000 Universal American Financial Corp.* 44 22,700 WellPoint, Inc.* 1,164 -------- 9,898 -------- PHARMACEUTICALS (1.1%) 11,800 Allergan, Inc. 710 30,200 Endo Pharmaceuticals Holdings, Inc.* 632 2,800 Hi-Tech Pharmacal Co., Inc.* 64 9,400 Impax Laboratories, Inc.* 198 ================================================================================ 22 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 16,000 Johnson & Johnson $ 933 13,300 Medicis Pharmaceutical Corp. "A" 309 31,000 Par Pharmaceutical Companies, Inc.* 861 21,600 Perrigo Co. 1,283 7,900 Pfizer, Inc. 120 18,100 Questcor Pharmaceuticals, Inc.* 172 13,500 Santarus, Inc.* 39 10,900 ViroPharma, Inc.* 133 21,200 Watson Pharmaceuticals, Inc.* 936 -------- 6,390 -------- Total Health Care 28,856 -------- INDUSTRIALS (4.1%) ------------------ AEROSPACE & DEFENSE (0.7%) 4,200 Ceradyne, Inc.* 91 44,600 Northrop Grumman Corp. 2,698 28,800 Raytheon Co. 1,509 -------- 4,298 -------- AIR FREIGHT & LOGISTICS (0.5%) 45,500 United Parcel Service, Inc. "B" 2,855 -------- AIRLINES (0.1%) 9,000 Alaska Air Group, Inc.* 420 12,800 Hawaiian Holdings, Inc.* 91 6,000 SkyWest, Inc. 88 -------- 599 -------- COMMERCIAL PRINTING (0.2%) 1,000 Consolidated Graphics, Inc.* 46 52,800 R.R. Donnelley & Sons Co. 1,011 -------- 1,057 -------- CONSTRUCTION & ENGINEERING (0.6%) 71,600 EMCOR Group, Inc.* 1,788 19,400 Jacobs Engineering Group, Inc.* 810 1,300 Northwest Pipe Co.* 26 25,000 Shaw Group, Inc.* 853 -------- 3,477 -------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.2%) 2,800 Astec Industries, Inc.* 84 28,500 Oshkosh Corp.* 1,013 10,500 Trinity Industries, Inc. 229 -------- 1,326 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 23 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- ELECTRICAL COMPONENTS & EQUIPMENT (0.0%) 4,500 Fushi Copperweld, Inc.* $ 45 -------- INDUSTRIAL CONGLOMERATES (1.0%) 42,100 3M Co. 3,339 29,500 Carlisle Companies, Inc. 1,147 85,800 General Electric Co. 1,403 18 Seaboard Corp. 26 -------- 5,915 -------- INDUSTRIAL MACHINERY (0.5%) 13,100 Eaton Corp. 916 17,000 Parker-Hannifin Corp. 1,045 32,400 Timken Co. 933 7,400 Watts Water Technologies, Inc. "A" 240 -------- 3,134 -------- MARINE (0.1%) 29,900 Genco Shipping & Trading Ltd.* 569 -------- TRADING COMPANIES & DISTRIBUTORS (0.1%) 27,900 Aircastle Ltd. 275 -------- TRUCKING (0.1%) 60,000 Hertz Global Holdings, Inc.* 682 -------- Total Industrials 24,232 -------- INFORMATION TECHNOLOGY (8.5%) ----------------------------- APPLICATION SOFTWARE (0.0%) 2,100 Kenexa Corp.* 30 5,300 Smith Micro Software, Inc.* 52 -------- 82 -------- COMMUNICATIONS EQUIPMENT (0.7%) 15,300 Cisco Systems, Inc.* 354 1,600 EchoStar Corp. "A"* 34 10,600 Harris Corp. 497 398,800 Motorola, Inc.* 2,732 1,800 Sycamore Networks, Inc. 32 19,500 Tellabs, Inc. 175 -------- 3,824 -------- COMPUTER HARDWARE (1.8%) 8,000 Apple, Inc.* 2,058 63,900 Hewlett-Packard Co. 2,940 44,900 International Business Machines Corp. 5,624 -------- 10,622 -------- ================================================================================ 24 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- COMPUTER STORAGE & PERIPHERALS (0.9%) 12,300 SanDisk Corp.* $ 574 134,900 Seagate Technology* 2,072 12,200 Synaptics, Inc.*(a) 365 71,100 Western Digital Corp.* 2,475 -------- 5,486 -------- DATA PROCESSING & OUTSOURCED SERVICES (0.6%) 27,400 Computer Sciences Corp.* 1,369 7,200 MasterCard, Inc. "A" 1,453 31,500 Total System Services, Inc. 460 -------- 3,282 -------- ELECTRONIC COMPONENTS (0.5%) 140,400 Corning, Inc. 2,447 41,400 Vishay Intertechnology, Inc.* 375 -------- 2,822 -------- ELECTRONIC MANUFACTURING SERVICES (0.1%) 3,900 Benchmark Electronics, Inc.* 72 50,100 Jabil Circuit, Inc. 686 1,400 Multi-Fineline Electronix, Inc.* 37 -------- 795 -------- HOME ENTERTAINMENT SOFTWARE (0.4%) 240,000 Activision Blizzard, Inc. 2,580 -------- INTERNET SOFTWARE & SERVICES (0.9%) 7,100 AOL, Inc.* 146 9,600 Google, Inc. "A"* 4,658 24,300 IAC/InterActiveCorp.* 570 -------- 5,374 -------- IT CONSULTING & OTHER SERVICES (0.1%) 5,200 Cognizant Technology Solutions Corp. "A"* 260 11,500 Unisys Corp.* 267 -------- 527 -------- SEMICONDUCTORS (0.1%) 8,700 Intel Corp. 186 9,100 Micron Technology, Inc.* 83 -------- 269 -------- SYSTEMS SOFTWARE (1.0%) 238,200 Microsoft Corp. 6,146 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 25 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- TECHNOLOGY DISTRIBUTORS (1.4%) 4,300 Anixter International, Inc.* $ 204 85,100 Arrow Electronics, Inc.* 2,321 82,200 Avnet, Inc.* 2,361 80,700 Ingram Micro, Inc. "A"* 1,369 53,900 Tech Data Corp.* 2,191 -------- 8,446 -------- Total Information Technology 50,255 -------- MATERIALS (1.6%) ---------------- DIVERSIFIED CHEMICALS (0.1%) 2,500 Ashland, Inc. 134 6,900 Cabot Corp. 193 16,500 Huntsman Corp. 165 -------- 492 -------- DIVERSIFIED METALS & MINING (0.2%) 16,600 Freeport-McMoRan Copper & Gold, Inc. 1,163 -------- FERTILIZERS & AGRICULTURAL CHEMICALS (0.3%) 31,700 CF Industries Holdings, Inc. 2,174 -------- PAPER PACKAGING (0.1%) 63,600 Boise, Inc.* 391 -------- PAPER PRODUCTS (0.3%) 55,700 International Paper Co. 1,294 14,200 MeadWestvaco Corp. 339 -------- 1,633 -------- SPECIALTY CHEMICALS (0.6%) 28,300 Cytec Industries, Inc. 1,209 14,200 Lubrizol Corp. 1,258 1,800 Stepan Co. 130 36,000 W.R. Grace & Co.* 922 -------- 3,519 -------- Total Materials 9,372 -------- TELECOMMUNICATION SERVICES (1.2%) --------------------------------- ALTERNATIVE CARRIERS (0.0%) 5,100 Cogent Communications Group, Inc.* 46 -------- INTEGRATED TELECOMMUNICATION SERVICES (0.9%) 211,200 AT&T, Inc. 5,132 5,600 Cbeyond, Inc.* 88 -------- 5,220 -------- ================================================================================ 26 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- WIRELESS TELECOMMUNICATION SERVICES (0.3%) 119,800 MetroPCS Communications, Inc.* $ 1,077 13,900 Telephone & Data Systems, Inc. 457 4,900 U.S. Cellular Corp.* 203 -------- 1,737 -------- Total Telecommunication Services 7,003 -------- UTILITIES (1.3%) ---------------- ELECTRIC UTILITIES (0.8%) 51,700 Exelon Corp. 1,996 86,000 Southern Co. 2,812 -------- 4,808 -------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (0.4%) 17,400 Constellation Energy Group, Inc. 615 79,300 NRG Energy, Inc.* 1,852 -------- 2,467 -------- MULTI-UTILITIES (0.1%) 1,600 DTE Energy Co. 73 8,400 Integrys Energy Group, Inc. 380 -------- 453 -------- Total Utilities 7,728 -------- Total Common Stocks (cost: $223,404) 236,017 -------- ------------------------------------------------------------------------------------- PRINCIPAL AMOUNT $(000)/ SHARES ------------------------------------------------------------------------------------- PREFERRED SECURITIES (1.7%) CONSUMER STAPLES (0.4%) ----------------------- AGRICULTURAL PRODUCTS (0.4%) 30,000 Dairy Farmers of America, Inc., 7.88%, cumulative redeemable, perpetual(b) 2,460 -------- FINANCIALS (1.3%) ----------------- LIFE & HEALTH INSURANCE (0.5%) 65,000 Delphi Financial Group, Inc., 7.38%, perpetual 1,305 60,000 Delphi Financial Group, Inc., 8.00% 1,476 -------- 2,781 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 27 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- PRINCIPAL AMOUNT MARKET $(000)/ VALUE SHARES SECURITY (000) ------------------------------------------------------------------------------------- OTHER DIVERSIFIED FINANCIAL SERVICES (0.4%) 30 International Lease Finance Corp., 0.97%, perpetual(c) $ 2,400 -------- PROPERTY & CASUALTY INSURANCE (0.0%) $1,000 Security Capital Assurance Ltd., 6.88%, perpetual*(c) - -------- REINSURANCE (0.4%) 1,500 Ram Holdings Ltd., 7.50%, non-cumulative, perpetual, acquired 1/23/2007 - 3/09/2007; cost $1,533*(d) 375 $2,500 Swiss Re Capital I LP, 6.85%, perpetual(b) 2,028 -------- 2,403 -------- Total Financials 7,584 -------- ------------------------------------------------------------------------------------- NUMBER OF SHARES ------------------------------------------------------------------------------------- GOVERNMENT (0.0%) ----------------- U.S. GOVERNMENT (0.0%) 40,000 Fannie Mae, 8.25%, perpetual* 42 40,000 Freddie Mac, 8.38%, perpetual* 42 -------- Total Government 84 -------- Total Preferred Securities (cost: $14,103) 10,128 -------- EXCHANGE-TRADED FUNDS (15.2%) 1,256,543 iShares MSCI EAFE Index Fund 60,716 268,322 SPDR Trust Series 1(a) 29,365 -------- Total Exchange-Traded Funds (cost: $112,524) 90,081 -------- WARRANTS (0.0%) CONSUMER DISCRETIONARY (0.0%) ----------------------------- RESTAURANTS (0.0%) 1,356 Krispy Kreme Doughnuts, Inc.* (cost: $0) - -------- Total Equity Securities (cost: $350,031) 336,226 -------- ================================================================================ 28 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ----------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ----------------------------------------------------------------------------------------------- BONDS (42.1%) CORPORATE OBLIGATIONS (20.7%) CONSUMER DISCRETIONARY (0.2%) ----------------------------- APPAREL & ACCESSORIES & LUXURY GOODS (0.2%) $ 1,024 Kellwood Co.(f) 12.88% 7/15/2011 $ 860 1,000 Kellwood Co. 7.63 10/15/2017 505 -------- Total Consumer Discretionary 1,365 -------- CONSUMER STAPLES (0.5%) ----------------------- DRUG RETAIL (0.5%) 3,000 CVS Caremark Corp. 6.30 6/01/2037 2,716 -------- ENERGY (0.8%) ------------- OIL & GAS STORAGE & TRANSPORTATION (0.8%) 3,059 Enbridge Energy Partners, LP 8.05 10/01/2037 3,025 1,000 Enterprise Products Operating, LP 7.00 6/01/2067 878 1,000 Southern Union Co. 7.20 11/01/2066 905 -------- Total Energy 4,808 -------- FINANCIALS (16.2%) ------------------ CONSUMER FINANCE (0.7%) 2,500 American Express Co. 6.80 9/01/2066 2,381 2,000 Capital One Financial Corp. 7.69 8/15/2036 1,850 -------- 4,231 -------- DIVERSIFIED BANKS (1.7%) 1,800 Comerica Capital Trust II 6.58 2/20/2037 1,512 1,000 Emigrant Bancorp, Inc.(b) 6.25 6/15/2014 753 2,500 First Tennessee Bank, N.A. 5.65 4/01/2016 2,409 1,000 USB Capital IX 6.19 -(g) 790 2,000 USB Realty Corp.(b) 6.09 -(g) 1,470 2,500 Wachovia Capital Trust III 5.80(h) -(g) 2,000 1,000 Wells Fargo Capital XIII 7.70 -(g) 990 -------- 9,924 -------- INVESTMENT BANKING & BROKERAGE (0.4%) 3,000 Goldman Sachs Capital II 5.79 -(g) 2,310 -------- LIFE & HEALTH INSURANCE (2.4%) 1,000 Great-West Life & Annuity Insurance Co.(b) 7.15 5/16/2046 900 3,500 Lincoln National Corp. 7.00 5/17/2066 2,905 1,000 MetLife Capital Trust X(b) 9.25 4/08/2038 1,095 1,000 MetLife, Inc. 10.75 8/01/2069 1,198 4,000 Nationwide Mutual Insurance Co.(b) 5.81 12/15/2024 3,482 ================================================================================ PORTFOLIO OF INVESTMENTS | 29 <PAGE> ================================================================================ ----------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ----------------------------------------------------------------------------------------------- $ 2,000 Prudential Financial, Inc. 8.88% 6/15/2038 $ 2,140 3,000 StanCorp Financial Group, Inc. 6.90 6/01/2067 2,473 -------- 14,193 -------- MULTI-LINE INSURANCE (1.1%) 3,500 Genworth Financial, Inc. 6.15 11/15/2066 2,459 4,000 Glen Meadow(b) 6.51 2/12/2067 2,990 1,000 Oil Insurance Ltd.(b) 7.56 -(g) 874 -------- 6,323 -------- OTHER DIVERSIFIED FINANCIAL SERVICES (1.3%) 2,000 BankAmerica Capital III 0.87(h) 1/15/2027 1,356 1,500 BankBoston Capital Trust IV 0.85(h) 6/08/2028 1,007 1,000 First Republic Bank Corp. 7.75 9/15/2012 1,087 2,000 General Electric Capital Corp. 6.38(h) 11/15/2067 1,862 2,000 ILFC E-Capital Trust II(b) 6.25 12/21/2065 1,230 2,000 JPMorgan Chase & Co. Capital XXI 1.29(h) 2/02/2037 1,403 -------- 7,945 -------- PROPERTY & CASUALTY INSURANCE (2.5%) 3,000 Allstate Corp. 6.13 5/15/2037 2,640 3,000 Chubb Corp. 6.38 3/29/2067 2,880 1,500 Fund American Companies, Inc. 5.88 5/15/2013 1,551 1,500 Ironshore Holdings US, Inc.