SEMIANNUAL REPORT USAA CORNERSTONE EQUITY FUND NOVEMBER

Transcription

1 SEMIANNUAL REPORT USAA CORNERSTONE EQUITY FUND NOVEMBER 30, 2015

2 PRESIDENT S MESSAGE A new year is a great time to reevaluate your investment plan to help ensure you are staying on track toward your financial goals. January 2016 The financial markets were volatile during the reporting period ended November 30, 2015, but U.S. stocks, the broad U.S. fixed-income market, and longer-term U.S. Treasury securities had experienced minimal change when the reporting period came to an end. Emerging markets stocks, in contrast, generally suffered losses, while stocks in non-u.s. developed markets also declined, though to a lesser extent. When the reporting period began in June 2015, Greece was once again in the headlines, as the country s debt problems reemerged and investors speculated about the future of the European Union. During July 2015, market turbulence increased. Worries about China s slow economic growth triggered a steep decline in the Chinese equity market, with many other emerging stock markets falling in a similar fashion. In response, the Chinese authorities surprised many investors by devaluing its currency, which added to investors existing concerns about the health of the global economy. The result was a broad sell-off in riskier asset classes and a flight to the perceived safety of U.S. Treasury securities. Meanwhile, a divergence in global economic growth was reflected in the monetary policies being pursued by the world s central banks. Persistent economic weakness outside the United States led many central banks to cut interest rates and boost quantitative easing, resulting in low and even negative global interest rates. At the same time, the U.S. economy continued to grow, albeit slowly, and the Federal Reserve (the Fed) strongly signaled that it would begin to raise interest rates for the first time in seven years. As a result, shorter-term U.S. Treasury yields rose during the reporting period, while longer-term U.S. Treasury yields edged up slightly. On December 16, 2015, the Fed raised the target range for the federal funds rate from 0.25% to 0.50%. At USAA Investments, we believe it is less important when the first interest rate increase occurs than how quickly the Fed affects interest rates. We have long believed Fed policymakers are unlikely to raise interest rates rapidly because they will not want to jeopardize the U.S. economy. In addition, there appears to be no pressing reason, such as a higher rate of inflation, for them

3 to do so. Therefore, the modest interest rate increase in December 2015 is consistent with our outlook. Also of note during the reporting period was the steady decline in commodities prices. What caused the drop in oil, natural gas, coal, and industrial metals prices? In our opinion, there was no single reason. Certainly, the divergence in global economic growth and central bank monetary policy created uncertainty in the world s commodities markets. But softening global demand and, in the case of energy, an increase in supply were also key factors. In addition, commodities are generally priced in U.S. dollars and the appreciation of the U.S. dollar during the reporting period dampened prices. A new year is a great time to reevaluate your investment plan to help ensure you are staying on track toward your financial goals. Investors also may want to consider making a 2016 IRA contribution. The sooner investors invest their money, the sooner it can start working for them. For assistance, please feel free to give our financial advisors a call. Looking ahead, we expect to see continued volatility at least in the near term in the financial markets. It s been several years since we ve seen this kind of market turbulence, so the events of the reporting period are a helpful reminder that volatility is to be expected from time to time and is normal market behavior. Long-term investors should strive to make decisions based on their long-term objectives, time horizon, and risk tolerance, rather than in response to market turmoil. On behalf of all of us at USAA Investments, we wish you a happy, healthy, and prosperous year in Thank you for your continued investment in our family of mutual funds. Sincerely, Brooks Englehardt President USAA Investments Past performance is no guarantee of future results. As interest rates rise, bond prices generally fall; given the historically low interest rate environment, risks associated with rising interest rates may be heightened. Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability. Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies. There may be less publicly available information relating to foreign companies than those in the U.S. Foreign securities may also be subject to foreign taxes. Investments made in emerging market countries may be particularly volatile. Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.

