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Usaa Treasury Money Market Trust (MM) | NASDAQ:UATXX | NASDAQ | Ordinary Share |
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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 EMERGING MARKETS FUND] =============================================== ANNUAL REPORT USAA EMERGING MARKETS FUND FUND SHARES o INSTITUTIONAL SHARES MAY 31, 2010 =============================================== ================================================================================ <PAGE> ================================================================================ FUND OBJECTIVE CAPITAL APPRECIATION. -------------------------------------------------------------------------------- TYPES OF INVESTMENTS Invests at least 80% of the Fund's assets in equity securities of emerging market companies. 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 8 FINANCIAL INFORMATION Distributions to Shareholders 15 Report of Independent Registered Public Accounting Firm 16 Portfolio of Investments 17 Notes to Portfolio of Investments 33 Financial Statements 36 Notes to Financial Statements 39 EXPENSE EXAMPLE 57 ADVISORY AGREEMENTS 59 TRUSTEES' AND OFFICERS' INFORMATION 67 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 EMERGING MARKETS 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 The Boston Company Asset Management, Batterymarch Financial Management, Inc. LLC DAVID LAZENBY, CFA KIRK HENRY, CFA CAROLYN KEDERSHA, CFA, CPA WARREN SKILLMAN -------------------------------------------------------------------------------- o HOW DID THE USAA EMERGING MARKETS FUND (THE FUND) PERFORM DURING THE REPORTING PERIOD? For the one-year period ended May 31, 2010, the Fund had a total return of 20.00%. This compares to a return of 22.30% for the Lipper Emerging Markets Funds Index and 22.72% for the Morgan Stanley Capital International Emerging Markets Index (the Index). The Fund has two sub-advisers, each pursuing a distinct approach to emerging markets investing; Batterymarch Financial Management, Inc. (Batterymarch) and The Boston Company Asset Management, LLC (The Boston Company). o PLEASE CHARACTERIZE THE PERFORMANCE OF EMERGING MARKETS RELATIVE TO DEVELOPED MARKETS OVER THE PAST 12 MONTHS. The MSCI Emerging Markets Index (22.72%) slightly outperformed U.S. stocks as measured by the S&P 500 Index (20.99%), and Refer to pages 9 and 12 for benchmark definitions. Past performance is no guarantee of future results. Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. ================================================================================ 4 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ significantly outperformed non-U.S. developed markets as measured by the MSCI-EAFE Index (6.61%). o HOW DID THE BATTERYMARCH PORTION OF THE FUND PERFORM? We outperformed the Index, led by strong individual stock selection and, to a lesser degree, by sector allocation. Our best stock selection by country occurred in China, Thailand, Eastern Europe, Turkey, Brazil, Indonesia, and Russia. South Korea was the only country where our stock selection was meaningfully negative. In terms of industry sectors our overweight to autos was the biggest positive, led by holdings in Geely Automobile Holdings Ltd. in China as well as PT Astra International Tbk in Indonesia. To put emerging markets car sales in perspective, China's annualized pace of car sales is 17 million, compared to about 11 to 12 million in the United States. o WHAT'S BATTERYMARCH'S VIEW ON CHINA? China's stock market as measured by the Shanghai A Share Index sold off by 25.4% from its high on August 4, 2009, through the end of the reporting period, largely due to concerns about the government tightening policy to control a property market bubble and create a soft landing for what some perceive to be an overheated economy. Additionally, there has been pressure on China to allow its currency to strengthen, which would reduce the competitiveness of its exports. Our view is that the sell-off was overdone, especially in light of the eurozone debt crisis, which has caused the Chinese currency to rise along with the U.S. dollar. Also, Chinese exports continue to grow at staggering levels, supporting global economic growth. While we have been underweight China, we are actively seeking opportunities there. China was trading at a huge valuation premium to global equity markets before the sell-off, but at the end of the reporting year was roughly in line with them. ================================================================================ MANAGERS' COMMENTARY ON THE FUND | 5 <PAGE> ================================================================================ o WHAT'S BATTERYMARCH'S OUTLOOK? As in China, emerging markets overall have seen a contraction in their price-to-earnings multiples. Earnings continue to show strength, but stock prices have not gone up in tandem. In September 2009, the price-to-earnings ratio of the Index was roughly 13; at the end of the reporting year it stood at 10.5. Where emerging markets were trading roughly on par with developed markets, they are now selling at a valuation discount. We don't think the global economy will experience a double-dip recession, but we have added to less economically sensitive holdings to create a more balanced portfolio. o HOW DID THE BOSTON COMPANY'S PORTION OF THE PORTFOLIO PERFORM? We performed roughly in line with the Index, with the best returns coming from the technology sector, particularly in Taiwan, where holdings such as Compal Electronics Inc., one of the world's largest notebook manufacturers, did very well. We also had strong returns in South Korea for the full reporting year, led by holdings in KB Financial Group, Inc., Korea's biggest bank, and Lotte Shopping Co. Ltd., a major Korean retailer. However, our overweight position in South Korea, which is focused on consumer-focused stocks, proved detrimental at the end of the reporting period due to the political tension between North and South Korea. Other areas of strength included Thailand, where we invested in bank stocks at extremely low valuations as others were fleeing the market due to political instability. Brazil was also very good, with our defensive positioning helping during the late-period sell-off. Casual footwear manufacturer Grendene S.A., health care company Medial Saude S.A., and chemical company Braskem S.A. "A" were our best-performing Brazilian holdings relative to the Index. Medial Saude S.A. was sold out of the Fund prior to May 31, 2010. ================================================================================ 6 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ Stock selection was weak in China and India, markets where our strict valuation parameters kept us from owning the fastest-rising stocks during the late stage of the rally. Materials were another area of underperformance, but as with China and India, our defensiveness was rewarded at period's end when risk aversion returned to the markets. o WHAT'S THE BOSTON COMPANY'S VIEW ON CHINA? Our views are similar to Batterymarch's views. Relative to the Index, we've gone from being significantly underweight in the Chinese market to almost neutral by the end of the reporting year, and continue to actively seek opportunities in stocks with newly attractive valuations. In the last major sell-off in China in 2008, we pursued a similar strategy that paid off for shareholders in the Fund. o WHAT'S THE BOSTON COMPANY'S OUTLOOK FOR EMERGING MARKETS OVERALL? After an exceptional rebound, emerging markets have become more volatile and performance more selective. Europe's debt woes have interrupted the risk trade, causing some investors to abandon emerging markets in favor of safer havens. However, emerging markets should continue to outperform developed markets in profitability and performance. Longer-term structural trends remain in tact, fiscal and private debt is lower relative to developed markets, and consumption should expand with rising disposable income. We will continue to take advantage of opportunities to build positions in high-quality companies with attractive valuations. Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. ================================================================================ MANAGERS' COMMENTARY ON THE FUND | 7 <PAGE> ================================================================================ INVESTMENT OVERVIEW USAA EMERGING MARKETS FUND SHARES (Ticker Symbol: USEMX) -------------------------------------------------------------------------------- 5/31/10 5/31/09 -------------------------------------------------------------------------------- Net Assets $557.6 Million $425.9 Million Net Asset Value Per Share $17.20 $14.41 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/10 -------------------------------------------------------------------------------- 1 Year 5 Years 10 Years 20.00% 11.27% 9.21% -------------------------------------------------------------------------------- EXPENSE RATIO* -------------------------------------------------------------------------------- 1.79% High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future. THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END, VISIT USAA.COM. *THE EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AS REPORTED IN THE FUND SHARES' PROSPECTUS DATED OCTOBER 1, 2009, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. THE EXPENSE RATIO MAY DIFFER FROM THE EXPENSE RATIO DISCLOSED IN THE FINANCIAL HIGHLIGHTS. Total return measures the price change in a share assuming the reinvestment of all net investment income and realized capital gain distributions. The total returns quoted do not reflect adjustments made to the enclosed financial statements in accordance with U.S. generally accepted accounting principles or the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. ================================================================================ 8 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ o CUMULATIVE PERFORMANCE COMPARISON o [CHART OF CUMULATIVE PERFORMANCE COMPARISON] MSCI EMERGING LIPPER EMERGING USAA EMERGING MARKETS INDEX MARKETS FUNDS INDEX MARKETS FUND SHARES 05/31/00 $10,000.00 $10,000.00 $10,000.00 06/30/00 10,352.25 10,495.86 10,534.52 07/31/00 9,819.84 10,067.62 10,053.95 08/31/00 9,868.12 10,171.65 10,187.70 09/30/00 9,006.48 9,199.54 9,284.85 10/31/00 8,353.48 8,512.72 8,727.54 11/30/00 7,623.04 7,743.24 7,846.98 12/31/00 7,807.15 8,022.74 8,225.96 01/31/01 8,882.19 8,952.25 8,995.05 02/28/01 8,186.71 8,258.08 8,225.96 03/31/01 7,382.61 7,470.31 7,490.30 04/30/01 7,747.40 7,852.00 7,835.84 05/31/01 7,839.88 8,067.92 7,980.74 06/30/01 7,678.95 7,927.18 7,869.28 07/31/01 7,193.71 7,435.58 7,456.86 08/31/01 7,122.75 7,338.63 7,189.35 09/30/01 6,020.30 6,291.42 6,286.50 10/31/01 6,393.91 6,621.68 6,598.60 11/30/01 7,061.46 7,277.60 7,122.48 12/31/01 7,621.96 7,742.10 7,749.34 01/31/02 7,880.25 8,047.36 8,129.53 02/28/02 8,009.72 8,227.37 8,386.73 03/31/02 8,492.33 8,677.98 8,945.84 04/30/02 8,546.63 8,783.99 8,957.03 05/31/02 8,410.45 8,703.20 8,867.57 06/30/02 7,779.48 8,067.08 8,207.81 07/31/02 7,187.80 7,464.16 7,514.51 08/31/02 7,298.56 7,525.39 7,603.97 09/30/02 6,511.11 6,770.75 6,787.66 10/31/02 6,933.60 7,093.67 7,033.67 11/30/02 7,410.86 7,570.88 7,525.69 12/31/02 7,164.63 7,383.78 7,357.96 01/31/03 7,133.44 7,341.01 7,268.50 02/28/03 6,940.91 7,167.85 7,067.22 03/31/03 6,744.10 6,936.72 6,865.93 04/30/03 7,344.81 7,605.08 7,525.69 05/31/03 7,871.96 8,151.95 8,084.81 06/30/03 8,320.62 8,562.31 8,476.19 07/31/03 8,841.72 8,954.26 8,945.84 08/31/03 9,435.17 9,552.50 9,404.32 09/30/03 9,504.34 9,764.37 9,616.78 10/31/03 10,313.13 10,524.96 10,343.63 11/30/03 10,439.87 10,681.12 10,533.73 12/31/03 11,196.72 11,588.66 11,260.58 01/31/04 11,594.37 11,920.01 11,607.23 02/29/04 12,129.22 12,455.06 12,110.43 03/31/04 12,285.07 12,622.11 12,188.71 04/30/04 11,280.68 11,627.29 11,439.50 05/31/04 11,131.13 11,400.40 11,249.40 06/30/04 11,109.02 11,458.94 11,394.77 07/31/04 10,912.58 11,290.76 11,227.03 08/31/04 11,369.39 11,729.50 11,562.50 09/30/04 12,026.05 12,417.30 12,110.43 10/31/04 