(b) 8.50 5/15/2020 1,495 3,000 Progressive Corp. 6.70 6/15/2037 2,741 1,000 RLI Corp. 5.95 1/15/2014 1,030 2,500 Travelers Companies, Inc. 6.25 3/15/2037 2,334 -------- 14,671 -------- REGIONAL BANKS (3.5%) 1,000 City National Capital Trust I 9.63 2/01/2040 1,021 1,000 Cullen/Frost Bankers, Inc. 5.75 2/15/2017 951 3,500 Fifth Third Capital Trust IV 6.50 4/15/2037 2,826 500 First Empire Capital Trust I 8.23 2/01/2027 481 2,000 Fulton Capital Trust I 6.29 2/01/2036 1,282 4,000 Huntington Capital III 6.65 5/15/2037 2,793 2,000 Manufacturers & Traders Trust Co. 5.63 12/01/2021 1,857 1,000 National City Preferred Capital Trust I 12.00 -(g) 1,073 2,000 PNC Preferred Funding Trust(b) 6.52 -(g) 1,523 2,000 Regions Financing Trust II 6.63 5/15/2047 1,454 1,000 Susquehanna Bancshares, Inc. 2.16(h) 5/01/2014 764 1,000 Susquehanna Capital II 11.00 3/23/2040 1,053 1,000 TCF National Bank 5.50 2/01/2016 954 3,500 Webster Capital Trust IV 7.65 6/15/2037 2,450 -------- 20,482 -------- ================================================================================ 30 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------- REINSURANCE (0.5%) $ 1,500 Max USA Holdings Ltd.(b) 7.20% 4/14/2017 $ 1,569 1,500 Platinum Underwriters Finance, Inc. 7.50 6/01/2017 1,644 -------- 3,213 -------- REITs - INDUSTRIAL (0.4%) 1,000 ProLogis 6.88 3/15/2020 957 1,500 ProLogis 2.25 4/01/2037 1,416 -------- 2,373 -------- REITs - OFFICE (0.2%) 1,000 Brandywine Operating Partnership, LP 5.70 5/01/2017 988 -------- REITs - RETAIL (1.1%) 2,000 Developers Diversified Realty Corp. 5.38 10/15/2012 1,984 2,000 New Plan Excel Realty Trust, Inc. 5.13 9/15/2012 1,800 1,000 New Plan Excel Realty Trust, Inc., acquired 2/20/2009; cost $340(d) 7.68 11/02/2026 789 2,000 Pan Pacific Retail Properties, Inc. 7.95 4/15/2011 2,048 -------- 6,621 -------- REITs - SPECIALIZED (0.4%) 1,000 Hospitality Properties Trust 5.13 2/15/2015 979 1,500 Ventas Realty, LP 6.75 4/01/2017 1,506 -------- 2,485 -------- Total Financials 95,759 -------- INDUSTRIALS (0.2%) ------------------ AIRLINES (0.2%) 98 Airport Airplanes 0.63(h) 3/15/2019 96 1,149 America West Airlines, Inc. Pass-Through Trust (INS) 7.93 1/02/2019 1,138 -------- Total Industrials 1,234 -------- UTILITIES (2.8%) ---------------- ELECTRIC UTILITIES (1.5%) 923 Cedar Brakes II, LLC(b) 9.88 9/01/2013 947 1,000 FPL Group Capital, Inc. 6.35 10/01/2066 911 1,000 FPL Group Capital, Inc. 6.65 6/15/2067 916 1,000 FPL Group Capital, Inc. 7.30(h) 9/01/2067 987 617 Oglethorpe Power Corp. 6.97 6/30/2011 618 3,372 PPL Capital Funding, Inc. 6.70 3/30/2067 2,955 997 Texas Competitive Electric Holdings Co., LLC(i) 3.79 10/10/2014 771 995 Texas Competitive Electric Holdings Co., LLC(i) 3.80 10/10/2014 765 -------- 8,870 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 31 <PAGE> ================================================================================ ----------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ----------------------------------------------------------------------------------------------- MULTI-UTILITIES (1.3%) $ 2,500 Dominion Resources, Inc. 7.50% 6/30/2066 $ 2,428 3,042 Integrys Energy Group, Inc. 6.11 12/01/2066 2,741 1,325 Puget Sound Energy, Inc. 6.97 6/01/2067 1,215 1,500 Wisconsin Energy Corp. 6.25 5/15/2067 1,367 -------- 7,751 -------- Total Utilities 16,621 -------- Total Corporate Obligations (cost: $109,441) 122,503 -------- EURODOLLAR AND YANKEE OBLIGATIONS (3.7%) ENERGY (0.7%) ------------- INTEGRATED OIL & GAS (0.0%) 133 PEMEX Finance Ltd. 8.88 11/15/2010 136 -------- OIL & GAS DRILLING (0.1%) 672 Delek & Avner-Yam Tethys Ltd.(b) 5.33 8/01/2013 684 -------- OIL & GAS STORAGE & TRANSPORTATION (0.6%) 3,500 TransCanada Pipelines Ltd. 6.35 5/15/2067 3,179 -------- Total Energy 3,999 -------- FINANCIALS (2.9%) ----------------- DIVERSIFIED BANKS (0.7%) 2,500 Barclays Bank plc(b) 8.55 -(g) 2,375 2,000 BayernLB Capital Trust I 6.20 -(g) 925 1,000 Landsbanki Islands hf, acquired 10/12/2007; cost $1,000(b),(d),(j) 7.43 -(g) 4 2,000 Royal Bank of Scotland Group plc 7.64 -(g) 1,140 -------- 4,444 -------- DIVERSIFIED CAPITAL MARKETS (0.5%) 3,000 UBS Preferred Funding Trust I 8.62(h) -(g) 2,926 -------- DIVERSIFIED REAL ESTATE ACTIVITIES (0.3%) 1,500 Brookfield Asset Management, Inc. 7.13 6/15/2012 1,611 -------- MULTI-LINE INSURANCE (0.6%) 1,500 AXA SA 3.79(h) -(g) 1,013 2,625 ING Capital Funding Trust III 8.44 -(g) 2,336 -------- 3,349 -------- OTHER DIVERSIFIED FINANCIAL SERVICES (0.2%) 1,000 ZFS Finance USA Trust II(b) 6.45 12/15/2065 920 -------- ================================================================================ 32 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ----------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ----------------------------------------------------------------------------------------------- PROPERTY & CASUALTY INSURANCE (0.6%) $ 1,000 Allied World Assurance Holdings Ltd. 7.50% 8/01/2016 $ 1,089 3,000 QBE Insurance Group Ltd.(b) 5.65 7/01/2023 2,750 -------- 3,839 -------- REGIONAL BANKS (0.0%) 2,000 Glitnir Banki hf, acquired 9/11/2006 and 10/18/2006; cost $2,034(b),(d),(j) 7.45 -(g) 8 -------- Total Financials 17,097 -------- MATERIALS (0.1%) ---------------- DIVERSIFIED METALS & MINING (0.1%) 1,000 Glencore Finance S.A. 8.00 -(g) 965 -------- Total Eurodollar and Yankee Obligations (cost: $24,905) 22,061 -------- ASSET-BACKED SECURITIES (2.1%) FINANCIALS (2.1%) ----------------- ASSET-BACKED FINANCING (2.1%) 150 Aerco Ltd.(b) 0.86(h) 7/15/2025 141 1,500 AESOP Funding II, LLC(b) 9.31 10/20/2013 1,667 18 AmeriCredit Automobile Receivables Trust 2.03(h) 1/12/2012 18 1,000 AmeriCredit Automobile Receivables Trust 6.96 10/14/2014 1,065 1,500 Credit Acceptance Auto Loan Trust(b) 5.68 5/15/2017 1,548 1,000 GE Equipment Midticket, LLC 0.66(h) 9/15/2017 967 1,000 Hertz Vehicle Financing, LLC(b) 5.08 11/25/2011 1,010 1,000 MBNA Master Credit Card Note Trust 6.80 7/15/2014 1,067 850 Prestige Auto Receivables Trust "A"(b) 5.67 4/15/2017 850 1,500 Rental Car Finance Corp.(b) 0.48(h) 7/25/2013 1,393 908 SLM Student Loan Trust 0.87(h) 10/25/2038 791 1,500 Triad Automobile Receivables Owners Trust 5.43 7/14/2014 1,570 242 USXL Funding, LLC (INS)(b) 5.38 4/15/2014 242 -------- Total Financials 12,329 -------- Total Asset-Backed Securities (cost: $11,718) 12,329 -------- COMMERCIAL MORTGAGE SECURITIES (10.6%) FINANCIALS (10.6%) ------------------ COMMERCIAL MORTGAGE-BACKED SECURITIES (10.6%) 268 Banc of America Commercial Mortgage, Inc. 7.20 9/15/2032 268 1,000 Banc of America Commercial Mortgage, Inc. 5.32 11/10/2042 608 1,205 Banc of America Commercial Mortgage, Inc. 4.95 7/10/2043 987 ================================================================================ PORTFOLIO OF INVESTMENTS | 33 <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------- $ 3,000 Banc of America Commercial Mortgage, Inc. 6.01% 7/10/2044 $ 2,569 2,000 Banc of America Commercial Mortgage, Inc. 5.96 5/10/2045 1,797 2,700 Banc of America Commercial Mortgage, Inc. 5.46 9/10/2045 2,365 2,643 Banc of America Commercial Mortgage, Inc. 5.18 10/10/2045 2,467 1,000 Banc of America Commercial Mortgage, Inc. 5.68 7/10/2046 875 2,429 Banc of America Commercial Mortgage, Inc. 5.35 9/10/2047 2,298 2,867 Banc of America Commercial Mortgage, Inc.(b) 6.14 9/10/2047 2,509 2,000 BCRR Trust(b) 5.86 7/17/2040 1,711 218 Bear Stearns Commercial Mortgage Securities, Inc. 4.00 3/13/2040 221 1,000 Bear Stearns Commercial Mortgage Securities, Inc. 5.69 6/11/2050 1,020 1,000 Citigroup Commercial Mortgage Trust 5.40 7/15/2044 964 2,000 Citigroup Commercial Mortgage Trust 6.30 12/10/2049 1,707 1,000 Commercial Mortgage Loan Trust 5.54 2/11/2017 811 3,000 Commercial Mortgage Loan Trust 6.22 12/10/2049 2,359 1,000 Credit Suisse Commercial Mortgage Trust 6.02 6/15/2038 1,026 3,000 Credit Suisse Commercial Mortgage Trust 6.42 2/15/2041 3,043 1,000 Credit Suisse First Boston Mortgage Securities Corp.(b) 5.02 1/15/2037 811 1,000 Credit Suisse First Boston Mortgage Securities Corp. 5.10 8/15/2038 886 75 Credit Suisse First Boston Mortgage Securities Corp. 7.17 5/17/2040 76 1,598 G-Force, LLC(b) 5.16 12/25/2039 1,582 1,000 GE Capital Commercial Mortgage Corp. 6.07 6/10/2038 1,033 1,000 GE Capital Commercial Mortgage Corp. 5.51 11/10/2045 524 1,000 GE Capital Commercial Mortgage Corp. 5.61 12/10/2049 666 1,000 GMAC Commercial Mortgage Securities, Inc. 4.75 5/10/2043 950 1,000 GMAC Commercial Mortgage Securities, Inc. 4.81 5/10/2043 912 166 Government Lease Trust(b) 6.48 5/18/2011 169 1,000 GS Mortgage Securities Corp. II 4.78 7/10/2039 894 1,000 J.P. Morgan Chase Commercial Mortgage Securities Corp. 4.82 9/12/2037 1,009 1,000 J.P. Morgan Chase Commercial Mortgage Securities Corp. 4.99 9/12/2037 912 1,500 J.P. Morgan Chase Commercial Mortgage Securities Corp. 5.81 6/12/2043 1,536 1,000 J.P. Morgan Chase Commercial Mortgage Securities Corp. 5.50 12/15/2044 618 1,000 J.P. Morgan Chase Commercial Mortgage Securities Corp. 5.50 12/15/2044 678 1,500 Merrill Lynch Mortgage Trust 5.41 11/12/2037 1,493 2,000 Merrill Lynch Mortgage Trust 5.38 8/12/2048 1,858 1,000 Merrill Lynch Mortgage Trust 6.02 6/12/2050 999 2,000 Merrill Lynch Mortgage Trust 5.69 2/12/2051 2,015 1,000 ML-CFC Commercial Mortgage Trust 5.42 8/12/2048 733 ================================================================================ 34 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT COUPON VALUE (000) SECURITY RATE MATURITY (000) ---------------------------------------------------------------------------------------------- $ 1,500 ML-CFC Commercial Mortgage Trust 6.15% 8/12/2049 $ 1,267 1,500 ML-CFC Commercial Mortgage Trust 5.70 9/12/2049 1,453 878 Morgan Stanley Capital I, Inc. 5.15 8/13/2042 598 723 Morgan Stanley Capital I, Inc. 5.17 8/13/2042 472 2,000 Morgan Stanley Capital I, Inc. 5.81 12/12/2049 1,988 2,000 Morgan Stanley Capital I, Inc. 4.77 7/15/2056 1,663 1,500 Mortgage Capital Funding, Inc. 7.15 6/18/2030 1,497 2,000 Prudential Mortgage Capital Funding, LLC 6.76 5/10/2034 2,056 2,000 Wachovia Bank Commercial Mortgage Trust 5.42 1/15/2045 2,016 -------- Total Financials 62,969 -------- Total Commercial Mortgage Securities (cost: $52,468) 62,969 -------- U.S. GOVERNMENT AGENCY ISSUES (0.0%)(k) INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.0%) 1,976 Government National Mortgage Assn. (cost: $5) 1.75 7/16/2010 24 -------- U.S. TREASURY SECURITIES (4.5%) INFLATION-INDEXED NOTES (4.5%) 19,129 2.13%, 2/15/2040 20,499 5,574 2.50%, 1/15/2029 6,206 -------- Total Inflation-Indexed Notes 26,705 -------- Total U.S. Treasury Securities (cost: $26,407) 26,705 -------- MUNICIPAL BONDS (0.5%) CASINOS & GAMING (0.4%) 2,000 Mashantucket (Western) Pequot Tribe, acquired 7/29/2005; cost $2,000(b),(d),(j) 5.91 9/01/2021 1,003 1,020 Seneca Nation of Indians Capital Improvements Auth. 6.75 12/01/2013 976 -------- 1,979 -------- SPECIAL ASSESSMENT/TAX/FEE (0.1%) 855 Erie County Tobacco Asset Securitization Corp. 6.00 6/01/2028 748 -------- Total Municipal Bonds (cost: $3,847) 2,727 -------- Total Bonds (cost: $228,791) 249,318 -------- MONEY MARKET INSTRUMENTS (0.6%) U.S. TREASURY BILLS (0.1%) 401 0.01%, 9/16/2010(m),(e) 401 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 35 <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ---------------------------------------------------------------------------------------------- MONEY MARKET FUNDS (0.5%) 3,050,490 State Street Institutional Liquid Reserve Fund, 0.18%(l),(m) $ 3,050 -------- Total Money Market Instruments (cost: $3,451) 3,451 -------- SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED (5.8%) MONEY MARKET FUNDS (1.5%) 2,423 BlackRock Liquidity Funds TempFund Portfolio, 0.16%(l) 3 8,676,142 Fidelity