-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P7y6aU4fF1Uh6na6I6fYUmNlO15t+l23lC/azbJGkgWk2ecRsgbN/EYBpvjIJc6w TsSc7G5EwuxHuPnGx6ByYA== 0000872323-03-000032.txt : 20031113 0000872323-03-000032.hdr.sgml : 20031113 20031113161140 ACCESSION NUMBER: 0000872323-03-000032 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 EFFECTIVENESS DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRIS ASSOCIATES INVESTMENT TRUST CENTRAL INDEX KEY: 0000872323 STATE OF INCORPORATION: MA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06279 FILM NUMBER: 03998300 BUSINESS ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO N LASALLE ST STE 500 CITY: CHICAGO STATE: IL ZIP: 60602-3790 BUSINESS PHONE: 8004769625 MAIL ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO NORTH LASALLE STREET STE 500 CITY: CHICAGO STATE: IL ZIP: 60602-3790 N-CSR 1 annualreport03.txt [GRAPHIC] THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK SMALL CAP FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND ANNUAL REPORT SEPTEMBER 30, 2003 ADVISED BY HARRIS ASSOCIATES L.P. [OAKMARK FAMILY OF FUNDS LOGO] THE OAKMARK FAMILY OF FUNDS 2003 ANNUAL REPORT PRESIDENTS' LETTER 1 SUMMARY INFORMATION 2 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 4 THE OAKMARK FUND Letter from the Portfolio Managers 6 Schedule of Investments 7 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 11 Schedule of Investments 12 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Managers 14 Schedule of Investments 16 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 20 Schedule of Investments 22 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 28 Global Diversification Chart 30 Schedule of Investments 31 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 36 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 38 International Diversification Chart 39 Schedule of Investments 40 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 45 International Diversification Chart 46 Schedule of Investments 47 FINANCIAL STATEMENTS Statements of Assets and Liabilities 52 Statements of Operations 54 Statements of Changes in Net Assets 56 Notes to Financial Statements 63 TRUSTEES AND OFFICERS 84 OAKMARK PHILOSOPHY AND PROCESS 87 THE OAKMARK GLOSSARY 88
FORWARD-LOOKING STATEMENT DISCLOSURE One of our most important responsibilities as mutual fund managers is to communicate with shareholders in an open and direct manner. Some of our comments in our letters to shareholders are based on current management expectations and are considered "forward-looking statements". Actual future results, however, may prove to be different from our expectations. You can identify forward-looking statements by words such as "estimate", "may", "will", "expect", "believe", "plan" and other similar terms. We cannot promise future returns. Our opinions are a reflection of our best judgment at the time this report is compiled, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise. PRESIDENTS' LETTER DEAR FELLOW SHAREHOLDERS, The stock market continued its recent gains during the third calendar quarter. While each of our funds posted a positive return for the quarter, performance relative to our benchmarks was mixed. More importantly, with most broad indices posting strong double digit gains for the full fiscal year, most of our funds outperformed their benchmarks. MARKET ASSESSMENT The economy continues its recovery, which started at the end of 2002. While interest rates have risen, they still remain near record lows. Corporate earnings appear to be gaining strength and are providing more frequent positive surprises. Good economic news and strong consumer spending are tempered though, by concerns over the Iraqi conflict, a large budget deficit, and lack of jobs growth. While the market has posted sizable gains since the first quarter, returns have varied widely across the market--often rewarding promises of growth more than delivered results. As we look at the relative performance of our holdings we believe that much of the recent quarter's performance is more reflective of emotion than business fundamentals. While the attractive valuation discounts we saw in early spring are not as prevalent today, we believe this has become more of a "stock pickers" market--where values exist, but are tougher to find. We believe that short-term emotional valuation swings, while sometimes painful, will in the long-term play to our strengths as disciplined, bottom-up investors. CAPITAL GAIN DISTRIBUTIONS We are pleased that with the exception of a small estimated capital gains distribution in The Oakmark Global Fund, we do not anticipate paying a capital gains distribution for any other funds this year. While this is not unusual for many mutual funds this year because of longer-term realized losses, it is unusual for a fund family like ours, where many of the funds fared well in the bear market and continue to reach new highs. FUND TRADING Most of you have no doubt heard about New York Attorney General Eliot Spitzer's investigation into market timing and trading practices at certain investment firms. [PHOTO ROBERT M. LEVY AND JOHN R. RAITT] We are very troubled by those allegations involving other fund companies, as they erode investor confidence in the mutual fund industry. Trust is essential to our business and once lost, it is hard to earn back. Our position on the kind of activities alleged by Mr. Spitzer is clear. We believe that market timers hurt the returns of long-term investors in our funds. Market timers are unwelcome in our funds and are not provided any special breaks. We have redemption fees in place for most of our funds to discourage market timers and we police subscription and redemption activity to catch other timers. In regard to "after-hours" trading, our position is also straightforward: we don't permit it, period. We believe we have taken proper steps to prevent this from happening in our funds. We hope for a clear and rapid solution to these issues in order to regain investor confidence in the industry. If you want to know more about our position on this subject, please visit our web site at www.oakmark.com. Thank you for entrusting your long-term assets to The Oakmark Family of Funds. We welcome your comments and questions; you can reach us via email at ContactOakmark@oakmark.com. /s/ Robert M. Levy /s/ John R. Raitt ROBERT M. LEVY JOHN R. RAITT PRESIDENT PRESIDENT AND CEO OF THE OAKMARK FUNDS OF HARRIS ASSOCIATES L.P. CHAIRMAN AND CIO OF HARRIS ASSOCIATES L.P. 1 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION
THE OAKMARK THE OAKMARK PERFORMANCE FOR THE OAKMARK SELECT SMALL CAP PERIOD ENDED FUND FUND FUND SEPTEMBER 30, 2003(1) (OAKMX) (OAKLX) (OAKSX) - ----------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* 0.33% 0.04% 5.79% - ----------------------------------------------------------------------------------------------------------------------------- 6 MONTHS* 17.33% 16.24% 23.69% - ----------------------------------------------------------------------------------------------------------------------------- 1 YEAR 20.99% 27.25% 21.84% - ----------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 8.73% 11.30% 5.67% - ----------------------------------------------------------------------------------------------------------------------------- 5 YEAR 5.11% 17.42% 7.25% - ----------------------------------------------------------------------------------------------------------------------------- 10 YEAR 10.73% N/A N/A - ----------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 16.50% 21.20% 9.99% (8/5/91) (11/1/96) (11/1/95) - ----------------------------------------------------------------------------------------------------------------------------- VALUE OF $10,000 FROM INCEPTION DATE $ 64,034 $ 37,820 $ 21,255 - ----------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY HOLDINGS Washington Washington eFunds AS OF SEPTEMBER 30, Mutual, Inc. 3.8% Mutual, Inc. 18.1% Corporation 4.7% 2003(2) H&R Block, Inc. 2.7% H&R Block, Inc. 7.5% Ralcorp Holdings, Inc. 4.5% Fannie Mae 2.5% Yum! Brands, Inc. 5.4% Checkpoint COMPANY AND % OF TOTAL McDonald's The Kroger Co. 4.5% Systems, Inc. 4.4% NET ASSETS Corporation 2.4% First Data Hanger Orthopedic Yum! Brands, Inc. 2.3% Corporation 4.4% Group, Inc. 4.2% BankAtlantic Bancorp, Inc., Class A 4.1% - ----------------------------------------------------------------------------------------------------------------------------- TOP FIVE INDUSTRIES Retail 10.0% Banks & Thrifts 18.1% Computer Software 8.7% AS OF SEPTEMBER 30, 2003 Pharmaceuticals 8.5% Other Consumer Banks & Thrifts 8.4% Food & Beverage 8.3% Goods & Services 11.6% Food & Beverage 7.7% Banks & Thrifts 7.0% Retail 10.8% Medical Products 7.3% INDUSTRIES AND % OF TOTAL Other Consumer Information Services 7.1% Oil & Natural Gas 5.6% NET ASSETS Goods & Services 6.3% Pharmaceuticals 6.8% - -----------------------------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized 2