12,314.15 12,796.24 12,412.36 11/30/04 13,454.75 13,848.58 13,541.77 12/31/04 14,102.49 14,566.21 14,210.19 01/31/05 14,147.12 14,618.00 14,075.29 02/28/05 15,389.36 15,836.86 15,143.30 03/31/05 14,375.50 14,760.07 14,086.53 04/30/05 13,992.34 14,398.87 13,805.47 05/31/05 14,484.99 14,844.35 14,153.98 06/30/05 14,985.00 15,337.10 14,682.37 07/31/05 16,045.31 16,395.83 15,604.23 08/31/05 16,189.74 16,650.76 15,671.68 09/30/05 17,699.38 18,107.00 16,919.57 10/31/05 16,542.98 17,015.16 15,739.14 11/30/05 17,912.69 18,290.48 16,840.88 12/31/05 18,973.80 19,322.48 17,839.88 01/31/06 21,104.55 21,546.49 19,458.60 02/28/06 21,084.45 21,420.40 19,469.92 03/31/06 21,273.45 21,711.06 19,866.11 04/30/06 22,791.43 23,249.04 21,190.52 05/31/06 20,408.69 20,692.82 19,039.77 06/30/06 20,365.45 20,590.32 18,926.58 07/31/06 20,670.03 21,032.90 19,039.77 08/31/06 21,207.01 21,605.70 19,435.96 09/30/06 21,385.26 21,766.48 19,775.56 10/31/06 22,401.84 22,903.29 20,669.81 11/30/06 24,070.61 24,408.27 22,141.38 12/31/06 25,156.69 25,519.11 23,077.85 01/31/07 24,896.08 25,396.86 22,951.99 02/28/07 24,751.87 25,158.58 22,665.95 03/31/07 25,747.03 26,117.62 23,455.42 04/30/07 26,942.67 27,354.91 24,382.20 05/31/07 28,284.13 28,827.02 25,938.26 06/30/07 29,621.97 29,830.95 26,887.92 07/31/07 31,200.26 30,912.39 27,997.76 08/31/07 30,547.43 30,242.32 27,517.21 09/30/07 33,923.27 33,176.14 29,816.99 10/31/07 37,709.06 36,716.02 32,791.82 11/30/07 35,038.33 34,459.97 30,617.91 12/31/07 35,163.50 34,770.53 30,833.64 01/31/08 30,785.60 30,930.49 28,076.36 02/29/08 33,069.16 32,280.50 29,222.08 03/31/08 31,322.15 30,776.58 28,051.18 04/30/08 33,869.11 33,104.54 30,279.66 05/31/08 34,507.25 33,714.34 30,808.46 06/30/08 31,071.24 30,245.93 27,837.15 07/31/08 29,923.80 29,188.47 27,069.14 08/31/08 27,543.42 26,970.75 25,042.10 09/30/08 22,726.20 22,548.00 20,975.44 10/31/08 16,509.84 15,999.94 15,070.59 11/30/08 15,268.20 14,630.78 13,736.01 12/31/08 16,463.23 15,730.56 14,908.74 01/31/09 15,406.76 14,372.97 13,680.31 02/28/09 14,540.21 13,563.44 13,010.25 03/31/09 16,631.76 15,311.80 14,629.55 04/30/09 19,401.99 17,841.81 17,030.59 05/31/09 22,728.46 21,073.98 20,115.64 06/30/09 22,426.81 20,824.80 19,766.65 07/31/09 24,964.69 23,233.61 22,028.09 08/31/09 24,882.03 23,327.56 22,097.89 09/30/09 27,144.64 25,410.49 24,205.77 10/31/09 27,180.72 25,101.86 23,940.54 11/30/09 28,349.66 26,477.71 25,182.93 12/31/09 29,472.71 27,409.98 26,063.49 01/31/10 27,833.74 25,876.92 24,645.17 02/28/10 27,937.54 26,095.78 24,813.68 03/31/10 30,195.23 28,255.35 26,793.72 04/30/10 30,567.81 28,456.98 26,892.02 05/31/10 27,603.91 25,773.20 24,139.63 [END CHART] Data from 5/31/00 to 5/31/10. The graph illustrates the comparison of a $10,000 hypothetical investment in the USAA Emerging Markets Fund Shares to the following benchmarks: o The unmanaged Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. o The unmanaged Lipper Emerging Markets Funds Index tracks the total return performance of the 30 largest funds within the Lipper Emerging Markets Funds category. Past performance is no guarantee of future results, and the cumulative performance quoted does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. ================================================================================ INVESTMENT OVERVIEW | 9 <PAGE> ================================================================================ USAA EMERGING MARKETS FUND INSTITUTIONAL SHARES* -------------------------------------------------------------------------------- 5/31/10 5/31/09 -------------------------------------------------------------------------------- Net Assets $77.4 Million $23.3 Million Net Asset Value Per Share $17.22 $14.41 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN AS OF 5/31/10 -------------------------------------------------------------------------------- 1 Year Since Inception 8/01/08 20.65% -4.99% -------------------------------------------------------------------------------- EXPENSE RATIO** -------------------------------------------------------------------------------- Before Reimbursement 1.28% After Reimbursement 1.13% *The USAA Emerging Markets Fund Institutional Shares (Institutional Shares) commenced operations on August 1, 2008, and are not offered for sale directly to the general public. The Institutional Shares are available only to the USAA Target Retirement Funds. THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. **THE BEFORE REIMBURSEMENT EXPENSE RATIO REPRESENTS THE TOTAL ANNUAL OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND INCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AND IS CALCULATED AS A PERCENTAGE OF AVERAGE NET ASSETS. THE AFTER REIMBURSEMENT EXPENSE RATIO REPRESENTS TOTAL ANNUAL OPERATING EXPENSES, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND EXCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AFTER REIMBURSEMENT FROM USAA INVESTMENT MANAGEMENT COMPANY (IMCO). BEFORE AND AFTER REIMBURSEMENT EXPENSE RATIOS ARE REPORTED IN THE INSTITUTIONAL SHARES' PROSPECTUS DATED OCTOBER 1, 2009. FOR THE FIRST TWO FISCAL YEARS, IMCO HAS VOLUNTARILY AGREED TO LIMIT THE INSTITUTIONAL SHARES' TOTAL ANNUAL OPERATING EXPENSES TO 1.13%, BEFORE REDUCTIONS OF ANY EXPENSES PAID INDIRECTLY AND EXCLUDING ANY ACQUIRED FUND FEES AND EXPENSES, AND TO REIMBURSE THE INSTITUTIONAL SHARES 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. ================================================================================ 10 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ o CUMULATIVE PERFORMANCE COMPARISON o [CHART OF CUMULATIVE PERFORMANCE COMPARISON] MSCI EMERGING USAA EMERGING MARKETS LIPPER EMERGING MARKETS INDEX FUND INSTITUTIONAL SHARES MARKETS FUNDS INDEX 07/31/08 $10,000.00 $10,000.00 $10,000.00 08/31/08 9,204.52 9,355.60 9,240.21 09/30/08 7,594.69 7,836.31 7,724.97 10/31/08 5,517.29 5,630.29 5,481.60 11/30/08 5,102.36 5,131.70 5,012.52 12/31/08 5,501.72 5,573.05 5,389.31 01/31/09 5,148.66 5,117.78 4,924.20 02/28/09 4,859.08 4,871.84 4,646.85 03/31/09 5,558.04 5,484.09 5,245.84 04/30/09 6,483.80 6,384.15 6,112.62 05/31/09 7,595.45 7,545.85 7,219.97 06/30/09 7,494.64 7,415.03 7,134.60 07/31/09 8,342.75 8,273.23 7,959.86 08/31/09 8,315.13 8,299.39 7,992.05 09/30/09 9,071.25 9,094.79 8,705.66 10/31/09 9,083.31 9,000.60 8,599.92 11/30/09 9,473.95 9,471.56 9,071.29 12/31/09 9,849.25 9,807.63 9,390.69 01/31/10 9,301.54 9,273.63 8,865.46 02/28/10 9,336.23 9,342.36 8,940.44 03/31/10 10,090.71 10,093.13 9,680.31 04/30/10 10,215.22 10,130.14 9,749.39 05/31/10 9,224.74 9,104.44 8,829.92 [END CHART] *Data from 7/31/08 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. *The performance of the MSCI Emerging Markets Index and the Lipper Emerging Markets Funds Index is calculated from the end of the month, July 31, 2008, while the Institutional Shares' inception date is August 1, 2008. There may be a slight variation of performance numbers because of this difference. ================================================================================ INVESTMENT OVERVIEW | 11 <PAGE> ================================================================================ The graph on page 11 illustrates the comparison of a $10,000 hypothetical investment in the USAA Emerging Markets Fund Institutional Shares to the following benchmarks: o The unmanaged Morgan Stanley Capital International (MSCI) Emerging Markets Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. o The unmanaged Lipper Emerging Markets Funds Index tracks the total return performance of the 30 largest funds within the Lipper Emerging Markets Funds category. ================================================================================ 12 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ TOP 10 INDUSTRIES AS OF 5/31/10 (% of Net Assets) Diversified Banks ..................................... 17.6% Integrated Oil & Gas .................................. 8.8% Steel ................................................. 6.7% Wireless Telecommunication Services ................... 6.5% Semiconductors ........................................ 5.5% Integrated Telecommunication Services ................. 2.8% Construction & Engineering ............................ 2.4% Diversified Metals & Mining ........................... 2.1% Automobile Manufacturers .............................. 2.0% Money Market Funds .................................... 1.6% TOP 10 EQUITY HOLDINGS AS OF 5/31/10 (% of Net Assets) Samsung Electronics Co. Ltd. .......................... 2.7% Petroleo Brasileiro S.A. ADR .......................... 2.3% OAO Gazprom ADR ....................................... 1.8% China Mobile Ltd. ..................................... 1.5% America Movil S.A.B. de C.V. ADR "L" .................. 1.4% Itau Unibanco Banco Multiplo S.A. GDR ................. 1.3% Vale S.A. ............................................. 1.3% Vale S.A. ADR ......................................... 1.1% China Construction Bank Corp. "H" ..................... 1.1% Reliance Industries Ltd. GDR .......................... 1.0% You will find a complete list of securities that the Fund owns on pages 17-32. ================================================================================ INVESTMENT OVERVIEW | 13 <PAGE> ================================================================================ o ASSET ALLOCATION -- 5/31/2010* o [PIE CHART OF ASSET ALLOCATION] CHINA 12.6% BRAZIL 12.1% SOUTH KOREA 11.9% TAIWAN 9.4% SOUTH AFRICA 9.0% MEXICO 6.0% RUSSIA 5.3% INDIA 4.9% GERMANY 3.7% HONG KONG 3.4% OTHER** 20.4% [END CHART] * Excludes short-term investments purchased with cash collateral from securities loaned. ** Includes countries with less than 3% of portfolio and money market instruments. Percentages are of the net assets of the Fund and may not equal 100%. ================================================================================ 14 | USAA EMERGING MARKETS FUND <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. The Fund has elected under Section 853 of the Internal Revenue Code to pass through the credit for taxes paid in foreign countries. The gross income derived from foreign sources and foreign taxes paid during the fiscal year ended May 31, 2010, by the Fund are $12,048,000 and $1,027,000, respectively. For the fiscal year ended May 31, 2010, certain dividends paid by the Fund qualify as interest-related dividends. The Fund designates $10,000 as qualifying interest income. ================================================================================ DISTRIBUTIONS TO SHAREHOLDERS | 15 <PAGE> ================================================================================ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA EMERGING MARKETS FUND: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the USAA Emerging Markets 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 Emerging Markets 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 ================================================================================ 16 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ PORTFOLIO OF INVESTMENTS May 31, 2010 ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- EQUITY SECURITIES (97.1%) COMMON STOCKS (92.0%) CONSUMER DISCRETIONARY (9.0%) ----------------------------- APPAREL & ACCESSORIES & LUXURY GOODS (0.2%) 1,314,000 Bosideng International Holdings Ltd.(a) $ 306 86,620 Fuqi International, Inc.*(b) 801 -------- 1,107 -------- APPAREL RETAIL (0.5%) 56,000 Foschini Ltd.(a) 485 273,700 Mr. Price Group Ltd.(a) 1,626 115,400 Truworths International Ltd.(a) 824 -------- 2,935 -------- AUTO PARTS & EQUIPMENT (0.5%) 42,600 Halla Climate Control Corp.(a) 556 9,400 Hyundai Mobis Co. Ltd.(a) 1,541 962,000 Minth Group Ltd.(a) 1,251 -------- 3,348 -------- AUTOMOBILE MANUFACTURERS (2.0%) 7,193,800 Denway Motors Ltd.(a) 2,859 896,000 Dongfeng Motor Group Co. Ltd.(a) 1,041 72,100 Ford Otomotiv Sanayi A.S.(a) 460 3,650,000 Geely Automobile Holdings Ltd.(a) 1,205 494,500 Great Wall Motor Co. Ltd.(a) 814 61,560 Kia Motors Corp.(a) 1,588 228,200 Mahindra & Mahindra Ltd. GDR 2,624 454,000 PT Astra International Tbk(a) 2,043 -------- 12,634 -------- BROADCASTING (0.1%) 49,700 Grupo Televisa S.A. de C.V. ADR 924 -------- CABLE & SATELLITE (0.3%) 45,400 ednNaspers Ltd.