4 TABLE OF CONTENTS Fund Objective 1 Managers Commentary 2 Investment Overview 5 Financial Information Portfolio of Investments 9 Notes to Portfolio of Investments 10 Financial Statements 11 Notes to Financial Statements 14 Expense Example 23 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

5 FUND OBJECTIVE The USAA Cornerstone Equity Fund (the Fund) seeks capital appreciation over the long term. Types of Investments The Fund invests at least 80% of its assets in a selection of USAA mutual funds (underlying USAA Funds) consisting of a long-term target asset allocation in equity securities. This is often referred to as a fund-of-funds investment strategy. The target asset class allocation can deviate from time to time from these targets as market conditions warrant. This 80% policy may be changed upon at least 60 days written notice to shareholders. IRA DISTRIBUTION WITHHOLDING DISCLOSURE We generally must withhold federal income tax at a rate of 10% of the taxable portion of your distribution and, if you live in a state that requires state income tax withholding, at your state s set rate. However, you may elect not to have withholding apply or to have income tax withheld at a higher rate. 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) 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

6 MANAGERS COMMENTARY ON THE FUND John P. Toohey, CFA USAA Asset Management Company Wasif A. Latif USAA Asset Management Company How did the global financial markets perform during the reporting period? The reporting period ended November 30, 2015, proved to be a challenging time for the world financial markets as concerns about slow global growth, China s currency devaluation, and the potential for an interest rate increase by the Federal Reserve (the Fed) combined to weigh upon investor sentiment. U.S. equities generally finished the reporting period with a negative return, but they generated returns above those of the international markets. The U.S. economy appeared to be on track to deliver growth of approximately 2% in the second half of 2015 amid strength in the housing market, employment, and consumer spending. While low compared to historical standards, this rate is nonetheless higher than the majority of the world s developed economies a positive for U.S. stocks relative performance during the reporting period. Within the domestic market, small-cap stocks generally underperformed large-cap stocks as investors appeared averse to risk. Developed market international stocks finished with a loss and underperformed U.S. equities which was likely due to mounting concerns about slowing economic growth in both Europe and Japan. In addition, the weakness in foreign currencies relative to the U.S. dollar translated to lower total returns for U.S.-based investors. Emerging market stocks also generally finished the reporting period with a loss. Falling commodity prices, together with China s move toward a consumer-led economy from one driven primarily by fixed-asset investment, likely led to slower Refer to page 7 for benchmark definitions. Past performance is no guarantee of future results. 2 USAA Cornerstone Equity Fund

7 growth in many of the exporting economies within the asset class. In addition, currency weakness compelled many central banks to raise interest rates even as growth slowed. Together, these factors caused the emerging markets to close the reporting period near the low end of their range for the past five years. The impact of weaker commodity prices was not limited to the emerging markets. Stocks in the gold-mining sector fell sharply as well, reflecting the effect of falling gold prices on their profit outlook. How did the USAA Cornerstone Equity Fund (the Fund) perform during the reporting period? For the reporting period ended November 30, 2015, the Fund had a total return of 5.44%. This compares to a return of 5.43% for the MSCI All-Country World Index and 4.73% for the Cornerstone Equity 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. The Fund employs a diversified, long-term approach that favors undervalued market segments and avoids those that appear more richly priced. While this strategy led to underperformance during the reporting period, we remain confident in the Fund s overall positioning. The Fund s overweight position in the developed international markets was the primary factor affecting performance during a time in which U.S. equities delivered superior returns. Nevertheless, we retain this positioning for the Fund on the belief that the foreign markets offer both attractive relative valuations and the potential for improving corporate earnings. In addition, we believe international equities can benefit from accommodative monetary policies of the central banks in Europe and Japan relative to the Fed s current monetary policy. The Fund s allocation to the emerging markets also pressured results given the substantial underperformance of the market segment. Although we Managers Commentary on the Fund 3