THE OAKMARK THE OAKMARK PERFORMANCE FOR EQUITY AND GLOBAL PERIOD ENDED INCOME FUND FUND SEPTEMBER 30, 2003(1) (OAKBX) (OAKGX) - ------------------------------------------------------------------------------------------ 3 MONTHS* 2.01% 9.55% - ------------------------------------------------------------------------------------------ 6 MONTHS* 15.47% 46.25% - ------------------------------------------------------------------------------------------ 1 YEAR 19.75% 50.27% - ------------------------------------------------------------------------------------------ AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 10.89% 17.63% - ------------------------------------------------------------------------------------------ 5 YEAR 13.25% N/A - ------------------------------------------------------------------------------------------ 10 YEAR N/A N/A - ------------------------------------------------------------------------------------------ SINCE INCEPTION 14.04% 14.83%(3) (11/1/95) (8/4/99) - ------------------------------------------------------------------------------------------ VALUE OF $10,000 FROM INCEPTION DATE $ 28,308 $ 17,774 - ------------------------------------------------------------------------------------------ TOP FIVE EQUITY HOLDINGS Synopsys, Inc. 2.6% Diageo plc 5.9% AS OF SEPTEMBER 30, Watson Pharmaceuticals Nestle SA 4.5% 2003(2) Inc. 2.4% Fannie Mae 4.0% First Health Group First Health Group COMPANY AND % OF TOTAL Corp. 2.4% Corp. 3.9% NET ASSETS SAFECO Corporation 2.3% Aventis S.A. 3.8% Diageo plc 2.3% - ------------------------------------------------------------------------------------------ TOP FIVE INDUSTRIES U.S. Government Food & Beverage 11.3% AS OF SEPTEMBER 30, 2003 Notes 27.2% Pharmaceuticals 9.8% Oil & Natural Gas 5.8% Other Financial 9.2% Health Care Services 4.8% Information Services 7.0% INDUSTRIES AND % OF TOTAL Food & Beverage 4.6% Retail 5.8% NET ASSETS Aerospace & Defense 4.2% - ------------------------------------------------------------------------------------------ THE OAKMARK THE OAKMARK PERFORMANCE FOR INTERNATIONAL INTERNATIONAL PERIOD ENDED FUND SMALL CAP FUND SEPTEMBER 30, 2003(1) (OAKIX) (OAKEX) - ------------------------------------------------------------------------------------------ 3 MONTHS* 7.70% 14.12% - ------------------------------------------------------------------------------------------ 6 MONTHS* 35.09% 47.42% - ------------------------------------------------------------------------------------------ 1 YEAR 29.97% 39.78% - ------------------------------------------------------------------------------------------ AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 3.61% 11.14% - ------------------------------------------------------------------------------------------ 5 YEAR 13.21% 20.03% - ------------------------------------------------------------------------------------------ 10 YEAR 8.53% N/A - ------------------------------------------------------------------------------------------ SINCE INCEPTION 10.62% 9.46% (9/30/92) (11/1/95) - ------------------------------------------------------------------------------------------ VALUE OF $10,000 FROM INCEPTION DATE $ 30,368 $ 20,465 - ------------------------------------------------------------------------------------------ TOP FIVE EQUITY HOLDINGS Diageo plc 3.7% Baycorp Advantage AS OF SEPTEMBER 30, GlaxoSmithKline plc 3.6% Limited 4.6% 2003(2) Nestle SA 3.2% Bulgari S.p.A. 3.7% Aventis S.A. 3.2% Neopost SA 3.6% COMPANY AND % OF TOTAL Henkel KGaA 3.1% Gurit-Heberlein AG 3.6% NET ASSETS Schindler Holding AG 3.5% - ------------------------------------------------------------------------------------------ TOP FIVE INDUSTRIES Food & Beverage 14.2% Retail 9.3% AS OF SEPTEMBER 30, 2003 Pharmaceuticals 11.4% Machinery & Industrial Banks & Thrifts 11.0% Processing 8.1% INDUSTRIES AND % OF TOTAL Other Financial 7.6% Airport Maintenance 6.5% NET ASSETS Chemicals 6.5% Diversified Conglomerates 6.3% Food & Beverage 5.9% - ------------------------------------------------------------------------------------------
3 THE OAKMARK AND OAKMARK SELECT FUNDS AT OAKMARK, WE LOOK FOR STOCKS WITH PRICES LESS THAN 60% OF INTRINSIC VALUE, WITH INTRINSIC VALUE THAT IS LIKELY TO GROW AND WITH MANAGEMENT THAT ACTS IN THE INTEREST OF OUTSIDE SHAREHOLDERS. THE COMBINATION OF THESE FACTORS CREATES OUR BIGGEST COMPETITIVE ADVANTAGE--THE ABILITY TO BE MORE PATIENT THAN MOST INVESTORS. [PHOTO OF WILLIAM C. NYGREN] Next quarter when you notice that we no longer own AOL, don't assume that we sold our position. In a press release last month, AOL announced they would change their name back to Time Warner Inc. This was an acknowledgement that the company's future belongs more to their outstanding portfolio of traditional media assets than to their Internet access company. Jerry Levin and Steve Case, the CEOs who four years ago united these companies in what they referred to as the "merger of the century", have both since resigned. AOL stock, which traded at nearly $100 in the Internet bubble, today is priced at just $15. Though we believe it is significantly undervalued, it will almost certainly fail to produce a profit for those who bought into the merger hype. The success of corporate strategies, business leaders, and, yes, portfolio managers can only be determined after long periods of time. Perhaps that's what makes reading old business books so entertaining. Bookstores are filled with newly published texts promoting recently successful business strategies. On the bargain counter, one of our portfolio managers found one such book, LESSONS FROM THE TOP(4) by Neff and Citrin. (As we've said before, our value approach is deeply ingrained!) It was written in 1999 during the peak of the "Marquee CEO" approach to investing as a study of "the 50 most successful business leaders in America." Since one of our three key stock selection criteria is investing with good management, I decided to give the book a quick read. To their credit, the authors concluded that successful business leaders share common traits such as a passion for their work, strong competitive drives, clarity of thought, and the ability to clearly communicate those thoughts. (Not coincidentally, we believe these traits are also shared by successful investors.) But what makes the book more entertaining today is how events of the past four years have changed the way we read the quotes. Tyco CEO Dennis Kozlowski's claim that "there is a lot one person can do" was read differently in 1999 than it is today after Tyco's turmoil. When Bernie Ebbers from WorldCom said, "I look at my stewardship of this company as an opportunity that the Lord has given me," or when Ken Lay attributed the strength of Enron's culture to, "my basic value system" it didn't produce the sighs or smirks it does today. Yes, all three of them were considered Top 50 business leaders (as was AOL's Steve Case) just four short years ago! In fairness, among the Top 50 were also many CEOs still considered exceptional such as Michael Dell of Dell Computer, Herb Kelleher of Southwest Airlines, and Bob Tillman of Lowe's. Their companies have each enjoyed four great years since the book was written. So, how would an investor who bought stock in all the profiled companies have faired over the past four years? Unfortunately, not too well. An investor who equal-weighted positions would have underperformed the equal-weighted S&P 500 by about three percentage points. Likewise, an investor who weighted positions based on market capitalization would have underperformed the cap-weighted S&P 500 by a similar amount. Why does this sort of investment strategy almost always fail? After all, the authors went to great lengths to make sure their selections were based on solid quantitative measures of excellence that were free of industry bias. Though their approach was very logical, stock market prices generally incorporate the obvious. Investors were aware of these excellent leaders' track records and had bid up prices of these stocks. Simply put, betting on a single-factor model rarely outperforms the market. If you buy the highest growth or best-managed companies, the stocks' valuations are generally too high to make the strategy work. Likewise, if you buy only the cheapest stocks, you end up with too many businesses that have either stopped growing or are poorly managed. That's why at The Oakmark Family we utilize a three-pronged approach to stock selection. We aren't necessarily [SIDENOTE] HIGHLIGHTS - - We seek to avoid overvalued, low-growth, or poorly managed companies. - - Our investment approach has been consistent over time. - - Only shareholders with long time horizons should buy our funds. 4 looking for the statistically cheapest stocks, but we are looking for stocks priced at a bigger discount to business value than most. We don't require our businesses to be the fastest growers, but we do want the combination of dividend yield and projected per-share value growth to be at least average. And we don't require the managements to be recognized as among America's most successful business leaders, but we do require them to be smart, honest, and working to further the shareholders' interests. Although we make our share of mistakes, when we find a business that is growing, being managed to benefit shareholders, and is priced at a discount to business value, we can purchase the stock with the knowledge that, given time, the price and the value will usually converge. We write these reports with the goal of helping shareholders and potential shareholders better understand how we approach investing their money. On our website we include all the quarterly reports we have written since 1997 and our annual reports from two years before that. Our hope is that by reading a history of these reports, one would know what to expect from us. The danger of allowing access to our old reports is that our mistakes, much like those in the Top CEOs book, may look even more glaring in hindsight. The benefit to those studying our funds is that history can be revisited and one can see what we were saying back then. You can see what we got wrong on stocks like USG Corp or Electronic Data Systems. You can also see what we got right on stocks we still own, like Washington Mutual, and on those we fortunately never owned, like the Internet stocks. But most importantly, you can see that our investment approach has been consistent throughout The Oakmark Family's history. Our reports also explain our thinking on the importance of protecting shareholders. Over the past quarter, mutual fund industry news was dominated by allegations about special privileges being accorded to hyper-active traders. Following the negative publicity, market timers now seem to be universally hated. Interestingly, just two years ago US Congressman Thomas Tancredo wrote a letter to the SEC Chairman expressing concern about the industry's "increasingly discriminatory practices towards market timers."(5) He further stated, "I have an issue with these nefarious attempts by mutual fund families to limit this key benefit (the flexibility to buy and sell at will) that they have been promising." Amazing how fast the winds change! You don't have to wonder what Oakmark's attitude was back then towards timers. You can read our quarterly letter from June 1999 when we put redemption fees on those funds that appealed to market timers. From day one, we have told potential investors that our funds were only suited to investors who have the same long-term time horizon that we use when selecting stocks. When, despite our efforts to thwart frequent traders, we found them using our funds, we instituted redemption fees that eliminated the profit potential from their trades. All of The Oakmark Family portfolio managers have made substantial personal investments in our mutual funds--it gives us the same economic alignment with our shareholders that we look for in the companies in which we invest. Best wishes, /s/ William C. Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com PS: Last quarter this report discussed the Michael Lewis book MONEYBALL and the successful use in baseball of a value investing strategy by Billy Beane, General Manager of the Oakland Athletics. Congratulations to Mr. Beane on another in a string of successful seasons for his penny-pinching American League Western Division champs! And congratulations to our hometown favorites, the Chicago Cubs, on their first of what is hopefully a long string of division championships! 5 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. NYGREN AND KEVIN GRANT] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (9/30/03) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(6)