(a) 1,784 21,300 Net Servicos de Comunicacao S.A.* 217 -------- 2,001 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 17 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- CASINOS & GAMING (0.9%) 174,620 Kangwon Land, Inc.(a) $ 2,457 4,138,820 Resorts World Berhad(a) 3,340 -------- 5,797 -------- CONSUMER ELECTRONICS (0.8%) 25,918 LG Electronics, Inc.(a) 2,196 470,000 Skyworth Digital Technology Co. Ltd.(a) 365 10,943,000 Tatung Co. Ltd.*(a) 1,983 810,400 TCL Multimedia Technology(a) 542 -------- 5,086 -------- DEPARTMENT STORES (0.4%) 85,000 Golden Eagle Retail Group Ltd.(a) 165 7,000 Hyundai Department Store Co. Ltd.(a) 595 3,678 Lotte Shopping Co. Ltd.(a) 967 272,500 Woolworths Holdings Ltd.(a) 828 -------- 2,555 -------- DISTRIBUTORS (0.4%) 179,300 Imperial Holdings Ltd.(a) 2,270 -------- FOOTWEAR (0.4%) 310,380 Grendene S.A., acquired 2/03/2005 - 9/23/2009; cost $1,001(c) 1,257 1,312,000 Prime Success International Group Ltd.(a) 1,269 -------- 2,526 -------- GENERAL MERCHANDISE STORES (0.3%) 445,400 Clicks Group Ltd.(a) 1,915 30,200 Lojas Americanas S.A. 204 -------- 2,119 -------- HOME IMPROVEMENT RETAIL (0.5%) 557,090 JD Group Ltd.(a) 2,990 -------- HOMEBUILDING (1.1%) 122,000 Brascan Residential Properties S.A. 502 1,606,400 Consorcio ARA S.A. de C.V. 988 505,000 Corporacion GEO, S.A. de C.V. "B"* 1,394 88,400 Cyrela Brazil Realty S.A. 958 92,150 Desarrolladora Homex S.A. de C.V. ADR*(b) 2,429 57,900 Gafisa S.A. ADR(b) 689 40,400 PDG Realty S.A. Empreedimentos 347 18,600 Urbi Desarrollo Urbanos S.A. de C.V.* 36 -------- 7,343 -------- HOUSEWARES & SPECIALTIES (0.2%) 889,585 Turk Sise ve Cam Fabrikalari A.S.*(a) 1,024 -------- ================================================================================ 18 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- RESTAURANTS (0.1%) 523,000 Ajisen (China) Holdings Ltd.(a) $ 535 -------- TEXTILES (0.3%) 2,703,000 Weiqiao Textile Co. Ltd. "H"(a) 1,662 -------- Total Consumer Discretionary 56,856 -------- CONSUMER STAPLES (4.9%) ----------------------- AGRICULTURAL PRODUCTS (0.2%) 6,606,500 Global Bio-chem Technology Group Co. Ltd.*(a) 1,272 -------- BREWERS (0.3%) 26,430 Anadolu Efes Biracilik ve Malt Sanayii A.S.(a) 298 31,600 Compania Cervecerias Unidas S.A. ADR 1,292 56,500 Grupo Modelo S.A. de C.V. "C" 309 -------- 1,899 -------- DISTILLERS & VINTNERS (0.1%) 30,830 Jinro Ltd.(a) 812 -------- FOOD DISTRIBUTORS (0.2%) 116,800 Spar Group Ltd.(a) 1,194 -------- FOOD RETAIL (0.7%) 137,400 Shoprite Holdings Ltd.(a) 1,425 90,200 X5 Retail Group NV*(a) 2,913 -------- 4,338 -------- HYPERMARKETS & SUPER CENTERS (0.4%) 115,400 Grupo Comercial Chedraui S.A.* 308 2,896 Shinsegae Co. Ltd.(a) 1,134 596,200 Wal-Mart de Mexico 1,331 -------- 2,773 -------- PACKAGED FOODS & MEAT (1.5%) 5,044,500 Charoen Pokphand Foods Public Co. Ltd.(a) 2,689 591,000 China Yurun Food Group Ltd.(a) 1,561 5,473 CJ Cheiljedang Corp.(a) 971 492,900 JBS S.A. 1,951 9,763 Nong Shim Co. Ltd.(a) 1,840 430,700 Thai Union Frozen Products Public Co. Ltd.(a) 539 -------- 9,551 -------- PERSONAL PRODUCTS (0.0%) 17,200 Hypermarcas S.A* 234 -------- SOFT DRINKS (1.0%) 11,100 Coca Cola Femsa S.A. de C.V. ADR 738 721,400 Embotelladoras Arca S.A. 2,476 ================================================================================ PORTFOLIO OF INVESTMENTS | 19 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 23,500 Fomento Economico Mexicano ADR $ 991 651,900 Grupo Continental S.A., acquired 7/02/2002 - 3/27/2009; cost $1,079(c) 1,665 453 Lotte Chilsung Beverage Co. Ltd.(a) 298 -------- 6,168 -------- TOBACCO (0.5%) 52,683 KT&G Corp.(a) 2,547 182,000 PT Gudang Garam Tbk(a) 659 -------- 3,206 -------- Total Consumer Staples 31,447 -------- ENERGY (10.3%) -------------- COAL & CONSUMABLE FUELS (0.9%) 8,700 Banpu Public Co. Ltd.(a) 152 21,500 Banpu Public Co. Ltd. NVDR(a) 377 397,500 China Shenhua Energy Co. Ltd. "H"(a) 1,580 328,400 PT Bumi Resources Tbk(a) 72 47,600 PT Indo Tambangraya Megah(a) 176 1,164,000 Yanzhou Coal Mining Co. Ltd. "H"(a) 2,717 26,900 Yanzhou Coal Mining Co. Ltd. ADR "H" 630 -------- 5,704 -------- INTEGRATED OIL & GAS (6.5%) 1,158,000 China Petroleum and Chemical Corp. "H"(a) 912 16,450 China Petroleum and Chemical Corp. ADR "H"(b) 1,294 115,860 LUKoil Holdings ADR 5,608 12,620 MOL Hungarian Oil and Gas plc*(a) 995 554,730 OAO Gazprom ADR(a) 11,317 138,500 OJSC OC Rosneft 1,018 5,284,000 PetroChina Co. Ltd. "H"(a) 5,680 23,980 PetroChina Co. Ltd. ADR 2,573 173,040 Petroleo Brasileiro S.A. ADR 6,164 235,800 PTT Public Co. Ltd.(a) 1,761 84,610 Sasol Ltd.(a) 3,060 17,180 Sasol Ltd. ADR 618 -------- 41,000 -------- OIL & GAS EQUIPMENT & SERVICES (0.1%) 226,282 Maridive & Oil Services Co.(a) 792 -------- OIL & GAS EXPLORATION & PRODUCTION (1.2%) 1,872,000 CNOOC Ltd.(a) 2,935 237,750 JKX Oil & Gas plc(a) 803 3,760,000 Medco Energi Internasional(a) 1,095 2,800 Osx Brasil S.A.* 755 ================================================================================ 20 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 101,000 Pacific Rubiales Energy Corp.* $ 2,102 10,800 Petrominerales Ltd.* 260 -------- 7,950 -------- OIL & GAS REFINING & MARKETING (1.6%) 37,200 Reliance Industries Ltd. GDR(a),(d) 1,661 147,672 Reliance Industries Ltd. GDR(a),(b),(d) 6,594 42,320 S-Oil Corp.(a) 1,801 -------- 10,056 -------- Total Energy 65,502 -------- FINANCIALS (22.6%) ------------------ CONSUMER FINANCE (0.0%) 277,100 Kiatnakin Bank Public Co. Ltd.(a) 217 -------- DIVERSIFIED BANKS (17.0%) 89,200 ABSA Group Ltd.(a) 1,518 247,900 Asya Katilim Bankasi A.S.(a) 535 239,140 Banco Bradesco S.A. ADR 3,908 833,900 Banco De Oro(a) 780 43,600 Banco do Brasil S.A. 622 2,000 Banco do Estado do Rio Grande do Sul S.A. 14 377,200 Banco Santander Brasil S.A. ADR 3,930 759,640 Bangkok Bank Public Co. Ltd.(a) 2,685 49,300 Bangkok Bank Public Co. Ltd. NVDR(a) 171 40,510 Bank Hapoalim Ltd.*(a) 154 5,102,000 Bank of China Ltd. "H"(a) 2,537 918,277 Bank of the Philippine Islands(a) 879 8,430 Bank Polska Kasa Opieki S.A.(a) 418 20,600 Bank Zachodni WBK(a) 1,255 12,300 BRE Bank S.A.*(a) 932 3,750 BRE Bank S.A. Allotment Shares 287 4,487,000 Chang Hwa Bank(a) 1,774 8,548,620 China Construction Bank Corp. "H"(a) 6,843 223,000 China Merchants Bank Co. Ltd. "H"(a) 532 452,900 China Minsheng Bank "H"*(a) 456 4,305,884 Chinatrust Financial Holding Co. Ltd.(a) 2,186 132,438 Commercial International Bank(a) 1,662 8,700 Credicorp Ltd. 768 6,002,448 First Financial Holding Co. Ltd.(a) 3,071 161,400 Grupo Financiero Banorte S.A. 621 33,500 Hana Financial Group, Inc.(a) 842 12,000 HDFC Bank Ltd. ADR 1,668 32,200 ICICI Bank Ltd. ADR 1,185 ================================================================================ PORTFOLIO OF INVESTMENTS | 21 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 8,673,300 Industrial and Commercial Bank of China Ltd. "H"(a) $ 6,380 185,500 Industrial Bank of Korea(a) 2,052 459,679 Itau Unibanco Banco Multiplo S.A. GDR 8,463 49,760 Itau Unibanco Holdings S.A. ADS(a) 916 542,800 JSC VTB Bank GDR(a) 2,568 1,239,100 Kasikornbank Public Co. Ltd.(a) 3,257 95,913 KB Financial Group, Inc.(a) 3,922 1,755 KB Financial Group, Inc. ADR 70 4,236,600 Krung Thai Bank Public Co. Ltd.(a) 1,439 2,099,270 Malayan Banking Berhad(a) 4,555 971,000 Mega Financial Holding Co. Ltd.(a) 508 772,000 Metropolitan Bank & Trust Co.(a) 946 124,587 Nedcor Ltd.(a) 2,205 95,600 OTP Bank*(a) 2,424 163,200 PKO Bank Polski S.A.(a) 1,992 591,800 PT Bank Danamon Indonesia Tbk(a) 317 4,856,500 PT Bank Mandiri Tbk(a) 2,677 2,950,000 PT Bank Negara Indonesia Tbk(a) 774 60,579 Shinhan Financial Group Co. Ltd.(a) 2,137 7,390,639 SinoPac Financials Holdings Co. Ltd.*(a) 2,192 302,711 Standard Bank Group Ltd.(a) 4,245 65,820 State Bank of India Ltd. GDR(a) 6,235 178,700 Turkiye Garanti Bankasi A.S.(a) 771 611,818 Turkiye Is Bankasi(a) 1,885 186,900 Turkiye Vakiflar Bankasi T.A.O.(a) 401 437,500 Union Bank of the Philippines(a) 377 159,000 Woori Finance Holdings Co. Ltd.(a) 2,038 -------- 107,979 -------- DIVERSIFIED REAL ESTATE ACTIVITIES (0.2%) 376,000 Huaku Development Co. Ltd.(a) 972 50,500 MRV Engenharia e Participacoes S.A. 327 -------- 1,299 -------- LIFE & HEALTH INSURANCE (1.3%) 598,000 Cathay Financial Holding Co. Ltd.*(a) 873 2,092,802 China Life Insurance Co. Ltd.*(a) 1,607 731,000 China Life Insurance Co. Ltd. "H"(a) 3,181 106,800 Discovery Holdings Ltd.(a) 491 230,920 Tong Yang Life Insurance Co. Ltd.(a) 2,343 -------- 8,495 -------- MULTI-LINE INSURANCE (0.5%) 239,200 Porto Seguro S.A. 2,439 3,560 Powszechny Zaklad Ubezpiecze S.A.* 375 -------- 2,814 -------- ================================================================================ 22 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- MULTI-SECTOR HOLDINGS (0.3%) 436,300 Haci Omer Sabanci Holdings A.S.(a) $ 1,806 -------- OTHER DIVERSIFIED FINANCIAL SERVICES (0.6%) 339,800 African Bank Investments Ltd.(a) 1,418 927,320 FirstRand Ltd.(a) 2,384 -------- 3,802 -------- PROPERTY & CASUALTY INSURANCE (0.6%) 41,100 Dongbu Insurance Co. Ltd.(a) 1,141 24,490 LIG Non-Life Insurance Co. Ltd.(a) 468 15,069 Samsung Fire & Marine Insurance Co. Ltd.(a) 2,245 -------- 3,854 -------- REAL ESTATE DEVELOPMENT (0.9%) 203,040 China Overseas Land & Investment Ltd.(a) 398 270,000 Hopson Development Holdings Ltd.(a) 324 5,501,300 L.P.N. Development Public Co. Ltd.(a) 1,115 320,000 Sino-Ocean Land Holdings Ltd.(a),(d) 237 2,909,000 SOHO China Ltd.(a) 1,525 2,831,000 Supali Public Co. Ltd.(a) 642 1,173,100 Talaat Moustafa Group Holding*(a) 1,619 -------- 5,860 -------- REAL ESTATE OPERATING COMPANIES (0.4%) 27,300 Iguatemi Empresa de Shopping Centers S.A. 447 10,850,000 Renhe Commercial Holdings Co. Ltd.(a) 2,345 -------- 2,792 -------- REAL ESTATE SERVICES (0.1%) 28,900 E-House (China) Holdings Ltd.(b) 421 -------- REGIONAL BANKS (0.2%) 31,880 Busan Bank(a) 278 97,320 Daegu Bank(a) 1,115 -------- 1,393 -------- REINSURANCE (0.3%) 242,803 Korean Reinsurance Co. Ltd.(a) 1,799 -------- SPECIALIZED FINANCE (0.2%) 134,200 BM&F Bovespa S.A. 899 -------- Total Financials 143,430 -------- HEALTH CARE (0.9%) ------------------ PHARMACEUTICALS (0.9%) 111,100 Aspen Pharmacare Holdings Ltd.*(a) 1,166 7,300 Genomma Lab Internacional S.A. "B"* 23 ================================================================================ PORTFOLIO OF INVESTMENTS | 23 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 3,861,500 PT Kalbe Farma Tbk(a) $ 757 20,210 Teva Pharmaceutical Industries Ltd. ADR 1,108 19,660 Yuhan Corp.(a) 2,366 -------- Total Health Care 5,420 -------- INDUSTRIALS (7.8%) ------------------ AEROSPACE & DEFENSE (0.5%) 134,374 Embraer Empresa Brasileira de Aeronautica S.A. ADR 2,927 -------- AIR FREIGHT & LOGISTICS (0.4%) 126,800 Julio Simoes Logistica S.A.* 517 8,216,200 Sinotrans Ltd. "H"(a) 1,832 -------- 2,349 -------- AIRLINES (0.7%) 2,126,000 Air China Ltd. "H"*(a) 2,121 1,426,000 China Eastern Airlines Corp. Ltd. "H"*(a) 589 3,006,000 China Southern Airlines Co. Ltd. "H"*(a) 1,294 60,500 Gol - Linhas Aereas Inteligentes S.A. ADR(b) 685 -------- 4,689 -------- AIRPORT SERVICES (0.3%) 2,496,000 Beijing Capital International Airport Co. Ltd. "H"(a) 1,354 182,900 TAV Havalimanlari Holding A.S.*(a) 641 -------- 1,995 -------- CONSTRUCTION & ENGINEERING (2.4%) 238,100 Aveng Ltd.(a) 1,131 3,099,500 China Railway Construction Corp.(a) 3,549 19,400 Daelim Industrial Co. Ltd.(a) 902 2,449,000 Gamuda Berhad(a) 2,059 92,980 Hyundai Development Co.(a) 1,791 599,220 Murray & Roberts Holdings Ltd.(a) 3,246 25,000 Orascom Construction Industries(a) 1,048 519,000 Tekfen Holding Co., Inc.(a) 1,560 -------- 15,286 -------- CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.8%) 1,107,500 PT United Tractors Tbk(a) 2,119 100,800 Tata Motors Ltd. ADR(b) 1,682 214,000 Weichai Power Co. Ltd. "H"(a) 1,550 -------- 5,351 -------- HEAVY ELECTRICAL EQUIPMENT (0.2%) 1,798,000 Harbin Power Equipment Co. Ltd.(a) 1,306 -------- ================================================================================ 24 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- INDUSTRIAL CONGLOMERATES (1.7%) 241,810 Barloworld Ltd.