Institutional Money Market Portfolio, 0.23%(l) 8,676 -------- Total Money Market Funds 8,679 -------- ---------------------------------------------------------------------------------------------- PRINCIPAL AMOUNT (000) ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (4.3%) $13,000 Credit Suisse First Boston LLC, 0.20%, acquired on 5/28/2010 and due 6/01/2010 at $13,000 (collateralized by $13,265 of Freddie Mac(k),(+), 0.16%(n), due 7/06/2010; market value $13,264) 13,000 12,700 Deutsche Bank Securities, Inc., 0.20%, acquired on 5/28/2010 and due 6/01/2010 at $12,700 (collateralized by $12,775 of Federal Home Loan Bank(k)(+), 1.75% - 1.85%, due 12/14/2012 - 4/01/2013; market value $12,956) 12,700 -------- Total Repurchase Agreements 25,700 -------- Total Short-Term Investments Purchased With Cash Collateral From Securities Loaned (cost: $34,379) 34,379 -------- TOTAL INVESTMENTS (COST: $616,651) $623,374 ======== ---------------------------------------------------------------------------------------------- NUMBER OF CONTRACTS ---------------------------------------------------------------------------------------------- PURCHASED OPTIONS (0.1%) 147 Put - Russell 2000 Index expiring June 19, 2010 at 620 139 150 Put - Russell 2000 Index expiring June 19, 2010 at 630 174 150 Put - S&P 500 Index expiring June 19, 2010 at 1,080 376 -------- TOTAL PURCHASED OPTIONS (COST: $797) $ 689 ======== ================================================================================ 36 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- MARKET NUMBER OF VALUE CONTRACTS SECURITY (000) ---------------------------------------------------------------------------------------------- WRITTEN OPTIONS (0.0%) (147) Put - Russell 2000 Index expiring June 19, 2010 at 550 $ (38) (150) Put - S&P 500 Index expiring June 19, 2010 at 970 (86) ------- TOTAL WRITTEN OPTIONS (PREMIUMS RECEIVED: $311) $ (124) ======= ---------------------------------------------------------------------------------------------- NUMBER OF CONTRACT UNREALIZED CONTRACTS EXPIRATION VALUE (DEPRECIATION) LONG/(SHORT) DATE (000) (000) ---------------------------------------------------------------------------------------------- FUTURES (0.2%) 19 Russell 2000 Mini Index Futures 6/18/2010 $1,256 $ (21) ------- TOTAL FUTURES $ (21) ======= ================================================================================ PORTFOLIO OF INVESTMENTS | 37 <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- ($ IN 000s) VALUATION HIERARCHY ---------------------------------------------------------------------------------------------- (LEVEL 1) (LEVEL 2) (LEVEL 3) QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE ASSETS FOR IDENTICAL ASSETS INPUTS INPUTS TOTAL ---------------------------------------------------------------------------------------------- Equity Securities: Common Stocks $236,017 $ - $ - $236,017 Preferred Securities 1,518 6,210 2,400 10,128 Exchange-Traded Funds 90,081 - - 90,081 Warrants - - - - Bonds: Corporate Obligations - 122,503 - 122,503 Eurodollar and Yankee Obligations - 22,061 - 22,061 Asset-Backed Securities - 12,329 - 12,329 Commercial Mortgage Securities - 62,969 - 62,969 U.S. Government Agency Issues - 24 - 24 U.S. Treasury Securities 26,705 - - 26,705 Municipal Bonds - 2,727 - 2,727 Money Market Instruments: U.S. Treasury Bills - 401 - 401 Money Market Funds 3,050 - - 3,050 Short-Term Investments Purchased With Cash Collateral From Securities Loaned: Repurchase Agreements - 25,700 - 25,700 Money Market Funds 8,679 - - 8,679 Purchased Options 689 - - 689 Futures* (21) - - (21) ---------------------------------------------------------------------------------------------- Total $366,718 $254,924 $2,400 $624,042 ---------------------------------------------------------------------------------------------- * Futures are valued at the unrealized appreciation/depreciation on the investment. ================================================================================ 38 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ---------------------------------------------------------------------------------------------- ($ IN 000s) VALUATION HIERARCHY ---------------------------------------------------------------------------------------------- (LEVEL 1) (LEVEL 2) (LEVEL 3) QUOTED PRICES OTHER SIGNIFICANT SIGNIFICANT IN ACTIVE MARKETS OBSERVABLE UNOBSERVABLE LIABILITIES FOR IDENTICAL LIABILITIES INPUTS INPUTS TOTAL ---------------------------------------------------------------------------------------------- Written Options $(124) $- $- $(124) ---------------------------------------------------------------------------------------------- Total $(124) $- $- $(124) ---------------------------------------------------------------------------------------------- Reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value: ---------------------------------------------------------------------------------------------- PREFERRED SECURITIES ---------------------------------------------------------------------------------------------- Balance as of May 31, 2009 $ - Net realized gain (loss) - Change in net unrealized appreciation/depreciation* (150) Net purchases (sales) 2,550 Transfers in and/or out of Level 3 - ---------------------------------------------------------------------------------------------- Balance as of May 31, 2010 $2,400 ---------------------------------------------------------------------------------------------- * Reported in the statement of operations in the change in net unrealized appreciation/depreciation of investments. ================================================================================ PORTFOLIO OF INVESTMENTS | 39 <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. Investments in foreign securities were 14.1% of net assets at May 31, 2010. The Fund may rely on certain Securities and Exchange Commission (SEC) exemptive orders or rules that permit funds meeting various conditions to invest in an exchange-traded fund (ETF) in amounts exceeding limits set forth in the Investment Company Act of 1940 that would otherwise be applicable. o CATEGORIES AND DEFINITIONS ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES -- Asset-backed securities represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets. Commercial mortgage- backed securities reflect an interest in, and are secured by, mortgage loans on commercial real property. The weighted average life is likely to be substantially shorter than the stated final maturity as a result of scheduled and unscheduled principal repayments. Rates on commercial mortgage-backed securities may change slightly over time as underlying mortgages pay down. ================================================================================ 40 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ EURODOLLAR AND YANKEE OBLIGATIONS -- Eurodollar obligations are dollar- denominated instruments that are issued outside the U.S. capital markets by foreign corporations and financial institutions and by foreign branches of U.S. corporations and financial institutions. Yankee obligations are dollar- denominated instruments that are issued by foreign issuers in the U.S. capital markets. INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS IOs) -- represent the right to receive only the interest payments on an underlying pool of commercial mortgage loans. The purchase yield reflects an anticipated yield based upon interest rates at the time of purchase and the estimated timing and amount of future cash flows. Coupon rates after purchase vary from period to period. The principal amount represents the notional amount of the underlying pool on which current interest is calculated. CMBS IOs are backed by loans that have various forms of prepayment protection, which include lock-out provisions, yield maintenance provisions, and prepayment penalties. This serves to moderate their prepayment risk. CMBS IOs are subject to default-related prepayments that may have a negative impact on yield. U.S. TREASURY INFLATION-INDEXED NOTES -- designed to provide a real rate of return after being adjusted over time to reflect the impact of inflation. Their principal value periodically adjusts to the rate of inflation. They trade at the prevailing real, or after-inflation, interest rates. The U.S. Treasury guarantees repayment of these securities of at least their face value in the event of sustained deflation or a drop in prices. Inflation adjustments to the face value of these securities are included in interest income. WARRANTS -- entitle the holder to buy a proportionate amount of common stock at a specified price for a stated period. o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS iShares Exchange-traded funds, managed by Black Rock, Inc., that represent a portfolio of stocks designed to closely track a ================================================================================ NOTES TO PORTFOLIO OF INVESTMENTS | 41 <PAGE> ================================================================================ specific market index. iShares funds are traded on securities exchanges. REIT Real estate investment trust SPDR Exchange-traded funds, managed by State Street Global Advisers, that represent a portfolio of stocks designed to closely track a specific market index. SPDR is an acronym for the first member of the fund family, Standard & Poor's Depositary Receipts, which tracks the S&P 500 Index. SPDRs are traded on securities exchanges. CREDIT ENHANCEMENTS -- add the financial strength of the provider of the enhancement to support the issuer's ability to repay the principal and interest payments when due. The enhancement may be provided by a high-quality bank, insurance company or other corporation, or a collateral trust. The enhancements do not guarantee the market values of the securities. (INS) Principal and interest payments are insured by one of the following: AMBAC Assurance Corp., and Financial Guaranty Insurance Co. Although bond insurance reduces the risk of loss due to default by an issuer, such bonds remain subject to the risk that value may fluctuate for other reasons, and there is no assurance that the insurance company will meet its obligations. o SPECIFIC NOTES (a) The security or a portion thereof was out on loan as of May 31, 2010. (b) Restricted security that is not registered under the Securities Act of 1933. A resale of this security in the United States may occur in an exempt transaction to a qualified institutional buyer as defined by Rule 144A, and as such has been deemed liquid by USAA Investment Management Company (the Manager) under liquidity guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. ================================================================================ 42 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ (c) Security was fair valued at May 31, 2010, by the Manager in accordance with valuation procedures approved by the Board of Trustees. (d) Security deemed illiquid by the Manager, under liquidity guidelines approved by the Board of Trustees. The aggregate market value of these securities at May 31, 2010, was $2,179,000, which represented 0.4% of the Fund's net assets. (e) Security with a value of $401,000 is segregated as collateral for initial margin requirements on open futures contracts. (f) Pay-in-kind (PIK) -- security in which the issuer has the option to make interest or dividend payments in cash or in additional securities. The security issued with the interest or dividend payment option usually has the same terms, including maturity date, as the PIK securities. (g) Security is perpetual and has no final maturity date but may be subject to calls at various dates in the future. (h) Variable-rate or floating-rate security -- interest rate is