THE OAKMARK FUND S&P 500 8/1/1991 $ 10,000 $ 10,000 12/31/1991 $ 13,020 $ 10,909 3/31/1992 $ 14,690 $ 10,634 6/30/1992 $ 15,230 $ 10,836 9/30/1992 $ 16,800 $ 11,178 12/31/1992 $ 19,386 $ 11,741 3/31/1993 $ 20,927 $ 12,253 6/30/1993 $ 21,494 $ 12,313 9/30/1993 $ 23,095 $ 12,631 12/31/1993 $ 25,300 $ 12,924 3/31/1994 $ 24,242 $ 12,434 6/30/1994 $ 24,951 $ 12,486 9/30/1994 $ 26,663 $ 13,097 12/31/1994 $ 26,138 $ 13,095 3/31/1995 $ 28,539 $ 14,370 6/30/1995 $ 30,303 $ 15,741 9/30/1995 $ 32,841 $ 16,992 12/31/1995 $ 35,134 $ 18,015 3/31/1996 $ 36,386 $ 18,982 6/30/1996 $ 37,661 $ 19,834 9/30/1996 $ 37,945 $ 20,447 12/31/1996 $ 40,828 $ 22,152 3/31/1997 $ 42,456 $ 22,746 6/30/1997 $ 48,917 $ 26,716 9/30/1997 $ 52,009 $ 28,717 12/31/1997 $ 54,132 $ 29,542 3/31/1998 $ 59,517 $ 33,663 6/30/1998 $ 57,909 $ 34,775 9/30/1998 $ 49,899 $ 31,316 12/31/1998 $ 56,155 $ 37,985 3/31/1999 $ 55,888 $ 39,877 6/30/1999 $ 62,332 $ 42,688 9/30/1999 $ 53,882 $ 40,023 12/31/1999 $ 50,277 $ 45,977 3/31/2000 $ 45,767 $ 47,032 6/30/2000 $ 46,950 $ 45,783 9/30/2000 $ 49,815 $ 45,339 12/31/2000 $ 56,201 $ 41,791 3/31/2001 $ 60,342 $ 36,837 6/30/2001 $ 65,927 $ 38,993 9/30/2001 $ 59,986 $ 33,269 12/31/2001 $ 66,479 $ 36,824 3/31/2002 $ 69,250 $ 36,926 6/30/2002 $ 63,463 $ 31,979 9/30/2002 $ 52,927 $ 26,454 12/31/2002 $ 56,902 $ 28,686 3/31/2003 $ 54,576 $ 27,783 6/30/2003 $ 63,826 $ 32,059 9/30/2003 $ 64,034 $ 32,907
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (8/5/91) - --------------------------------------------------------------------------------------------------------------------- OAKMARK FUND 0.33% 20.99% 5.11% 10.73% 16.50% S&P 500 2.65% 24.40% 1.00% 10.04% 10.29% Dow Jones Average(9) 3.91% 25.13% 5.32% 12.35% 12.12% Lipper Large Cap Value Index(10) 1.95% 22.65% 2.00% 8.92% 9.78%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Fund increased in value by less than 1% last quarter bringing the fiscal year to a 21% increase. The quarter was disappointing relative to gains achieved in the market averages--the S&P 500 gained 3% and the NASDAQ(7) added to its great year by rising another 10%. The technology stocks were very strong, and we own almost none of them. We maintain that their premium prices--particularly versus high quality non-technology stocks--are a result of overly positive investor sentiment rather than fundamental value. Even our one traditional technology holding, Sun Microsystems, was among our worst performers in the quarter. The reason Sun appeals to us--high book value, large cash balance, large sales base, high R&D spending--is of no interest to today's tech stock buyers that seem to focus only on earnings growth. Our pharmaceutical stocks also lost money in the quarter. We continue to believe that these companies have above-average futures and therefore deserve to sell at above-average multiples. Looking across our portfolio, we are generally very pleased with how the businesses are performing. That gives us confidence about the stocks as we look ahead to next year. During the quarter, we sold the Medco shares we received from the Merck spinoff and we added one new holding, AFLAC. AFLAC INC. (AFL--$31) We have been a fan of AFLAC since the duck made his television debut several years ago! Those funny commercials have not only brought many smiles, but have quickly made the AFLAC name one of the insurance industry's most recognized. AFLAC's strong track record during the 1990's, (20% compounded annual earnings growth), caused the stock to reach a high of $37 in 2000, which was over thirty times earnings. Despite achieving rapid growth in the US market, the majority of AFLAC's sales and income still comes from Japan where it is the leading provider of supplemental medical insurance. While growth has slowed in the US, profit growth in Japan remains robust. With projected growth "just" in the low teens, the stock fell below $30. Selling at less than half its peak P/E(8) multiple, just over fourteen times our earnings estimate for next year, we believe AFLAC is another on our growing list of excellent businesses priced below the market multiple. Best wishes, /s/ William C. Nygren /s/ Kevin Grant WILLIAM C. NYGREN, CFA KEVIN GRANT, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com kgrant@oakmark.com 6 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--91.7% FOOD & BEVERAGE--8.3% General Mills, Inc. 1,805,000 $ 84,961,350 Kraft Foods Inc. 2,845,000 83,927,500 Diageo plc (b) 1,821,000 80,397,150 H.J. Heinz Company 2,310,000 79,186,800 Anheuser-Busch Companies, Inc. 1,400,000 69,076,000 ---------------- 397,548,800 HOUSEHOLD PRODUCTS--1.3% The Clorox Company 1,390,200 $ 63,768,474 OTHER CONSUMER GOODS & SERVICES--6.3% H&R Block, Inc. (c) 3,029,300 $ 130,714,295 Fortune Brands, Inc. 1,745,600 99,062,800 Mattel, Inc. 3,839,800 72,802,608 ---------------- 302,579,703 BROADCASTING & PROGRAMMING--2.2% Liberty Media Corporation, Class A (a) 7,399,400 $ 73,772,018 The Walt Disney Company 1,500,000 30,255,000 ---------------- 104,027,018 BUILDING MATERIALS & CONSTRUCTION--1.8% Masco Corporation 3,533,000 $ 86,487,840 CABLE SYSTEMS & SATELLITE TV--6.1% General Motors Corporation, Class H (Hughes Electronics Corporation) (a) 6,100,000 $ 87,291,000 AOL Time Warner Inc. (a)(d) 5,727,700 86,545,547 EchoStar Communications Corporation (a) 2,075,000 79,410,250 Comcast Corporation, Special Class A (a) 1,300,000 38,402,000 ---------------- 291,648,797 HARDWARE--1.6% The Black & Decker Corporation 1,922,200 $ 77,945,210 MOTORCYCLES--1.6% Harley-Davidson, Inc. 1,575,000 $ 75,915,000 PUBLISHING--2.7% Gannett Co., Inc. 884,500 $ 68,601,820 Knight-Ridder, Inc. 916,000 61,097,200 ---------------- 129,699,020 RECREATION & ENTERTAINMENT--1.2% Carnival Corporation (e) 1,678,300 $ 55,199,287
7
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--91.7% (CONT.) RESTAURANTS--4.7% McDonald's Corporation 4,900,000 $ 115,346,000 Yum! Brands, Inc (a) 3,674,000 108,823,880 ---------------- 224,169,880 RETAIL--10.0% The Home Depot, Inc. 3,281,500 $ 104,515,775 The Kroger Co. (a) 5,790,000 103,467,300 The Gap, Inc. 4,776,700 81,777,104 Safeway Inc. (a) 3,327,000 76,321,380 J.C. Penney Company, Inc. 3,502,900 74,856,973 Toys 'R' Us, Inc. (a)(c) 3,125,000 37,593,750 ---------------- 478,532,282 BANK & THRIFTS--7.0% Washington Mutual, Inc. 4,587,300 $ 180,602,001 U.S. Bancorp 3,700,000 88,763,000 The Bank of New York Company, Inc. 2,300,000 66,953,000 ---------------- 336,318,001 INSURANCE--3.2% MGIC Investment Corporation 1,640,600 $ 85,426,042 AFLAC Incorporated 2,067,000 66,764,100 ---------------- 152,190,142 OTHER FINANCIAL--2.4% Fannie Mae 1,670,000 $ 117,234,000 HEALTH CARE SERVICES--1.1% AmerisourceBergen Corp 1,000,000 $ 54,050,000 MEDICAL PRODUCTS--2.5% Baxter International Inc. 2,500,000 $ 72,650,000 Guidant Corporation 956,700 44,821,395 ---------------- 117,471,395 PHARMACEUTICALS--8.5% Bristol-Myers Squibb Company 3,750,000 $ 96,225,000 Merck & Co., Inc. 1,850,000 93,647,000 Abbott Laboratories 2,050,000 87,227,500 Schering-Plough Corporation 5,100,000 77,724,000 Chiron Corporation (a) 999,000 51,638,310 ---------------- 406,461,810 TELECOMMUNICATIONS--1.8% Sprint Corporation 5,741,800 $ 86,701,180
8
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--91.7% (CONT.) COMPUTER SERVICES--4.8% First Data Corporation 2,513,800 $ 100,451,448 SunGard Data Systems, Inc. (a) 3,203,700 84,289,347 Automatic Data Processing, Inc. 1,200,000 43,020,000 ---------------- 227,760,795 COMPUTER SYSTEMS--1.2% Sun Microsystems, Inc. (a) 17,450,000 $ 57,759,500 OFFICE EQUIPMENT--1.4% Xerox Corporation (a) 6,472,400 $ 66,406,824 AEROSPACE & DEFENSE--2.6% Honeywell International, Inc. 3,250,000 $ 85,637,500 The Boeing Company 1,152,800 39,575,624 ---------------- 125,213,124 OTHER INDUSTRIAL GOODS & SERVICES--0.8% Illinois Tool Works Inc. 604,200 $ 40,034,292 WASTE DISPOSAL--1.9% Waste Management, Inc. 3,474,300 $ 90,922,431 OIL & NATURAL GAS--3.2% ConocoPhillips 1,435,335 $ 78,584,591 Burlington Resources, Inc. 1,571,100 75,727,020 ---------------- 154,311,611 ELECTRIC UTILITIES--1.5% Duke Energy Corporation 3,997,700 $ 71,199,037 TOTAL COMMON STOCKS (COST: $3,864,754,742) 4,391,555,453
9
NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--8.4% U.S. GOVERNMENT BILLS--5.0% United States Treasury Bills, 0.845% - 0.93% due 10/2/2003 - 11/28/2003 $ 240,000,000 $ 239,824,096 TOTAL U.S. GOVERNMENT BILLS (COST: $239,816,491) 239,824,096 REPURCHASE AGREEMENTS--3.4% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price $160,004,222 collateralized by U.S. Government Agency Securities $ 160,000,000 $ 160,000,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price $1,752,013 collateralized by a U.S. Government Agency Security 1,751,976 1,751,976 TOTAL REPURCHASE AGREEMENTS (COST: $161,751,976) 161,751,976 TOTAL SHORT TERM INVESTMENTS (COST: $401,568,467) 401,576,072 Total Investments (Cost $4,266,323,209)--100.1% $ 4,793,131,525 Other Liabilities In Excess Of Other Assets--(0.1%) (2,616,390) ---------------- TOTAL NET ASSETS--100% $ 4,790,515,135 ================