(a) $ 1,451 64,800 Bidvest Group Ltd.(a) 1,112 221,955 Enka Insaat ve Sanayi A.S.(a) 738 685,500 Koc Holding AS(a) 2,360 45,570 LG Corp.(a) 2,536 1,307,147 NWS Holdings Ltd.(a) 2,287 666,000 Tianjin Development Holdings Ltd.(a) 362 -------- 10,846 -------- INDUSTRIAL MACHINERY (0.2%) 127,900 Metalfrio Solutions S.A., acquired 4/12/2007 - 6/20/2007; cost $1,253(c) 655 39,100 NEPES Corp.(a) 650 -------- 1,305 -------- MARINE (0.1%) 16,900 Korea Line Corp.*(a) 706 -------- MARINE PORTS & SERVICES (0.4%) 1,841,709 Cosco Pacific Ltd.(a) 2,232 -------- TRUCKING (0.1%) 66,700 Localiza Rent a Car S.A. 696 -------- Total Industrials 49,688 -------- INFORMATION TECHNOLOGY (12.0%) ------------------------------ COMMUNICATIONS EQUIPMENT (0.4%) 213,500 BYD Electronic International Co. Ltd.(a) 131 1,304,600 Comba Telecom Systems Holdings Ltd.(a) 1,540 238,200 ZTE Corp.(a) 781 -------- 2,452 -------- COMPUTER HARDWARE (1.4%) 1,203,990 Compal Electronics, Inc.(a) 1,458 2,911,300 Quanta Computer, Inc.(a) 5,219 1,301,972 Wistron Corp.(a) 2,130 -------- 8,807 -------- COMPUTER STORAGE & PERIPHERALS (0.9%) 1,062,654 Asustek Computer, Inc.(a) 1,676 867,000 Catcher Technology Co. Ltd.(a) 2,096 498,000 Giga-Byte Technology Co. Ltd.(a) 505 713,195 Lite-On Technology Corp.(a) 806 1,063,530 TPV Technology Ltd.(a) 635 -------- 5,718 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 25 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- DATA PROCESSING & OUTSOURCED SERVICES (0.6%) 169,600 Cielo S.A. $ 1,437 138,900 Redecard S.A. 2,061 -------- 3,498 -------- ELECTRONIC COMPONENTS (0.6%) 230,000 AU Optronics Corp.(a) 223 150,800 AU Optronics Corp. ADR 1,466 11,400 LG Philips LCD Co. Ltd.(a) 412 292,384 Nan Ya Printed Circuit Board Corp.(a) 1,224 338,000 Unimicron Technology Corp.(a) 475 -------- 3,800 -------- ELECTRONIC MANUFACTURING SERVICES (0.9%) 1,403,989 Hon Hai Precision Industry Corp. Ltd.*(a) 5,536 -------- INTERNET SOFTWARE & SERVICES (0.7%) 21,140 Sohu.com, Inc.* 934 197,400 Tencent Holdings Ltd.(a) 3,758 -------- 4,692 -------- IT CONSULTING & OTHER SERVICES (0.6%) 21,700 Infosys Technologies Ltd. ADR 1,248 748,220 Rolta India Ltd.*(d) 2,636 -------- 3,884 -------- SEMICONDUCTORS (5.5%) 516,287 King Yuan Electronics Co. Ltd.(a) 218 115,270 Media Tek, Inc.(a) 1,845 230,320 Radiant Opto-Electronics Corp.(a) 309 41,000 Richtek Technology Corp.(a) 377 26,620 Samsung Electronics Co. Ltd.(a) 17,207 97,195 Siliconware Precision Industries Co. ADR 529 3,534,378 Taiwan Semiconductor Manufacturing Co. Ltd.(a) 6,455 226,993 Taiwan Semiconductor Manufacturing Co. Ltd. ADR 2,213 372,500 Transcend Information, Inc.(a) 972 7,731,286 United Microelectronics Corp.*(a) 3,444 475,280 United Microelectronics Corp. ADR* 1,573 -------- 35,142 -------- SYSTEMS SOFTWARE (0.3%) 104,590 Asseco Poland S.A.(a) 1,808 500 Asseco Poland S.A. Allotment Shares* 8 -------- 1,816 -------- ================================================================================ 26 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- TECHNOLOGY DISTRIBUTORS (0.1%) 301,000 WPG Holdings Ltd.(a) $ 576 -------- Total Information Technology 75,921 -------- MATERIALS (13.4%) ----------------- ALUMINUM (0.2%) 1,310,500 United Co. RUSAL*(a) 1,226 -------- COMMODITY CHEMICALS (0.4%) 27,833 Huchems Fine Chemical Corp.(a) 556 6,690 LG Chem Ltd.(a) 1,499 186,902 Mexichem S.A. de C.V. 498 -------- 2,553 -------- CONSTRUCTION MATERIALS (1.6%) 3,212,000 Asia Cement (China) Holdings Corp.(a) 1,486 1,794,000 Asia Cement Corp.(a) 1,535 89,892 Cemex S.A. de C.V. ADR* 973 879,840 India Cements Ltd. GDR(a),(d) 4,205 496,500 PT Indocement Tunggal Prakarsa Tbk(a) 794 1,672,500 PT Semen Gresik (Perssero) Tbk(a) 1,503 -------- 10,496 -------- DIVERSIFIED CHEMICALS (0.3%) 10,062 OCI Co. Ltd.(a) 1,641 -------- DIVERSIFIED METALS & MINING (2.1%) 89,900 Exxaro Resources Ltd.(a) 1,297 1,075,768 Grupo Mexico S.A.B. de C.V. "B" 2,554 64,800 KGHM Polska Miedz S.A.(a) 1,880 9,560 Korea Zinc Co. Ltd.(a) 1,548 128,100 Mining and Metallurgical Co. Norilsk Nickel ADR(a) 2,084 77,244 Mining and Metallurgical Co. Norilsk Nickel ADR 1,257 2,674,500 PT International Nickel Indonesia Tbk(a) 1,119 92,600 Sterlite Industries India Ltd. ADR(b) 1,321 -------- 13,060 -------- FERTILIZERS & AGRICULTURAL CHEMICALS (0.2%) 353,510 Makhteshim-Agan Industries Ltd.(a) 1,263 -------- GOLD (0.6%) 178,250 African Barrick Gold Ltd.* 1,603 38,196 AngloGold Ashanti Ltd. ADR 1,601 40,920 Gold Fields Ltd. ADR 563 -------- 3,767 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 27 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- METAL & GLASS CONTAINERS (0.3%) 879,244 Nampak Ltd.(a) $ 2,097 -------- PAPER PRODUCTS (0.7%) 773,000 Lee & Man Paper Manufacturing Ltd.(a) 578 1,855,000 Nine Dragons Paper Holdings Ltd.(a) 2,746 382,061 Sappi Ltd.*(a) 1,446 -------- 4,770 -------- PRECIOUS METALS & MINERALS (0.2%) 10,372 Anglo Platinum Ltd.*(a) 1,049 -------- SPECIALTY CHEMICALS (0.2%) 4,878,000 Lumena Resources Corp.*(a) 1,222 -------- STEEL (6.6%) 144,585 ArcelorMittal South Africa Ltd.*(a) 1,516 1,114,082 China Steel Corp.(a) 1,052 76,000 Companhia Siderurgica Nacional S.A. ADR 1,146 100,794 Confab Industrial S.A. 233 514,927 El Ezz Steel Rebars S.A.E.*(a) 1,743 27,500 Evraz Group S.A. GDR* 745 65,900 Gerdau S.A. ADR 887 70,000 Grupo Simec S.A. "B"* 173 47,700 Hyundai Hysco(a) 693 13,200 Hyundai Steel Co.(a) 963 163,700 Industrias CH, S.A. de C.V "B"* 584 74,000 Kumba Iron Ore Ltd.(a) 3,155 4,550,000 Maanshan Iron & Steel Co. Ltd.(a) 2,199 71,200 Magnitogorsk Iron & Steel Works GDR* 749 6,400 Mechel OAO ADR 139 59,500 Metalurgica Gerdau S.A. 1,007 43,800 Novolipetsk Steel GDR* 1,268 8,859 POSCO(a) 3,455 27,980 POSCO ADR 2,696 201,000 Severstal Joint Stock Co. 2,177 18,925 Usinas Siderurgicas de Minas Gerais S.A. 457 304,600 Vale S.A. 8,282 299,800 Vale S.A. ADR 6,910 -------- 42,229 -------- Total Materials 85,373 -------- TELECOMMUNICATION SERVICES (8.7%) --------------------------------- INTEGRATED TELECOMMUNICATION SERVICES (2.4%) 3,120,000 China Communications Services Corp. Ltd. "H"(a) 1,371 844,406 China Unicom Hong Kong Ltd.(a) 1,015 ================================================================================ 28 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 17,571 Chunghwa Telecom Co. Ltd. $ 335 177,400 KT Corp. ADR 3,302 857,420 Mahanagar Telephone Nigam Ltd. ADR(b) 2,049 1,761,700 PT Telekomunikasi Indonesia Tbk(a) 1,449 14,500 Tele Norte Leste Participacoes S.A. 272 47,500 Telefonos de Mexico S.A. de C.V. ADR "L" 668 333,860 Telekomunikacja Polska S.A.(a) 1,558 176,420 Telkom S.A. Ltd.(a) 860 167,000 Vimpelcom Ltd.* 2,597 -------- 15,476 -------- WIRELESS TELECOMMUNICATION SERVICES (6.3%) 192,720 America Movil S.A.B. de C.V. ADR "L" 9,123 997,000 China Mobile Ltd.(a) 9,298 67,870 China Mobile Ltd. ADR 3,161 166,000 Mobile TeleSystems ADR* 3,192 311,111 MTN Group Ltd.(a) 4,349 9,300 Philippine Long Distance Telephone Co.(a) 482 2,176,500 PT Indonesian Satellite Corp. Tbk(a) 1,198 84,800 Sistema JSFC GDR(a) 2,200 4,664 SK Telecom Co. Ltd.(a) 621 170,120 SK Telecom Co. Ltd. ADR 2,645 170,340 Turkcell Iletisim Hizmetleri A.S.(a) 924 106,390 Turkcell Iletisim Hizmetleri A.S. ADR 1,434 37,000 Vivo Participacoes S.A. 1,011 -------- 39,638 -------- Total Telecommunication Services 55,114 -------- UTILITIES (2.4%) ---------------- ELECTRIC UTILITIES (0.9%) 51,013 Centrais Electricas Brasileiras S.A. 635 96,008 Companhia Energetica de Minas Gerais ADR(b) 1,380 48,900 Enersis S.A. ADR 922 17,000 First Philippine Holdings Corp. 21 67,100 Korea Electric Power Corp.*(a) 1,823 23,580 Korea Electric Power Corp. ADR* 318 233,950 Tenaga Nasional Berhad(a) 584 -------- 5,683 -------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS (1.0%) 8,701,000 China Power International Development Ltd.(a) 1,882 123,700 Companhia Energetica de Sao Paulo 1,476 12,200 Empresa Nacional De Electricidad S.A. ADR 545 2,561,800 Huaneng Power International, Inc. "H"(a) 1,437 ================================================================================ PORTFOLIO OF INVESTMENTS | 29 <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- 21,670 Huaneng Power International, Inc. ADR "H" $ 476 67,070 Tractebel Energia S.A. 752 -------- 6,568 -------- WATER UTILITIES (0.5%) 39,804 Companhia de Saneamento Basico do Estado de Sao Paulo 748 6,580 Companhia de Saneamento Basico do Estado de Sao Paulo ADR(b) 249 159,900 Companhia de Saneamento de Minas Gerais 2,071 -------- 3,068 -------- Total Utilities 15,319 -------- Total Common Stocks (cost: $534,437) 584,070 -------- PREFERRED SECURITIES (4.7%) CONSUMER DISCRETIONARY (0.1%) ----------------------------- TEXTILES (0.1%) 287,688 Companhia de Tecidos Norte de Minas, acquired 5/29/2003 - 4/20/2009; cost $1,011(c) 698 -------- Total Consumer Discretionary 698 -------- ENERGY (2.3%) ------------- INTEGRATED OIL & GAS (2.3%) 469,450 Petroleo Brasileiro S.A. ADR 14,539 -------- Total Energy 14,539 -------- FINANCIALS (0.3%) ----------------- DIVERSIFIED BANKS (0.2%) 18,800 Banco Itau Holding Financeira S.A. 348 61,400 Bradespar S.A. 1,230 -------- 1,578 -------- REGIONAL BANKS (0.1%) 102,100 Banco Panamericano S.A. 490 -------- Total Financials 2,068 -------- INDUSTRIALS (0.4%) ------------------ TRADING COMPANIES & DISTRIBUTORS (0.4%) 428,542 Itausa - Investimentos Itau S.A. 2,549 -------- Total Industrials 2,549 -------- MATERIALS (0.6%) ---------------- COMMODITY CHEMICALS (0.4%) 374,900 Braskem S.A. "A"* 2,199 -------- ================================================================================ 30 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ ------------------------------------------------------------------------------------- MARKET NUMBER VALUE OF SHARES SECURITY (000) ------------------------------------------------------------------------------------- PAPER PRODUCTS (0.1%) 93,125 Suzano Papel e Celulose S.A. $ 811 -------- STEEL (0.1%) 21,275 Usinas Siderurgicas de Minas Gerais S.A. 531 -------- Total Materials 3,541 -------- TELECOMMUNICATION SERVICES (0.6%) --------------------------------- INTEGRATED TELECOMMUNICATION SERVICES (0.4%) 157,350 Tele Norte Leste Participacoes S.A. ADR 2,431 -------- WIRELESS TELECOMMUNICATION SERVICES (0.2%) 59,900 Tim Participacoes S.A. ADR 1,615 -------- Total Telecommunication Services 4,046 -------- UTILITIES (0.4%) ---------------- ELECTRIC UTILITIES (0.4%) 186,371 Companhia Energetica de Minas Gerais (CEMIG) 2,640 -------- Total Utilities 2,640 -------- Total Preferred Securities (cost: $27,565) 30,081 -------- EXCHANGE-TRADED NOTES (0.4%) 45,451 iPath MSCI India Index*(b) (cost: $1,764) 2,764 -------- RIGHTS (0.0%) INDUSTRIALS (0.0%) ------------------ TRADING COMPANIES & DISTRIBUTORS (0.0%) 2,760 Itausa - Investimentos Itau S.A.*(a) (cost: $0) 2 -------- Total Equity Securities (cost: $563,766) 616,917 -------- MONEY MARKET INSTRUMENTS (1.6%) MONEY MARKET FUNDS (1.6%) 9,852,236 State Street Institutional Liquid Reserve Fund, 0.18%(e) (cost: $9,852) 9,852 -------- SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED (1.8%) MONEY MARKET FUNDS (1.2%) 33,437 AIM Short-Term Investment Co. Liquid Assets Portfolio, 0.18%(e) 34 28,003 BlackRock Liquidity Funds TempFund Portfolio, 0.16%(e) 28 7,126,221 Fidelity Institutional Money Market Portfolio, 0.23%(e) 7,126 -------- Total Money Market Funds 7,188 -------- ================================================================================ PORTFOLIO OF INVESTMENTS | 31 <PAGE> ================================================================================ -------------------------------------------------------------------------------------- PRINCIPAL MARKET AMOUNT VALUE (000) SECURITY (000) -------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS (0.6%) $2,000 Credit Suisse First Boston LLC, 0.20%, acquired on 5/28/2010 and due 6/01/2010 at $2,000 (collateralized by $2,045 of Freddie Mac(g), 0.16%(f), due 7/06/2010; market value $2,045) $ 2,000 2,000 Deutsche Bank Securities, Inc., 0.20%, acquired on 5/28/2010 and due 6/01/2010 at $2,000 (collateralized by $1,999 of Federal Farm Credit Bank(g), 3.63%, due 11/16/2016; market value $2,041) 2,000 -------- Total Repurchase Agreements 4,000 -------- Total Short-Term Investments Purchased With Cash Collateral From Securities Loaned (cost: $11,188) 11,188 -------- TOTAL INVESTMENTS (COST: $584,806) $637,957 ======== ---------------------------------------------------------------------------------------------------- ($ 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 $169,598 $414,472 $- $584,070 Preferred Securities 30,081 - - 30,081 Exchange-Traded Notes 2,764 - - 2,764 Rights - 2 - 2 Money Market Instruments: Money Market Funds 9,852 - - 9,852 Short-Term Investments Purchased With Cash Collateral From Securities Loaned: Money Market Funds 7,188 - - 7,188 Repurchase Agreements - 4,000 - 4,000 ---------------------------------------------------------------------------------------------------- Total $219,483 $418,474 $- $637,957 ---------------------------------------------------------------------------------------------------- ================================================================================ 32 | USAA EMERGING MARKETS FUND <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. 