adjusted periodically. The interest rate disclosed represents the current rate at May 31, 2010. (i) Senior loan (loan) -- is not registered under the Securities Act of 1933. The loan contains certain restrictions on resale and cannot be sold publicly. The interest rate is adjusted periodically, and the rate disclosed represents the current rate at May 31, 2010. The weighted average life of the loan is likely to be substantially shorter than the stated final maturity date due to mandatory or optional prepayments. Security deemed liquid by the Manager, under liquidity guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. (j) Currently the issuer is in default with respect to interest and/or principal payments. (k) U.S. government agency issues -- mortgage-backed securities issued by Government National Mortgage Association (GNMA) ================================================================================ NOTES TO PORTFOLIO OF INVESTMENTS | 43 <PAGE> ================================================================================ and certain other U.S. government guaranteed securities are supported by the full faith and credit of the U.S. government. Securities issued by government-sponsored enterprises, indicated with "+", are supported only by the right of the government-sponsored enterprise to borrow from the U.S. Treasury, the discretionary authority of the U.S. government to purchase the government-sponsored enterprises' obligations, or by the credit of the issuing agency, instrumentality, or corporation, and are neither issued nor guaranteed by the U.S. Treasury. (l) Rate represents the money market fund annualized seven-day yield at May 31, 2010. (m) Security, or a portion thereof, is segregated to cover the value of open futures contracts at May 31, 2010. (n) Zero-coupon security. Rate represents the effective yield at the date of purchase. * Non-income-producing security. See accompanying notes to financial statements. ================================================================================ 44 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS) May 31, 2010 -------------------------------------------------------------------------------- ASSETS Investments in securities, at market value (including securities on loan of $33,306) (cost of $616,651) $623,374 Purchased options, at market value (cost of $797) 689 Cash 20 Receivables: Capital shares sold 594 USAA Investment Management Company (Note 6D) 822 Dividends and interest 4,131 Other 25 -------- Total assets 629,655 -------- LIABILITIES Payables: Upon return of securities loaned 34,379 Securities purchased 2,163 Capital shares redeemed 348 Written options, at market value (premiums received of $311) 124 Variation margin on futures contracts 23 Accrued management fees 385 Accrued transfer agent's fees 15 Other accrued expenses and payables 130 -------- Total liabilities 37,567 -------- Net assets applicable to capital shares outstanding $592,088 ======== NET ASSETS CONSIST OF: Paid-in capital $672,987 Accumulated undistributed net investment income 3,613 Accumulated net realized loss on investments, options, and futures transactions (91,294) Net unrealized appreciation of investments, options, and futures contracts 6,782 -------- Net assets applicable to capital shares outstanding $592,088 ======== Capital shares outstanding, unlimited number of shares authorized, no par value 48,306 ======== Net asset value, redemption price, and offering price per share $ 12.26 ======== See accompanying notes to financial statements. ================================================================================ FINANCIAL STATEMENTS | 45 <PAGE> ================================================================================ STATEMENT OF OPERATIONS (IN THOUSANDS) Year ended May 31, 2010 -------------------------------------------------------------------------------- INVESTMENT INCOME Dividends $ 6,414 Interest 20,640 Securities lending (net) 199 -------- Total income 27,253 -------- EXPENSES Management fees 4,050 Administration and servicing fees 825 Transfer agent's fees 2,179 Custody and accounting fees 197 Postage 129 Shareholder reporting fees 63 Trustees' fees 10 Registration fees 45 Professional fees 88 Other 16 -------- Total expenses 7,602 Expenses reimbursed (2,101) -------- Net expenses 5,501 -------- NET INVESTMENT INCOME 21,752 -------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS, AND FUTURES CONTRACTS Net realized gain (loss) on: Unaffiliated transactions 20,704 Affiliated transactions (Note 8) (168) Options (5,406) Futures transactions 13,310 Change in net unrealized appreciation/depreciation of: Investments 77,878 Options (236) Futures contracts (7,088) -------- Net realized and unrealized gain 98,994 -------- Increase in net assets resulting from operations $120,746 ======== See accompanying notes to financial statements. ================================================================================ 46 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) Years ended May 31, -------------------------------------------------------------------------------- 2010 2009 -------------------------------------------------------------------------------------- FROM OPERATIONS Net investment income $ 21,752 $ 18,908 Net realized gain (loss) on investments 20,536 (82,452) Net realized gain (loss) on options (5,406) 1,402 Net realized gain (loss) on futures transactions 13,310 (20,082) Change in net unrealized appreciation/depreciation of: Investments 77,878 (77,587) Options (236) 196 Futures contracts (7,088) 4,780 ------------------------ Increase (decrease) in net assets resulting from operations 120,746 (154,835) ------------------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (21,571) (17,911) Net realized gains - (78) ------------------------ Distributions to shareholders (21,571) (17,989) ------------------------ FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 120,358 89,126 Reinvested dividends 21,344 17,794 Cost of shares redeemed (98,773) (106,338) ------------------------ Increase in net assets from capital share transactions 42,929 582 ------------------------ Capital contribution from USAA Transfer Agency Company - 40 ------------------------ Net increase (decrease) in net assets 142,104 (172,202) NET ASSETS Beginning of year 449,984 622,186 ------------------------ End of year $592,088 $ 449,984 ======================== Accumulated undistributed net investment income: End of year $ 3,613 $ 3,420 ======================== CHANGE IN SHARES OUTSTANDING Shares sold 10,071 8,741 Shares issued for dividends reinvested 1,845 1,730 Shares redeemed (8,264) (10,214) ------------------------ Increase in shares outstanding 3,652 257 ======================== See accompanying notes to financial statements. ================================================================================ FINANCIAL STATEMENTS | 47 <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 Balanced Strategy Fund (the Fund), which is classified as diversified under the 1940 Act. The Fund's investment objective is to seek high total return, with reduced risk over time, through an asset allocation strategy that seeks a combination of long-term growth of capital and current income. A. SECURITY VALUATION -- The value of each security is determined (as of the close of trading on the New York Stock Exchange (NYSE) on each business day the NYSE is open) as set forth below: 1. Equity securities, including exchange-traded funds (ETFs), except as otherwise noted, traded primarily on a domestic securities exchange or the Nasdaq over-the-counter markets, are valued at the last sales price or official closing price on the exchange or primary market on which they trade. Equity securities traded primarily on foreign securities exchanges or markets are valued at the last quoted sales price, or the most recently determined official closing price calculated according to local market convention, available at the time the Fund is valued. If no last sale or official closing price is reported or available, the average of the bid and asked prices is generally used. 2. Equity securities trading in various foreign markets may take place on days when the NYSE is closed. Further, when the NYSE is open, the foreign markets may be closed. Therefore, the calculation of ================================================================================ 48 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ the Fund's net asset value (NAV) may not take place at the same time the prices of certain foreign securities held by the Fund are determined. In most cases, events affecting the values of foreign securities that occur between the time of their last quoted sales or official closing prices and the close of normal trading on the NYSE on a day the Fund's NAV is calculated will not be reflected in the value of the Fund's foreign securities. However, USAA Investment Management Company (the Manager), an affiliate of the Fund, and the Fund's subadvisers, if applicable, will monitor for events that would materially affect the value of the Fund's foreign securities. The Fund's subadvisers have agreed to notify the Manager of significant events they identify that would materially affect the value of the Fund's foreign securities. If the Manager determines that a particular event would materially affect the value of the Fund's foreign securities, then the Manager, under valuation procedures approved by the Trust's Board of Trustees, will consider such available information that it deems relevant to determine a fair value for the affected foreign securities. In addition, the Fund may use information from an external vendor or other sources to adjust the foreign market closing prices of foreign equity securities to reflect what the Fund believes to be the fair value of the securities as of the close of the NYSE. Fair valuation of affected foreign equity securities may occur frequently based on an assessment that events that occur on a fairly regular basis (such as U.S. market movements) are significant. 3. Investments in open-end investment companies, hedge, or other funds, other than ETFs, are valued at their NAV at the end of each business day. 4. Futures are valued based upon the last sale price at the close of market on the principal exchange on which they are traded. 5. Options are valued by a pricing service at the National Best Bid/Offer (NBBO) composite price, which is derived from the best available bid and ask prices in all participating options exchanges ================================================================================ NOTES TO FINANCIAL STATEMENTS | 49 <PAGE> ================================================================================ determined to most closely reflect market value of the options at the time of computation of the Fund's NAV. 6. Debt securities purchased with original or remaining maturities of 60 days or less may be valued at amortized cost, which approximates market value. 7. 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. 8. Repurchase agreements are valued at cost, which approximates market value. 