8 trimmed the Fund s positions during the course of the year in order to manage risk, we maintained an allocation to emerging markets on the belief that emerging market stocks continue to offer superior long-term return potential relative to developed markets. The Fund s U.S. equity portfolio lost ground in the aggregate, but it outpaced the other allocations within the Fund. We continue to invest the Fund s domestic equity portfolio in large-cap stocks based on our belief that they offer attractive valuations relative to their mid- and small-cap counterparts. This aspect of our positioning for the Fund contributed to its performance during the reporting period, illustrating the potential benefits of our value-oriented approach. The Fund s exposure to gold stocks detracted from performance. While the prices of gold and the related equities fell during the reporting period, we believe this asset class remains essential to diversification through its ability to offset the potential long-term impact of inflation. The market backdrop remains uncertain as we move toward 2016, with the Fed s monetary policy, China s growth outlook, and geopolitical headlines all representing factors that are affecting investor sentiment. In this environment, our approach is to remain focused on identifying asset classes that have the potential to offer value. The reason for this is simple: valuation is one of the strongest indicators of longer-term returns. While a value-driven approach may not always work for a quarter-to-quarter basis, we measure success in years, not months. With this as background, we believe the Fund will be better served by a continued emphasis on diversification and a preference for market segments with attractive valuations. Thank you for your interest in the Fund. The assets of the Cornerstone Equity Fund will be invested in other USAA funds and will indirectly bear expenses and reflect the risks of the underlying funds in which it invests. The underlying funds may be invested in, among other things: (1) exchange-traded funds; (2) futures, options, and other derivatives; (3) non-investment grade securities; (4) precious metals and minerals companies; (5) real estate investment trusts; (6) money market instruments; and (7) foreign and emerging markets. These types of investments and asset classes may be more volatile than others. In addition, it is possible that a particular asset allocation used by the Manager may not produce the intended result. 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. The USAA Precious Metals and Minerals Fund is subject to additional risks, such as currency fluctuation, market illiquidity, political instability and increased price volatility. It may be more volatile than a fund that diversifies across many industries and companies. Diversification is a technique intended to help reduce risk and does not guarantee a profit or prevent a loss. 4 USAA Cornerstone Equity Fund

9 INVESTMENT OVERVIEW USAA CORNERSTONE EQUITY FUND (THE FUND) (Ticker Symbol: UCEQX) 11/30/15 5/31/15 Net Assets $94.8 Million $91.7 Million Net Asset Value Per Share $12.87 $13.61 AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/15 5/31/15-11/30/15* 1 Year Since Inception 6/8/ % 2.19% 9.02% AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/15 1 Year Since Inception 6/8/ % 8.12% EXPENSE RATIOS AS OF 5/31/15** Before Reimbursement 1.16% After Reimbursement 1.02% (Includes acquired fund fees and expenses of 0.92%) 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 October 1, 2015, and are calculated as a percentage of average net assets. USAA Asset Management Company (the Manager) has agreed, through October 1, 2016, to make payments or waive management, administration, and other fees to limit the expenses of the Fund so that the total annual operating expenses (exclusive of commission recapture, expense offset arrangements, acquired fund fees and expenses, and extraordinary expenses) do not exceed an annual rate of 0.10% of the Fund s average net assets. This reimbursement arrangement may not be changed or terminated during this time period without approval of the Fund s Board of Trustees and may be changed or terminated by the Manager at any time after October 1, If the total annual operating expense ratio of the Fund is lower than 0.10%, the Fund will operate at the lower expense ratio. These 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. Investment Overview 5

10 CUMULATIVE PERFORMANCE COMPARISON $16,000 $15,000 $14,000 $14,878 $14,669 $13,510 $13,000 $12,000 $11,000 $10,000 05/12 11/12 05/13 11/13 05/14 11/14 05/15 11/15 Cornerstone Equity Composite Index $14,878 MSCI-All Country World Index $14,669 USAA Cornerstone Equity Fund $13,510 Data from 5/31/12 through 11/30/15.* 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 indexes does not reflect the deduction of any fees, expenses, or taxes. *The performance of the Cornerstone Equity Composite Index and MSCI All-Country World Index is calculated from the end of the month, May 31, 2012, while the inception date of the Cornerstone Equity Fund is June 8, There may be a slight variation of the performance numbers because of this difference. 6 USAA Cornerstone Equity Fund

11 The graph on page 6 illustrates the comparison of a $10,000 hypothetical investment in the USAA Cornerstone Equity Fund to the benchmarks listed below. The Manager has developed the Composite Index, which is used to measure the Fund s performance. The custom benchmark was created by the Manager to show how the Fund s performance compares with the returns of an index or indexes with similar asset allocations. The Cornerstone Equity Composite Index is a combination of unmanaged indexes representing the Fund s model allocation, and consists of the MSCI USA Investable Market Index (IMI) (56%), the MSCI ACWI ex USA IMI (37%), the Bloomberg Commodity Index Total Return (2.5%), the MSCI U.S. Real Estate Investment Trust (REIT) Index (2.5%), and the Barclays U.S. Treasury - Bills (1 3M) (2%). The unmanaged MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. Investment Overview 7