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 RIGHTS -- enable the holder to buy a specified number of shares of new issues of a common stock before it is offered to the public. o PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS ADR American depositary receipts are receipts issued by a U.S. bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. GDR Global depositary receipts are receipts issued by a U.S. or foreign bank evidencing ownership of foreign shares. Dividends are paid in U.S. dollars. ================================================================================ NOTES TO PORTFOLIO OF INVESTMENTS | 33 <PAGE> ================================================================================ iPath iPath - Exchange traded notes (ETNs) that are senior, unsecured, unsubordinated debt securities issued by Barclays Bank, PLC. ETNs are traded on securities exchanges and are linked to the return of a benchmark index. NVDR Non-voting depositary receipts are receipts issued by Thai NVDR Company Limited. o SPECIFIC NOTES (a) Security was fair valued at May 31, 2010, by USAA Investment Management Company (the Manager) in accordance with valuation procedures approved by the Board of Trustees. (b) The security or a portion thereof was out on loan as of May 31, 2010. (c) 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 $6,751,000, which represented 1.1% of the Fund's net assets. (d) 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 the Manager under liquidity guidelines approved by the Board of Trustees, unless otherwise noted as illiquid. (e) Rate represents the money market fund annualized seven-day yield at May 31, 2010. (f) Zero-coupon security. Rate represents the effective yield at the date of purchase. (g) Securities issued by government-sponsored enterprises are supported only by the right of the government-sponsored enterprise to borrow from the U.S. Treasury, the discretionary ================================================================================ 34 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ 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. * Non-income-producing security. See accompanying notes to financial statements. ================================================================================ NOTES TO PORTFOLIO OF INVESTMENTS | 35 <PAGE> ================================================================================ STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS) May 31, 2010 -------------------------------------------------------------------------------- ASSETS Investments in securities, at market value (including securities on loan of $10,666) (cost of $584,806) $637,957 Cash denominated in foreign currencies (identified cost of $6,795) 6,797 Receivables: Capital shares sold: Affiliated transactions (Note 8) 83 Nonaffiliated transactions 371 USAA Investment Management Company (Note 7D) 53 USAA Transfer Agency Company (Note 7E) 3 Dividends and interest 3,005 Securities sold 3,248 Other 17 -------- Total assets 651,534 -------- LIABILITIES Payables: Upon return of securities loaned 11,188 Securities purchased 2,657 Capital shares redeemed: Affiliated transactions (Note 8) 1 Nonaffiliated transactions 340 Bank overdraft 727 Unrealized depreciation on foreign currency contracts held, at value 8 Accrued management fees 574 Accrued transfer agent's fees 69 Other accrued expenses and payables 921 -------- Total liabilities 16,485 -------- Net assets applicable to capital shares outstanding $635,049 ======== NET ASSETS CONSIST OF: Paid-in capital $647,170 Accumulated undistributed net investment income 3,992 Accumulated net realized loss on investments (68,491) Net unrealized appreciation of investments 53,151 Net unrealized depreciation of foreign currency translations (773) -------- Net assets applicable to capital shares outstanding $635,049 ======== Net asset value, redemption price, and offering price per share: Fund Shares (net assets of $557,639/32,429 shares outstanding) $ 17.20 ======== Institutional Shares (net assets of $77,410/4,496 shares outstanding) $ 17.22 ======== See accompanying notes to financial statements. ================================================================================ 36 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ STATEMENT OF OPERATIONS (IN THOUSANDS) Year ended May 31, 2010 -------------------------------------------------------------------------------- INVESTMENT INCOME Dividends (net of foreign taxes withheld of $1,493) $13,379 Interest 31 Securities lending (net) 139 ------- Total income 13,549 ------- EXPENSES Management fees 6,194 Administration and servicing fees: Fund Shares 832 Institutional Shares 23 Transfer agent's fees: Fund Shares 1,738 Institutional Shares 23 Custody and accounting fees: Fund Shares 651 Institutional Shares 53 Postage: Fund Shares 70 Shareholder reporting fees: Fund Shares 46 Trustees' fees 10 Registration fees: Fund Shares 50 Institutional Shares 3 Professional fees 92 Other 14 ------- Total expenses 9,799 Transfer agent's fees reimbursed (Note7E): Fund Shares (102) Expenses reimbursed: Institutional Shares (53) ------- Net expenses 9,644 ------- NET INVESTMENT INCOME 3,905 ------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, AND FOREIGN CURRENCY Net realized gain (loss) on: Investments (net of foreign taxes withheld of $620) 49,246 Foreign currency transactions (177) Change in net unrealized appreciation/depreciation of: Investments 36,133 Foreign currency translations (739) ------- Net realized and unrealized gain 84,463 ------- Increase in net assets resulting from operations $88,368 ======= See accompanying notes to financial statements. ================================================================================ FINANCIAL STATEMENTS | 37 <PAGE> ================================================================================ STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) Years ended May 31, -------------------------------------------------------------------------------- 2010 2009 ---------------------------------------------------------------------------------------------- FROM OPERATIONS Net investment income $ 3,905 $ 7,668 Net realized gain (loss) on investments 49,246 (115,156) Net realized loss on foreign currency transactions (177) (1,159) Change in net unrealized appreciation/depreciation of: Investments 36,133 (90,726) Foreign currency translations (739) 236 --------------------------- Increase (decrease) in net assets resulting from operations 88,368 (199,137) --------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income: Fund Shares (3,451) (5,291) Institutional Shares* (549) (220) --------------------------- Total distributions of net investment income (4,000) (5,511) --------------------------- Net realized gains: Fund Shares - (22,676) Institutional Shares* - (771) --------------------------- Total distributions of net realized gains - (23,447) --------------------------- Distributions to shareholders (4,000) (28,958) --------------------------- NET INCREASE IN NET ASSETS FROM CAPITAL SHARE TRANSACTIONS (NOTE 6) Fund Shares 50,071 35,555 Institutional Shares* 51,418 19,264 --------------------------- Total net increase in net assets from capital share transactions 101,489 54,819 --------------------------- Capital contribution from USAA Transfer Agency Company (Note 7E): Fund Shares 3 19 Institutional Shares* - 10 --------------------------- Net increase (decrease) in net assets 185,860 (173,247) NET ASSETS Beginning of year 449,189 622,436 --------------------------- End of year $635,049 $ 449,189 =========================== Accumulated undistributed net investment income: End of year $ 3,992 $ 3,389 =========================== *Institutional Shares were initiated on August 1, 2008 See accompanying notes to financial statements. ================================================================================ 38 | USAA EMERGING MARKETS FUND <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 Emerging Markets Fund (the Fund), which is classified as diversified under the 1940 Act. The Fund's investment objective is capital appreciation. The Fund concentrates its investments in securities of companies in emerging market countries, which may have limited or developing capital markets. Such investments may involve greater risks than investments in developed markets, and political, social, or economic changes in these markets may cause the prices of such investments to be volatile. The Fund has two classes of shares: Emerging Markets Fund Shares (Fund Shares) and Emerging Markets Fund Institutional Shares (Institutional Shares). Each class of shares has equal rights to assets and earnings, except that each class bears certain class-related expenses specific to the particular class. These expenses include administration and servicing fees, transfer agent fees, postage, shareholder reporting fees, and certain registration and custodian fees. Expenses not attributable to a specific class, income, and realized gains or losses on investments are allocated to each class of shares based on each class's relative net assets. Each class has exclusive voting rights on matters related solely to that class and separate voting rights on matters that relate to both classes. The Institutional Shares are currently offered for sale only to the USAA Target Retirement Funds (Target Funds) and not to the general public. The Target Funds are managed by USAA Investment Management Company (the Manager), an affiliate of the Fund. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 39 <PAGE> ================================================================================ 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. Securities, including exchange-traded funds (ETFs), exchange-traded notes (ETNs), and equity-linked structured notes, 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. 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. Securities trading in various foreign markets may take place on days when the NYSE is closed. Further, when the NYSE is open, the foreign markets may be closed. Therefore, the calculation of the Fund's net asset value (NAV) may not take place at the same time the prices of certain foreign securities held by the Fund are determined. In most cases, events affecting the values of foreign securities that occur between the time of their last quoted sales or official closing prices and the close of normal trading on the NYSE on a day the Fund's NAV is calculated will not be reflected in the value of the Fund's foreign securities. However, the Manager and the Fund's subadvisers, if applicable, will monitor for events that would materially affect the value of the Fund's foreign securities. The Fund's subadvisers have agreed to notify the Manager of significant events they identify that would materially affect the value of the Fund's foreign securities. If the Manager determines that a particular event would materially affect the value of the Fund's foreign securities, then the Manager, under valuation procedures approved by the Trust's Board of Trustees, will consider such available information that it deems relevant ================================================================================ 40 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ 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. Debt securities purchased with original or remaining maturities of 60 days or less may be valued at amortized cost, which approximates market value. 