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (d) Effective October 16, 2003, AOL Time Warner Inc. changed its name to Time Warner Inc. (e) Represents a foreign domiciled corporation. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. NYGREN AND HENRY R. BERGHOEF] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/03) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(6)
THE OAKMARK SELECT FUND S&P 500 10/31/1996 $ 10,000 $ 10,000 12/31/1996 $ 11,420 $ 10,543 3/31/1997 $ 12,140 $ 10,826 6/30/1997 $ 14,180 $ 12,715 9/30/1997 $ 16,340 $ 13,668 12/31/1997 $ 17,704 $ 14,060 3/31/1998 $ 20,078 $ 16,021 6/30/1998 $ 20,462 $ 16,551 9/30/1998 $ 16,936 $ 14,904 12/31/1998 $ 20,575 $ 18,078 3/31/1999 $ 22,766 $ 18,979 6/30/1999 $ 24,482 $ 20,317 9/30/1999 $ 22,028 $ 19,048 12/31/1999 $ 23,557 $ 21,882 3/31/2000 $ 25,667 $ 22,384 6/30/2000 $ 24,324 $ 21,790 9/30/2000 $ 27,432 $ 21,578 12/31/2000 $ 29,637 $ 19,890 3/31/2001 $ 32,826 $ 17,532 6/30/2001 $ 35,865 $ 18,558 9/30/2001 $ 34,496 $ 15,834 12/31/2001 $ 37,359 $ 17,526 3/31/2002 $ 38,306 $ 17,574 6/30/2002 $ 35,206 $ 15,220 9/30/2002 $ 29,720 $ 12,590 12/31/2002 $ 32,699 $ 13,653 3/31/2003 $ 32,535 $ 13,223 6/30/2003 $ 37,806 $ 15,258 9/3/2003 $ 37,820 $ 15,662
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/96) - ---------------------------------------------------------------------------------------------- OAKMARK SELECT FUND 0.04% 27.25% 17.42% 21.20% S&P 500 2.65% 24.40% 1.00% 6.70% S&P MidCap 400(11) 6.59% 26.81% 11.96% 12.70% Lipper Mid Cap Value Index(12) 6.17% 29.17% 9.30% 8.39%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Select Fund increased last quarter by 1 cent, so let's just call it a flat quarter. For the fiscal year so far, the increase has been 27%. Although the quarter was disappointing relative to a 3% gain in the S&P 500, the nine-month increase is still a bit more than the S&P 500. The stock market has been strong this year, far outpacing returns from other asset classes. The strongest part of the market has been tech stocks. We don't own any because we only buy stocks that we believe are selling at less than 60% of business value, and most technology names fail that test miserably. We are very pleased that gains in stocks such as Washington Mutual, IMS Health, and Xerox have allowed us to keep pace with the market despite having zero exposure to its hottest sector. In the quarter just ended, our two worst performers were Washington Mutual and Janus. Washington Mutual gave back some of its first half increase as the mortgage refinancing boom was halted by higher interest rates. We believe that Washington Mutual's earnings will continue to grow despite declining refinancings and that its biggest, though underpublicized, positive is its increasing share of primary checking accounts, which should allow its continued rapid growth in retail banking. Priced at less than half the market P/E(8) multiple, with twice the dividend yield, Washington Mutual's future is being seriously underestimated in our opinion. Janus, though still up on the year, lost 15% in the quarter following allegations of allowing rapid traders into their mutual funds. Unfortunately, the strength of Janus' brand has been confirmed by the publicity these matters received. We are continuing to hold our Janus stock because it is priced at a large discount to other money management firms. Unless new information causes us to believe that discount is deserved, we are likely to continue holding this position. Thank you for your continued support, /s/ William C. Nygren /s/ Henry R. Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com berghoef@oakmark.com 11 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--92.8% OTHER CONSUMER GOODS & SERVICES--11.6% H&R Block, Inc. (b) 8,859,800 $ 382,300,370 Mattel, Inc. 10,955,400 207,714,384 ---------------- 590,014,754 CABLE SYSTEMS & SATELLITE TV--3.8% AOL Time Warner Inc. (a)(c) 12,710,000 $ 192,048,100 HOTELS & MOTELS--2.7% Starwood Hotels & Resorts Worldwide, Inc. 3,880,000 $ 135,024,000 INFORMATION SERVICES--7.1% The Dun & Bradstreet Corporation (a)(b) 4,534,900 $ 188,379,746 Moody's Corporation 3,123,600 171,704,292 ---------------- 360,084,038 PUBLISHING--3.4% Knight-Ridder, Inc. 2,606,500 $ 173,853,550 RESTAURANTS--5.4% Yum! Brands, Inc (a) 9,307,000 $ 275,673,340 RETAIL--10.8% The Kroger Co. (a) 12,675,700 $ 226,514,759 Toys 'R' Us, Inc. (a)(b) 13,698,500 164,792,955 Office Depot, Inc. (a) 11,384,900 159,957,845 ---------------- 551,265,559 BANK & THRIFTS--18.1% Washington Mutual, Inc. 23,351,400 $ 919,344,618 INVESTMENT MANAGEMENT--2.5% Janus Capital Group, Inc. 9,169,600 $ 128,099,312 HEALTH CARE SERVICES--4.1% IMS Health Incorporated 9,903,441 $ 208,962,605 PHARMACEUTICALS--6.8% Bristol-Myers Squibb Company 6,840,200 $ 175,519,532 Chiron Corporation (a) 3,292,000 170,163,480 ---------------- 345,683,012 TELECOMMUNICATIONS--4.1% Sprint Corporation 13,834,600 $ 208,902,460
12
SHARES HELD/ NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--92.8% (CONT.) COMPUTER SERVICES--4.4% First Data Corporation 5,630,400 $ 224,990,784 OFFICE EQUIPMENT--3.9% Xerox Corporation (a) 19,354,700 $ 198,579,222 OIL & NATURAL GAS--4.1% Burlington Resources, Inc. 4,326,800 $ 208,551,760 TOTAL COMMON STOCKS (COST: $3,484,167,653) 4,721,077,114 SHORT TERM INVESTMENTS--7.4% U.S. GOVERNMENT BILLS--4.7% United States Treasury Bills, 0.77% - 1.015% due 10/9/2003 - 12/18/2003 $ 240,000,000 $ 239,731,710 TOTAL U.S. GOVERNMENT BILLS (COST: $239,719,675) 239,731,710 REPURCHASE AGREEMENTS--2.7% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price $134,503,549 collateralized by U.S. Government Agency Securities $ 134,500,000 $ 134,500,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price $741,235 collateralized by a U.S. Government Agency Security 741,220 741,220 TOTAL REPURCHASE AGREEMENTS (COST: $135,241,220) 135,241,220 TOTAL SHORT TERM INVESTMENTS (COST: $374,960,895) 374,972,930 Total Investments (Cost $3,859,128,548)--100.2% $ 5,096,050,044 Other Liabilities In Excess Of Other Assets--(0.2%) (9,962,774) ---------------- TOTAL NET ASSETS--100% $ 5,086,087,270 ================
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (c) Effective October 16, 2003, AOL Time Warner Inc. changed its name to Time Warner Inc. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 THE OAKMARK SMALL CAP FUND REPORT FROM JAMES P. BENSON AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF JAMES P. BENSON AND EDWARD A. STUDZINSKI] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/03) AS COMPARED TO THE RUSSELL 2000 INDEX(13)
THE OAKMARK SMALL CAP FUND RUSSELL 2000 10/31/1995 $ 10,000 $ 10,000 12/31/1995 $ 10,330 $ 10,695 3/31/1996 $ 11,460 $ 11,241 6/30/1996 $ 12,470 $ 11,803 9/30/1996 $ 13,250 $ 11,843 12/31/1996 $ 14,440 $ 12,459 3/31/1997 $ 15,220 $ 11,815 6/30/1997 $ 17,660 $ 13,730 9/30/1997 $ 20,340 $ 15,774 12/31/1997 $ 20,290 $ 15,245 3/31/1998 $ 21,732 $ 16,779 6/30/1998 $ 20,467 $ 15,997 9/30/1998 $ 14,976 $ 12,774 12/31/1998 $ 17,620 $ 14,857 3/31/1999 $ 16,069 $ 14,051 6/30/1999 $ 18,205 $ 16,237 9/30/1999 $ 16,558 $ 15,210 12/31/1999 $ 16,224 $ 18,015 3/31/2000 $ 15,974 $ 19,292 6/30/2000 $ 15,926 $ 18,562 9/30/2000 $ 18,014 $ 18,768 12/31/2000 $ 16,937 $ 17,471 3/31/2001 $ 17,816 $ 16,335 6/30/2001 $ 21,218 $ 18,688 9/30/2001 $ 18,026 $ 14,788 12/31/2001 $ 21,391 $ 17,906 3/31/2002 $ 24,014 $ 18,619 6/30/2002 $ 22,369 $ 17,064 9/30/2002 $ 17,445 $ 13,412 12/31/2002 $ 18,595 $ 14,238 3/31/2003 $ 17,185 $ 13,598 6/30/2003 $ 20,092 $ 16,784 9/30/2003 $ 21,255 $ 18,307
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - ---------------------------------------------------------------------------------------------- OAKMARK SMALL CAP FUND 5.79% 21.84% 7.25% 9.99% Russell 2000 9.08% 36.50% 7.46% 7.93% S&P Small Cap 600(14) 7.08% 26.86% 10.20% 10.44% Lipper Small Cap Value Index(15) 9.46% 33.80% 11.67% 11.40%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The positive returns we achieved during the third calendar quarter of 2003 built upon the strong returns of the second quarter, but the sharp stock market sell-off in the final week of the quarter trimmed our gains. Investors seem to be nervous with respect to the sustainability of the economic expansion. While we understand these concerns, we believe the fiscal and monetary stimulus in the economy is likely to create a sustained economic recovery. Our goal is to invest in companies positioned to do well in an economic recovery, but these companies must also possess the staying power to do reasonably well if the economy unexpectedly fades. In summary, during the just concluded quarter the S&P 500 Index rose by 3% and the Russell 2000 Index climbed by 9%. Your Fund experienced a gain of 6% during the past three months, which places its performance above the S&P 500 Index(6), but below the Russell 2000 Index. RECENT SUCCESSES AND SHORTCOMINGS One of the key reasons for having a portfolio diversified among 40-50 stocks is to decrease the volatility of the portfolio's returns over time. Despite your Fund's 14% gain on a year-to-date basis, we are trailing our benchmark index, the Russell 2000, for the first time since 1999. There are two principal reasons for this relative underperformance. First, several stock groups within the Russell 2000 that have done particularly well thus far in 2003 are underrepresented in our portfolio. The strongest small cap stocks have been those with negative earnings over the trailing twelve months and this is a group of stocks where we have only a limited number of investments. We have tended to avoid some industries within this strong group of stocks such as airlines, biotechs, telecommunications and technology capital equipment companies since our analysis indicates that most of these companies fail to earn a reasonable return on capital over time. We prefer to invest in companies where we believe our invested capital can earn above average rates of return and achieve above average growth on value. During those periods when stocks of unprofitable companies perform better than the market averages, we are likely to underperform. However, while we are not surprised by our relative underperformance thus far in 2003, we