SEMIANNUAL REPORT
USAA REAL RETURN FUND
FUND SHARES ■ INSTITUTIONAL SHARES
JUNE 30, 2016
PRESIDENT’S
MESSAGE
“We believe however, that it’s important for
investors to stay focused on their long-term
objectives, using an investment plan that is
based on their time horizon and risk tolerance.”
August 2016
The reporting period ended June 30, 2016, started and ended in a dramatic
fashion. During the first six weeks of 2016, worries about global economic
growth drove an increase in volatility and a steep sell-off in global stocks.
Although the decline was followed by a strong rally, market uncertainty
continued throughout the reporting period. Volatility spiked in the final days
of June 2016, as new concerns about the global economy and the United
Kingdom’s unexpected vote to exit the European Union (“Brexit”) rattled the
financial markets. When all was said and done, the broad U.S. stock market
finished in positive territory—near its high for the reporting period. In general,
non-U.S. stock indexes were down slightly.
The strong performance of U.S. stocks was due in part to the growth of the U.S.
economy, which continued to outperform the world’s other large economies. That
said, the U.S. economy has yet to achieve “escape velocity,” which is the ability to
grow at a sufficiently fast rate to escape a recession and return to a normal rate of
economic growth. Slower spending by households that are seeking to reduce their
debt has impeded the recovery. Also, while the American consumer was expected
to benefit from the huge drop in the price of oil, savings at the pump were offset
by higher costs in other parts of the economy, including housing and health care.
As a result, consumer spending has been lower than expected.
In response to the unexpected soft market and what the Federal Reserve (the Fed)
chair Janet Yellen termed “sizable” economic uncertainties, the Fed backed off its
earlier guidance and did not raise interest rates during the reporting period. Fed
policymakers have indicated their desire to increase interest rates to what they
consider “normal levels,” if only to have more policy tools at their disposal in
case of a recession. In our view, the Fed will likely remain on a “lower for longer”
track to avoid derailing U.S. economic growth. Furthermore, the market
volatility that was unleashed by the “Brexit’’ vote may lead the Fed to scale back
further its plans for interest rate increases this year and in 2017.
Meanwhile, corporate earnings during the reporting period were disappointing.
In the first quarter of 2016, for example, the companies in the S&P 500® Index
experienced a fourth consecutive quarter of year-over-year earnings declines. To
compensate for this, many companies have cut operating costs, reduced capital
spending, and bought back shares. However, we think they may have extracted
most of what they can using these methods. Given the lack of revenue and
earnings growth in recent quarters, we believe it will be a challenge for stocks to
generate meaningful gains in the near term.
Because of heightened volatility during the reporting period, investors generally
favored safe-haven assets, such as gold and U.S. Treasuries. In mid-June 2016, for
example, strong demand drove 10-year U.S. Treasury yields—which move in the
opposite direction of prices—to their lowest level since 2012. On July 5th, just two
trading days after the end of the reporting period, 10-year Treasury yields
sank to a record low of 1.37% amid ongoing uncertainty about the impact of
“Brexit”. Government bond yields around the world also fell, reflecting
persistent worries about weak global growth and limits to what central banks can
do to support their economies through monetary stimulus.
Looking ahead, we expect market volatility to continue. In this environment, it is
difficult to find investments that provide adequate compensation relative to the
risks assumed. We believe however, that it’s important for investors to stay focused
on their long-term objectives, using an investment plan that is based on their time
horizon and risk tolerance. Market conditions are always in fluctuation and time
horizon matters—even price movements like those seen during the reporting
period have historically smoothed out in the long term. A plan can also keep you
from making hasty portfolio decisions based on market turmoil, while giving you
flexibility to take advantage of attractive opportunities when they arise. If you are
uneasy about the markets in general or are concerned about having too much
exposure to specific asset classes, please give one of our financial advisors a call.
They will help with your investment allocations and discuss whether you are
properly aligned with your long-term goals, time horizon, and tolerance for risk.
On behalf of all of us at USAA Investments, thank you for the opportunity to
help you achieve your financial goals.
Sincerely,
Brooks Englehardt
President
USAA Investments
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc.,
both registered broker-dealers, and affiliates. • Financial planning services and financial advice provided
by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance
Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its
wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. • Standard & Poor’s
500 Index and S&P are registered trademarks. The S&P 500 Index is an unmanaged index of 500 stocks.
The S&P 500 focuses on the large cap segment of the market, covering 75% of the U.S. equities market.
S&P 500 is a trademark of the McGraw-Hill Companies, Inc.
TABLE OF CONTENTS
Fund Objective
1
Managers’ Commentary on the Fund
2
Investment Overview
6
Financial Information
Portfolio of Investments
13
Notes to Portfolio of Investments
18
Financial Statements
21
Notes to Financial Statements
24
Expense Example
41
Advisory Agreement(s)
43
This report is for the information of the shareholders and others who have received a copy of the
currently effective prospectus of the Fund, managed by USAA Asset Management Company. It may
be used as sales literature only when preceded or accompanied by a current prospectus, which
provides further details about the Fund.
©2016, USAA. All rights reserved.
208366-0816
FUND OBJECTIVE
The USAA Real Return Fund (the Fund) seeks a total return that
exceeds the rate of inflation over an economic cycle.
Types of Investments
The Fund’s principal investment strategy is to invest its assets principally in a
portfolio of investments that the Adviser believes will have a total return that
exceeds the rate of inflation over an economic cycle. In pursuing its investment
objective, the Fund will allocate its assets under normal market conditions
among the following asset classes: (1) inflation-linked securities, including U.S.
Treasury inflation-protected securities (TIPS), non-U.S. dollar inflation-linked
securities, and inflation-linked corporate and municipal securities; (2) fixedincome securities, including bank loans, floating-rate notes, short-duration
bonds, investment-grade securities, high-yield bonds (also known as “junk”
bonds), and non-U.S. dollar instruments, including foreign currencies;
(3) equity securities, including real estate investment trusts (REITs) and
exchange-traded funds (ETFs), including those that the Adviser believes
have a high correlation to measures of inflation; and (4) commodity-linked
instruments, such as commodity ETFs, commodity-linked notes, and other
investment companies that concentrate their investments in commodity-linked
instruments and to a limited extent, certain types of derivative instruments.
In allocating the Fund’s assets, the Adviser may invest all or a substantial
portion of the Fund’s assets in one or a limited number of these asset classes.
Accordingly, the allocation of the Fund’s assets among these classes may vary
substantially from time to time.
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 tax rate. However, you may elect not to have withholding apply or to have
income tax withheld at a higher rate. Any withholding election that you make will apply
to any subsequent distribution unless and until you change or revoke the election. If you
wish to make a withholding election or change or revoke a prior withholding election,
call (800) 531-USAA (8722) or (210) 531-8722.
If you do not have a withholding election in place by the date of a distribution, federal
income tax will be withheld from the taxable portion of your distribution at a rate of
10%. If you must pay estimated taxes, you may be subject to estimated tax penalties if
your estimated tax payments are not sufficient and sufficient tax is not withheld from
your distribution.
For more specific information, please consult your tax adviser.
Fund Objective |
1
MANAGERS’ COMMENTARY
ON THE FUND
USAA Asset Management Company
John P. Toohey, CFA
R. Matthew Freund, CFA
Wasif A. Latif
Brian W. Smith, CFA, CPA
■ How did the global financial markets perform during the reporting
period?
The reporting period ended June 30, 2016 was characterized by a modest
revival of inflation expectations and strong performance across all
segments of the financial markets, which created a favorable backdrop
for the Fund.
The inflation outlook was supported by two key factors. First, the U.S.
consumer price index (CPI)—which came in well below the historical
average in 2015—moved higher in the first five months of 2016. Second,
the increasingly accommodative nature of global central bank policies
helped support future inflation expectations. Japan cut short-term interest
rates into negative territory, while the European Central Bank further
reduced interest rates that were below zero already. In the United States,
commentary from Federal Reserve officials made it apparent that the
central bank would maintain its “lower for longer” interest rate policy for
an extended period. Together, these factors indicated that the market’s
previous concerns about the potential for deflation may have been
exaggerated – a tailwind for the types of investments held in the Fund.
Favorable central bank action also led to improving market performance,
with both stocks and bonds gaining ground in the first half of 2016. In
addition, commodities, emerging-market stocks and other segments in
which the Fund is invested staged impressive recoveries after their poor
showing in 2015.
2
| USAA Real Return Fund
■ How did the USAA Real Return Fund (the Fund) perform during
the reporting period?
The Fund has two share classes: Fund Shares and Institutional Shares.
For the reporting period ended June 30, 2016, the Fund Shares and
Institutional Shares had total returns of 7.91% and 7.90%, respectively.
This compares to a total return of 6.55% for the Barclays U.S.
Government Inflation-Linked Bond Index and 8.71% for the Real
Return Composite Index.
USAA Asset Management Company (the Manager) is the Fund’s
investment adviser. The investment adviser provides day-to-day
discretionary management for the Fund’s assets.
■ Please discuss the factors that helped and hurt performance during
the reporting period.
All segments of the portfolio generated positive returns, with the Fund’s
allocation to commodities making the largest contribution. Commodities
came under significant pressure in 2015, but the Fund maintained the
position on the belief that this asset class can help offset the potential
long-term impact of inflation. This approach paid off, as commodity
prices indeed rebounded during the reporting period. The Fund’s
allocation to gold stocks, which staged an impressive rally, was the top
performing segment within both the commodity portfolio and the Fund
as a whole. The price of gold surged in January and February 2016 behind
the pullback in the U.S. dollar, and after a three-month pause, rose again
in June 2016 as investors sought shelter from the fallout of the United
Kingdom’s vote to leave the European Union. After lagging considerably
in the prior two calendar years, gold stocks rebounded strongly in
conjunction with the recovery in commodities.