12 ASSET ALLOCATION 11/30/15 Investment Allocation USAA Fund: Aggressive Growth 4.9% Emerging Markets 8.0% Growth 7.4% Income Stock 11.1% International 29.7% Precious Metals and Minerals 2.0% S&P 500 Index 14.7% Small Cap Stock 10.6% Value 11.1% Total Equity & Alternative 99.5% Cash: Money Market Instruments 0.4% Percentages are of the net assets of the Fund and may not equal 100%. 8 USAA Cornerstone Equity Fund

13 PORTFOLIO OF INVESTMENTS November 30, 2015 (unaudited) Market Number Value of Shares Security (000) EQUITY & ALTERNATIVE FUNDS (99.5%) 109,104 USAA Aggressive Growth Fund $ 4, ,847 USAA Emerging Markets Fund 7, ,480 USAA Growth Fund 7, ,372 USAA Income Stock Fund 10, ,910 USAA International Fund 28, ,343 USAA Precious Metals and Minerals Fund 1, ,370 USAA S&P 500 Index Fund 13, ,818 USAA Small Cap Stock Fund 9, ,050 USAA Value Fund 10,558 Total Equity & Alternative Funds (cost: $89,463) 94,366 MONEY MARKET INSTRUMENTS (0.4%) MONEY MARKET FUNDS (0.4%) 399,194 State Street Institutional Liquid Reserves Fund Premier Class, 0.15% (a) (cost: $399) 399 Total Investments (cost: $89,862) $94,765 ($ in 000s) VALUATION HIERARCHY (LEVEL 1) (LEVEL 2) (LEVEL 3) Quoted Prices Other Significant Significant in Active Markets Observable Unobservable Assets for Identical Assets Inputs Inputs Total Equity & Alternative Funds $94,366 $ $ $94,366 Money Market Instruments: Money Market Funds Total $94,765 $ $ $94,765 For the period of June 1, 2015, through November 30, 2015, there were no transfers of securities between levels. The Fund s policy is to recognize any transfers into and out of the levels as of the beginning of the period in which the event or circumstance that caused the transfer occurred. Portfolio of Investments 9

14 NOTES TO PORTFOLIO OF INVESTMENTS November 30, 2015 (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. The underlying funds in which the Fund invests are managed by USAA Asset Management Company, an affiliate of the Fund. The Fund invests in the Reward Shares of the USAA S&P 500 Index Fund and the Institutional Shares of the other USAA mutual funds. SPECIFIC NOTES (a) Rate represents the money market fund annualized seven-day yield at November 30, See accompanying notes to financial statements. 10 USAA Cornerstone Equity Fund

15 STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS) November 30, 2015 (unaudited) ASSETS Investments in affiliated underlying funds, at value (cost of $89,463) $94,366 Investments in other securities, at value (cost of $399) 399 Receivables: Capital shares sold 178 USAA Asset Management Company (Note 5C) 27 Total assets 94,970 LIABILITIES Payables: Capital shares redeemed 113 Other accrued expenses and payables 39 Total liabilities 152 Net assets applicable to capital shares outstanding $94,818 NET ASSETS CONSIST OF: Paid-in capital $89,501 Accumulated undistributed net investment income 214 Accumulated net realized gain on investments 200 Net unrealized appreciation of investments 4,903 Net assets applicable to capital shares outstanding $94,818 Capital shares outstanding, unlimited number of shares authorized, no par value 7,369 Net asset value, redemption price, and offering price per share $ See accompanying notes to financial statements. Financial Statements 11

16 STATEMENT OF OPERATIONS (IN THOUSANDS) Six-month period ended November 30, 2015 (unaudited) INVESTMENT INCOME Income distributions from affiliated underlying funds $ 206 EXPENSES Custody and accounting fees 21 Postage 8 Shareholder reporting fees 6 Trustees fees 13 Registration fees 11 Professional fees 33 Other 3 Total expenses 95 Expenses reimbursed (50) Net expenses 45 NET INVESTMENT INCOME 161 NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS Net realized loss on sales of affiliated underlying funds (1,379) Change in net unrealized appreciation/(depreciation) of affiliated underlying funds (3,845) Net realized and unrealized loss (5,224) Decrease in net assets resulting from operations $(5,063) See accompanying notes to financial statements. 12 USAA Cornerstone Equity Fund