continue 14 to invest with a long-term bias towards reasonably priced stocks of profitable companies. The second topic we would highlight is stock selection. While the majority of our stock holdings are up on a year-to-date basis with two of our stocks more than doubling (Mentor Graphics and Measurement Specialties which was sold earlier in 2003), two stocks have been notable drags on our performance. The two offenders are MCSi Inc., which we sold for a loss earlier in 2003 following an accounting scandal, and Surebeam which is encountering slower than expected consumer adoption of its food safety technology. While we continue to believe Surebeam's technology for killing food borne pathogens via irradiating food would make our food safer, the outlook for this company's products and services remains dependent on consumer acceptance. We will continue to monitor Surebeam's progress closely. WHAT'S NEW (AND NOT SO NEW) During the past few months there has been extensive media coverage of "market timers" and their trading in mutual funds. We believe trading by market timers in your Fund would be detrimental to our long-term investors since large scale, rapid-fire additions and subtractions of funds would drive up our trading costs. Therefore, back in 1999 we took a proactive stance against people that wanted to rapidly trade your Fund by imposing a 2% redemption fee on shares sold that were held 90 days or less. This redemption cost has, we believe, largely eliminated any interest market timers would have in your Fund. While this is largely old news, we just wanted to remind everyone how we conduct the stewardship of your funds. Our new news is a change in your portfolio management team. We bid a fond farewell to Clyde McGregor and thank him for his valuable contributions over the past three years. The demands on Clyde's time have been increasing over the past year or so as the other fund he manages, The Oakmark Equity and Income Fund, experienced tremendous growth. Ed Studzinski joins the management team of your Fund. Ed has been an active participant in supplying investment ideas for your Fund for many years and we believe his investment insights should prove valuable to your Fund. PORTFOLIO CHANGES During the third quarter we sold three stocks from your Fund's portfolio and we added four new stocks. The companies we sold were Columbus McKinnon, InFocus Corp. and Measurement Specialties. We sold all three companies based upon our belief that intensifying international competition would continue to pressure their profit margins. We initiated positions in Hudson Highland Group (a specialty staffing company), Jack In The Box (a quick serve restaurant company), Landry's Restaurants (a firm that operates mainly casual dining seafood restaurants) and Schweitzer-Mauduit (a manufacturer of premium specialty papers). We believe all four of our new positions are healthy companies that are well positioned to benefit from an economic recovery. SUMMATION We would like to thank our shareholders for your continuing interest in and your support of The Oakmark Small Cap Fund. We look forward to communicating with you again next quarter. /s/ James P. Benson /s/ Edward A. Studzinski JAMES P. BENSON, CFA EDWARD A. STUDZINSKI, CFA Portfolio Manager Portfolio Manager jbenson@oakmark.com estudzinski@oakmark.com [SIDENOTE] HIGHLIGHTS - - Small-cap stocks with negative earnings--those we tend to avoid--were strongest this quarter. - - We prefer companies where we believe invested capital can earn above-average rates of return. - - We continue to invest with a long-term bias toward reasonably priced stocks of profitable companies. 15 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.4% FOOD & BEVERAGE--7.7% Ralcorp Holdings, Inc. (a) 575,000 $ 15,927,500 Del Monte Foods Company (a) 1,260,000 10,974,600 -------------- 26,902,100 HOUSEHOLD PRODUCTS--4.0% Tupperware Corporation 1,060,000 $ 14,182,800 OTHER CONSUMER GOODS & SERVICES--4.9% Department 56, Inc. (a) 688,000 $ 8,737,600 Callaway Golf Company 475,000 6,778,250 Central Parking Corporation 137,200 1,680,700 -------------- 17,196,550 SECURITY SYSTEMS--4.4% Checkpoint Systems, Inc. (a) 968,300 $ 15,299,140 APPAREL--3.2% Oakley, Inc. (a) 671,200 $ 6,712,000 R.G. Barry Corporation (a)(b) 900,000 4,680,000 -------------- 11,392,000 AUTOMOBILE RENTALS--2.4% Dollar Thrifty Automotive Group, Inc. (a) 375,000 $ 8,520,000 BUILDING MATERIALS & CONSTRUCTION--5.2% Insituform Technologies, Inc., Class A (a) 738,500 $ 13,115,760 Integrated Electrical Services, Inc. (a) 750,000 5,175,000 -------------- 18,290,760 HOTELS & MOTELS--0.8% Prime Hospitality Corp. (a) 327,800 $ 2,848,582 HUMAN RESOURCES--1.0% Hudson Highland Group, Inc. (a) 175,000 $ 3,367,000 INFORMATION SERVICES--4.7% eFunds Corporation (a)(b) 1,327,600 $ 16,395,860 MARKETING SERVICES--0.3% Grey Global Group, Inc. 1,500 $ 1,141,650
16
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.4% (CONT.) RESTAURANTS--3.8% Triarc Companies, Inc., Class B 500,000 $ 5,200,000 Jack in the Box Inc. (a) 210,000 3,738,000 Triarc Companies, Inc. 250,000 2,517,500 Landry's Restaurants, Inc. 87,800 1,808,680 -------------- 13,264,180 RETAIL--2.2% ShopKo Stores, Inc. (a)(c) 517,600 $ 7,764,000 BANK & THRIFTS--8.4% BankAtlantic Bancorp, Inc., Class A 1,000,000 $ 14,250,000 People's Bank of Bridgeport, Connecticut 360,000 10,778,400 PennFed Financial Services, Inc. 150,000 4,365,000 -------------- 29,393,400 INSURANCE--3.2% The PMI Group, Inc. 330,000 $ 11,137,500 OTHER FINANCIAL--3.5% NCO Group, Inc. (a) 530,000 $ 12,439,100 REAL ESTATE--1.8% Trammell Crow Company (a) 495,000 $ 6,162,750 MEDICAL PRODUCTS--7.3% Hanger Orthopedic Group, Inc. (a) 950,000 $ 14,582,500 CONMED Corporation (a) 400,000 8,256,000 Advanced Medical Optics, Inc. (a) 150,000 2,694,000 -------------- 25,532,500 COMPUTER SERVICES--4.0% CIBER, Inc. (a) 1,625,000 $ 12,350,000 Interland, Inc. (a) 210,000 1,614,900 -------------- 13,964,900 COMPUTER SOFTWARE--8.7% Mentor Graphics Corporation (a) 650,000 $ 11,394,500 MSC.Software Corp. (a) 1,350,000 9,720,000 Sybase, Inc. (a) 550,000 9,355,500 -------------- 30,470,000 COMPUTER SYSTEMS--1.7% Optimal Robotics Corp., Class A (a)(d) 723,500 $ 6,120,810 DATA STORAGE--2.0% Imation Corp. 215,000 $ 7,019,750
17
SHARES HELD/ NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.4% (CONT.) MACHINERY & INDUSTRIAL PROCESSING--1.7% SureBeam Corporation, Class A (a)(b) 4,250,000 $ 6,077,500 FORESTRY PRODUCTS--0.9% Schweitzer-Mauduit International, Inc. 130,500 $ 3,295,125 OIL & NATURAL GAS--5.6% St. Mary Land & Exploration Company 350,000 $ 8,862,000 Cabot Oil & Gas Corporation 250,000 6,500,000 Berry Petroleum Company 232,800 4,255,584 -------------- 19,617,584 TOTAL COMMON STOCKS (COST: $306,039,431) 327,795,541 SHORT TERM INVESTMENTS--7.3% U.S. GOVERNMENT BILLS--4.3% United States Treasury Bills, 0.845% - 0.91% due 10/2/2003 - 10/9/2003 $ 15,000,000 $ 14,998,813 TOTAL U.S. GOVERNMENT BILLS (COST: $14,998,813) 14,998,813 REPURCHASE AGREEMENTS--3.0% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price $9,000,238 collateralized by U.S. Government Agency Securities $ 9,000,000 $ 9,000,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price $1,558,003 collateralized by a U.S. Government Agency Security 1,587,970 1,587,970 TOTAL REPURCHASE AGREEMENTS (COST: $10,587,970) 10,587,970 TOTAL SHORT TERM INVESTMENTS (COST: $25,586,783) 25,586,783 Total Investments (Cost $331,626,214)--100.7% $ 353,382,324
18
NAME SHARES SUBJECT TO CALL MARKET VALUE - ----------------------------------------------------------------------------------------------------- CALL OPTIONS WRITTEN--(0.1%) RETAIL--(0.1%) ShopKo Stores, Inc., March 17.50 Calls (45,000) $ (38,250) ShopKo Stores, Inc., December 15 Calls (50,000) (60,000) -------------- (98,250) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(116,769))--(0.1%) $ (98,250) Other Liabilities In Excess Of Other Assets--(0.6%) (2,270,441) -------------- TOTAL NET ASSETS--100% $ 351,013,633 ==============
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (c) A portion of this security has been segregated to cover written option contracts. (d) Represents a foreign domiciled corporation. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. McGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. McGREGOR AND EDWARD A. STUDZINSKI] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/03) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(16)
THE OAKMARK EQUITY AND INCOME FUND LIPPER BALANCED FUND INDEX 10/31/1995 $ 10,000 $ 10,000 12/31/1995 $ 10,240 $ 10,473 3/31/1996 $ 10,500 $ 10,707 6/30/1996 $ 11,040 $ 10,925 9/30/1996 $ 11,110 $ 11,213 12/31/1996 $ 11,805 $ 11,840 3/31/1997 $ 12,153 $ 11,895 6/30/1997 $ 13,430 $ 13,178 9/30/1997 $ 14,810 $ 14,024 12/31/1997 $ 14,941 $ 14,243 3/31/1998 $ 16,233 $ 15,370 6/30/1998 $ 16,320 $ 15,599 9/30/1998 $ 15,191 $ 14,701 12/31/1998 $ 16,792 $ 16,392 3/31/1999 $ 16,792 $ 16,655 6/30/1999 $ 18,457 $ 17,402 9/30/1999 $ 17,518 $ 16,682 12/31/1999 $ 18,119 $ 17,863 3/31/2000 $ 18,924 $ 18,396 6/30/2000 $ 18,886 $ 18,174 9/30/2000 $ 20,761 $ 18,535 12/31/2000 $ 21,723 $ 18,290 3/31/2001 $ 22,621 $ 17,374 6/30/2001 $ 24,445 $ 17,984 9/30/2001 $ 23,751 $ 16,621 12/31/2001 $ 25,635 $ 17,698 3/31/2002 $ 26,708 $ 17,805 6/30/2002 $ 25,855 $ 16,628 9/30/2002 $ 23,640 $ 14,986 12/31/2002 $ 25,087 $ 15,807 3/31/2003 $ 24,515 $ 15,516 6/30/2003 $ 27,750 $ 17,209 9/30/2003 $ 28,308 $ 17,562