Refer to page 8 for benchmark definitions.
Past performance is no guarantee of future results.
Managers’ Commentary on the Fund |
3
The Fund’s allocation to real estate investment trusts (REITs) also made
a significant contribution to its return. REITs performed well behind the
continued strength in the property market and investors’ renewed thirst
for yield. REITs were a prime beneficiary of the latter trend, and they
finished the reporting period with healthy, mid-single digit returns.
The Fund’s U.S. equity allocation made an additional positive contribution.
We emphasize companies with high growing dividends, which is
consistent with our goal of generating positive real returns over time.
Dividend stocks were driven by the same demand for yield that aided
the REIT sector, so this segment of the Fund generated a solid gain.
The Fund’s allocation to emerging-market stocks, which it achieves
through investments in exchange-traded funds (ETFs), also delivered a
healthy return. The emerging markets sectors lagged in 2015 on concerns
about slowing growth, but stabilizing economic data from China and
improving sentiment in Brazil fueled outperformance during the reporting
period. We believe this illustrates the potential benefits of using a longterm strategy rather than overreacting to temporary fears in the market.
The Fund’s fixed-income allocation finished with a gain, and it provided a
measure of stability during times in which stocks experienced volatility.
The Fund’s investment in an ETF linked to local currency emerging-market
bonds performed well, as improving sentiment prompted investors to take
advantage of the high yields and depressed valuations the sector offered at
the beginning of 2016. The Fund’s investments in Treasury InflationProtected Securities (TIPS), also gained ground at a time of falling yields
due to their above-average interest rate sensitivity. Similarly, the Fund’s
actively-managed domestic bond portfolio benefited from its substantial
weighting in long-term U.S. Treasuries. This portion of the Fund also
provided a meaningful contribution, as longer-dated government debt
was one of the best performing segments of the fixed-income market
during the reporting period. The bond portfolio also has an allocation to
investment-grade corporate and high-yield bonds, which enabled the
Fund to capture the positive returns in these areas.
4
| USAA Real Return Fund
■ What were your strategies for the Fund during the reporting
period?
We are encouraged by both the Fund’s performance and the signs that
inflation may be starting to increase slowly. Inflation in Japan has been
above zero in each of the past four months, while the increase in the U.S.
CPI represents a meaningful shift from the near-zero levels which
characterized 2015. Inflation struggled to stay in positive territory in
Europe, which bears watching, but the European Central Bank continues
to pursue extremely aggressive policies designed to offset this trend. These
developments, taken together, indicate that inflation-sensitive investments
could play an increasingly important role for investors in the months and
years ahead. We believe the Fund, through its diversified approach, is
well-positioned to capitalize on this shift.
Thank you for allowing us to help you manage your investments.
The Real Return Fund may be subject to stock market risk and is non-diversified, which means that it
may invest a greater percentage of its assets in a single issuer. Individual stocks will fluctuate in response
to the activities of individual companies, general market, and economic conditions domestically and
abroad. When redeemed or sold, shares of the Fund may be worth more or less than the original cost.
• Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and
political instability. Emerging market countries are most volatile. Emerging market countries are less
diverse and mature than other countries and tend to be politically less stable. • As interest rates rise,
existing bond prices generally fall; given the historically low interest rate environment, risks associated
with rising interest rates may be heightened. • Precious metals and minerals is a volatile asset class and is
subject to additional risks, such as currency fluctuation, market illiquidity, political instability, and
increased volatility. It may be more volatile than other asset classes that diversify across many industries
and companies. • Investing in REITs has some of the same risks associated with the direct ownership of
real estate. • ETFs are subject to risks similar to those of stocks.
Managers’ Commentary on the Fund |
5
INVESTMENT OVERVIEW
USAA REAL RETURN FUND SHARES (FUND SHARES)
(Ticker Symbol: USRRX)
Net Assets
Net Asset Value Per Share
6/30/16
12/31/15
$26.4 Million
$9.85
$69.4 Million
$9.14
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
12/31/15–6/30/16*
7.91%
1 Year
1.06%
5 Years
1.67%
Since Inception 10/18/10
2.28%
EXPENSE RATIOS AS OF 12/31/15 **
Before Reimbursement
1.19%
After Reimbursement
1.17%
(Includes acquired fund fees and expenses of 0.17%)
The performance data quoted represents past performance and is no guarantee of
future results. Current performance may be higher or lower than the performance
data quoted. The return and principal value of an investment will fluctuate, so that
an investor’s shares, when redeemed, may be worth more or less than their original
cost. For performance data current to the most recent month-end, visit usaa.com.
* Total returns for periods of less than one year are not annualized. This return is cumulative.
** The expense ratios represent the total annual operating expenses, before reductions of any expenses paid
indirectly and including any acquired fund fees and expenses, as reported in the Fund’s prospectus dated
May 1, 2016, and are calculated as a percentage of average net assets. USAA Asset Management Company
(the Manager) has agreed, through May 1, 2017, to make payments or waive management, administration,
and other fees to limit the expenses of the Fund so that the total annual operating expenses of the Fund
Shares (exclusive of commission recapture, expense offset arrangements, acquired fund fees and expenses,
and extraordinary expenses) do not exceed an annual rate of 1.00% of the Fund Shares’ average net assets.
This reimbursement arrangement may not be changed or terminated during this time period without
approval of the Fund’s Board of Trustees and may be changed or terminated by the Manager at any time
after May 1, 2017. If the total annual operating expense ratio of the Fund Shares is lower than 1.00%, the
Fund Shares will operate at the lower expense ratio. These expense ratios may differ from the expense ratios
disclosed in the Financial Highlights, which excludes acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of all net investment income
and realized capital gain distributions, if any. The total returns quoted do not reflect adjustments made to
the enclosed financial statements in accordance with U.S. generally accepted accounting principles or the
deduction of taxes that a shareholder would pay on distributions (including capital gains distributions),
redemption of shares, or reinvested net investment income.
6
| USAA Real Return Fund
■ CUMULATIVE PERFORMANCE COMPARISON ■
$13,000
$12,116
$12,000
$11,737
$11,374
$11,000
$10,000
$9,000
10/10
6/11
6/12
6/13
6/14
6/15
6/16
Real Return Composite Index $12,116
Barclays U.S. Government Inflation-Linked Bond Index $11,737
USAA Real Return Fund Shares $11,374
Data from 10/31/10 to 6/30/16.*
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 distributions or the redemption of shares.
Indexes are unmanaged and you cannot invest directly in an index. The return information for the index
does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Barclays U.S. Government Inflation-Linked Bond Index and Real Return Composite
Index is calculated from the end of the month of October 31, 2010, while the inception date of the Fund
Shares is October 18, 2010. There may be a slight variation of performance numbers because of this difference.
Investment Overview |
7
The graph on page 7 illustrates the comparison of a $10,000 hypothetical
investment in the USAA Real Return Fund Shares to the following
benchmark:
■ The Real Return Composite Index is a combination of unmanaged
indexes representing the Fund’s model allocation, and consists of the
Morningstar Dividend Composite (15%), MSCI U.S. REIT Gross
(10%), Barclays U.S. Inflation-Linked Bond (50%), Bloomberg
Commodity TR (15%), and the MSCI Emerging Markets (10%).
■ The unmanaged Barclays U.S. Government Inflation-Linked Bond
Index measures the performance of the U.S. Treasury InflationProtected Securities (TIPS) market. The index includes TIPS with one
or more years remaining maturity with total outstanding issue size of
$500 million or more.
8
| USAA Real Return Fund
USAA REAL RETURN FUND INSTITUTIONAL SHARES
(INSTITUTIONAL SHARES) (Ticker Symbol: UIRRX)
Net Assets
Net Asset Value Per Share
6/30/16
12/31/15
$81.5 Million
$9.86
$275.3 Million
$9.15
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/16
12/31/15–6/30/16*
7.90%
1 Year
1.15%
5 Years
1.88%
Since Inception 10/18/10
2.49%
EXPENSE RATIO AS OF 12/31/15**
0.99%
(Includes acquired fund fees and expenses of 0.17%)
The performance data quoted represents past performance and is no guarantee of
future results. Current performance may be higher or lower than the performance
data quoted. The return and principal value of an investment will fluctuate, so that
an investor’s shares, when redeemed, may be worth more or less than their original
cost. For performance data current to the most recent month-end, visit usaa.com.
* Total returns for periods of less than one year are not annualized. This return is cumulative.
** The expense ratio represents the total annual operating expenses, before reductions of any expenses paid
indirectly and including any acquired fund fees and expenses, as reported in the Fund’s prospectus dated
May 1, 2016, and is calculated as a percentage of average net assets. USAA Asset Management Company (the
Manager) has agreed, through May 1, 2017, to make payments or waive management, administration, and
other fees to limit the expenses of the Fund so that the total annual operating expenses of the Institutional
Shares (exclusive of commission recapture, expense offset arrangements, acquired fund fees and expenses,
and extraordinary expenses) do not exceed an annual rate of 0.90% of the Institutional Shares’ average net
assets. This reimbursement arrangement may not be changed or terminated during this time period without
approval of the Fund’s Board of Trustees and may be changed or terminated by the Manager at any time
after May 1, 2017. If the total annual operating expense ratio of the Institutional Shares is lower than
0.90%, the Institutional Shares will operate at the lower expense ratio. The expense ratio may differ from the
expense ratio disclosed in the Financial Highlights, which excludes acquired fund fees and expenses.
