OVERVIEW• We remain underweight equities in our multi-asset portfolios but are neutral risk due to an overweight to high yield. Within

equities, we are underweight US, overweight developed Europe, and slightly overweight emerging markets. In fixed income, our overweight to high yield is risk-balanced by long-dated Treasuries.

• The Federal Reserve’s plans to raise interest rates in 2016 seem to have ground to a halt amid signs of global economic softening and the aftermath of “Brexit.” Meanwhile, the market seems to be anticipating increased monetary stimulus from the European Central Bank (ECB) and Bank of Japan (BOJ) as they continue efforts to reflate their economies.

• After a rollicking 1Q, volatility was muted in 2Q until June, when a surprisingly poor U.S. jobs report preceded the even more surprising Brexit vote. Given the many market and economic uncertainties, we expect volatility to remain elevated for the rest of 2016.

• Our portfolios had a very good quarter. While our overweight to international equities hurt post-Brexit, this was more than offset by our position in long-dated Treasuries, whose yields fell to an all-time low in early July. Our allocations to low-volatility assets and factor-based equities also added value in 2Q.

2Q/16 MARKETS RECAP

Equities — U.S. large caps were close to an all-time high when Brexit triggered a 5% plunge over two days, but a strong relief rally pushed them back into positive territory for 2Q. Emerging markets finished essentially flat for the quarter, while weakness in Europe led to negative performance for international developed markets.

Fixed Income — Credit spreads continued to tighten in the first half of 2Q before flaring out again on growth-related worries and Brexit. Long-dated Treasuries prospered as haven assets were in high demand. Emerging market debt took a quick Brexit hit, but quickly bounced back on expectations of more central-bank easing.

Alternatives — Crude oil finished 2Q up about 17%, extending its recovery to 46% above its YTD low in January. Gold and gold equities turned in another outstanding quarter as nervous investors sought out haven assets. Real-estate investment trusts benefited from investors desperately seeking yield.

3Q/2016 Multi-Asset Commentary | 1

3Q/2016 MULTI-ASSET COMMENTARY

Asset Class Change Underweight Neutral Overweight

Equities — ●

US Large Cap — ●

US Small Cap — ●

International Developed — ●

Emerging Markets ▲ ●

Fixed Income — ●

Investment Grade — ●

High Yield — ●

Duration — ●

Alternatives — ●

Commodities — ●

REITs — ●

3Q/2016 Multi-Asset Commentary | 2

LOOKING AHEADOur outlook is that interest rates will remain low well into 2017. While U.S. recession risks have resurfaced recently, we believe the odds are against one occurring in the next 12 months. At the same time, we don’t see the “low and slow” recovery getting much stronger at home or overseas. Rich valuations for U.S. equities are increasingly difficult to justify given decelerating earnings growth. Despite being cheap, Europe continues to deal with the uncertainties related to Brexit and a hobbled banking sector. A U.S.-style bank bailout is affordable but politically complicated, so the markets are not discounting one at this point. Meanwhile, Japan’s economic growth and corporate profitability continues to be tightly tied to the yen, whose strength in the absence of continued BOJ stimulus has crimped returns. The market’s recent anticipation of further monetary accommodation is a plus for both EM equity and EM debt.

Central Bank PolicyThe Fed is in a box: it wants to raise rates, but is reluctant to risk hurting the U.S. economy or negating the benefits of ECB and BOJ stimulus. The Fed’s ambitious plan to increase interest rates was dashed as the U.S. economy signaled that growth may be slowing toward stall speed. The initial vision of four rate hikes in 2016 was halved by weak 1Q GDP growth, and halved again by May’s abysmal jobs report. Post-Brexit volatility led European central banks to pledge even looser monetary policy, while in Japan, markets rejoiced when the BOJ appeared ready to launch an even more potent form of quantitative easing.

No Hiding From VolatilityU.S. stocks with bond-like characteristics — notably, utilities, telecom and staples — have been the top performers in 2016. This is no surprise given how long Treasury yields have been at rock bottom. These bond-like stock sectors tend to be the low-volatility sectors that have also been coveted by the “min-vol,” factor-based investors. As a result of heightened demand, these sectors are exhibiting rich valuations. While these valuations give us pause, we see these bond-substitute sectors maintaining their lead as long as the low growth, low interest rate environment persists. A near-term inflation surprise would likely be the trigger to jolt investors out of their complacent views on these sectors.

Earnings PressureWe expect corporate earnings growth in the U.S. to decelerate in 2Q, marking a fifth straight quarter of shrinking profitability. Revenue growth is mostly to blame — its trajectory has been negative as a stronger U.S. dollar works against American firms doing business overseas. Brexit also contributed — the euro dropped and the British pound fell to its lowest against the greenback in more than three decades. With current valuations well above historical averages, declining revenue and earnings add to equity risk and could add to volatility in the months ahead. The news is better in emerging markets, where we have seen an optimistic uptick in earnings.

The Case for CreditBeing relative value investors, we think credit — particularly high yield — looks more attractive on a risk-adjusted basis than U.S. equities. There is a strong historic correlation between equities and high yield, but that relationship has diverged since credit spreads began widening in 2015. Wider spreads reflect a perception of greater risk in owning high yield, and it’s true that default rates have increased a bit — most of this is related to energy. High yield spreads over Treasuries, however, provide a large cushion in case defaults increase further. We continue to favor high yield over U.S. equities as the relationship between the two converges back to its long-term balance.