17 STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) Six-month period ended November 30, 2015 (unaudited), and year ended May 31, /30/2015 5/31/2015 FROM OPERATIONS Net investment income $ 161 $ 1,361 Net realized loss on sales of affiliated underlying funds (1,379) (487) Net realized gain on capital gain distributions from affiliated underlying funds 2,085 Change in net unrealized appreciation/(depreciation) of affiliated underlying funds (3,845) 1,155 Increase (decrease) in net assets resulting from operations (5,063) 4,114 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (1,371) Net realized gains (165) Distributions to shareholders (1,536) FROM CAPITAL SHARE TRANSACTIONS Proceeds from shares sold 19,697 47,305 Reinvested dividends 1,457 Cost of shares redeemed (11,542) (25,654) Increase in net assets from capital share transactions 8,155 23,108 Net increase in net assets 3,092 25,686 NET ASSETS Beginning of period 91,726 66,040 End of period $ 94,818 $91,726 Accumulated undistributed net investment income: End of period $ 214 $ 53 CHANGE IN SHARES OUTSTANDING Shares sold 1,525 3,560 Shares issued for dividends reinvested 112 Shares redeemed (896) (1,929) Increase in shares outstanding 629 1,743 See accompanying notes to financial statements. Financial Statements 13

18 NOTES TO FINANCIAL STATEMENTS November 30, 2015 (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 Cornerstone Equity Fund (the Fund), which is classified as diversified under the 1940 Act. The Fund s investment objective is to seek capital appreciation over the long term. The Fund is a fund of funds in that it invests in a portfolio of underlying USAA equity & alternative mutual funds (underlying USAA Funds) managed by USAA Asset Management Company (the Manager), an affiliate of the Fund. A. Security valuation The Trust s Board of Trustees (the Board) has established the Valuation Committee (the Committee), and subject to Board oversight, the Committee administers and oversees the Fund s valuation policies and procedures, which are approved by the Board. Among other things, these policies and procedures allow the Fund to utilize independent pricing services, quotations from securities dealers, and a wide variety of sources and information to establish and adjust the fair value of securities as events occur and circumstances warrant. The Committee reports to the Board on a quarterly basis and makes recommendations to the Board as to pricing methodologies and services used by the Fund and presents additional information to the Board regarding application of the pricing and fair valuation policies and procedures during the preceding quarter. 14 USAA Cornerstone Equity Fund

19 The Committee meets as often as necessary to make pricing and fair value determinations. In addition, the Committee holds regular monthly meetings to review prior actions taken by the Committee and the Manager, 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. The value of each security is determined (as of the close of trading on the New York Stock Exchange (NYSE) on each business day the NYSE is open) as set forth below: 1. Investments in the underlying USAA Funds and other open-end investment companies, other than exchange-traded funds (ETFs) are valued at their net asset value (NAV) at the end of each business day. 2. The underlying USAA Funds have specific valuation procedures. 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 a fund s NAV to be more reliable than it otherwise would be. Fair value methods used by the Manager include, but are not limited to, obtaining market quotations from secondary pricing 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. Notes to Financial Statements 15

20 B. Fair value measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-level valuation hierarchy disclosed in the Portfolio of Investments is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical securities. Level 2 inputs to the valuation methodology are other significant observable inputs, including quoted prices for similar securities, inputs that are observable for the securities, either directly or indirectly, and market-corroborated inputs such as market 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. 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. D. Investments in securities Security transactions are accounted for on the date the securities are purchased or sold (trade date). Gains or losses from sales of investment securities are computed on the identified cost basis. Dividend income and capital gain distributions from the underlying USAA Funds are recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis. Discounts and premiums on shortterm securities are amortized on a straight-line basis over the life of the respective securities. E. Expenses paid indirectly Through arrangements with the Fund s custodian and other banks utilized by the Fund for cash management purposes, realized credits, if any, generated from cash balances in the 16 USAA Cornerstone Equity Fund