Total return measures the price change in a share assuming the reinvestment of all net investment income
and realized capital gain distributions, if any. The total returns quoted do not reflect adjustments made to
the enclosed financial statements in accordance with U.S. generally accepted accounting principles or the
deduction of taxes that a shareholder would pay on distributions (including capital gains distributions),
redemption of shares, or reinvested net investment income.
The Institutional Shares are available for investment through a USAA discretionary managed account
program, and certain advisory programs sponsored by financial intermediaries, such as brokerage firms,
investment advisors, financial planners, third-party administrators, and insurance companies. Institutional
Shares also are available to institutional investors, which include retirement plans, endowments, foundations,
and bank trusts, as well as other persons or legal entities that the Fund may approve from time to time, or for
purchase by a USAA fund participating in a fund-of-funds investment strategy (USAA fund-of-funds).
Investment Overview |
9
■ CUMULATIVE PERFORMANCE COMPARISON ■
$13,000
$12,116
$12,000
$11,737
$11,502
$11,000
$10,000
$9,000
10/10
6/11
6/12
6/13
6/14
6/15
6/16
Real Return Composite Index $12,116
Barclays U.S. Government Inflation-Linked Bond Index $11,737
USAA Real Return Fund Institutional Shares $11,502
Data from 10/31/10 to 6/30/16.*
The graph illustrates the comparison of a $10,000 hypothetical investment in
the USAA Real Return Fund Institutional Shares to the benchmark listed
above (see page 8 for the benchmark definition).
Past performance is no guarantee of future results, and the cumulative performance quoted does not
reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of
shares. Indexes are unmanaged and you cannot invest directly in an index. The return information for
the index does not reflect the deduction of any fees, expenses, or taxes.
*The performance of the Barclays U.S. Government Inflation-Linked Bond Index and Real Return
Composite Index is calculated from the end of the month, October 31, 2010, while the inception date
of the Institutional Shares is October 18, 2010. There may be a slight variation of performance numbers
because of this difference.
10
| USAA Real Return Fund
■ TOP 10 EQUITY HOLDINGS – 6/30/16 ■
(% of Net Assets)
iShares Core Dividend Growth ETF*
Vanguard REIT ETF*
--------------------------
10.1%
----------------------------------------------------------
9.8%
-----------------------
6.2%
------------------------
5.5%
------------------------------
5.4%
----------------------------------------------------
5.3%
Powershares DB Optimum Yield ETF*
United States Commodity Index Fund
Proshares S&P 500 Aristocrats ETF
iShares TIPS Bond ETF*
----------
5.1%
-----------------------------------------------------------------------
1.4%
iShares Core MSCI Emerging Markets ETF*
First Trust Global Tactical Commodity
Strategy Fund
PowerShares FTSE RAFI Emerging Markets
Portfolio ETF*
---------------------------------------------------------------------
WisdomTree India Earnings Fund*
-------------------------------
1.1%
1.0%
*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, as amended, that would otherwise be applicable.
Investment Overview |
11
■ TOP 10 BOND HOLDINGS – 6/30/16 ■
(% of Net Assets)
U.S. Treasury Inflation-Indexed Note 0.63%,
7/15/2021
U.S. Treasury Inflation-Indexed Note 0.13%,
1/15/2023
U.S. Treasury Inflation-Indexed Note 1.25%,
7/15/2020
U.S. Treasury Inflation-Indexed Note 2.50%,
1/15/2029
U.S. Treasury Inflation-Indexed Note 1.13%,
1/15/2021
U.S. Treasury Inflation-Indexed Note 0.13%,
1/15/2022
Enterprise Products Operating, LLC 7.03%,
1/15/2068
U.S. Treasury Inflation-Indexed Note 0.13%,
7/15/2022
U.S. Treasury Inflation-Indexed Note 2.13%,
2/15/2040
U.S. Treasury Inflation-Indexed Note 2.13%,
2/15/2041
---------------------------------------------------------------------------------
3.5%
---------------------------------------------------------------------------------
3.4%
---------------------------------------------------------------------------------
2.4%
---------------------------------------------------------------------------------
2.2%
---------------------------------------------------------------------------------
2.1%
---------------------------------------------------------------------------------
2.0%
---------------------------------------------------------------------------------
2.09%
---------------------------------------------------------------------------------
1.6%
---------------------------------------------------------------------------------
1.5%
---------------------------------------------------------------------------------
1.5%
■ TOP 10 INDUSTRIES – 6/30/16 ■
(% of Net Assets)
Oil & Gas Storage & Transportation
Property & Casualty Insurance
Asset-Backed Financing
Metal & Glass Containers
Specialty Stores
Commercial Mortgage-Backed Securities
Trading Companies & Distributors
Oil & Gas Exploration & Production
Thrifts & Mortgage Finance
Health Care Facilities
----------------------------
----------------------------------------
------------------------------------------------------
--------------------------------------------------
-------------------------------------------------------------------------
------------------
-------------------------------
---------------------------
---------------------------------------------
------------------------------------------------------------
You will find a complete list of securities that the Fund owns on pages 13-17.
12
| USAA Real Return Fund
3.1%
1.9%
1.0%
0.9%
0.8%
0.7%
0.7%
0.7%
0.6%
0.5%
PORTFOLIO OF INVESTMENTS
June 30, 2016 (unaudited)
Number
of Shares
Market
Value
(000)
Security
U.S. EQUITY SECURITIES (21.0%)
EXCHANGE-TRADED FUNDS (15.7%)
3,600
399,600
107,600
Energy Select Sector SPDR ETF
iShares Core Dividend Growth ETF
Proshares S&P 500 Aristocrats ETF
Total Exchange-Traded Funds (cost: $15,730)
$
246
10,897
5,855
16,998
FIXED-INCOME EXCHANGE-TRADED FUNDS (5.3%)
48,600
iShares TIPS Bond ETF(a) (cost: $5,504)
Total U.S. Equity Securities (cost: $21,234)
5,670
22,668
INTERNATIONAL EQUITY SECURITIES (10.8%)
EXCHANGE-TRADED FUNDS (10.3%)
132,500
9,900
12,939
70,600
8,400
13,100
18,004
15,400
52,900
iShares Core MSCI Emerging Markets ETF
iShares MSCI Emerging Markets Minimum Volatility ETF
iShares MSCI Turkey ETF
PowerShares FTSE RAFI Emerging Markets Portfolio ETF
SPDR S&P China ETF
SPDR S&P Emerging Markets SmallCap ETF
WisdomTree Emerging Markets High Dividend Fund(a)
WisdomTree Emerging Markets SmallCap Dividend Fund
WisdomTree India Earnings Fund
Total Exchange-Traded Funds (cost: $12,125)
5,542
511
513
1,147
587
516
638
597
1,068
11,119
FIXED-INCOME EXCHANGE-TRADED FUNDS (0.5%)
14,900
WisdomTree Emerging Markets Local Debt Fund (cost: $697)
Total International Equity Securities (cost: $12,822)
557
11,676
PRECIOUS METALS AND COMMODITY-RELATED SECURITIES (15.1%)
EXCHANGE-TRADED FUNDS (15.1%)
71,500
24,500
25,200
372,900
27,000
138,200
First Trust Global Tactical Commodity Strategy Fund*
iShares Gold Trust*
iShares Silver Trust*
Powershares DB Optimum Yield ETF*
SPDR S&P Oil & Gas Exploration & Production ETF
United States Commodity Index Fund*
Portfolio of Investments |
1,548
313
450
6,653
940
5,969
13
Number
of Shares
Market
Value
(000)
Security
10,700
3,500
VanEck Vectors Gold Miners ETF
VanEck Vectors Oil Services ETF
Total Exchange-Traded Funds (cost: $15,115)
Total Precious Metals and Commodity-Related Securities (cost: $15,115)
$
296
102
16,271
16,271
GLOBAL REAL ESTATE EQUITY SECURITIES (9.8%)
EXCHANGE-TRADED FUNDS (9.8%)
119,400
Vanguard REIT ETF (cost: $8,595)
Principal
Amount
(000)
10,587
Coupon
Rate
Maturity
BONDS (42.5%)
CORPORATE OBLIGATIONS (10.7%)
$
859
755
1,000
2,000
54
560
Consumer Discretionary (0.8%)
Specialty Stores (0.8%)
Harbor Freight Tools USA, Inc.(b)
Energy (3.8%)
Oil & Gas Exploration & Production (0.7%)
QEP Resources, Inc.
Oil & Gas Storage & Transportation (3.1%)
Energy Transfer Partners, LP
Enterprise Products Operating, LLC
NGPL PipeCo, LLC(b)
Targa Resources Partners, LP
Total Energy
Financials (2.8%)
Multi-Line Insurance (0.3%)
1,000 Genworth Holdings, Inc.
Property & Casualty Insurance (1.9%)
1,000 Chubb Corp.