5. Repurchase agreements are valued at cost, which approximates market value. 6. 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 services, broker-dealers, or widely used quotation systems. General factors considered in determining the fair value of securities ================================================================================ NOTES TO FINANCIAL STATEMENTS | 41 <PAGE> ================================================================================ include fundamental analytical data, the nature and duration of any restrictions on disposition of the securities, and an evaluation of the forces that influenced the market in which the securities are purchased and sold. B. FAIR VALUE MEASUREMENTS -- Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-level valuation hierarchy disclosed in the portfolio of investments is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 -- inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical securities. Level 2 -- inputs to the valuation methodology are other significant observable inputs, including quoted prices for similar securities, inputs that are observable for the securities, either directly or indirectly, and market-corroborated inputs such as market indices. Level 3 -- inputs to the valuation methodology are unobservable and significant to the fair value measurement, including the Manager's own assumptions in determining the fair value. The inputs or methodologies used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. C. FEDERAL TAXES -- The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its income to its shareholders. Therefore, no federal income tax provision is required. D. INVESTMENTS IN SECURITIES -- Security transactions are accounted for on the date the securities are purchased or sold (trade date). Gains or losses from sales of investment securities are computed on the identified cost basis. Dividend income, less foreign taxes, if any, is recorded on the ex-dividend date. If the ex-dividend date has passed, ================================================================================ 42 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ certain dividends from foreign securities are recorded upon notification. Interest income is recorded daily on the accrual basis. Discounts and premiums on short-term securities are amortized on a straight-line basis over the life of the respective securities. E. REPURCHASE AGREEMENTS -- The Fund may enter into repurchase agreements with commercial banks or recognized security dealers. These agreements are collateralized by underlying securities. The collateral obligations are marked-to-market daily to ensure their value is equal to or in excess of the repurchase agreement price plus accrued interest and are held by the Fund, either through its regular custodian or through a special "tri-party" custodian that maintains separate accounts for both the Fund and its counterparty, until maturity of the repurchase agreement. Repurchase agreements are subject to credit risk, and the Fund's Manager monitors the creditworthiness of sellers with which the Fund may enter into repurchase agreements. F. FOREIGN CURRENCY TRANSLATIONS -- The Fund's assets may be invested in the securities of foreign issuers and may be traded in foreign currency. Since the Fund's accounting records are maintained in U.S. dollars, foreign currency amounts are translated into U.S. dollars on the following bases: 1. Purchases and sales of securities, income, and expenses at the exchange rate obtained from an independent pricing service on the respective dates of such transactions. 2. Market value of securities, other assets, and liabilities at the exchange rate obtained from an independent pricing service on a daily basis. 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 ================================================================================ NOTES TO FINANCIAL STATEMENTS | 43 <PAGE> ================================================================================ the trade and settlement dates on security transactions, and from the difference between amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts received. At the end of the Fund's fiscal year, these net realized foreign currency gains/losses are reclassified from accumulated net realized gain/loss to accumulated undistributed net investment income on the statement of assets and liabilities as such amounts are treated as ordinary income/loss for tax purposes. Net unrealized foreign currency exchange gains/losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rate. G. EXPENSES PAID INDIRECTLY -- A portion of the brokerage commissions that the Fund pays may be recaptured as a credit that is tracked and used by the custodian to directly reduce expenses paid by the Fund. In addition, through arrangements with the Fund's custodian and other banks utilized by the Fund for cash management purposes, realized credits, if any, generated from cash balances in the Fund's bank accounts may be used to directly reduce the Fund's expenses. For the year ended May 31, 2010, custodian and other bank credits reduced the Fund's expenses by less than $500. For the year May 31, 2010, the Fund did not incur any brokerage commission recapture credits. H. INDEMNIFICATIONS -- Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business the Trust enters into contracts that contain a variety of representations and warranties that provide general indemnifications. The Trust's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, the Trust expects the risk of loss to be remote. I. USE OF ESTIMATES -- The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. ================================================================================ 44 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ (2) LINE OF CREDIT The Fund participates in a joint, short-term, revolving, committed loan agreement of $750 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager. The purpose of the agreement is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability, the Fund may borrow from CAPCO an amount up to 5% of the Fund's total assets at a rate per annum equal to the rate at which CAPCO obtains funding in the capital markets, with no markup. The USAA funds that are party to the loan agreement are assessed facility fees by CAPCO based on the funds' assessed proportionate share of CAPCO's operating expenses related to obtaining and maintaining CAPCO's funding programs in total (in no event to exceed 0.13% annually of the amount of the committed loan agreement). Prior to September 25, 2009, the maximum annual facility fee was 0.07% of the amount of the committed loan agreement. The facility fees are allocated among the funds based on their respective average net assets for the period. For the year ended May 31, 2010, the Fund paid CAPCO facility fees of $3,000, 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 foreign currency gains and losses resulted ================================================================================ NOTES TO FINANCIAL STATEMENTS | 45 <PAGE> ================================================================================ 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 $698,000. This includes differences in the accounting for distributions, passive foreign investment companies, foreign currency gains and losses. 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* $4,000,000 $11,492,000 Long-term realized capital gains -- 17,466,000 *Includes distribution of short-term realized capital gains, if any, which are taxable as ordinary income. As of May 31, 2010, the components of net assets representing distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 4,829,000 Accumulated capital and other losses (59,613,000) Unrealized appreciation 43,440,000 Unrealized depreciation on foreign currency translations (773,000) 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 adjustments. Distributions of net investment income and 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 a current post-October currency loss of $303,000 and capital loss carryovers of $59,310,000, for federal income tax purposes. The post-October loss will be recognized on the first day of the following fiscal year. If not offset by subsequent capital gains, the capital loss carryovers will expire between 2017 and 2018, as shown below. It is unlikely that the Trust's Board of Trustees will authorize ================================================================================ 46 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ 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 $17,653,000 2018 41,657,000 ----------- Total $59,310,000 =========== 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 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 $481,237,000 and $376,753,000, respectively. As of May 31, 2010, the cost of securities, including short-term securities, for federal income tax purposes, was $594,517,000. Gross unrealized appreciation and depreciation of investments as of May 31, 2010, for federal income tax purposes, were $83,080,000 and $39,640,000, respectively, resulting in net unrealized appreciation of $43,440,000. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 47 <PAGE> ================================================================================ (5) LENDING OF PORTFOLIO SECURITIES The Fund, through its third-party securities-lending agent, Wachovia Global Securities Lending (Wachovia), may lend its securities to qualified financial institutions, such as certain broker-dealers, to earn additional income. The borrowers are required to secure their loans continuously with cash collateral in an amount at least equal to the fair value of the securities loaned, initially in an amount at least equal to 102% of the fair value of domestic securities loaned and 105% of the fair value of international securities loaned. Cash collateral is invested in high-quality short-term investments. Cash collateral requirements are determined daily based on the prior business day's ending value of securities loaned. Imbalances in cash collateral may occur on days where market volatility causes security prices to change significantly, and are adjusted the next business day. The Fund and Wachovia retain 80% and 20%, respectively, of the income earned from the investment of cash received as collateral, net of any expenses associated with the lending transaction. Wachovia receives no other fees from the Fund for its services as securities- lending agent. Risks to the Fund in securities-lending transactions are that the borrower may not provide additional collateral when required or return the securities when due, and that the value of the short-term investments will be less than the amount of cash collateral required to be returned to the borrower. Wachovia Bank, N.A., parent company of Wachovia, has agreed to indemnify the Fund against any losses due to counterparty default in securities-lending transactions. For the year ended May 31, 2010, the Fund received securities- lending income of $139,000, 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 $10,666,000 and received cash collateral of $11,188,000 for the loans, which was invested in short-term investments, as noted in the Fund's portfolio of investments. (6) CAPITAL SHARE TRANSACTIONS At May 31, 2010, there were an unlimited number of shares of capital stock at no par value authorized for the Fund. ================================================================================ 48 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ Capital share transactions for the Institutional Shares resulted from purchases and sales by the affiliated Target Funds. Capital share transactions were as