HIGH YIELD, EM DEBT LOOK APPEALING YIELD AS OF 6/30/16

■ High Yield ■ Emerging Markets Debt■ Investment Grade Corporate ■ Municipal

■ Commercial Mortgage-Backed Securities ■ S&P 500■ 10-Yr US Treasury ■ US Treasury Bills■ Treasury Inflation Protected Securities

Source: Thomson Reuters Datastream as of 6/30/16

0

2

6

4

8

2.411.49

2.42

5.38

2.092.92

7.55

0.26

-0.09

3Q/2016 Multi-Asset Commentary | 3

KEY THEMESOverall, we are neutral risk. In equities, we are positioned with a larger than normal tilt toward value over growth globally. We think value stocks are much cheaper than their historical average, which we believe provides us a margin of safety. Overweights to international developed markets and high yield offset an underweight to U.S. equities, while long-dated Treasuries balance our allocation to risk assets.

Developed MarketsEven in light of Brexit, we are maintaining our overweight to developed Europe. Fundamentally, European equities appear significantly cheaper than the U.S. market, with the potential for re-ratings due to widening margins and higher expected earnings growth. Credit is expanding, wages are climbing, and rising prices are beating back deflationary risk. The possibility of even more monetary easing by the ECB and the possibility of government support of the banking sector adds to the appeal.

High YieldHigh yield provides similar but lower-beta exposure to risk assets compared to equities. This creates an asymmetric risk profile that favors high yield. On the return side, credit spreads are starting to come back in. If the economy accelerates, high yield stands to benefit (though less than equities), but if the slowing trend continues, richly valued equities present more downside risk. Given our cautious outlook, we like high yield’s protective attributes relative to stocks.

Emerging MarketsWe added to our EM position in 2Q based on a pick-up in earnings and a stable U.S. dollar as the Fed dials back its pace of monetary tightening. EM stocks are very cheap, but attractive valuations alone do not support an overweight. Improving macro conditions enhance the appeal of EM. We currently hold a slight overweight and are watching for positive catalysts — such as improving liquidity and/or economic fundamentals — that would justify adding even more to our weighting.

20112006 2007 2008 2009 2010 2012 2013

*See page 5 for more information on these indexes. Source: Bloomberg

2014 2015 20165

10

15

20

25

30

35

PRICE MULTIPLES STILL LOW FOR EUROPE, EM

PRICE/5-YEAR AVERAGE EARNINGS*

■ MSCI U.S.A ■ MSCI Europe ■ MSCI EM■ S&P 600 Small Cap

3Q/2016 Multi-Asset Commentary | 4

USAA GLOBAL MULTI-ASSETS TEAMThe USAA Global Multi-Assets team manages more than $10 billion in assets invested in Target Retirement funds, the Cornerstone series of target-risk funds, and several outcome-oriented funds.

Our asset allocation views and portfolio positioning follow a rigorous and disciplined process that integrates:

• Quantitative analysis on global markets including valuation, businessfundamentals, macro themes, and market data.

• Qualitative assessment on economic views, interest rate policy,business cycle, and tactical market opportunities.

• Rigorous risk management throughout the investment process.

Wasif Latif Lance HumphreyCFA

Julius BarnesCFA

Brian HerscoviciCFA

OUR PHILOSOPHY

Fundamentals are key• Value over growth

• Credit wins over time

• Diversification

• Active management

Long-term focus• Look through short-term

performance

Doing the right thing• Willing to deviate from

consensus

• Seek to be compensated for risks taken

Continuously manage risk

Consider the investment objectives, risks, charges and expenses of the USAA Mutual Funds carefully before investing. Contact us at 800-531-8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.

 800-531-8722 | www.usaa.com

This material is provided for informational purposes only by USAA Asset Management Company (AMCO) and/or USAA Investment Management Company (IMCO), both registered investment advisers. The material is not investment advice and is not a recommendation, an offer, or a solicitation of an offer, to buy or sell any security, strategy, or investment product. The views and opinions expressed in the material solely reflect the judgment of the authors, as of the date provided and are subject to change at any time. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but AMCO/IMCO do not guarantee its accuracy. The information presented should not be regarded as a complete analysis of the subjects discussed. Any past results provided do not predict or indicate future performance, which may be negative. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of AMCO/IMCO and USAA.The fixed income securities are subject to price volatility and a number of risks, including interest rate risk. Interest rates and bond prices move in opposite directions so that as interest rates rise, bond prices usually fall, and vice versa. Interest rates are currently at historically low levels. Fixed income securities also carry other risks, such as inflation risk, liquidity risk, call risk, and credit and default risks. Lower-quality fixed income securities involve greater risk of default or price changes. Securities of non-U.S. issuers generally involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Fixed-income securities sold or redeemed prior to maturity may be subject to loss.Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and ececonomic 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.Investing in REITs has some of the same risks associated with the direct ownership of real estate.Asset allocation does not protect against a loss or guarantee that an investor’s goal will be met. USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Investments provided by USAA Investment Management Company (IMCO) and USAA Financial Advisors Inc. (FAI), both registered broker dealers, and affiliates.©2016 USAA. 233238-0716

3Q/2016 Multi-Asset Commentary | 5

INDEX DEFINITIONS• MSCI USA Index — is designed to measure the performance of the large and mid cap segments of the US market. With 622

constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.

• MSCI Europe Index — captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 449 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. DM countries in Europe include: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.

• MSCI Emerging Markets Index — captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 836 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

• S&P 600 Small Cap® — measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.