1,564 Oil Insurance Ltd.(d)
14
| USAA Real Return Fund
4.75%
7/26/2019
861
6.80
3/01/2020
764
3.65(c) 11/01/2066
7.03
1/15/2068
6.75
9/15/2017
6.88
2/01/2021
605
2,108
54
573
3,340
4,104
6.15
6.38
3.61(c)
11/15/2066
3/29/2067
–(e)
340
872
1,236
2,108
Principal
Amount
(000)
$
Coupon
Rate
Security
Thrifts & Mortgage Finance (0.6%)
793 Walter Investment Management Corp.(b)
Total Financials
Health Care (0.9%)
Health Care Facilities (0.5%)
500 HCA, Inc.
Pharmaceuticals (0.4%)
500 Valeant Pharmaceuticals International, Inc.(d)
Total Health Care
Industrials (0.7%)
Trading Companies & Distributors (0.7%)
1,000 ILFC E-Capital Trust I(d)
Materials (0.9%)
Metal & Glass Containers (0.9%)
933 Anchor Glass Container Corp.(b)
Telecommunication Services (0.4%)
Integrated Telecommunication Services (0.4%)
500 Frontier Communications Corp.
Utilities (0.4%)
Multi-Utilities (0.4%)
500 Puget Sound Energy, Inc.
Total Corporate Obligations (cost: $12,935)
Market
Value
(000)
Maturity
4.75% 12/19/2020
$
638
3,086
5.38
2/01/2025
513
6.75
8/15/2021
429
942
3.98(c) 12/21/2065
787
4.75
7/01/2022
932
7.88
1/15/2027
418
6.97
6/01/2067
426
11,556
6.13
12/15/2020
503
2.94(c)
7/15/2041
1,087
EURODOLLAR AND YANKEE OBLIGATIONS (0.5%)
Materials (0.5%)
Gold (0.5%)
500 Eldorado Gold Corp.(d) (cost: $500)
ASSET-BACKED SECURITIES (1.0%)
Financials (1.0%)
Asset-Backed Financing (1.0%)
1,081 Trip Rail Master Funding, LLC(d) (cost: $1,117)
Portfolio of Investments |
15
Principal
Amount
(000)
Security
Coupon
Rate
Market
Value
(000)
Maturity
COMMERCIAL MORTGAGE SECURITIES (0.7%)
Financials (0.7%)
Commercial Mortgage-Backed Securities (0.7%)
403 Merrill Lynch Mortgage Trust
396 Morgan Stanley Capital I Trust
$
Total Financials
Total Commercial Mortgage Securities (cost: $799)
5.74%
5.59
5/12/2039
3/12/2044
$
400
396
796
796
796
U.S. TREASURY SECURITIES (29.6%)
990
1,483
2,375
2,103
3,634
2,107
1,659
3,644
1,028
1,047
1,470
1,909
1,217
1,202
161
1,582
1,026
1,016
Inflation-Indexed Notes (29.6%)
1.88%, 7/15/2019
1.38%, 1/15/2020
1.25%, 7/15/2020
1.13%, 1/15/2021
0.63%, 7/15/2021
0.13%, 1/15/2022
0.13%, 7/15/2022
0.13%, 1/15/2023
0.38%, 7/15/2023
0.63%, 1/15/2024
0.13%, 7/15/2024
2.50%, 1/15/2029
2.13%, 2/15/2040
2.13%, 2/15/2041
0.75%, 2/15/2042
0.63%, 2/15/2043
1.38%, 2/15/2044
0.75%, 2/15/2045
Total U.S. Treasury Securities (cost: $30,581)
Total Bonds (cost: $45,932)
1,072
1,585
2,554
2,251
3,829
2,149
1,699
3,697
1,064
1,097
1,486
2,422
1,595
1,588
162
1,543
1,189
1,023
32,005
32,005
45,947
Number of
Shares
MONEY MARKET INSTRUMENTS (1.3%)
MONEY MARKET FUNDS (1.3%)
1,375,027 State Street Institutional Liquid Reserves Fund
Premier Class, 0.47%(a),(f),(g) (cost: $1,375)
Total Investments (cost: $105,073)
16
| USAA Real Return Fund
1,375
$108,524
Number of
Contracts
Long/(Short)
Unrealized
Appreciation/
Contract (Depreciation)
Value (000)
(000)
Expiration
Date
Security
FUTURES (2.4%)
15 U.S. Treasury Bond
($ in 000s)
09/21/2016
$2,585
$90
VALUATION HIERARCHY
Assets
LEVEL 1
U.S. Equity Securities:
Exchange-Traded Funds
$16,998
Fixed-Income Exchange-Traded Funds
5,670
International Equity Securities:
Exchange-Traded Funds
11,119
Fixed-Income Exchange-Traded Funds
557
Precious Metals and Commodity-Related
Securities:
Exchange-Traded Funds
16,271
Global Real Estate Equity Securities:
Exchange-Traded Funds
10,587
Bonds:
Corporate Obligations
–
Eurodollar and Yankee Obligations
–
Asset-Backed Securities
–
Commercial Mortgage Securities
–
U.S. Treasury Securities
32,005
Money Market Instruments:
Money Market Funds
1,375
Futures(1)
90
Total
$94,672
LEVEL 2
LEVEL 3
Total
–
–
$–
–
$ 16,998
5,670
–
–
–
–
11,119
557
–
–
16,271
–
–
10,587
11,556
503
1,087
796
–
–
–
–
–
–
11,556
503
1,087
796
32,005
–
–
$13,942
–
–
$–
1,375
90
$108,614
$
Futures are valued at the unrealized appreciation/(depreciation) on the investment.
(1)
Refer to the Portfolio of Investments for additional industry, country, or geographic region classifications.
For the period of January 1, 2016, through June 30, 2016, there were no transfers of securities between
levels. The Fund’s policy is to recognize any transfers in and transfers out as of the beginning of the
reporting period in which the event or circumstance that caused the transfer occurred.
Portfolio of Investments |
17
NOTES TO PORTFOLIO
OF INVESTMENTS
June 30, 2016 (unaudited)
■ GENERAL NOTES
Market values of securities are determined by procedures and practices
discussed in Note 1A to the financial statements.
The Portfolio of Investments category percentages shown represent the
percentages of the investments to net assets, and, in total, may not equal
100%. A category percentage of 0.0% represents less than 0.1% of net
assets. Investments in foreign securities were 12.3% of net assets at
June 30, 2016.
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, as
amended, that would otherwise be applicable.
■ CATEGORIES AND DEFINITIONS
Eurodollar and Yankee obligations – Eurodollar obligations are U.S.
dollar-denominated instruments that are issued outside the U.S. capital
markets by foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions. Yankee
obligations are dollar-denominated instruments that are issued by
foreign issuers in the U.S. capital markets.
Asset-backed and commercial mortgage-backed securities – Asset-backed
securities represent a participation in, or are secured by and payable
from, a stream of payments generated by particular assets. Commercial
18
| USAA Real Return Fund
mortgage-backed securities reflect an interest in, and are secured by,
mortgage loans on commercial real property. These securities represent
ownership in a pool of loans and are divided into pieces (tranches) with
varying maturities. The stated final maturity of such securities represents
the date the final principal payment will be made for the last outstanding
loans in the pool. The weighted average life is the average time for
principal to be repaid, which is calculated by assuming prepayment rates
of the underlying loans. The weighted average life is likely to be
substantially shorter than the stated final maturity as a result of
scheduled principal payments and unscheduled principal prepayments.
Stated interest rates on commercial mortgage-backed securities may
change slightly over time as underlying mortgages pay down.
U.S. Treasury inflation-indexed notes – Designed to provide a real rate of
return after being adjusted over time to reflect the impact of inflation.
Their principal value periodically adjusts to the rate of inflation. They
trade at the prevailing real, or after-inflation, interest rates. The U.S.
Treasury guarantees repayment of these securities of at least their face
value in the event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in interest
income.
■ PORTFOLIO ABBREVIATIONS AND DESCRIPTIONS
REIT
Real estate investment trust
TIPS
U.S. Treasury Inflation-Protected Securities
■ SPECIFIC NOTES
(a) The security, or a portion thereof, is segregated to cover the value of
open futures contracts at June 30, 2016.
(b) Senior loan (loan) – is not registered under the Securities Act of
1933. The loan contains certain restrictions on resale and cannot be
sold publicly. The stated interest rate represents the weighted average
interest rate of all contracts within the senior loan facility. The
Notes to Portfolio of Investments |
19
interest rate is adjusted periodically, and the rate disclosed represents
the current rate at June 30, 2016. The weighted average life of the
loan is likely to be shorter than the stated final maturity date due to
mandatory or optional prepayments. The loan is deemed liquid by
USAA Asset Management Company (the Manager), under liquidity
guidelines approved by the USAA Mutual Funds Trust’s Board of
Trustees (the Board), unless otherwise noted as illiquid.
(c) Variable-rate or floating-rate security – interest rate is adjusted
periodically. The interest rate disclosed represents the rate at June 30,
2016.
(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, unless otherwise
noted as illiquid.
(e) Security is perpetual and has no final maturity date but may be
subject to calls at various dates in the future.
(f) Rate represents the money market fund annualized seven-day yield at
June 30, 2016.
(g) Security with a value of $491,000 is segregated as collateral for initial
margin requirements on open futures contracts.
* Non-income-producing security.
See accompanying notes to financial statements
20
| USAA Real Return Fund
STATEMENT OF ASSETS AND LIABILITIES
(IN THOUSANDS)
June 30, 2016 (unaudited)
ASSETS
Investments in securities, at market value (cost of $105,073)
Cash denominated in foreign currencies (identified cost of $47)
Receivables:
Capital shares sold
USAA Asset Management Company (Note 6C)
Interest
Securities sold
Other
Variation margin on futures contracts
Total assets
LIABILITIES
Payables:
Capital shares redeemed
Bank overdraft
Accrued management fees
Accrued transfer agent’s fees
Other accrued expenses and payables
Total liabilities
Net assets applicable to capital shares outstanding
NET ASSETS CONSIST OF:
Paid-in capital
Accumulated undistributed net investment income
Accumulated net realized loss on investments and futures transactions
Net unrealized appreciation of investments and futures contracts
Net unrealized depreciation of foreign currency translations
Net assets applicable to capital shares outstanding
Net asset value, redemption price, and offering price per share:
Fund Shares (net assets of $26,433/2,682 shares outstanding)
Institutional Shares (net assets of $81,534/8,270 shares outstanding)
$108,524
45
69
39
315
275
1
90
109,358
1,291
7
44
5
44
1,391
$107,967
$154,154
34
(49,760)
3,541
(2)
$107,967
$
$
9.85
9.86
See accompanying notes to financial statements.