9. Securities for which market quotations are not readily available or are considered unreliable, or whose values have been materially affected by events occurring after the close of their primary markets but before the pricing of the Fund, are valued in good faith at fair value, using methods determined by the Manager in consultation with the Fund's subadvisers, if applicable, under valuation procedures approved by the Trust's Board of Trustees. The effect of fair value pricing is that securities may not be priced on the basis of quotations from the primary market in which they are traded and the actual price realized from the sale of a security may differ materially from the fair value price. Valuing these securities at fair value is intended to cause the Fund's NAV to be more reliable than it otherwise would be. Fair value methods used by the Manager include, but are not limited to, obtaining market quotations from secondary pricing ================================================================================ 50 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ 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. For the securities that were valued as of May 31, 2010, using significant unobservable inputs, market quotations were not available from the pricing services. As such, the securities were valued in good faith using methods determined by the Manager, under valuation procedures approved by the Trust's Board of Trustees. The Fund held a preferred security that was not priced by any of the pricing services. The fair value methods included using inputs such as the last available quotations from the sole market maker for the security. Refer to the portfolio of ================================================================================ NOTES TO FINANCIAL STATEMENTS | 51 <PAGE> ================================================================================ investments for a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value. C. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -- On December 1, 2008, the Fund adopted an accounting standard that requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements, if any. The Fund may buy, sell, and enter into certain types of derivatives, including, but not limited to futures contracts, options, and options on futures contracts under circumstances in which such instruments are expected by the portfolio manager to aid in achieving the Fund's investment objective. The Fund also may use derivatives in circumstances where the portfolio manager believes they offer an economical means of gaining exposure to a particular asset class or securities market or to keep cash on hand to meet shareholder redemptions or other needs while maintaining exposure to the market. With exchange listed futures contracts and options, counterparty credit risk to the Fund is limited to the exchange's clearinghouse which, as counterparty to all exchange traded futures contracts and options, guarantees the transactions against default from the actual counterparty to the trade. FUTURES CONTRACTS -- The Fund is subject to equity price risk, interest rate risk, and foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use futures contracts to gain exposure to, or hedge against, changes in the value of equities, interest rates, or foreign currencies. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Upon entering into such contracts, the Fund is required to deposit with the broker in either cash or securities an initial margin in an amount equal to a certain percentage of the contract amount. Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded ================================================================================ 52 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ for financial statement purposes as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Upon entering into such contracts, the Fund bears the risk of interest or exchange rates or securities prices moving unexpectedly in an unfavorable direction, in which case, the Fund may not achieve the anticipated benefits of the futures contracts. OPTION TRANSACTIONS -- The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund may use options on underlying instruments, namely, equity securities, ETFs, and equity indexes, to gain exposure to, or hedge against, changes in the value of equity securities, ETFs, or equity indexes. A call option gives the purchaser the right to buy, and the writer the obligation to sell, the underlying instrument at a specified price during a specified period. Conversely, a put option gives the purchaser the right to sell, and the writer the obligation to buy, the underlying instrument at a specified price during a specified period. The purchaser of the option pays a premium to the writer of the option. Premiums paid for purchased options are included in the Fund's statement of assets and liabilities as an investment. If a purchased option expires unexercised, the premium paid is recognized as a realized loss. If a purchased call option on a security is exercised, the cost of the security acquired includes the exercise price and the premium paid. If a purchased put option on a security is exercised, the realized gain or loss on the security sold is determined from the exercise price, the original cost of the security, and the premium paid. The risk associated with purchasing a call or put option is limited to the premium paid. Premiums received from writing options are included in the Fund's statement of assets and liabilities as a liability. If a written option expires unexercised, the premium received is recognized as a realized gain. If a written call option on a security is exercised, the realized gain or loss on the security sold is determined from the exercise price, the original cost of the security, and the premium received. If a written ================================================================================ NOTES TO FINANCIAL STATEMENTS | 53 <PAGE> ================================================================================ put option on a security is exercised, the cost of the security acquired is the exercise price paid less the premium received. The Fund, as a writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. In an attempt to reduce the Fund's volatility over time, the Fund may implement a strategy that involves writing (selling) index call or corresponding ETF options and purchasing index put or corresponding ETF options or index put spread options against a highly correlated stock portfolio. The combination of the diversified stock portfolio with the index call and put or corresponding ETF options is designed to provide the Fund with consistent returns over a wide range of equity market environments. This strategy may not fully protect the Fund against declines in the portfolio's value, and the Fund could experience a loss. Options on securities indexes or corresponding ETF options are different from options on individual securities in that the holder of the index options contract has the right to receive an amount of cash equal to the difference between the exercise price and the closing price of the underlying index on exercise date. If an option on an index is exercised, the realized gain or loss is determined from the exercise price, the value of the underlying index, and the amount of the premium. FAIR VALUES OF DERIVATIVE INSTRUMENTS (IN THOUSANDS) ASSETS 5/31/2010 5/31/2009 ------------------------------------------------------------------------------------------- STATEMENT OF STATEMENT OF DERIVATIVES NOT ACCOUNTED ASSETS AND ASSETS AND FOR AS HEDGING INSTRUMENTS LIABILITIES LIABILITIES UNDER STATEMENT 133 LOCATION FAIR VALUE LOCATION FAIR VALUE ------------------------------------------------------------------------------------------- Equity contracts Purchased options; $668* Purchased options; $8,323* Net unrealized Net unrealized appreciation of depreciation of investments, investments, options, and options, and futures contracts futures contracts ------------------------------------------------------------------------------------------- *Includes cumulative appreciation (depreciation) of futures contracts as reported in the portfolio of investments. Only current day's variation margin is reported within the statement of assets and liabilities. ================================================================================ 54 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ LIABILITIES 5/31/2010 5/31/2009 ------------------------------------------------------------------------------------------- STATEMENT OF STATEMENT OF DERIVATIVES NOT ACCOUNTED ASSETS AND ASSETS AND FOR AS HEDGING INSTRUMENTS LIABILITIES LIABILITIES UNDER STATEMENT 133 LOCATION FAIR VALUE LOCATION FAIR VALUE ------------------------------------------------------------------------------------------- Equity contracts Written options $124 Written options $774 ------------------------------------------------------------------------------------------- THE EFFECT OF DERIVATIVE INSTRUMENTS ON THE STATEMENT OF CHANGES IN NET ASSETS DURING THE YEAR ENDED MAY 31, 2010, AND SIX-MONTH PERIOD ENDED MAY 31, 2009* (IN THOUSANDS) DERIVATIVES NOT ACCOUNTED FOR AS HEDGING CHANGE IN UNREALIZED INSTRUMENTS APPRECIATION UNDER STATEMENT OF CHANGES IN REALIZED GAIN (LOSS) (DEPRECIATION) ON STATEMENT 133 NET ASSETS LOCATION ON DERIVATIVES DERIVATIVES ------------------------------------------------------------------------------------------ 5/31/2010 5/31/2009* 5/31/2010 5/31/2009* ------------------------------------------------------------------------------------------ Interest rate Net realized gain (loss) on $ (27) $ - $ - $ - contracts transactions from futures/ Change in unrealized appreciation/depreciation of futures ------------------------------------------------------------------------------------------ Equity contracts Net realized gain (loss) on 7,931 (19,041) 7,324 20,790 options and futures transactions/Change in net unrealized appreciation/depreciation of options and futures contracts ------------------------------------------------------------------------------------------ Total $7,904 $(19,041) $7,324 $20,790 ------------------------------------------------------------------------------------------ *The statement of changes reflects the year ended May 31, 2009, while the schedule reflects the period December 1, 2008 -- May 31, 2009. This accounting standard was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. D. 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. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 55 <PAGE> ================================================================================ E. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the date the securities are purchased or sold (trade date). Gains or losses from sales of investment securities are computed on the identified cost basis. Dividend income, less foreign taxes, if any, is recorded on the ex-dividend date. If the ex-dividend date has passed, certain dividends from foreign securities are recorded upon notification. Interest income is recorded daily on the accrual basis. Discounts and premiums 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. F. 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. G. FOREIGN CURRENCY TRANSLATIONS -- The Fund's assets may be invested in the securities of foreign issuers and may be traded in foreign currency. Since the Fund's accounting records are maintained in U.S. dollars, foreign currency amounts are translated into U.S. dollars on the following bases: 1. Purchases and sales of securities, income, and expenses at the exchange rate obtained from an independent pricing service on the respective dates of such transactions. 2. Market value of securities, other assets, and liabilities at the exchange rate obtained from an independent pricing service on a daily basis. ================================================================================ 56 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Separately, net realized foreign currency gains/losses may arise from sales of foreign currency, currency gains/losses realized between the trade and settlement dates on security transactions, and from the difference between amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts received. At the end of the Fund's fiscal year, these net realized foreign currency gains/losses are reclassified from accumulated net realized gain/loss to accumulated undistributed net investment income on the statement of assets and liabilities as such amounts are treated as ordinary income/loss for tax purposes. Net unrealized foreign currency exchange gains/losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. H. 