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - ---------------------------------------------------------------------------------------------- OAKMARK EQUITY & INCOME FUND 2.01% 19.75% 13.25% 14.04% S&P 500(6) 2.65% 24.40% 1.00% 8.75% Lehman Govt./Corp. Bond(17) -0.51% 6.51% 6.69% 7.40% Lipper Balanced Fund Index 2.05% 17.19% 3.62% 7.37%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized QUARTER AND ANNUAL REVIEW The rebound in the equity markets enabled The Oakmark Equity and Income Fund to deliver solid absolute returns in fiscal 2003. The result for the 12 months came in just shy of 20% despite earning a relatively quiet 2% in the recently ended September quarter. The outcome for the fiscal year compared favorably with the 17% that the Lipper Balanced Fund Index, our primary standard of comparison, registered. The quarter's result came in essentially equal with the Lipper Balanced Index. The 20% return represents the second highest fiscal year return in the fund's history. While pleasing, it must be placed in context. The fiscal year began at the tail end of a major stock market decline. This decline had compressed valuations of equities, thereby creating numerous opportunities for our talented team of security analysts to exploit. In contrast, the bond market began the fiscal year in the late innings of a powerful upward thrust. Bonds lost momentum as the year progressed, and the summer witnessed what appears to be a change in direction to higher interest rates. The net result for the Fund was that the equities contributed a robust 35% return for the fiscal year while bonds came in at only 5%. Remember, however, that in the previous fiscal year it was bonds that dominated returns. It is this variability and unpredictability of markets that makes a balanced fund such as Oakmark Equity and Income a sensible investing plan for many investors. THE RETURN OF THE BUBBLE? As noted above, stocks have enjoyed a strong resurgence over the last 12 months. Given the perilous state of world affairs, it is hardly surprising that many pundits believe that the stock market has outrun its fundamental support and have described the rally as a return to the overheated conditions that eventually ended the previous bull market. We share some of this skepticism concerning current levels of valuation and fret about the miserable insider selling statistics. We also observe that it is more difficult to identify compelling opportunities. Nevertheless, we recall that several of our investing progenitors taught us "the hardest time to invest is ALWAYS right now." We might not like current valuations, but the market today has favorable attributes that were not present in the bubble and that make it a much better time to be an investor. 20 The most definitive evidence of the health and vigor of the 2003 stock market rally is the market's breadth. "Breadth" simply measures the proportion of stocks that are rising, without taking size or other factors into account. Strong market breadth statistics characterize long-lived market rallies, and this characteristic is definitely present currently: in the first nine months of 2003 more than 83% of the issues in the Russell 3000 Stock Index enjoyed price increases. The positive returns have not skipped specific sectors but have been spread across the entire market. While this outcome is not rare, it has been absent since 1997. In contrast, the 1998-'99 stock market saw a dwindling list of very large companies keep that bull market going. In 1999, for example, the popular stock market averages rose more than 20% even though the majority of stocks declined in price that year. This deterioration in market breadth presaged the 2000-'02 bear market. Aside from the market's own internal characteristics, economic fundamentals also appear to be very supportive of the stock market. Fiscal and monetary stimulus is approaching record levels, productivity is achieving remarkable advances, and corporate profits are both growing rapidly and improving qualitatively. Interest rates, though off of their lows, remain moderate. To sum up, the market is high but probably deserves to be. And, while it feels to us that undervalued opportunities are scarce, the experience of the last decade teaches that the market will reward our patient search for value. DIVIDENDS Oakmark Equity and Income is a balanced fund seeking to provide its shareholders high current income as well as preservation and growth of capital. Given the fund's income objective, we were quite pleased earlier this year when the tax cut bill included a roughly 60% reduction in the rate of taxation on corporate dividends. For the next five years the maximum marginal tax rate for both dividends and capital gains will be 15%. This change in the law has already altered corporate behavior as companies that never before paid dividends (E.G. Microsoft) have initiated payouts while others that paid token dividends (E.G. Waste Management) have drastically increased their payout. Given the fund's mandate to produce income for its shareholders, we have always studied the available universe to discover opportunities to enhance the fund's income generation. With the change in dividend taxes, we believed that our search for income would become more difficult as investors bid up the prices of dividend paying companies. To our surprise, this has not yet happened. In fact, throughout 2003, stocks of companies that do not pay dividends have trounced dividend payers in total return, and those companies that have instituted dividends have generally not seen much favorable impact on their share price. Experience has taught us that restrictive investing guidelines reduce total returns to portfolios. Accordingly, we have not limited Oakmark Equity and Income to income-producing securities. Nevertheless, our search for value is well suited to identify companies with the potential for meaningful dividend increases. In particular, we seek out companies with substantial free cash flow--that is, cash flow after corporate activities such as capital spending, working capital, debt repayment, and acquisitions. While the stock market's short term reaction to the tax law change remains abstruse, we expect the combination of our investing approach and lower dividend taxes to enhance returns to our shareholders over time. The last time that we wrote about dividends in a quarterly report was in January of 2000. We noted then that dividends generally correlate positively with total returns. In both 1999 and 2003 that correlation turned negative. Rather than merely whine about it, our best course of action is to take advantage of this sort of anomalous market behavior. In closing, we thank our shareholders for their interest and support. As always, we welcome e-mailed questions or comments. /s/ Clyde S. McGregor /s/ Edward A. Studzinski CLYDE S. McGREGOR, CFA EDWARD A. STUDZINSKI, CFA Portfolio Manager Portfolio Manager mcgregor@oakmark.com estudzinski@oakmark.com [SIDENOTE] HIGHLIGHTS - - Market variability and unpredictability makes balanced funds a sensible investing plan for most. - - Despite less-attractive valuations, the market has favorable attributes not present in the late 90s. - - In spite of dividend-tax changes, investors have not yet bid up prices of dividend-paying companies. 21 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--56.2% COMMON STOCKS--55.8% FOOD & BEVERAGE--4.6% Diageo plc (b) 2,300,000 $ 101,545,000 Nestle SA (b) 1,200,000 69,170,400 Kraft Foods Inc. 1,000,000 29,500,000 ---------------- 200,215,400 CABLE SYSTEMS & SATELLITE TV--2.1% General Motors Corporation, Class H (Hughes Electronics Corporation) (a) 6,356,200 $ 90,957,222 HARDWARE--0.7% The Stanley Works 962,100 $ 28,401,192 INFORMATION SERVICES--2.0% Ceridian Corporation (a) 4,800,000 $ 89,376,000 MARKETING SERVICES--1.9% The Interpublic Group of Companies, Inc. 5,750,000 $ 81,190,000 RESTAURANTS--0.4% Darden Restaurants, Inc. 1,000,000 $ 19,000,000 RETAIL--3.7% Costco Wholesale Corporation (a) 2,200,000 $ 68,376,000 J.C. Penney Company, Inc. 3,000,000 64,110,000 Office Depot, Inc. (a) 2,230,000 31,331,500 ---------------- 163,817,500 INSURANCE--2.4% SAFECO Corporation 2,900,000 $ 102,254,000 RenaissanceRe Holdings Ltd. (c) 100,000 4,563,000 ---------------- 106,817,000 REAL ESTATE--0.4% Hospitality Properties Trust 488,500 $ 17,136,580 HEALTH CARE SERVICES--4.3% Caremark Rx, Inc. (a) 4,250,000 $ 96,050,000 Cardinal Health, Inc. 1,600,000 93,424,000 ---------------- 189,474,000 MANAGED CARE SERVICES--2.4% First Health Group Corp. (a)(d) 3,950,000 $ 103,292,500
22
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--56.2% (CONT.) MEDICAL CENTERS--2.3% Laboratory Corporation of America Holdings (a) 3,500,000 $ 100,450,000 MEDICAL PRODUCTS--1.7% Apogent Technologies, Inc. (a) 2,264,400 $ 47,235,384 Techne Corporation (a) 750,000 23,842,500 Edwards Lifesciences Corporation (a) 100,000 2,708,000 ---------------- 73,785,884 PHARMACEUTICALS--3.0% Watson Pharmaceuticals, Inc. (a) 2,550,000 $ 106,309,500 Abbott Laboratories 565,400 24,057,770 ---------------- 130,367,270 COMPUTER SERVICES--1.4% Concord EFS, Inc. (a) 4,500,000 $ 61,515,000 COMPUTER SOFTWARE--3.9% Synopsys, Inc. (a) 3,690,000 $ 113,541,300 Novell, Inc. (a) 8,000,000 42,640,000 Mentor Graphics Corporation (a) 800,000 14,024,000 ---------------- 170,205,300 COMPUTER SYSTEMS--0.7% The Reynolds and Reynolds Company, Class A 1,164,000 $ 32,068,200 AEROSPACE & DEFENSE--4.2% Rockwell Collins, Inc. 3,107,900 $ 78,474,475 General Dynamics Corporation 730,800 57,046,248 Honeywell International, Inc. 1,889,500 49,788,325 ---------------- 185,309,048 AGRICULTURAL EQUIPMENT--0.0% Alamo Group, Inc. 141,900 $ 2,023,494 DIVERSIFIED CONGLOMERATES--1.3% Textron, Inc. 1,400,100 $ 55,233,945 INSTRUMENTS--1.2% Varian, Inc. (a) 1,649,400 $ 51,659,208 MACHINERY & INDUSTRIAL PROCESSING--2.0% Rockwell Automation, Inc. 2,075,000 $ 54,468,750 Cooper Industries, Ltd. 727,500 34,941,825 ---------------- 89,410,575 AGRICULTURAL OPERATIONS--1.9% Monsanto Company 3,500,000 $ 83,790,000
23
SHARES HELD/ NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--56.2% (CONT.) FORESTRY PRODUCTS--1.5% Plum Creek Timber Company, Inc. 2,657,044 $ 67,595,199 OIL & NATURAL GAS--5.8% Burlington Resources, Inc. 2,100,000 $ 101,220,000 XTO Energy, Inc. 4,499,933 94,453,594 St. Mary Land & Exploration Company 1,200,000 30,384,000 Cabot Oil & Gas Corporation 1,075,000 27,950,000 Cross Timbers Royalty Trust 33,295 699,195 ---------------- 254,706,789 TOTAL COMMON STOCKS (COST: $2,080,904,989) 2,447,797,306 CONVERTIBLE BONDS--0.4% CABLE SYSTEMS & SATELLITE TV--0.4% EchoStar Communications Corporation, 4.875% due 1/1/2007 $ 15,000,000 $ 15,281,250 TOTAL CONVERTIBLE BONDS (COST: $12,744,913) 15,281,250 TOTAL EQUITY AND EQUIVALENTS (COST: $2,093,649,902) 2,463,078,556 FIXED INCOME--33.4% PREFERRED STOCKS--0.0% BANK & THRIFTS--0.0% Fidelity Capital Trust I, Preferred, 8.375% 43,500 $ 446,310 TELECOMMUNICATIONS--0.0% MediaOne Finance Trust III, Preferred, 9.04% 20,000 $ 502,600 TOTAL PREFERRED STOCKS (COST: $935,000) 948,910 CORPORATE BONDS--2.1% BROADCASTING & PROGRAMMING--0.3% Liberty Media Corporation, 8.25% due 2/1/2030, Debenture 12,900,000 $ 14,934,137 BUILDING MATERIALS & CONSTRUCTION--0.0% Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note 750,000 $ 821,250