Financial Statements |
21
STATEMENT OF OPERATIONS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited)
INVESTMENT INCOME
Dividends
Interest
Total income
EXPENSES
Management fees
Administration and servicing fees:
Fund Shares
Institutional Shares
Transfer agent’s fees:
Fund Shares
Institutional Shares
Custody and accounting fees:
Fund Shares
Institutional Shares
Postage:
Fund Shares
Shareholder reporting fees:
Fund Shares
Institutional Shares
Trustees’ fees
Registration fees:
Fund Shares
Institutional Shares
Professional fees
Other
Total expenses
Expenses reimbursed:
Fund Shares
Institutional Shares
Net expenses
NET INVESTMENT INCOME
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY, AND FUTURES CONTRACTS
Net realized gain (loss) on:
Unaffiliated transactions
Affiliated transactions (Note 8)
Foreign currency transactions
Futures transactions
Change in net unrealized appreciation/(depreciation) of:
Investments
Foreign currency translations
Futures contracts
Net realized and unrealized gain
Increase in net assets resulting from operations
See accompanying notes to financial statements.
22
| USAA Real Return Fund
$
107
829
936
419
24
68
68
68
16
57
3
5
4
14
8
24
39
8
825
(63)
(26)
736
200
(30,581)
(56)
(15)
511
32,753
2
93
2,707
$ 2,907
STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Six-month period ended June 30, 2016 (unaudited), and year ended December 31, 2015
6/30/2016
FROM OPERATIONS
Net investment income
$
200
Net realized loss on investments
(30,637)
Net realized loss on foreign currency transactions
(15)
Net realized loss on options
–
Net realized gain on futures transactions
511
Change in net unrealized appreciation/(depreciation) of:
Investments
32,753
Foreign currency translations
2
Options
–
Futures contracts
93
Increase (decrease) in net assets resulting from operations
2,907
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Fund Shares
Institutional Shares
Distributions to shareholders
NET DECREASE IN NET ASSETS FROM CAPITAL
SHARE TRANSACTIONS (NOTE 5)
Fund Shares
Institutional Shares
Total net decrease in net assets from
capital share transactions
Net decrease in net assets
NET ASSETS
Beginning of period
End of period
Accumulated undistributed (overdistribution of)
net investment income:
End of period
12/31/2015
$
5,442
(21,573)
(317)
(34)
220
(17,779)
78
1
(3)
(33,965)
(35)
(106)
(141)
(587)
(3,238)
(3,825)
(43,582)
(195,984)
(2,921)
(75,323)
(239,566)
(236,800)
(78,244)
(116,034)
344,767
$ 107,967
460,801
$ 344,767
$
$
34
(25)
See accompanying notes to financial statements.
Financial Statements |
23
NOTES TO FINANCIAL
STATEMENTS
June 30, 2016 (unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USAA MUTUAL FUNDS TRUST (the Trust), registered under the
Investment Company Act of 1940, as amended (the 1940 Act), is an open-end
management investment company organized as a Delaware statutory trust
consisting of 54 separate funds. Additionally, the Fund qualifies as a registered
investment company under Accounting Standards Codification Topic 946.
The information presented in this semiannual report pertains only to the
USAA Real Return Fund (the Fund), which is classified as nondiversified
under the 1940 Act. The Fund’s investment objective is to seek a total return
that exceeds the rate of inflation over an economic cycle.
As a nondiversified fund, the Fund may invest a greater percentage of its
assets in a single issuer, such as a single stock or bond. Because a relatively
high percentage of the Fund’s total assets may be invested in the securities of
a single issuer or a limited number of issuers, the securities of the Fund may
be more sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused investment
strategy may increase the volatility of the Fund’s investment results because
the Fund may be more susceptible to risk associated with a single issuer or
economic, political, or regulatory event than a diversified fund.
The Fund consists of two classes of shares: Real Return Fund Shares (Fund
Shares) and Real Return 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
24
| USAA Real Return Fund
class’ 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 available for investment through a
USAA discretionary managed account program, and certain advisory
programs sponsored by financial intermediaries, such as brokerage firms,
investment advisors, financial planners, third-party administrators, and
insurance companies. Institutional Shares also are available to institutional
investors, which include retirement plans, endowments, foundations, and
bank trusts, as well as other persons or legal entities that the Fund may
approve from time to time, or for purchase by a USAA fund participating in
a fund-of-funds investment strategy (USAA fund-of-funds).
A. Security valuation – The Trust’s Board of Trustees (the Board) has
established the Valuation Committee (the Committee), and subject to
Board oversight, the Committee administers and oversees the Fund’s
valuation policies and procedures, which are approved by the Board.
Among other things, these policies and procedures allow the Fund to
utilize independent pricing services, quotations from securities dealers,
and a wide variety of sources and information to establish and adjust the
fair value of securities as events occur and circumstances warrant.
The Committee reports to the Board on a quarterly basis and makes
recommendations to the Board as to pricing methodologies and services
used by the Fund and presents additional information to the Board
regarding application of the pricing and fair valuation policies and
procedures during the preceding quarter.
The Committee meets as often as necessary to make pricing and fair
value determinations. In addition, the Committee holds regular monthly
meetings to review prior actions taken by the Committee and USAA
Asset Management Company (the Manager), an affiliate of the Fund.
Among other things, these monthly meetings include a review and analysis
of back testing reports, pricing service quotation comparisons, illiquid
securities and fair value determinations, pricing movements, and daily
stale price monitoring.
Notes to Financial Statements |
25
The value of each security is determined (as of the close of trading on
the New York Stock Exchange (NYSE) on each business day the NYSE
is open) as set forth below:
1. Equity securities, including exchange-traded funds (ETFs), except as
otherwise noted, traded primarily on a domestic securities exchange
or the over-the-counter markets, are valued at the last sales price or
official closing price on the exchange or primary market on which
they trade. Equity securities traded primarily on foreign securities
exchanges or markets are valued at the last quoted sales price, or the
most recently determined official closing price calculated according
to local market convention, available at the time the Fund is valued.
If no last sale or official closing price is reported or available, the
average of the bid and asked prices generally is used. Actively traded
equity securities listed on a domestic exchange generally are
categorized in Level 1 of the fair value hierarchy. Certain preferred
and equity securities traded in inactive markets generally are
categorized in Level 2 of the fair value hierarchy.
2. Equity securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is open,
the foreign markets may be closed. Therefore, the calculation of 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 many 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 need to be reflected in the value of
the Fund’s foreign securities. However, the Manager will monitor for
events that would materially affect the value of the Fund’s foreign
securities and, if necessary, the Committee will consider such available
information that it deems relevant and will determine a fair value for
the affected foreign securities in accordance with valuation procedures.
In addition, information from an external vendor or other sources
may be used to adjust the foreign market closing prices of foreign
equity securities to reflect what the Committee believes to be the fair
value of the securities as of the close of the NYSE. Fair valuation of
26
| USAA Real Return Fund
affected foreign equity securities may occur frequently based on
events that occur on a fairly regular basis (such as U.S. market
movements) are significant and are categorized in Level 2 of the fair
value hierarchy.
3. Investments in open-end investment companies, commingled, or other
funds, other than ETFs, are valued at their NAV at the end of each
business day and are categorized in Level 1 of the fair value hierarchy.
4. Short-term debt securities with original or remaining maturities of
60 days or less may be valued at amortized cost, provided that
amortized cost represents the fair value of such securities.
5. Debt securities with maturities greater than 60 days are valued each
business day by a pricing service (the Service) approved by the
Board. The Service uses an evaluated mean between quoted bid and
asked prices or the last sales price to value a security when, in the
Service’s judgment, these prices are readily available and are
representative of the security’s market value. For many securities,
such prices are not readily available. The Service generally prices
those securities based on methods which include consideration of
yields or prices of securities of comparable quality, coupon, maturity,
and type; indications as to values from dealers in securities; and
general market conditions. Generally, debt securities are categorized
in Level 2 of the fair value hierarchy; however, to the extent the
valuations include significant unobservable inputs, the securities
would be categorized in Level 3.
6. Repurchase agreements are valued at cost.
7. Futures are valued at the last sale price at the close of market on the
principal exchange on which they are traded or, in the absence of any
transactions that day, the last sale price on the prior trading date if it
is within the spread between the closing bid and asked prices closest
to the last reported sale price.
8. Options are valued by a pricing service at the National Best
Bid/Offer (NBBO) composite price, which is derived from the best
available bid and asked prices in all participating options exchanges
Notes to Financial Statements |
27
determined to most closely reflect market value of the options at the
time of computation of the Fund’s NAV.
9. Forward foreign currency contracts are valued on a daily basis using
forward foreign currency exchange rates obtained from an
independent pricing service and are categorized in Level 2 of the fair
value hierarchy.
10. In the event that price quotations or valuations are not readily
available, are not reflective of market value, or a significant event has
been recognized in relation to a security or class of securities, the
securities are valued in good faith by the Committee in accordance
with valuation procedures approved by the Board. The effect of fair
value pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and
the actual price realized from the sale of a security may differ
materially from the fair value price. Valuing these securities at fair
value is intended to cause 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, other pricing services, or widely used quotation
systems. General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and duration
of any restrictions on disposition of the securities, evaluation of
credit quality, 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.
28
| USAA Real Return Fund
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 indexes.