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, 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. I. EXPENSES PAID INDIRECTLY -- A portion of the brokerage commissions that the Fund pays may be recaptured as a credit that is tracked and used by the custodian to directly reduce expenses paid by the Fund. In addition, through arrangements with the Fund's custodian and other ================================================================================ NOTES TO FINANCIAL STATEMENTS | 57 <PAGE> ================================================================================ 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, the Fund incurred custodian and other bank credits of less than $500. For the year ended May 31, 2010, the Fund did not incur any brokerage commission recapture credits. J. 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. K. USE OF ESTIMATES -- The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINE OF CREDIT The Fund participates in a joint, short-term, revolving, committed loan agreement of $750 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager. The purpose of the agreement is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at a rate per annum equal to the rate at which CAPCO obtains funding in the capital markets, with no markup. The USAA funds that are party to the loan agreement are assessed facility fees by CAPCO based on the funds' assessed proportionate share of CAPCO's operating expenses related to obtaining and maintaining CAPCO's ================================================================================ 58 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ 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 $2,000, which represents 1.3% 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 distributions resulted in reclassifications to the statement of assets and liabilities to increase accumulated undistributed net investment income and increase accumulated net realized loss on investments by $12,000. 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* $21,571,000 $17,989,000 * Includes distribution of short-term realized capital gains, if any, which are taxable as ordinary income. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 59 <PAGE> ================================================================================ As of May 31, 2010, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $3,621,000 Accumulated capital and other losses (89,386,000) Unrealized appreciation 4,779,000 The difference between book-basis and tax-basis unrealized appreciation of investments is attributable to the tax deferral of losses on wash sales and the mark-to-market of open futures contracts. Distributions of net investment income are made quarterly. Distributions of realized gains from security transactions not offset by capital losses are made annually in the succeeding fiscal year or as otherwise required to avoid the payment of federal taxes. At May 31, 2010, the Fund had capital loss carryovers of $89,386,000, for federal income tax purposes, which are not offset by subsequent capital gains, will expire between 2017 and 2018, 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 --------- ----------- 2017 $58,134,000 2018 31,252,000 ----------- Total $89,386,000 =========== The Fund is required to evaluate tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Income tax and related interest and penalties would be recognized by the Fund as tax expense in the statement of operations if the tax positions were deemed to not meet the more-likely-than-not threshold. For the 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 ================================================================================ 60 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ 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 $646,700,000 and $555,956,000, respectively. As of May 31, 2010, the cost of securities, including short-term securities, for federal income tax purposes, was $619,285,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2010, for federal income tax purposes, were $46,255,000 and $41,476,000, respectively, resulting in net unrealized appreciation of $4,779,000. For the year ended May 31, 2010 transactions in written call and put options* were as follows: PREMIUMS NUMBER OF RECEIVED CONTRACTS (000's) ---------------------- Outstanding at May 31, 2009 2,986 $ 1,841 Options written 18,353 25,478 Options terminated in closing purchase transactions (15,459) (23,421) Options expired (5,583) (3,587) ---------------------- Outstanding at May 31, 2010 297 $ 311 ====================== * Refer to Note 1C for a discussion of derivative instruments and how they are accounted for in the Fund's financial statements. (5) LENDING OF PORTFOLIO SECURITIES The Fund, through its third-party securities-lending agent, Wachovia Global Securities Lending (Wachovia), may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with cash collateral in an amount at least equal to the fair value of the ================================================================================ NOTES TO FINANCIAL STATEMENTS | 61 <PAGE> ================================================================================ securities loaned, initially in an amount at least equal to 102% of the fair value of domestic securities loaned and 105% of the fair value of international securities loaned. Cash collateral is invested in high-quality short-term investments. Cash collateral requirements are determined daily based on the prior business day's ending value of securities loaned. Imbalances in cash collateral may occur on days where market volatility causes security prices to change significantly, and are adjusted the next business day. The Fund and Wachovia retain 80% and 20%, respectively, of the income earned from the investment of cash received as collateral, net of any expenses associated with the lending transaction. Wachovia receives no other fees from the Fund for its services as securities-lending agent. Risks to the Fund in securities-lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. Wachovia Bank, N.A., parent company of Wachovia, has agreed to indemnify the Fund against any losses due to counterparty default in securities-lending transactions. For the year ended May 31, 2010, the Fund received securities-lending income of $199,000, which is net of the 20% income retained by Wachovia. As of May 31, 2010, the Fund loaned securities having a fair market value of approximately $33,306,000 and received cash collateral of $34,379,000 for the loans, which was invested in short-term investments, as noted in Fund's portfolio of investments. (6) TRANSACTIONS WITH MANAGER A. MANAGEMENT FEES -- The Manager provides investment management services to the Fund pursuant to an Advisory Agreement. Under this agreement, the Manager is responsible for managing the business and affairs of the Fund and for directly managing the day-to-day investment of a portion of the Fund's assets, subject to the authority of and supervision by the Trust's Board of Trustees. The Manager is also authorized to select (with approval of the Trust's Board of Trustees and without shareholder approval) one or more subadvisers to manage the day-to-day investment of a portion of the Fund's assets. The ================================================================================ 62 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ Manager monitors each subadviser's performance through quantitative and qualitative analysis, and periodically recommends to the Trust's Board of Trustees as to whether each subadviser's agreement should be renewed, terminated, or modified. The Manager also is responsible for allocating assets to the subadvisers. The allocation for each subadviser can range from 0% to 100% of the Fund's assets, and the Manager can change the allocations without shareholder approval. The investment management fee for the Fund is composed of a base fee and a performance adjustment. The Fund's base fee is accrued daily and paid monthly at an annualized rate of 0.75% of the Fund's average net assets for the fiscal year. The performance adjustment is calculated monthly by comparing the Fund's performance to that of the Lipper Balanced Funds Index over the performance period. The Lipper Balanced Funds Index tracks the total return performance of the 30 largest funds in the Lipper Balanced Funds category. The performance period for the Fund consists of the current month plus the previous 35 months. The following table is utilized to determine the extent of the performance adjustment: OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS(1) ----------------------------------------------------------------------------- +/- 1.00% to 4.00% +/- 0.04% +/- 4.01% to 7.00% +/- 0.05% +/- 7.01% and greater +/- 0.06% (1)Based on the difference between average annual performance of the Fund and its relevant index, rounded to the nearest 0.01%. Average net assets are calculated over a rolling 36-month period. The annual performance adjustment rate is multiplied by the average net assets of the Fund over the entire performance period, which is then multiplied by a fraction, the numerator of which is the number of days in the month and the denominator of which is 365 (366 in leap years). The resulting amount is the performance adjustment; a positive adjustment in the case of overperformance, or a negative adjustment in the case of underperformance. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 63 <PAGE> ================================================================================ Under the performance fee arrangement, the Fund will pay a positive performance fee adjustment for a performance period whenever the Fund outperforms the Lipper Balanced 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 $4,050,000, which included a (0.01)% performance adjustment of $(76,000). B. SUBADVISORY ARRANGEMENTS -- The Manager has entered into an investment subadvisory agreement with Deutsche Investment Management Americas Inc. (DIMA) and Credit Suisse Securities (USA) LLC (CSSU) for its Volaris Volatility Management Group (Volaris Group), under which DIMA directs the investment and reinvestment of a portion of the Fund's assets invested in equity securities (as allocated from time to time by the Manager) and Volaris Group directs the investment and reinvestment of the portion of the Fund's assets invested in index options (as allocated from time to time by the Manager). The Manager (not the Fund) pays DIMA a subadvisory fee in an annual amount of 0.15% of the portion of the Fund's average net assets that DIMA manages. For the year ended May 31, 2010, the Manager incurred subadvisory fees, paid or payable to DIMA, of $338,000. The Manager (not the Fund) pays CSSU's Volaris Group a subadvisory fee based on the total notional amount of the options contracts that CSSU's Volaris Group manages in the USAA Balanced Strategy Fund, the USAA Cornerstone Strategy Fund, the USAA First Start Growth Fund, the USAA Total Return Strategy Fund, and the USAA Global Opportunities Fund, in an annual amount of 0.23% on the first $50 million of the total notional amount; 0.20% on the total notional amount over $50 million and up to $250 million; 0.12% on the total notional amount over $250 million and up to $500 million; 0.10% on the total notional amount over $500 million and up to $2 billion; and 0.08% on the total notional amount over $2 billion. The notional amount is based on the daily closing price of the index that underlies the written options strategy for the Fund. For the year ended May 31, ================================================================================ 64 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ 2010, the Manager incurred subadvisory fees for the Fund, paid or payable to CSSU's Volaris Group of $161,000. C. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain administration and shareholder servicing functions for the Fund. For such services, the Manager receives a fee accrued daily and paid monthly at an annualized rate of 0.15% of the Fund's average net assets. For the year ended May 31, 2010, the Fund incurred administration and servicing fees, paid or payable to the Manager, of $825,000. In addition to the services provided under its Administration and Servicing Agreement with the Fund, the Manager also provides certain compliance and legal services for the benefit of the Fund. The Trust's Board of Trustees has approved the reimbursement of a portion of these expenses incurred by the Manager. For the year ended May 31, 2010, the Fund reimbursed the Manager $23,000 for these compliance and legal services. These expenses are included in the professional fees on the Fund's statement of operations. D. EXPENSE LIMITATION -- The Manager has voluntarily agreed to limit the annual expenses of the Fund to 1.00% of its average annual 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. The Manager may modify or terminate this voluntary agreement at any time. For the year ended May 31, 2010, the Fund incurred reimbursable expenses of $2,101,000, of which $822,000 was receivable from the Manager. E. TRANSFER AGENT'S FEES -- USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services (SAS), an affiliate of the Manager, provides transfer agent services to the Fund based on an annual charge of $23 per shareholder account plus out-of-pocket expenses. The Fund also pays SAS fees that are related to the administration and servicing of accounts that are traded on an omnibus basis. For the year ended May 31, 2010, the Fund incurred transfer agent's fees, paid or payable to SAS, of $2,179,000. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 65 <PAGE> ================================================================================ F. UNDERWRITING SERVICES -- The Manager provides exclusive underwriting and distribution of the Fund's shares on a continuing best-efforts basis. The Manager receives no commissions or fees for this service. (7) 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. (8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS During the year ended May 31, 2010, in accordance with affiliated transaction procedures approved by the Trust's Board of Trustees, purchases and sales of security transactions were executed between the Fund and the following affiliated USAA funds at the then-current market price with no brokerage commissions incurred. COST TO NET REALIZED SELLER PURCHASER PURCHASER GAIN (LOSS) TO SELLER -------------------------------------------------------------------------------- USAA Balanced USAA High-Yield Strategy Fund Opportunities Fund $ 798,000 $(228,000) USAA Balanced USAA Short-Term Strategy Fund Bond Fund 1,078,000 60,000 (9) SUBSEQUENT EVENTS Events or transactions that occur after the balance sheet date, but before the financial statements are issued are categorized as recognized or non-recognized for financial statement purposes. The Manager has evaluated subsequent events through the date the financial statements were issued, and has determined there were no events that require recognition or disclosure in the Fund's financial statements. The following events will affect the Fund's future financial statements. Effective August 1, 2010, QS Investors, LLC will replace Deutsche Investment Management Americas, Inc. as one of the subadvisers of the Fund. ================================================================================ 66 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ (10) NEW ACCOUNTING PRONOUNCEMENT 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. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 67 <PAGE> ================================================================================ (11) 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 $ 10.08 $ 14.01 $ 15.70 $ 14.97 $ 15.41 ----------------------------------------------------------------- Income (loss) from investment operations: Net investment income .47 .43 .38 .37 .34 Net realized and unrealized gain (loss) 2.18 (3.95) (.96) 1.68 .26 ----------------------------------------------------------------- Total from investment operations 2.65 (3.52) (.58) 2.05 .60 ----------------------------------------------------------------- Less distributions from: Net investment income (.47) (.41) (.38) (.38) (.31) Realized capital gains - (.00)(a) (.73) (.94) (.73) ----------------------------------------------------------------- Total distributions (.47) (.41) (1.11) (1.32) (1.04) ----------------------------------------------------------------- Net asset value at end of period $ 12.26 $ 10.08 $ 14.01 $ 15.70 $ 14.97 ================================================================= Total return (%)* 26.63 (25.13) (3.82) 14.28(b) 3.84 Net assets at end of period (000) $592,088 $449,984 $622,186 $661,780 $634,124 Ratios to average net assets:** Expenses (%)(c) 1.00 1.00 1.00 1.00(b) 1.00 Expenses, excluding reimbursements (%)(c) 1.38 1.42 1.26 1.26(b) 1.27 Net investment income (%) 3.95 4.12 2.61 2.46 2.15 Portfolio turnover (%) 110 115 185(d) 179 153 * 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 $550,354,000. (a) Represents less than $0.01 per share. (b) 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. (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 as follows: (.00%)(+) (.00%)(+) (.00%)(+) (.01%) (.01%) (+) Represents less than 0.01% of average net assets. (d) Reflects increased trading activity due to changes in subadvisers and asset allocation strategies. ================================================================================ 68 | USAA BALANCED STRATEGY FUND <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 or expenses you paid for the period. You may use this ================================================================================ EXPENSE EXAMPLE | 69 <PAGE> ================================================================================ information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any direct costs, such as wire fees, redemption fees, or low balance fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these direct costs were included, your costs would have been higher. EXPENSES PAID BEGINNING ENDING DURING PERIOD* ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2009 - DECEMBER 1, 2009 MAY 31, 2010 MAY 31, 2010 ------------------------------------------------------- Actual $1,000.00 $1,036.60 $5.08 Hypothetical (5% return before expenses) 1,000.00 1,019.95 5.04 * Expenses are equal to the Fund's annualized expense ratio of 1.00%, which is net of any reimbursements and 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 3.66% for the six-month period of December 1, 2009, through May 31, 2010. ================================================================================ 70 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ADVISORY AGREEMENTS 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 and the Subadvisory Agreements 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 Subadvisory Agreements and the Manager and each Subadviser, 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 and the Subadvisers' operations and personnel. Prior to voting, the Independent Trustees reviewed the proposed continuance of the Advisory Agreement and the Subadvisory Agreements 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 and the Subadvisory Agreements with respect to the Fund. The Independent Trustees also reviewed the proposed continuation of the Advisory Agreement and the Subadvisory Agreements 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 ================================================================================ ADVISORY AGREEMENTS | 71 <PAGE> ================================================================================ the Fund's performance and related services provided by the Manager and by each Subadviser. At the meeting at which the renewal of the Advisory Agreement and Subadvisory Agreements is considered, particular focus is given to information concerning Fund performance, comparability of fees and total expenses, and profitability. However, the Board noted that the evaluation process with respect to the Manager and the Subadvisers is an ongoing one. In this regard, the Board's and its committees' consideration of the Advisory Agreement and Subadvisory Agreements 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 ================================================================================ 72 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ 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 Board discussed the Manager's effectiveness in monitoring the performance of the Subadvisers and its timeliness in responding to performance issues. The allocation of the Fund's brokerage, including the Manager's process for monitoring "best execution" and the utilization of "soft dollars," also were considered. The Manager's role in coordinating the activities of the 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 classification, 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 ================================================================================ ADVISORY AGREEMENTS | 73 <PAGE> ================================================================================ 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 fee adjustment as well as any fee waivers or reimbursements -- was below the median of its expense group and its expense universe. The data indicated that the Fund's total expenses, after reimbursements, 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 computing the management fee, including any performance adjustment to such fee. The Board also took into account the Manager's current voluntary undertakings to maintain expense limitations for the Fund and that the subadvisory fees under the Subadvisory Agreements are paid by the Manager. 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 above the average of its performance universe and its Lipper index for the one-year period ended December 31, 2009, was lower than the average of its performance universe and its Lipper index for the three- and five-year periods ended December 31, 2009. The Board also noted that the Fund's percentile performance ranking was in the top 5% of its performance universe for the one-year period ended December 31, 2009, was in the bottom 50% of its performance universe for the three- and five-year periods ended December 31, 2009. The Board took into account management's ================================================================================ 74 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ discussion of the Fund's performance, as well as the various steps management has taken to address the Fund's performance. The Board also noticed the Fund's more recent improved performance. 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. In considering the profitability data with respect to the Fund, the Trustees noted that the Manager has reimbursed a portion of its management fees to the Fund and also pays the subadvisory fees. The Trustees reviewed the profitability of the Manager's relationship with the Fund before tax 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. 