24
NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- FIXED INCOME--33.4% (CONT.) CABLE SYSTEMS & SATELLITE TV--0.1% CSC Holdings Inc., 7.875% due 12/15/2007 3,000,000 $ 3,067,500 HOTELS & MOTELS--0.1% HMH Properties, 7.875% due 8/1/2005, Senior Note Series A 2,960,000 $ 3,034,000 Park Place Entertainment, 7.00% due 7/15/2004, Senior Notes 2,750,000 2,822,187 ---------------- 5,856,187 RETAIL--0.5% The Gap, Inc., 6.90% due 9/15/2007 9,187,000 $ 9,876,025 Toys 'R' Us, Inc., 7.875% due 4/15/2013 5,000,000 5,467,800 Rite Aid Corporation, 7.625% due 4/15/2005, Senior Notes 4,900,000 5,022,500 Ugly Duckling Corporation, 12.00% due 10/23/2003, Subordinated Debenture 650,000 642,687 ---------------- 21,009,012 HEALTH CARE SERVICES--0.5% Omnicare, Inc., 6.125% due 6/1/2013 20,000,000 $ 19,600,000 MEDICAL PRODUCTS--0.0% Apogent Technologies Inc., 144A, 6.50% due 5/15/2013 1,000,000 $ 1,025,000 OFFICE EQUIPMENT--0.3% Xerox Corporation, 7.125% due 6/15/2010 15,000,000 $ 14,887,500 MACHINERY & INDUSTRIAL PROCESSING--0.1% Columbus McKinnon Corporation New York, 8.50% due 4/1/2008 3,000,000 $ 2,640,000 OTHER INDUSTRIAL GOODS & SERVICES--0.2% Sealed Air Corporation, 144A, 5.625% due 7/15/2013 8,300,000 $ 8,407,975 ELECTRIC UTILITIES--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 458,221 $ 498,315 TOTAL CORPORATE BONDS (COST: $87,298,047) 92,746,876 GOVERNMENT AND AGENCY SECURITIES--31.3% CANADIAN GOVERNMENT BONDS--3.4% Canada Government, 3.50% due 6/1/2004 100,000,000 $ 74,487,227 Canada Government, 3.00% due 12/1/2005 100,000,000 74,091,077 ---------------- 148,578,304
25
NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- FIXED INCOME--33.4% (CONT.) U.S. GOVERNMENT NOTES--27.2% United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed 247,224,840 $ 271,947,324 United States Treasury Notes, 5.75% due 11/15/2005 200,000,000 217,593,800 United States Treasury Notes, 1.625% due 1/31/2005 200,000,000 201,265,600 United States Treasury Notes, 1.50% due 7/31/2005 200,000,000 200,461,000 United States Treasury Notes, 1.50% due 2/28/2005 125,000,000 125,576,125 United States Treasury Notes, 1.875% due 9/30/2004 75,000,000 75,600,600 United States Treasury Notes, 1.625% due 4/30/2005 50,000,000 50,292,950 United States Treasury Notes, 1.25% due 5/31/2005 50,000,000 49,970,700 ---------------- 1,192,708,099 U.S. GOVERNMENT AGENCIES--0.7% Federal Home Loan Mortgage Corporation, 3.75% due 11/26/2007 10,000,000 $ 10,041,380 Federal Home Loan Mortgage Corporation, 2.35% due 5/5/2008 7,100,000 7,147,187 Fannie Mae, 2.25% due 12/30/2008 6,975,000 6,901,281 Federal Home Loan Bank, 3.125% due 7/10/2009 4,000,000 3,897,568 Federal Home Loan Bank, 5.10% due 12/26/2006 2,035,000 2,053,584 Federal Home Loan Bank, 3.875% due 12/15/2004 1,000,000 1,029,836 ---------------- 31,070,836 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $1,335,285,283) 1,372,357,239 TOTAL FIXED INCOME (COST: $1,423,518,330) 1,466,053,025 SHORT TERM INVESTMENTS--9.7% U.S. GOVERNMENT BILLS--7.5% United States Treasury Bills, 0.765% - 0.925% due 10/2/2003 - 12/26/2003 $ 330,000,000 $ 329,705,731 TOTAL U.S. GOVERNMENT BILLS (COST: $329,700,153) 329,705,731 REPURCHASE AGREEMENTS--2.2% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price $92,002,428 collateralized by U.S. Government Agency Securities $ 92,000,000 $ 92,000,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price $1,457,275 collateralized by a U.S. Government Agency Security 1,457,245 1,457,245 TOTAL REPURCHASE AGREEMENTS (COST: $93,457,245) 93,457,245 TOTAL SHORT TERM INVESTMENTS (COST: $423,157,398) 423,162,976 Total Investments (Cost $3,940,325,630)--99.3% $ 4,352,294,557
26
NAME CONTRACTS HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- CALL OPTIONS PURCHASED--0.0% BANK & THRIFTS--0.0% First Health Group Corp., January 30 Calls 420 $ 22,050 First Health Group Corp., October 30 Calls 170 2,550 ---------------- 24,600 AEROSPACE & DEFENSE--0.0% General Dynamics Corporation, November 80 Calls 2,548 $ 522,340 TOTAL CALL OPTIONS PURCHASED (COST: $431,250)--0.0% $ 546,940 Other Assets In Excess Of Other Liabilities--0.7% 31,807,514 ---------------- TOTAL NET ASSETS--100% $ 4,384,649,011 ================
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a foreign domiciled corporation. (d) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 27 THE OAKMARK GLOBAL FUND REPORT FROM GREGORY L. JACKSON AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF GREGORY L. JACKSON AND MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (9/30/03) AS COMPARED TO THE MSCI WORLD INDEX(18)
THE OAKMARK GLOBAL FUND MSCI WORLD INDEX 8/1/1999 $ 10,000 $ 10,000 9/30/1999 $ 9,180 $ 9,883 12/31/1999 $ 9,981 $ 11,550 3/31/2000 $ 10,061 $ 11,668 6/30/2000 $ 10,381 $ 11,255 9/30/2000 $ 10,922 $ 10,689 12/31/2000 $ 11,562 $ 10,028 3/31/2001 $ 11,480 $ 8,739 6/30/2001 $ 13,289 $ 8,959 9/30/2001 $ 11,071 $ 7,676 12/31/2001 $ 13,880 $ 8,335 3/31/2002 $ 15,387 $ 8,364 6/30/2002 $ 14,372 $ 7,601 9/30/2002 $ 11,828 $ 6,204 12/31/2002 $ 13,587 $ 6,678 3/31/2003 $ 12,153 $ 6,340 6/30/2003 $ 16,225 $ 7,420 9/30/2003 $ 17,774 $ 7,779
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 3-YEAR (8/4/99) - ---------------------------------------------------------------------------------------------- OAKMARK GLOBAL FUND 9.55% 50.27% 17.63% 14.83%(3) MSCI World 4.84% 25.40% -10.05% -5.85% Lipper Global Fund Index(19) 5.39% 22.61% -9.18% -2.91%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized FELLOW SHAREHOLDERS, The Oakmark Global Fund had a strong quarter, gaining 10% for the three-month period ending September 30, 2003. This quarter's results compare favorably with the 5% increase for the MSCI World Index and the 5% increase for the Lipper Global Fund Index. For the first nine months of calendar year 2003, The Oakmark Global Fund has returned 31%, compared to the smaller gains of 16% for both MSCI World Index and the Lipper Global Fund Index. Most importantly, since inception the Fund has returned 15% annualized compared to declines in the above indices. HAPPY 4TH ANNIVERSARY On August 4th, the Oakmark Global Fund had its 4-year anniversary. We are proud of the record we have achieved over these past four years, with performance that is in the top 2% out of 187 global funds over that period according to Lipper.(20) We feel this anniversary is a good opportunity to reiterate the philosophy of the Fund and revisit how we manage the portfolio. PHILOSOPHY AND PROCESS As with the other Oakmark Funds we believe superior long-term results are achieved by investing in quality companies purchased at significant discounts to the underlying business value. We base our investment decisions on our own intensive, independent, fundamental research, focusing on the long-term worth of a business. Equally important as the price we pay, we must have confidence that the priority of management is to make money for the owners, namely, us. Inherent in our philosophy is the belief that, over time, a company's share price will reflect underlying business value. It may take time for this gap to close, perhaps, if the short-term uncertainty that created the opportunity persists. It is our job as analysts to determine whether the current share price is properly compensating us for this uncertainty. PORTFOLIO CONSTRUCTION The Global Fund is built from the bottom-up on a stock-by-stock basis. We will never allocate money, as many global investors do, based solely on macroeconomic predictions of the various 28 regions of the world. Too often this sort of top-down investing ignores valuation and, more important, the quality of the underlying companies in a particular economy. We certainly consider macroeconomic factors in our appraisals of companies, but never as a primary reason for making an investment. We like to characterize the construction process as "ideas battling their way into the portfolio on a stock-by-stock basis". Each idea is judged strictly on its merits, not whether it is a large or small cap, or where the company's headquarters is located. Strict discipline is maintained by adhering to individual stock buy and sell targets. Position sizes within the Fund are determined primarily by the size of the perceived gap between price and value. Concentration--bigger weightings in fewer companies--is another important component of portfolio construction. This is important, as we want our best ideas to have significant impact on the Fund's net asset value. Probably the most unique aspect of the Oakmark Global Fund is its flexibility--we are able to invest in companies of any size capitalization, in any industry, in any location. This flexibility allows us to go wherever value takes us. CURRENT PORTFOLIO Where value takes us today is primarily Europe, and in larger cap, blue-chip stocks. At today's prices, we continue to find better value outside of the United States. Looking at the composition of the Fund, the geographic breakdown is Europe & the United Kingdom 44%, United States 37%, Pacific Rim 14%, and Latin America 4%. Apart from the US the largest country weightings include the UK (11%), France (11%), Japan (8%), and Switzerland (8%). Among the largest industry concentrations include banking & financials, food & beverages, pharmaceuticals, information services and computer software. We have very much enjoyed the past four years as managers of Oakmark Global. We appreciate your continued confidence and support. /s/ Gregory L. Jackson /s/ Michael J. Welsh GREGORY L. JACKSON MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager gjackson@oakmark.com mwelsh@oakmark.com [SIDENOTE] HIGHLIGHTS - - Investment decisions are based on our own intensive, independent, fundamental research. - - As bottom up investors, we never allocate money based solely on top-down macro issues. - - We continue to find better value outside the U.S., and in bigger cap blue-chip stocks. 29 GLOBAL DIVERSIFICATION--SEPTEMBER 30, 2003 [CHART]