follows, in thousands: YEAR ENDED YEAR ENDED 5/31/2010 5/31/2009 ---------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT ------------------------------------------- FUND SHARES: Shares sold 13,197 $ 229,685 10,412 $ 135,494 Shares issued from reinvested dividends 190 3,395 2,574 27,451 Shares redeemed (10,524) (183,009) (8,855) (127,390) ------------------------------------------- Net increase from capital share transactions 2,863 $ 50,071 4,131 $ 35,555 =========================================== INSTITUTIONAL SHARES (INITIATED ON AUGUST 1, 2008): Shares sold 3,678 $ 65,156 1,949 $ 23,401 Shares issued from reinvested dividends 31 548 93 990 Shares redeemed (827) (14,286) (428) (5,127) ------------------------------------------- Net increase from capital share transactions 2,882 $ 51,418 1,614 $ 19,264 =========================================== (7) TRANSACTIONS WITH MANAGER A. MANAGEMENT FEES -- The Manager provides investment management services to the Fund pursuant to an Advisory Agreement. Under this agreement, the Manager is responsible for managing the business and affairs of the Fund, subject to the authority of and supervision by the Trust's Board of Trustees. The Manager is authorized to select (with approval of the Trust's Board of Trustees and without shareholder approval) one or more subadvisers to manage the actual day-to-day investment of the Fund's assets. The Manager monitors each subadviser's performance through quantitative and qualitative analysis, and periodically recommends to the Trust's Board of Trustees as to whether each subadviser's agreement should be renewed, terminated, or modified. The Manager also is responsible for allocating assets to the subadvisers. The allocation for each subadviser can range from ================================================================================ NOTES TO FINANCIAL STATEMENTS | 49 <PAGE> ================================================================================ 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 1.00% of the Fund's average net assets for the fiscal year. The performance adjustment is calculated separately for each share class on a monthly basis by comparing each class's performance to that of the Lipper Emerging Markets Funds Index over the performance period. The Lipper Emerging Markets Funds Index tracks the total return performance of the 30 largest funds in the Lipper Emerging Markets Funds category. The performance period for each class consists of the current month plus the previous 35 months. The performance adjustment for the Institutional Shares includes the performance of the Fund Shares for periods prior to August 1, 2008. The following table is utilized to determine the extent of the performance adjustment: OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS(1) ----------------------------------------------------------------------------- +/- 1.00% to 4.00% +/- 0.04% +/- 4.01% to 7.00% +/- 0.05% +/- 7.01% and greater +/- 0.06% (1)Based on the difference between average annual performance of the Fund and its relevant index, rounded to the nearest 0.01%. Average net assets are calculated over a rolling 36-month period. Each class's annual performance adjustment rate is multiplied by the average net assets of each respective class over the entire performance period, which is then multiplied by a fraction, the numerator of which is the number of days in the month and the denominator of which is 365 (366 in leap years). The resulting amount is the performance adjustment; a positive adjustment in the case of overperformance, or a negative adjustment in the case of underperformance. ================================================================================ 50 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ Under the performance fee arrangement, each class will pay a positive performance fee adjustment for a performance period whenever the class outperforms the Lipper Emerging Markets Funds Index over that period, even if the class 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 $6,194,000, which included a performance adjustment for the Fund Shares and Institutional Shares of $183,000 and $4,000, respectively. For the Fund Shares and Institutional Shares, the performance adjustments were 0.03% and 0.01%, respectively. B. SUBADVISORY ARRANGEMENTS -- The Manager has entered into an investment subadvisory agreement with The Boston Company Asset Management, LLC (The Boston Company) and Batterymarch Financial Management, Inc. (Batterymarch), under which The Boston Company and Batterymarch direct the investment and reinvestment of portions of the Fund's assets (as allocated from time to time by the Manager). The Manager (not the Fund) pays The Boston Company a subadvisory fee in the annual amount of 0.69% of the portion of the Fund's average net assets that The Boston Company manages. For the year ended May 31, 2010, the Manager incurred subadvisory fees, paid or payable to The Boston Company, of $2,179,000. The Manager (not the Fund) pays Batterymarch a subadvisory fee in the annual amount of 0.80% for assets up to $100 million; 0.75% for assets over $100 million up to $600 million; and 0.60% for assets over $600 million on the portion of the Fund's average net assets that Batterymarch manages. For the year ended May 31, 2010, the Manager incurred subadvisory fees, paid or payable to Batterymarch, of $2,190,000. C. ADMINISTRATION AND SERVICING FEES -- The Manager provides certain administration and shareholder servicing functions for the Fund. For such services, the Manager receives a fee accrued daily and paid monthly at an annualized rate of 0.15% and 0.05% of average net ================================================================================ NOTES TO FINANCIAL STATEMENTS | 51 <PAGE> ================================================================================ assets of the Fund Shares and Institutional Shares, respectively. For the year ended May 31, 2010, the Fund Shares and Institutional Shares incurred administration and servicing fees, paid or payable to the Manager, of $832,000 and $23,000, respectively. In addition to the services provided under its Administration and Servicing Agreement with the Fund, the Manager also provides certain compliance and legal services for the benefit of the Fund. The Trust's Board of Trustees has approved the reimbursement of a portion of these expenses incurred by the Manager. For the year ended May 31, 2010, the Fund reimbursed the Manager $24,000 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 Institutional Shares for its first two fiscal years to 1.13% of its average annual net assets, excluding extraordinary expenses and before reductions of any expenses paid indirectly, and will reimburse the Institutional Shares for all expenses in excess of that amount. The Manager may modify or terminate this voluntary agreement at any time. For the year ended May 31, 2010, the Institutional Shares incurred reimbursable expenses of $53,000 which 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. Transfer agent's fees for Fund Shares are paid monthly based on an annual charge of $23 per shareholder account plus out-of-pocket expenses. The Fund Shares also pay SAS fees that are related to the administration and servicing of accounts that are traded on an omnibus basis. Transfer agent's fees for Institutional Shares are paid monthly based on a fee accrued daily at an annualized rate of 0.05% of the Institutional Shares' average net assets, plus out-of-pocket expenses. For the year ended May 31, 2010, the Fund Shares and Institutional Shares incurred transfer agent's fees, paid or payable to SAS, of $1,738,000 and $23,000, respectively. For the year ended May 31, 2010, the Fund Shares ================================================================================ 52 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ recorded capital contributions from SAS of $3,000 for adjustments related to corrections to shareholder accounts, which was recorded as a receivable at May 31, 2010. During the year ended May 31, 2010, SAS reimbursed the Fund Shares $102,000 for corrections in fees paid for the administration and servicing of certain accounts. F. UNDERWRITING SERVICES -- The Manager provides exclusive underwriting and distribution of the Fund's shares on a continuing best-efforts basis. The Manager receives no commissions or fees for this service. (8) TRANSACTIONS WITH AFFILIATES The Fund is one of 13 USAA mutual funds in which the affiliated Target Funds may invest. The Target Funds do not invest in the Fund for the purpose of exercising management or control. As of May 31, 2010, the Fund recorded a receivable for capital shares sold of $83,000 and a payable for capital shares redeemed of $1,000 for the Target Funds' purchases and redemptions of Institutional Shares. As of May 31, 2010, the Target Funds owned the following percent of the total outstanding shares of the Fund: OWNERSHIP % -------------------------------------------------------------------------------- USAA Target Retirement Income Fund 0.6% USAA Target Retirement 2020 Fund 1.6 USAA Target Retirement 2030 Fund 3.5 USAA Target Retirement 2040 Fund 4.3 USAA Target Retirement 2050 Fund 2.1 Certain trustees and officers of the Fund are also directors, officers, and/or employees of the Manager. None of the affiliated trustees or Fund officers received any compensation from the Fund. (9) SUBSEQUENT EVENTS Events or transactions that occur after the balance sheet date, but before the financial statements are issued are categorized as recognized or non-recognized for financial statement purposes. The Manager has evaluated subsequent events through the date the financial statements ================================================================================ NOTES TO FINANCIAL STATEMENTS | 53 <PAGE> ================================================================================ were issued, and has determined there were no events that require recognition or disclosure in the Fund's financial statements. The following subsequent event will affect the Fund's future financial statements. Effective August 1, 2010, the Fund will offer a new class of shares, Adviser Shares, which are intended for persons purchasing shares through financial intermediaries, banks, broker-dealers, insurance companies, investment advisers, plan sponsors, and financial professionals that provide various administrative and distribution services. (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. ================================================================================ 54 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ (11) FINANCIAL HIGHLIGHTS -- FUND SHARES 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 $ 14.41 $ 24.47 $ 22.67 $ 16.82 $ 12.59 ----------------------------------------------------------------- Income (loss) from investment operations: Net investment income .11 .23 .29 .14 .13 Net realized and unrealized gain (loss) 2.79 (9.15) 3.99 5.93 4.21 ----------------------------------------------------------------- Total from investment operations 2.90 (8.92) 4.28 6.07 4.34 ----------------------------------------------------------------- Less distributions from: Net investment income (.11) (.20) (.29) (.22) (.11) Realized capital gains - (.94) (2.19) - - ----------------------------------------------------------------- Total distributions (.11) (1.14) (2.48) (.22) (.11) ----------------------------------------------------------------- Net asset value at end of period $ 17.20 $ 14.41 $ 24.47 $ 22.67 $ 16.82 ================================================================= Total return (%)* 20.07(d) (34.71) 18.78 36.23(a) 34.52 Net assets at end of period (000) $557,639 $425,934 $622,436 $445,365 $314,876 Ratios to average net assets:** Expenses (%)(b),(c) 1.66(d) 1.79 1.51 1.65(a) 1.61 Net investment income (%) .61 1.98 1.22 .88 1.31 Portfolio turnover (%) 66 76 64 109 48 * 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 $554,659,000. (a) For the year ended May 31, 2007, SAS voluntarily reimbursed the Fund Shares for a portion of the transfer agent's fees incurred. The