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 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 also considered the fee waivers and expense reimbursement arrangements by the Manager and the fact that the Manager pays the subadvisory fees. The Board determined that the current investment management fee structure was reasonable. ================================================================================ ADVISORY AGREEMENTS | 75 <PAGE> ================================================================================ 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) appropriate action has been taken to address the Fund's performance; (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 and its affiliates' level of profitability, if any, from their 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. SUBADVISORY AGREEMENTS In approving each Subadvisory Agreement with respect to the Fund, the Board considered various factors, among them: (i) the nature, extent, and quality of services provided to the Fund by the respective Subadviser, including the personnel providing services; (ii) each Subadviser's compensation and any other benefits derived from the subadvisory relationship; (iii) comparisons of subadvisory fees and performance to comparable investment companies; and (iv) the terms of each Subadvisory Agreement. The Board's analysis of these factors is set forth below. After full consideration of a variety of factors, the Board, including the Independent Trustees, voted to approve each Subadvisory Agreement. In approving the Subadvisory Agreements, 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 PROVIDED; INVESTMENT PERSONNEL -- The Trustees considered information provided to them regarding the services provided by each Subadviser, including information presented periodically throughout the previous year. The Board considered each Subadviser's level of knowledge and investment style. The Board reviewed the experience and credentials of the investment personnel who ================================================================================ 76 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ are responsible for managing the investment of portfolio securities with respect to the Fund and each Subadviser's level of staffing. The Trustees noted that the materials provided to them by each Subadviser indicated that the method of compensating portfolio managers is reasonable and includes appropriate mechanisms to prevent a manager with underperformance from taking undue risks. The Trustees also noted each Subadviser's brokerage practices. The Board also considered each Subadviser's regulatory and compliance history. The Board noted that the Manager's monitoring processes of each Subadviser include: (i) regular telephonic meetings to discuss, among other matters, investment strategies and to review portfolio performance; (ii) monthly portfolio compliance checklists and quarterly compliance certifications to the Board; and (iii) due diligence visits to the Subadviser. SUBADVISER COMPENSATION -- The Board also took into consideration the financial condition of each Subadviser. In considering the cost of services to be provided by each Subadviser and the profitability to that Subadviser of its relationship with the Fund, the Trustees noted the undertakings of the Manager to maintain expense limitations for the Fund and also noted that the fees under each Subadvisory Agreement were paid by the Manager. The Trustees also relied on the ability of the Manager to negotiate each Subadvisory Agreement and the fees thereunder at arm's length. The Board also considered information relating to the cost of services to be provided by each Subadviser, each Subadviser's profitability with respect to the Fund, and the potential economies of scale in each Subadviser's management of the Fund, to the extent available. However, for the reasons noted above, this information was less significant to the Board's consideration of the Subadvisory Agreements than the other factors considered. SUBADVISORY FEES AND FUND PERFORMANCE -- The Board compared the subadvisory fees for the Fund with the fees that each Subadviser charges to comparable clients, as applicable. The Board considered that the Fund pays a management fee to the Manager and that, in turn, the Manager pays a subadvisory fee to each Subadviser. As noted above, the Board considered, among other data, the Fund's performance during the one-, three-, and ================================================================================ ADVISORY AGREEMENTS | 77 <PAGE> ================================================================================ five-year periods ended December 31, 2009, as compared to the Fund's respective peer group and noted that the Board reviews at its regularly scheduled meetings information about the Fund's performance results. The Board also considered the performance of each Subadviser. The Board noted the Manager's expertise and resources in monitoring the performance, investment style, and risk-adjusted performance of each Subadviser. The Board was mindful of the Manager's focus on each Subadviser's performance. The Board also noted each Subadviser's long-term performance record for similar accounts, as applicable. CONCLUSIONS -- The Board reached the following conclusions regarding each Subadvisory Agreement, among others: (i) each Subadviser is qualified to manage the Fund's assets in accordance with its investment objectives and policies; (ii) each Subadviser maintains an appropriate compliance program; (iii) appropriate action has been taken to address the Fund's performance; and (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 each Subadviser. Based on its conclusions, the Board determined that approval of each Subadvisory Agreement with respect to the Fund would be in the best interests of the Fund and its shareholders. ================================================================================ 78 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ TRUSTEES' AND OFFICERS' INFORMATION TRUSTEES AND OFFICERS OF THE TRUST -------------------------------------------------------------------------------- The Board of Trustees of the Trust consists of six Trustees. These Trustees and the Trust's Officers supervise the business affairs of the USAA family of funds. The Board of Trustees is responsible for the general oversight of the funds' business and for assuring that the funds are managed in the best interests of each fund's respective shareholders. The Board of Trustees periodically reviews the funds' investment performance as well as the quality of other services provided to the funds and their shareholders by each of the fund's service providers, including USAA Investment Management Company (IMCO) and its affiliates. The term of office for each Trustee shall be 20 years or until the Trustee reaches age 70. All members of the Board of Trustees shall be presented to shareholders for election or re-election, as the case may be, at least once every five years. Vacancies on the Board of Trustees can be filled by the action of a majority of the Trustees, provided that at least two-thirds of the Trustees have been elected by the shareholders. Set forth below are the Trustees and Officers of the Trust, their respective offices and principal occupations during the last five years, length of time served, and information relating to any other directorships held. Each serves on the Board of Trustees of the USAA family of funds consisting of one registered investment company offering 46 individual funds as of 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 | 79 <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. ================================================================================ 80 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ ROBERT L. MASON, Ph.D.(3, 4, 5, 6) Trustee Born: June 1946 Year of Election or Appointment: 1997 Institute Analyst, Southwest Research Institute (3/02-present), which focuses in the fields of technological research. Dr. Mason holds no other directorships of any publicly held corporations or other investment companies outside the USAA family of funds. BARBARA B. OSTDIEK, Ph.D.(3, 4, 5, 6, 7) Trustee Born: March 1964 Year of Election or Appointment: 2007 Academic Director of the El Paso Corporation Finance Center at Jesse H. Jones Graduate School of 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 | 81 <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. ================================================================================ 82 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ INTERESTED OFFICERS(1) -------------------------------------------------------------------------------- DANIEL S. McNAMARA Vice President Born: June 1966 Year of Appointment: 2009 President and Director, IMCO, FAI, FPS, and SAS (10/09-present); President, Banc of America Investment Advisors (9/07-9/09); Managing Director, Planning and Financial Products Group, Bank of America (9/01-9/09). 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 | 83 <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. ================================================================================ 84 | USAA BALANCED STRATEGY FUND <PAGE> ================================================================================ TRUSTEES Christopher W. Claus Barbara B. Dreeben Robert L. Mason, Ph.D. Barbara B. Ostdiek, Ph.D. Michael F. Reimherr Richard A. Zucker -------------------------------------------------------------------------------- ADMINISTRATOR, USAA Investment Management Company INVESTMENT ADVISER, P.O. Box 659453 UNDERWRITER, AND San Antonio, Texas 78265-9825 DISTRIBUTOR -------------------------------------------------------------------------------- TRANSFER AGENT USAA Shareholder Account Services 9800 Fredericksburg Road San Antonio, Texas 78288 -------------------------------------------------------------------------------- CUSTODIAN AND State Street Bank and Trust Company ACCOUNTING AGENT P.O. Box 1713 Boston, Massachusetts 02105 -------------------------------------------------------------------------------- INDEPENDENT Ernst & Young LLP REGISTERED PUBLIC 100 West Houston St., Suite 1800 ACCOUNTING FIRM San Antonio, Texas 78205 -------------------------------------------------------------------------------- MUTUAL FUND Under "Products & Services" SELF-SERVICE 24/7 click "Investments," then AT USAA.COM "Mutual Funds" OR CALL Under "My Accounts" go to (800) 531-USAA "Investments." View account balances, (8722) or click "I want to...," and select the desired action. -------------------------------------------------------------------------------- Copies of the Manager's proxy voting policies and procedures, approved by the Trust's Board of Trustees for use in voting proxies on behalf of the Fund, are available without charge (i) by calling (800) 531-USAA (8722); (ii) at USAA.COM; and (iii) on the SEC's Web site at HTTP://WWW.SEC.GOV. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (i) at USAA.COM; and (ii) on the SEC's Web site at HTTP://WWW.SEC.GOV. The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. These Forms N-Q are available at no charge (i) by calling (800) 531-USAA (8722); (ii) at usaa.com; and (iii) on the SEC's Web site at http://www.sec.gov. These Forms N-Q also may be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling (800) 732-0330. ================================================================================ <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) ============================================================================= 26889-0710 (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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