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. Derivative instruments and hedging activities – The Fund may buy, sell,
and enter into certain types of derivatives, including, but not limited to
futures contracts, options, and options on futures contracts, under
circumstances in which such instruments are expected by the portfolio
manager to aid in achieving the Fund’s investment objective. The Fund
also may use derivatives in circumstances where the portfolio manager
believes they offer an economical means of gaining exposure to a
particular asset class or securities market or to keep cash on hand to
meet shareholder redemptions or other needs while maintaining
exposure to the market. With exchange-listed futures contracts and
options, counterparty credit risk to the Fund is limited to the exchange’s
clearinghouse which, as counterparty to all exchange-traded futures
contracts and options, guarantees the transactions against default from
the actual counterparty to the transaction. The Fund’s derivative
agreements held at June 30, 2016, did not include master netting
provisions.
Futures contracts – The Fund is subject to equity price risk, interest rate
risk, and foreign currency exchange rate risk in the normal course of
pursuing its investment objectives. The Fund may use futures contracts
to gain exposure to, or hedge against, changes in the value of equities,
interest rates, or foreign currencies. A futures contract represents a
commitment for the future purchase or sale of an asset at a specified
price on a specified date. Upon entering into such contracts, the Fund is
required to deposit with the broker in either cash or securities an initial
margin in an amount equal to a certain percentage of the contract
Notes to Financial Statements |
29
amount. Subsequent payments (variation margin) are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the contract, and are recorded for financial statement purposes as
unrealized gains or losses. When the contract is closed, the Fund records
a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
Upon entering into such contracts, the Fund bears the risk of interest or
exchange rates or securities prices moving unexpectedly in an
unfavorable direction, in which case, the Fund may not achieve the
anticipated benefits of the futures contracts.
Fair Values of Derivative Instruments as of June 30, 2016*
(in thousands)
Derivatives not
accounted for as
hedging instruments
Interest rate contracts
Asset Derivatives
Statement of
Assets and
Liabilities
Location
Fair Value
Net unrealized
$90**
appreciation of
investments and
futures contracts
Liability Derivatives
Statement of
Assets and
Liabilities
Location
Fair Value
–
$–
* For open derivative instruments as of June 30, 2016, see the Portfolio of Investments, which also
is indicative of activity for the six-month period ended June 30, 2016.
** Includes cumulative appreciation/(depreciation) of futures as reported on the Portfolio of
Investments. Only current day’s variation margin is reported within the Statement of Assets and
Liabilities.
The Effect of Derivative Instruments on the Statement of Operations for
the six-month period ended June 30, 2016 (in thousands)
Derivatives not
accounted for as
Statement of
hedging instruments Operations Location
Interest rate contracts Net realized gain (loss) on
Futures transactions /
Change in net unrealized
appreciation/(depreciation)
of Futures contracts
30
| USAA Real Return Fund
Realized
gain (loss)
on derivatives
$511
Change in
unrealized
appreciation/
(depreciation)
on derivatives
$93
D. Federal taxes – The Fund’s policy is to comply with the requirements of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its income to
its shareholders. Therefore, no federal income tax provision is required.
E. Investments in securities – Security transactions are accounted for on the
date the securities are purchased or sold (trade date). Gains or losses
from sales of investment securities are computed on the identified cost
basis. Dividend income, less foreign taxes, if any, is recorded on the exdividend date. If the ex-dividend date has passed, certain dividends from
foreign securities are recorded upon notification. Interest income is
recorded daily on the accrual basis. Discounts and premiums are
amortized over the life of the respective securities, using the effective
yield method for long-term securities and the straight-line method for
short-term securities. Foreign income and capital gains on some foreign
securities may be subject to foreign taxes, which are accrued as
applicable, as a reduction to such income and realized gains. These
foreign taxes have been provided for in accordance with the
understanding of the applicable countries’ tax rules and rates.
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.
Notes to Financial Statements |
31
Separately, net realized foreign currency gains/losses may arise from sales
of foreign currency, currency gains/losses realized between the trade and
settlement dates on security transactions, and from the difference
between amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund’s books and the U.S. dollar equivalent of the
amounts received. At the end of the Fund’s fiscal year, these net realized
foreign currency gains/losses are reclassified from accumulated net
realized gain/loss to accumulated undistributed net investment income
on the Statement of Assets and Liabilities as such amounts are treated as
ordinary income/loss for tax purposes. Net unrealized foreign currency
exchange gains/losses arise from changes in the value of assets and
liabilities, other than investments in securities, resulting from changes in
the exchange rate.
G. Securities purchased on a delayed-delivery or when-issued basis – Delivery
and payment for securities that have been purchased by the Fund on a
delayed-delivery or when-issued basis or for delayed draws on loans can
take place a month or more after the trade date. During the period prior
to settlement, these securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to their delivery.
The Fund receives a commitment fee for delayed draws on loans. The
Fund maintains segregated assets with a market value equal to or greater
than the amount of its purchase commitments. The purchase of
securities on a delayed-delivery or when-issued basis and delayed-draw
loan commitments may increase the volatility of the Fund’s NAV to the
extent that the Fund makes such purchases and commitments while
remaining substantially fully invested.
H. Expenses paid indirectly – Through arrangements with the Fund’s
custodian and other banks utilized by the Fund for cash management
purposes, realized credits, if any, generated from cash balances in the
Fund’s bank accounts may be used to directly reduce the Fund’s expenses.
For the six-month period ended June 30, 2016, there were no custodian
and other bank credits.
I.
32
Indemnifications – Under the Trust’s organizational documents, its
officers and trustees are indemnified against certain liabilities arising out
| USAA Real Return Fund
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.
J. Use of estimates – The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that may affect the reported amounts
in the financial statements.
(2) LINE OF CREDIT
The Fund participates in a joint, short-term, revolving, committed loan
agreement of $500 million with USAA Capital Corporation (CAPCO), an
affiliate of the Manager. The purpose of the agreement is to meet temporary
or emergency cash needs, including redemption requests that might otherwise
require the untimely disposition of securities. Subject to availability, the Fund
may borrow from CAPCO an amount up to 5% of the Fund’s total assets at
an interest rate based on the London Interbank Offered Rate (LIBOR).
The USAA Funds that are party to the loan agreement are assessed facility
fees by CAPCO in the amount of 9.0 basis points of the amount of the
committed loan agreement. Prior to September 30, 2015, the maximum
annual facility fee was 7.0 basis points of the amount of the committed loan
agreement. The facility fees are allocated among the USAA Funds based on
their respective average net assets for the period.
The USAA Funds may request an optional increase of the committed loan
agreement from $500 million up to $750 million. If the USAA Funds
increase the committed loan agreement, the assessed facility fee by CAPCO
will be increased to 10.0 basis points.
For the six-month period ended June 30, 2016, the Fund paid CAPCO
facility fees of less than $500, which represents 0.2% of the total fees paid to
CAPCO by the USAA Funds. The Fund had no borrowings under this
agreement during the six-month period ended June 30, 2016.
Notes to Financial Statements |
33
(3) DISTRIBUTIONS
The tax basis of distributions and accumulated undistributed net investment
income will be determined based upon the Fund’s tax year-end of
December 31, 2016, in accordance with applicable tax law.
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 December 31, 2015, the Fund had net capital loss carryforwards of
$28,625,000, for federal income tax purposes as shown in the table below. It
is unlikely that the Board will authorize a distribution of capital gains
realized in the future until the capital loss carryforwards have been used.
Capital Loss Carryforwards
Tax Character
(No Expiration)
Balance
Short-Term
Long-Term
$ 9,652,000
18,973,000
Total
$28,625,000
For the six-month period ended June 30, 2016, the Fund did not incur any
income tax, interest, or penalties, and has recorded no liability for net
unrecognized tax benefits relating to uncertain income tax positions. On an
ongoing basis, the Manager will monitor the Fund’s tax positions to
determine if adjustments to this conclusion are necessary. The statute of
limitations on the Fund’s tax return filings generally remain open for the
three preceding fiscal reporting year ends and remain subject to examination
by the Internal Revenue Service and state taxing authorities.
(4) INVESTMENT TRANSACTIONS
Cost of purchases and proceeds from sales/maturities of securities, excluding
short-term securities, for the six-month period ended June 30, 2016, were
$199,882,000 and $429,159,000, respectively.
34
| USAA Real Return Fund
As of June 30, 2016, the cost of securities, including short-term securities, for
federal income tax purposes, was approximately the same as that reported in
the financial statements.
Gross unrealized appreciation and depreciation of investments as of June 30,
2016, were $6,904,000 and $3,453,000, respectively, resulting in net
unrealized appreciation of $3,451,000.
(5) CAPITAL SHARE TRANSACTIONS
At June 30, 2016, there were an unlimited number of shares of capital stock
at no par value authorized for the Fund.
Capital share transactions for the Institutional Shares resulted from
purchases and sales by the affiliated USAA fund-of-funds as well as other
persons or legal entities that the Fund may approve from time to time.
Capital share transactions for all classes were as follows, in thousands:
Six-Month Period Ended
June 30, 2016
Shares
Amount
Fund Shares:
Shares sold
Shares issued from reinvested
dividends
Shares redeemed
Net decrease from capital share
transactions
Institutional Shares:
Shares sold
Shares issued from reinvested
dividends
Shares redeemed
Net decrease from capital share
transactions
308
2,821
2,132
$ 20,753
4
(5,227)
34
(46,437)
62
(2,487)
580
(24,254)
(4,915)
$ (43,582)
(293)
$ (2,921)
5,567
$ 49,458
5,692
$ 55,635
106
343
(245,548) (14,137)
3,238
(134,196)
11
(27,410)
(21,832)
$
Year Ended
December 31, 2015
Shares
Amount
$(195,984)
(8,102)
$ (75,323)
Notes to Financial Statements |
35
(6) TRANSACTIONS WITH MANAGER
A. Management fees – The Manager provides investment management
services to the Fund pursuant to an Advisory Agreement. Under this
agreement, the Manager is responsible for managing the business and
affairs of the Fund and for directly managing the day-to-day investment
of the Fund’s assets, subject to the authority of and supervision by the
Board. The Manager also is authorized to select (with approval of the
Board and without shareholder approval) one or more subadvisers to
manage the day-to-day investment of a portion of the Fund’s assets.