21 Fund s bank accounts may be used to directly reduce the Fund s expenses. For the six-month period ended November 30, 2015, there were no custodian and other bank credits. F. Indemnifications Under the Trust s organizational documents, its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, in the normal course of business, the Trust enters into contracts that contain a variety of representations and warranties that provide general indemnifications. The Trust s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust that have not yet occurred. However, the Trust expects the risk of loss to be remote. G. Use of estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. (2) LINE OF CREDIT The Fund participates in a joint, short-term, revolving, committed loan agreement of $500 million with USAA Capital Corporation (CAPCO), an affiliate of the Manager. The purpose of the agreement is to meet temporary or emergency cash needs, including redemption requests that might otherwise require the untimely disposition of securities. Subject to availability, the Fund may borrow from CAPCO an amount up 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 up to $750 million. If the USAA Funds increase the committed loan agreement above the $500 million, the assessed facility fee by CAPCO will be increased to 10.0 basis points. Notes to Financial Statements 17

22 For the six-month period ended November 30, 2015, the Fund paid CAPCO facility fees of less than $500, which represents 0.1% 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 November 30, (3) DISTRIBUTIONS The tax basis of distributions and any accumulated undistributed net investment income will be determined based upon the Fund s tax year-end of May 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 May 31, 2015, the Fund had no capital loss carryforwards, for federal income tax purposes. For the six-month period ended November 30, 2015, 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 November 30, 2015, were $19,173,000 and $10,162,000, respectively. As of November 30, 2015, 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 November 30, 2015, were $6,552,000 and $1,649,000, respectively, resulting in net unrealized appreciation of $4,903, USAA Cornerstone Equity Fund

23 (5) AGREEMENTS WITH MANAGER A. Advisory agreement The Manager carries out the Fund s investment policies and manages the Fund s portfolio pursuant to an Advisory Agreement. The Manager does not receive any management fees from the Fund for these services. B. Administration and servicing fees The Manager provides certain administration and servicing functions for the Fund. The Manager does not receive any fees from the Fund for these services. In addition to the services provided under its Administration and Servicing Agreement with the Fund, the Manager also provides certain compliance and legal services for the benefit of the Fund. The Board has approved the billing of these expenses to the Fund. These expenses are included in the professional fees on the Fund s Statement of Operations and, for the six-month period ended November 30, 2015, were $1,000 for the Fund. C. Expense limitation The Manager agreed, through October 1, 2016, to limit the total annual operating expenses of the Fund to 0.10% of its average net assets, excluding extraordinary expenses and before reductions of any expenses paid indirectly, and to reimburse the Fund for all expenses in excess of that amount. This expense limitation arrangement may not be changed or terminated through October 1, 2016, 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 November 30, 2015, the Fund incurred reimbursable expenses of $50,000, of which $27,000 was receivable from the Manager. D. Transfer agency agreement USAA Transfer Agency Company, d/b/a USAA Shareholder Account Services (SAS), an affiliate of the Manager, provides transfer agent services to the Fund. SAS does not receive any fees from the Fund for these services. E. Underwriting services USAA Investment Management Company provides exclusive underwriting and distribution of the Fund s shares on a continuing best-efforts basis and receives no commissions or fees for this service. Notes to Financial Statements 19

24 (6) TRANSACTIONS WITH AFFILIATES Certain trustees and officers of the Fund are also directors, officers, and/or employees of the Manager. None of the affiliated trustees or Fund officers received any compensation from the Fund. The Manager is indirectly wholly owned by United Services Automobile Association (USAA), a large, diversified financial services institution. At November 30, 2015, USAA and its affiliates owned 234,000 shares, which represents 3.2% of the Fund. (7) TRANSACTIONS WITH AFFILIATED FUNDS A. Share ownership The Fund does not invest in the underlying USAA Funds for the purpose of exercising management or control; however, investments by the Fund may represent a significant portion of the underlying USAA Funds net assets. At November 30, 2015, the Fund owned the following percentages of the total outstanding shares of each of the underlying USAA Funds: Affiliated USAA Fund Ownership % Aggressive Growth 0.3 Emerging Markets 0.8 Growth 0.3 Income Stock 0.4 International 0.8 Precious Metals and Minerals 0.4 S&P 500 Index 0.3 Small Cap Stock 0.7 Value USAA Cornerstone Equity Fund