reimbursement had no effect on the Fund Shares' total return or ratio of expenses to average net assets. (b) Reflects total operating expenses of the Fund Shares before reductions of any expenses paid indirectly. The Fund Shares' expenses paid indirectly decreased the expense ratios as follows: (.00%)(+) (.00%)(+) (.00%)(+) (.01%) (.02%) (+) Represents less than 0.01% of average net assets. (c) Effective March 1, 2004, through September 30, 2008, the Manager voluntarily agreed to limit the annual expenses of the Fund Shares to 1.80% of the Fund Shares' average net assets. (d) During the year ended May 31, 2010, SAS reimbursed the Fund $102,000 for corrections in fees paid for the administration and servicing of certain accounts. The effect of this reimbursement on the Fund's total return was less than 0.01%. The reimbursement decreased the Fund's expense ratios by 0.02%. This decrease is excluded from the expense ratios above. ================================================================================ NOTES TO FINANCIAL STATEMENTS | 55 <PAGE> ================================================================================ (11) FINANCIAL HIGHLIGHTS (CONTINUED) -- INSTITUTIONAL SHARES Per share operating performance for a share outstanding throughout each period is as follows: YEAR ENDED MAY 31, ----------------------- 2010 2009*** ----------------------- Net asset value at beginning of period $ 14.41 $ 21.26 ----------------------- Income (loss) from investment operations: Net investment income(a) .21 .31 Net realized and unrealized gain (loss)(a) 2.78 (5.98) ----------------------- Total from investment operations(a) 2.99 (5.67) ----------------------- Less distributions from: Net investment income (.18) (.24) Realized capital gains - (.94) ----------------------- Total distributions (.18) (1.18) ----------------------- Net asset value at end of period $ 17.22 $ 14.41 ======================= Total return (%)* 20.74 (24.59) Net assets at end of period (000) $77,410 $23,255 Ratios to average net assets:** Expenses (%)(b) 1.13 1.13(c) Expenses, excluding reimbursements (%)(b) 1.24 1.28(c) Net investment income (%) 1.17 3.30(c) Portfolio turnover (%) 66 76 * 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 $46,557,000. *** Institutional Shares were initiated on August 1, 2008. (a) Calculated using average shares. For the year ended May 31, 2010 average shares were 2,647,000. (b) Reflects total operating expenses of the Institutional Shares before reductions of any expenses paid indirectly. The Institutional Shares' expenses paid indirectly decreased the expense ratios by less than 0.01%. (c) Annualized. The ratio is not necessarily indicative of 12 months of operations. ================================================================================ 56 | USAA EMERGING MARKETS 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 line labeled "hypothetical" under each share class in the table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratios for each class and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you ================================================================================ EXPENSE EXAMPLE | 57 <PAGE> ================================================================================ paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any direct costs, such as wire fees, redemption fees, or low balance fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these direct costs were included, your costs would have been higher. EXPENSES PAID BEGINNING ENDING DURING PERIOD* ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2009 - DECEMBER 1, 2009 MAY 31, 2010 MAY 31, 2010 ------------------------------------------------------------------------------------- FUND SHARES Actual $1,000.00 $ 959.13 $7.86 Hypothetical (5% return before expenses) 1,000.00 1,016.90 8.10 INSTITUTIONAL SHARES Actual 1,000.00 961.24 5.53 Hypothetical (5% return before expenses) 1,000.00 1,019.30 5.69 * Expenses are equal to the annualized expense ratio of 1.61% for Fund Shares and 1.13% for Institutional Shares, which are 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 actual ending account values are based on its actual total returns of (4.09)% for Fund Shares and (3.88)% for Institutional Shares for the six- month period of December 1, 2009, through May 31, 2010. ================================================================================ 58 | USAA EMERGING MARKETS 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 Shares class' 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 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 | 59 <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 quarterly 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 level and depth of knowledge of the Manager, including the professional experience and qualifications of senior and ================================================================================ 60 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ investment personnel, as well as current staffing levels. The Board discussed the Manager's effectiveness in monitoring the performance of each Subadviser and its timeliness in responding to performance issues. The allocation of the Fund's brokerage, including the Manager's process for monitoring "best execution," also was considered. The Manager's role in coordinating the activities of the 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 advisory fees and total expense ratio of the Fund Shares class as compared to other open-end investment companies deemed to be comparable to the Fund Shares class as determined by the independent third party in its report. The expenses of the Fund Shares class were compared to (i) a group of investment companies chosen by the independent third party to be comparable to the Fund Shares class 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 same investment classification/objective as the Fund Shares class regardless ================================================================================ ADVISORY AGREEMENTS | 61 <PAGE> ================================================================================ of asset size, excluding outliers (the "expense universe"). Among other data, the Board noted that the Fund Shares class' management fee rate -- which includes advisory and administrative services and the effects of any performance adjustment -- was above the median of its expense group and its expense universe. The data indicated that the Fund Shares class' total expenses were above 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 the performance adjustment to such fee. The Board also took into account that the subadvisory fees under the Subadvisory Agreement relating to the Fund are paid by the Manager. The Board also took into account Management's discussion with respect to the Fund's expenses. In considering the Fund's performance, the Board noted that it reviews at its regularly scheduled meetings information about the Fund Share class' 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 Share class' 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 Shares class' performance universe consisted of the Fund Shares class and all retail and institutional open-end investment companies with the same classification/objective as the Fund Shares class regardless of asset size or primary channel of distribution. This comparison indicated that, among other data, the Fund Shares class' performance was lower than the average of its performance universe and above its Lipper index for the one-period ended December 31, 2009, was above the average of its performance universe and its Lipper index for the three-year period ended December 31, 2009, and was lower than the average of its performance universe and its Lipper index for the five-year period ended December 31, 2009. The Board also noted that the Fund Shares class' percentile performance ranking was in the top 50% of its performance universe for the one- and three-year periods ended December 31, 2009, and was in the bottom 50% of its ================================================================================ 62 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ performance universe for the five-year period ended December 31, 2009. The Board also took into account Management's discussion of the Fund's 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 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 determined that the current investment management fee structure was reasonable. CONCLUSIONS -- The Board reached the following conclusions regarding the Fund's Advisory Agreement with the Manager, among others: (i) the ================================================================================ ADVISORY AGREEMENTS | 63 <PAGE> ================================================================================ Manager has demonstrated that it possesses the capability and resources to perform the duties required of it under the Advisory Agreement; (ii) the Manager maintains an appropriate compliance program; (iii) the performance of the Fund is reasonable in relation to the performance of funds with a similar investment objective and to relevant indices; (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 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, 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 each Subadvisory 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 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 are responsible for managing the investment of portfolio securities with respect to the Fund and each Subadviser's level of staffing. The ================================================================================ 64 | USAA EMERGING MARKETS FUND <PAGE> ================================================================================ 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 each 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 that the fees under the Subadvisory Agreements 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. The Board considered that the Fund pays a management fee to the that, in turn, the Manager pays a subadvisory fee to each Subadviser. As noted above, the Board considered, among other data, the Fund Shares class' performance during the one-, three-, and 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 Shares ================================================================================ ADVISORY AGREEMENTS | 65 <PAGE> ================================================================================ class' performance results. 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 and the explanations of management regarding the performance of the Fund. The Board also noted each Subadviser's long-term performance record for similar accounts. 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 objective and policies; (ii) each Subadviser maintains an appropriate compliance program; (iii) the performance of the Fund is reasonable in relation to the performance of funds with a similar investment objective and to relevant indices; 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. ================================================================================ 66 | USAA EMERGING MARKETS 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 | 67 <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. ================================================================================ 68 | USAA EMERGING MARKETS 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 | 69 <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. ================================================================================ 70 | USAA EMERGING MARKETS 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 | 71 <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. ================================================================================ 72 | USAA EMERGING MARKETS 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) ============================================================================= 25558-0710 (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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