For the six-month period ended June 30, 2016, the Fund had no
subadviser(s).
The Fund’s management fees are accrued daily and paid monthly at an
annualized rate of 0.50% of the Fund’s average net assets. For the sixmonth period ended June 30, 2016, the Fund incurred management fees,
paid or payable to the Manager, of $419,000.
B. Administration and servicing fees – The Manager provides certain
administration and servicing functions for the Fund. For such services,
the Manager receives a fee accrued daily and paid monthly at an
annualized rate of 0.15% of average net assets of the Fund Shares and
0.10% of average net assets of the Institutional Shares. For the sixmonth period ended June 30, 2016, the Fund Shares and Institutional
Shares incurred administration and servicing fees, paid or payable to the
Manager, of $24,000 and $68,000, 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 Board has
approved the reimbursement of a portion of these expenses incurred by
the Manager. For the six-month period ended June 30, 2016, the Fund
reimbursed the Manager $2,000 for these compliance and legal services.
These expenses are included in the professional fees on the Fund’s
Statement of Operations.
C. Expense limitation – Effective January 1, 2016, the Manager agreed,
through May 1, 2017, to limit the total annual operating expenses of
36
| USAA Real Return Fund
the Fund Shares and the Institutional Shares to 1.00% and 0.90%,
respectively, of their average net assets, excluding extraordinary expenses
and before reductions of any expenses paid indirectly, and will reimburse
the Fund Shares and Institutional Shares for all expenses in excess of
those amounts. This expense limitation arrangement may not be changed
or terminated through May 1, 2017, without approval of the Board, and
may be changed or terminated by the Manager at any time after that
date. For the six-month period ended June 30, 2016, the Fund incurred
reimbursable expenses from the Manager for the Fund Shares and the
Institutional Shares of $63,000 and $26,000, respectively, of which
$39,000 was receivable from the Manager.
D. Transfer agent’s fees – USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund Shares based on an annual
charge of $23 per shareholder account plus out-of-pocket expenses. SAS
pays a portion of these fees to certain intermediaries for the
administration and servicing of accounts that are held with such
intermediaries. Transfer agent’s fees for Institutional Shares are paid
monthly based on a fee accrued daily at an annualized rate of 0.10% of
the Institutional Shares’ average net assets, plus out-of-pocket expenses.
For the six-month period ended June 30, 2016, the Fund Shares and
Institutional Shares incurred transfer agent’s fees, paid or payable to
SAS, of $68,000 each.
E. Underwriting services – USAA Investment Management Company
provides exclusive underwriting and distribution of the Fund’s shares on
a continuing best-efforts basis and receives no fee or other compensation
for these services.
(7) TRANSACTIONS WITH AFFILIATES
The Fund offers its Institutional Shares for investment by other USAA funds
and is one of 20 USAA mutual funds in which the affiliated USAA fund-offunds invest. The USAA fund-of-funds do not invest in the underlying funds
for the purpose of exercising management or control. As of June 30, 2016,
Notes to Financial Statements |
37
the USAA fund-of-funds owned the following percentages of the total
outstanding shares of the Fund:
Affiliated USAA Fund
Ownership %
Target Retirement Income
Target Retirement 2020
Target Retirement 2030
Target Retirement 2040
Target Retirement 2050
Target Retirement 2060
6.8
8.7
10.5
5.1
1.8
0.1
The Manager is indirectly wholly owned by United Services Automobile
Association (USAA), a large, diversified financial services institution.
Certain trustees and officers of the Fund are also directors, officers, and/or
employees of the Manager. None of the affiliated trustees or Fund officers
received any compensation from the Fund.
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
During the six-month period ended June 30, 2016, in accordance with
affiliated transaction procedures approved by the Board, purchases and sales
of security transactions were executed between the Fund and the following
affiliated USAA funds at the then-current market price with no brokerage
commissions incurred.
Purchaser
Cost to
Purchaser
Net Realized
Gain (Loss) to
Seller
Managed Allocation
Cornerstone Aggressive
$478,000
93,000
$ (8,000)
(48,000)
Seller
Real Return
Real Return
38
| USAA Real Return Fund
(9) FINANCIAL HIGHLIGHTS – FUND SHARES
Per share operating performance for a share outstanding throughout each
period is as follows:
Six-Month
Period Ended
June 30,
2016
Net asset value at
beginning of period
Income (loss) from
investment operations:
Net investment income
Net realized and
unrealized gain (loss)
Total from investment
operations
Less distributions from:
Net investment income
Realized capital gains
Total distributions
Net asset value at
end of period
$ 9.14
.01(a)
2015
Year Ended December 31,
2014
2013
2012
2011
$ 9.99
$ 10.22
$ 10.52
$ 9.84
$ 10.02
.07
.20
.22
.38
.34
(a)
(.84)
(.17)
(.27)
.71
(.12)
.72(a)
(.77)
.03
(.05)
1.09
.22
(.01)
–
(.01)
(.08)
–
(.08)
(.20)
(.06)
(.26)
(.22)
(.03)
(.25)
(.32)
(.09)
(.41)
(.34)
(.06)
(.40)
$ 9.85
$ 9.14
$ 9.99
$ 10.22
$ 10.52
.71
$
9.84
Total return (%)*
7.91
(7.75)
.27
(.44)
11.13
2.18
Net assets at end
of period (000)
$26,433
$69,435 $78,826
$77,567 $70,209 $167,716
Ratios to average
net assets:**
Expenses (%)(c)
1.00(b),(e) 1.02
.94(d)
.85
.85
.85
Expenses, excluding
reimbursements (%)(c)
1.40(b)
1.02
.99
1.22
1.51
1.48
Net investment income (%)
.27(b)
1.10
1.84
2.24
3.14
3.50
Portfolio turnover (%)
119
35
24
41
24
24
* Assumes reinvestment of all net investment income and realized capital gain distributions, if any,
during the period. Includes adjustments in accordance with U.S. generally accepted accounting
principles and could differ from the Lipper reported return. Total returns for periods of less than
one year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were $31,876,000.
(a) Calculated using average shares. For the six-month period ended June 30, 2016, average shares were
3,494,000.
(b) Annualized. The ratio is not necessarily indicative of 12 months of operations.
(c) Reflects total annual 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%)†
† Represents less than 0.01% of average net assets.
(d) Prior to May 1, 2014, the Manager had voluntarily agreed to limit the annual expenses of the Fund
Shares to 0.85% of the Fund Shares’ average net assets.
(e) Effective January 1, 2016, the Manager voluntarily agreed to limit the annual expenses of the Fund
Shares to 1.00% of the Fund Shares’ average net assets.
Notes to Financial Statements |
39
(9) FINANCIAL HIGHLIGHTS (continued) –
INSTITUTIONAL SHARES
Per share operating performance for a share outstanding throughout each
period is as follows:
Six-Month
Period Ended
June 30,
2016
Net asset value at
beginning of period
Income (loss) from
investment operations:
Net investment income
Net realized and
unrealized gain (loss)
Total from investment
operations
Less distributions from:
Net investment income
Realized capital gains
Total distributions
Net asset value at
end of period
$ 9.15
2015
Year Ended December 31,
2014
2013
2012
$ 10.00 $ 10.23
.01(a)
$ 10.53
$
2011
9.85
$ 10.03
.10
.22
.25
.32
.36
.71
(a)
(.85)
(.17)
(.28)
.79
(.12)
.72
(a)
(.75)
.05
(.03)
1.11
.24
(.10)
–
(.10)
(.22)
(.06)
(.28)
(.24)
(.03)
(.27)
(.34)
(.09)
(.43)
(.36)
(.06)
(.42)
9.15 $ 10.00
$ 10.23
$ 10.53
$ 9.85
(.01)
–
(.01)
$ 9.86
$
Total return (%)*
7.90
(7.56)
.46
(.24)
11.38
2.38
Net assets at end
of period (000)
$81,534 $275,332 $381,975 $334,673 $228,760 $46,694
Ratios to average
net assets:**
Expenses (%)(b)
.86(c),(d)
.82
.75(e)
.65
.65
.65
Expenses, excluding
reimbursements (%)(b)
.90(c)
.82
.80
.81
.81
.76
Net investment income (%)
.24(c)
1.33
2.02
2.43
3.58
3.71
Portfolio turnover (%)
119
35
24
41
24
24
* Assumes reinvestment of all net investment income and realized capital gain distributions, if any,
during the period. Includes adjustments in accordance with U.S. generally accepted accounting
principles and could differ from the Lipper reported return. Total returns for periods of less than one
year are not annualized.
** For the six-month period ended June 30, 2016, average net assets were $134,527,000.
(a) Calculated using average shares. For the six-month period ended June 30, 2016, average shares were
15,227,000.
(b) Reflects total annual operating expenses of the Institutional Shares before reductions of any expenses
paid indirectly. The Institutional Shares’ expenses paid indirectly decreased the expense ratios as follows:
–
–
–
(.00%)†
(.00%)†
(.00%)†
† Represents less than 0.01% of average net assets.
(c) Annualized. The ratio is not necessarily indicative of 12 months of operations.
(d) Effective January 1, 2016, the Manager voluntarily agreed to limit the annual expenses of the
Institutional Shares to 0.90% of the Institutional Shares’ average net assets.
(e) Prior to May 1, 2014, the Manager had voluntarily agreed to limit the annual expenses of the
Institutional Shares to 0.65% of the Institutional Shares’ average net assets.