25 B. Transactions with affiliated funds The following table provides details related to the Fund s investment in the underlying USAA Funds for the six-month period ended November 30, 2015 (in thousands): Realized Purchase Sales Dividend Gain Market Value Affiliated USAA Fund Cost (a) Proceeds Income (Loss) (b) 05/31/ /30/2015 Aggressive Growth $ 291 $2,642 $ $ 54 $ 6,900 $ 4,653 Emerging Markets 1,423 2,898 (778) 10,684 7,557 Growth 391 1,281 (5) 7,760 7,035 Income Stock 1, ,161 10,490 International 2,864 1,714 (122) 29,137 28,199 Precious Metals and Minerals 995 1,627 (528) 3,500 1,936 S&P 500 Index 7, ,414 13,942 Small Cap Stock 2,416 7,851 9,996 Value 1,730 9,172 10,558 (a) Includes reinvestment of distributions from dividend income and realized gains. (b) Includes capital gain distributions received, if any. Notes to Financial Statements 21

26 (8) FINANCIAL HIGHLIGHTS Per share operating performance for a share outstanding throughout each period is as follows: Six-Month Period Ended Year Ended Period Ended November 30, May 31, May 31, *** Net asset value at beginning of period $ $ $ $ Income (loss) from investment operations: Net investment income (a) Net realized and unrealized gain (loss) (.76) (a) Total from investment operations (.74) (a) Less distributions from: Net investment income (.24) (.16) (.12) Realized capital gains (.03) (.05) (.00) (b) Total distributions (.27) (.21) (.12) Net asset value at end of period $ $ $ $ Total return (%)* (5.44) Net assets at end of period (000) $94,818 $91,726 $66,040 $31,555 Ratios to average net assets:**,(e) Expenses (%) (c).10 (d) (d) Expenses, excluding reimbursements (%) (c).21 (d) (d) Net investment income (%).35 (d) (d) Portfolio turnover (%) * 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 November 30, 2015, average net assets were $91,585,000. *** Fund commenced operations on June 8, (a) Calculated using average shares. (b) Represents less than $0.01 per share. (c) Reflects total annual operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund s expenses paid indirectly decreased the expense ratios as follows: (.00%) (.00%) Represents less than 0.01% of average net assets. (d) Annualized. The ratio is not necessarily indicative of 12 months of operations. (e) Calculated excluding the Fund s pro-rata share of expenses of the underlying USAA Funds. 22 USAA Cornerstone Equity Fund

27 EXPENSE EXAMPLE November 30, 2015 (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 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 Fund also indirectly bears its pro-rata share of the expenses of the underlying USAA Funds in which it invests (acquired funds). These acquired fund fees and expenses are not included in the Fund s annualized expense ratios used to calculate the expense estimates in the table on the next page. 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 June 1, 2015, through November 30, ACTUAL EXPENSES The line labeled actual 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 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 in the table provides information about hypothetical account values and hypothetical expenses based on the Fund s actual expense ratio and an assumed rate of return of 5% per year before Expense Example 23

28 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 in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these direct costs were included, your costs would have been higher. Acquired fund fees and expenses are not included in the Fund s annualized expense ratio used to calculate the expenses paid in the table below. Expenses Paid Beginning Ending During Period* Account Value Account Value June 1, 2015 June 1, 2015 November 30, 2015 November 30, 2015 Actual $1, $ $0.49 Hypothetical (5% return before expenses) 1, , *Expenses are equal to the Fund s annualized expense ratio of 0.10%, which is net of any reimbursements and expenses paid indirectly, and excludes expenses of the acquired funds, multiplied by the average account value over the period, multiplied by 183 days/366 days (to reflect the one-half-year period). The Fund s actual ending account value is based on its actual total return of (5.44)% for the six-month period of June 1, 2015, through November 30, USAA Cornerstone Equity Fund

29 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 USAA Asset Management Company Investment Adviser P.O. Box San Antonio, Texas Underwriter and USAA Investment Management Company Distributor P.O. Box San Antonio, Texas Transfer Agent USAA Shareholder Account Services 9800 Fredericksburg Road San Antonio, Texas Custodian and State Street Bank and Trust Company Accounting Agent P.O. Box 1713 Boston, Massachusetts Independent Ernst & Young LLP Registered Public 100 West Houston St., Suite 1700 Accounting Firm San Antonio, Texas Mutual Fund Self-Service 24/7 at usaa.com Or call (800) 531-USAA (8722) (210) 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. 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) ; (ii) at usaa.com; and (iii) in summary within the Statement of Additional Information on the SEC s website at 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 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) ; (ii) at usaa.com; and (iii) on the SEC s website at These Forms N-Q also may be reviewed and copied at the SEC s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling (800) , USAA. All rights reserved.