40
| USAA Real Return Fund
EXPENSE EXAMPLE
June 30, 2016 (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 January 1, 2016,
through June 30, 2016.
ACTUAL EXPENSES
The line labeled “actual” under each share class in the table 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
for your share class in the “actual” 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
Expense Example |
41
of return of 5% per year before expenses, which is not the Fund’s actual
return. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the
period. You may use this 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 line labeled “hypothetical”
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.
Beginning
Account Value
January 1, 2016
Ending
Account Value
June 30, 2016
Expenses Paid
During Period*
January 1, 2016 –
June 30, 2016
$1,000.00
$1,079.10
$5.17
Hypothetical
(5% return before expenses)
1,000.00
1,019.89
5.02
Institutional Shares
Actual
1,000.00
1,079.00
4.45
Hypothetical
(5% return before expenses)
1,000.00
1,020.59
4.32
Fund Shares
Actual
*Expenses are equal to the annualized expense ratio of 1.00% for Fund Shares and 0.86% 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/366 days (to reflect the one-half-year period). The
Fund’s actual ending account values are based on its actual total returns of 7.91% for Fund Shares and
7.90% for Institutional Shares for the six-month period of January 1, 2016, through June 30, 2016.
42
| USAA Real Return Fund
ADVISORY AGREEMENT(S)
June 30, 2016 (unaudited)
At an in-person meeting of the Board of Trustees (the Board) held on April
22, 2016, the Board, including the Trustees who are not “interested persons”
(as that term is defined in the Investment Company Act of 1940, as amended)
of the Trust (the Independent Trustees), approved for an annual period the
continuance of the Advisory Agreement between the Trust and the Manager
with respect to the Fund.
In advance of the meeting, the Trustees received and considered a variety of
information relating to the Advisory Agreement and the Manager, and were
given the opportunity to ask questions and request additional information
from management. The information provided to the Board included, among
other things: (i) a separate report prepared by an independent third party,
which provided a statistical analysis comparing the Fund’s investment
performance, expenses, and fees to comparable investment companies; (ii)
information concerning the services rendered to the Fund, as well as
information regarding the Manager’s revenues and costs of providing services
to the Fund and compensation paid to affiliates of the Manager; and (iii)
information about the Manager’s operations and personnel. Prior to voting,
the Independent Trustees reviewed the proposed continuance of the Advisory
Agreement with management and with experienced counsel retained by the
Independent Trustees (Independent Counsel) and received materials from such
Independent Counsel discussing the legal standards for their consideration
of the proposed continuance of the Advisory Agreement with respect to the
Fund. The Independent Trustees also reviewed the proposed continuance of
the Advisory Agreement with respect to the Fund in private sessions with
Independent Counsel at which no representatives of management were present.
At each regularly scheduled meeting of the Board and its committees, the
Board receives and reviews, among other things, information concerning the
Fund’s performance and related services provided by the Manager. At the
meeting at which the renewal of the Advisory Agreement is considered,
Advisory Agreement(s) |
43
particular focus is given to information concerning Fund performance, fees
and total expenses as compared to comparable investment companies, and
the Manager’s profitability with respect to the Fund. However, the Board
noted that the evaluation process with respect to the Manager is an ongoing
one. In this regard, the Board’s and its committees’ consideration of the
Advisory Agreement included certain information previously received at
such meetings.
ADVISORY AGREEMENT
After full consideration of a variety of factors, the Board, including the
Independent Trustees, voted to approve the Advisory Agreement. In
approving the Advisory Agreement, the Trustees did not identify any single
factor as controlling, and each Trustee may have attributed different weights
to various factors. Throughout their deliberations, the Independent Trustees
were represented and assisted by Independent Counsel.
Nature, Extent, and Quality of Services – In considering the nature, extent,
and quality of the services provided by the Manager under the Advisory
Agreement, the Board reviewed information provided by the Manager relating
to its operations and personnel. The Board also took into account its
knowledge of the Manager’s management and the quality of the performance
of the Manager’s duties through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the Manager
and the services provided to the Fund by the Manager under the Advisory
Agreement, as well as other services provided by the Manager and its affiliates
under other agreements, and the personnel who provide these services. In
addition to the investment advisory services provided to the Fund, the Manager
and its affiliates provide administrative services, stockholder services, oversight
of Fund accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the operation of
the Fund and the Trust.
The Board considered the Manager’s management style and the performance
of the Manager’s duties under the Advisory Agreement. The Board considered
the level and depth of knowledge of the Manager, including the professional
experience and qualifications of its senior and investment personnel, as well
44
| USAA Real Return Fund
as current staffing levels. The allocation of the Fund’s brokerage, including
the Manager’s process for monitoring “best execution” was also considered.
The Manager’s role in coordinating the activities of the Fund’s other service
providers also was considered. The Board also considered the Manager’s risk
management processes. The Board considered the Manager’s financial
condition and that it had the financial wherewithal to continue to provide the
same scope and a 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 the
Fund, as well as the other funds in the Trust. 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 Trustees, guided also by information obtained from
their experiences as trustees of the Trust, also focused on the quality of the
Manager’s compliance and administrative staff.
Expenses and Performance – In connection with its consideration of the
Advisory Agreement, the Board evaluated the Fund’s advisory fees and total
expense ratio as compared to other open-end investment companies deemed
to be comparable to the Fund as determined by the independent third party
in its report. The Fund’s expenses were compared to (i) a group of investment
companies chosen by the independent third party to be comparable to the
Fund based upon certain factors, including fund type, comparability of
investment objective and classification, sales load type (in this case, retail
investment companies with front-end loads and no sales loads), asset size,
and expense components (the “expense group”) and (ii) a larger group of
investment companies that includes all front-end load and no-load retail
open-end investment companies with the same investment classification/
objective as the Fund regardless of asset size, excluding outliers (the “expense
universe”). Among other data, the Board noted that the Fund’s management
fee rate – which includes advisory and administrative services – was below
the median of its expense group and its expense universe. The data indicated
that the Fund’s total expenses were below the median of its expense group
and its expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates, including the high
Advisory Agreement(s) |
45
quality of services received by the Fund from the Manager. The Board also
noted the level and method of computing the management fee.
In considering the Fund’s performance, the Board noted that it reviews at its
regularly scheduled meetings information about the Fund’s performance
results. The Trustees also reviewed various comparative data provided to them
in connection with their consideration of the renewal of the Advisory
Agreement, including, among other information, a comparison of the
Fund’s average annual total returns with its Lipper index and with that of
other mutual funds deemed to be in its peer group by the independent third
party in its report (the “performance universe”). The Fund’s performance
universe consisted of the Fund and all retail and institutional open-end
investment companies with the same classification/objective as the Fund
regardless of asset size or primary channel of distribution. This comparison
indicated that, among other data, the Fund’s performance was lower than
the average of its performance universe and its Lipper index for the one-,
three-, and five-year periods ended December 31, 2015. The Board also noted
that the Fund’s percentile performance ranking was in the bottom 50% of its
performance universe for the one-, three-, and five-year periods ended
December 31, 2015. The Board took into account management’s discussion
of the Fund’s performance, including the impact of market conditions on the
Fund’s performance relative to its peers.
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 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 information included
a review of the methodology used in the allocation of certain costs to the
Fund. The Trustees reviewed the profitability of the Manager’s relationship
with the Fund before tax 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
46
| USAA Real Return Fund
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 Fund’s 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 current Advisory Agreement with the Manager, among others: (i) the
Manager has demonstrated that it possesses the capability and resources to
perform the duties required of it under the Advisory Agreement; (ii) the
Manager maintains an appropriate compliance program; (iii) the performance
of the Fund is being addressed; (iv) the Fund’s current advisory expenses
are reasonable in relation to the services to be provided by the Manager; and
(v) the Manager and its affiliates’ anticipated level of profitability from their
relationship with the Fund is reasonable in light of the nature and high
quality of services provided by the Manager and the type of fund. Based on
its conclusions, the Board determined that the continuation of the Advisory
Agreement would be in the best interests of the Fund and its shareholders.
Advisory Agreement(s) |
47
Trustees
Daniel S. McNamara
Robert L. Mason, Ph.D.
Jefferson C. Boyce
Dawn M. Hawley
Paul L. McNamara
Barbara B. Ostdiek, Ph.D.
Michael F. Reimherr
Administrator and
Investment Adviser
USAA Asset Management Company
P.O. Box 659453
San Antonio, Texas 78265-9825
Underwriter and
Distributor
USAA Investment Management Company
P.O. Box 659453
San Antonio, Texas 78265-9825
Transfer Agent
USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
Custodian and
Accounting Agent
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
Independent
Registered Public
Accounting Firm
Ernst & Young LLP
100 West Houston St., Suite 1700
San Antonio, Texas 78205
Mutual Fund
Self-Service 24/7
at usaa.com
Under “My Accounts” on
usaa.com select your mutual fund
account and either click the link or
select ‘I want to...’ and select
the desired action.
Or call
(800) 531-USAA (8722)
(210) 531-8722
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) or (210) 531-8722; (ii) at usaa.com; and (iii) in summary within the
Statement of Additional Information on the SEC’s website at http://www.sec.gov. Information
regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month
period ended June 30 is available without charge (i) at usaa.com; and (ii) on the SEC’s website at
http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third
quarters of each fiscal year on Form N-Q. These Forms N-Q are available at no charge (i) by calling
(800) 531-USAA (8722) or (210) 531-8722; (ii) at usaa.com; and (iii) on the SEC’s website at
http://www.sec.gov. These Forms N-Q also may be reviewed and copied at the SEC’s Public
Ref erence Room in Washington, D.C. Information on the operation of the Public Ref erence Room
may be obtained by calling (800) 732-0330.
94423-0816
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