% OF FUND EQUITY MARKET VALUE - ------------------------------------------------------------ - - EUROPE 44.3% Great Britain 11.0% * France 10.6% Switzerland 7.6% * Netherlands 6.0% * Italy 5.1% * Germany 3.2% Sweden 0.8% - - UNITED STATES 37.0% - - PACIFIC RIM 13.8% Japan 7.9% Australia 3.1% Korea 2.8% - - LATIN AMERICA 4.2% Mexico 4.2% - - OTHER 0.7% Israel 0.7%
* Euro currency countries comprise 24.9% of the Fund. 30 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.2% FOOD & BEVERAGE--11.3% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 3,885,000 $ 42,041,811 Nestle SA (Switzerland) Food & Beverage Manufacturer 139,100 32,072,048 Lotte Chilsung Beverage Co., Ltd. (Korea) (b) Soft Drinks, Juices & Sports Drinks Manufacturer 13,430 6,375,499 -------------- 80,489,358 HOUSEHOLD PRODUCTS--3.0% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 328,700 $ 21,065,972 BROADCASTING & PROGRAMMING--3.8% Grupo Televisa S.A. (Mexico) (c) Television Production & Broadcasting 566,500 $ 20,728,235 Liberty Media Corporation, Class A (United States) (a) Broadcast Services & Programming 650,000 6,480,500 -------------- 27,208,735 CABLE SYSTEMS & SATELLITE TV--1.4% AOL Time Warner Inc. (United States) (a)(d) Multimedia 675,000 $ 10,199,250 HUMAN RESOURCES--1.7% Michael Page International plc (Great Britain) (b) Recruitment Consultancy Services 4,815,400 $ 11,966,936 INFORMATION SERVICES--7.0% eFunds Corporation (United States) (a)(b)(e) Electronic Debit Payment Services 1,845,000 $ 22,785,750 Ceridian Corporation (United States) (a) Data Management Services 1,025,000 19,085,500 Equifax Inc. (United States) Credit Reporting & Collection 350,000 7,794,500 -------------- 49,665,750 MARKETING SERVICES--3.5% The Interpublic Group of Companies, Inc. (United States) Advertising & Marketing Services 1,750,000 $ 24,710,000
31
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.2% (CONT.) MOTORCYCLES--0.4% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 1,933,500 $ 3,174,492 RETAIL--5.8% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 2,890,100 $ 23,270,731 The TJX Companies, Inc. (United States) Discount Apparel & Home Fashion Retailer 900,000 17,478,000 -------------- 40,748,731 BANK & THRIFTS--1.8% Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 498,600 $ 7,028,280 Washington Mutual, Inc. (United States) Thrift 150,000 5,905,500 -------------- 12,933,780 FINANCIAL SERVICES--2.5% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 39,800 $ 11,451,937 Credit Suisse Group (Switzerland) Investment Services & Insurance 190,700 6,100,841 -------------- 17,552,778 OTHER FINANCIAL--9.2% Fannie Mae (United States) (e) Mortgage Provider 400,000 $ 28,080,000 Euronext (Netherlands) Stock Exchange 968,200 23,590,559 Daiwa Securities Group Inc. (Japan) Stock Broker 2,062,000 13,967,432 -------------- 65,637,991 MANAGED CARE SERVICES--3.9% First Health Group Corp. (United States) (a)(b) Health Benefits Company 1,064,000 $ 27,823,600 MEDICAL CENTERS--2.6% Laboratory Corporation of America Holdings (United States) (a) Medical Laboratory & Testing Services 650,000 $ 18,655,000
32
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.2% (CONT.) MEDICAL PRODUCTS--2.9% Ansell Limited (Australia) Protective Rubber & Plastics Products 4,468,100 $ 20,424,936 PHARMACEUTICALS--9.8% Aventis S.A. (France) Pharmaceuticals 520,900 $ 27,040,902 Takeda Chemical Industries, Ltd. (Japan) Pharmaceuticals & Food Supplements 656,900 23,986,928 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 875,300 18,231,290 -------------- 69,259,120 TELECOMMUNICATIONS--1.7% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 73,700 $ 11,790,462 TELECOMMUNICATIONS EQUIPMENT--0.7% Telefonaktiebolaget LM Ericsson, Class B (Sweden) (a) Mobile & Wired Telecommunications Products 3,470,000 $ 5,060,790 COMPUTER SERVICES--5.6% Concord EFS, Inc. (United States) (a) Electronic Processing Services 1,450,000 $ 19,821,500 Meitec Corporation (Japan) (b) Software Engineering Services 381,200 14,022,250 First Data Corporation (United States) Data Processing & Management 150,000 5,994,000 -------------- 39,837,750 COMPUTER SOFTWARE--3.9% Novell, Inc. (United States) (a) Network & Internet Integration Software 3,000,000 $ 15,990,000 Synopsys, Inc. (United States) (a)(e) Electronic Design Automation 390,000 12,000,300 -------------- 27,990,300 OFFICE EQUIPMENT--2.4% Neopost SA (France) Mailroom Equipment Supplier 362,050 $ 16,790,775
33
SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.2% (CONT.) AIRPORT MAINTENANCE--0.9% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b)(c) Airport Operator 463,000 $ 6,806,100 DIVERSIFIED CONGLOMERATES--3.6% Vivendi Universal SA (France) (a) Multimedia 1,430,500 $ 25,336,730 INSTRUMENTS--0.6% Orbotech, Ltd. (Israel) (a)(b) Optical Inspection Systems 228,700 $ 4,674,628 CHEMICALS--2.2% Akzo Nobel N.V. (Netherlands) Chemical Producer 497,800 $ 15,528,245 TOTAL COMMON STOCKS (COST: $573,667,677) 655,332,209 SHORT TERM INVESTMENTS--9.2% U.S. GOVERNMENT BILLS--7.0% United States Treasury Bills, 0.845%-0.93% due 10/2/2003 - 10/23/2003 $ 50,000,000 $ 49,988,023 TOTAL U.S. GOVERNMENT BILLS (COST: $49,988,023) 49,988,023 REPURCHASE AGREEMENTS--2.2% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price of $13,500,356, collateralized by U.S. Government Agency Securities $ 13,500,000 $ 13,500,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price of $1,835,844, collateralized by a U.S. Government Agency Security 1,835,806 1,835,806 TOTAL REPURCHASE AGREEMENTS (COST: $15,335,806) 15,335,806 TOTAL SHORT TERM INVESTMENTS (COST: $65,323,829) 65,323,829 Total Investments (Cost $638,991,506)--101.4% $ 720,656,038
34
NAME DESCRIPTION SHARES SUBJECT TO CALL MARKET VALUE - ----------------------------------------------------------------------------------------------------------- CALL OPTIONS WRITTEN--0.0% INFORMATION SERVICES--0.0% eFunds Corporation, December 15 Calls (United States) Electronic Debit Payment Services (100,000) $ (22,500) COMPUTER SOFTWARE--0.0% Synopsys, Inc., December 35 Calls (United States) Electronic Design Automation (100,000) $ (80,000) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(175,242))--0.0% (102,500) NAME DESCRIPTION SHARES SUBJECT TO PUT MARKET VALUE - ----------------------------------------------------------------------------------------------------------- PUT OPTIONS WRITTEN--0.0% COMPUTER SOFTWARE--0.0% Synopsys, Inc., December 27.50 Puts (United States) Electronic Design Automation (100,000) $ (105,000) TOTAL PUT OPTIONS WRITTEN (PREMIUMS RECEIVED: $(80,746))--0.0% (105,000) Other Liabilities In Excess Of Other Assets--(1.4%) (9,851,103) -------------- TOTAL NET ASSETS--100% $ 710,597,435 ==============
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (c) Represents an American Depository Receipt. (d) Effective October 16, 2003, AOL Time Warner Inc. changed its name to Time Warner Inc. (e) A portion of this security has been segregated to cover written option contracts. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 35 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS FELLOW SHAREHOLDERS: Both The Oakmark International and International Small Cap Funds had positive performance, up 8%, and 14% for the quarter ending September 30th; versus the MSCI World ex-US Index(21) which returned 8% for the same period. Both Funds are up significantly from recent market lows in March. Given the availability of value in overseas markets, we continue to remain enthusiastic about prospects in global equity markets. "I WANT IT NOW, DADDY!" Those telltale words from young Veruca Salt's mouth in "Willy Wonka and the Chocolate Factory" are instructive on how not to behave in the investment world. We think impatience is almost always a bad thing and it is particularly so in investing. Financial markets have been extremely volatile in the last 5 years: a stock market bubble build-up, a stock market bubble implosion, a bond market bubble build up, an implosion, etc. Certainly, in the short term, the price of any particular stock will react or, in many cases, overreact to "macro" factors, i.e., events in the company's environment that exist but do not have a long-term impact on the economic value of the firm. Now more than ever, given the threat of terrorist attacks, war in the Mid-East and Africa, a nuclear threat in North Korea, we try to harness the volatility these events precipitate for the good of our shareholders. We are keenly aware that all of these threats/risks exist but believe they often times have little long-term bearing on the worth of most businesses. Therefore, with discipline and our long-term orientation, we attempt to take advantage of the impatience of others. In sum, we believe our patience and discipline is a source of investment advantage and we will continue to use it. As an example, today, beside the macro threats listed above, there is a great deal of worry surrounding pharmaceutical companies. The news is filled with talk of regulatory issues, patent expiries, generic competition, meager pipelines, and other threats. The stock prices of these companies have collapsed, while in many cases business value per share has increased. We think this has materially increased the value proposition for many of these businesses and have therefore made significant investments. While we think there is validity to a few of the market concerns, pharmaceutical companies remain terrific economic enterprises, with high returns on capital, high barriers to entry, tremendous free cash flow, and above average long-term secular growth. Our three largest pharmaceutical holdings are GlaxoSmithKline (UK), Aventis (France), and Takeda (Japan). Glaxo trades for 15.0x earnings and 11.0x operating income. It throws off 7% of its market capitalization every year in free cash flow and uses this cash to buyback inexpensive stock and payout a healthy dividend equating to a current yield of 3.1%. Aventis' valuation is even more compelling, although the underlying business is not as high quality as Glaxo's. Aventis trades for 11.0x earnings and 8.0x operating income. It throws off 7% of its market capitalization every year in free cash flow as well. It is using this cash to pay a 1.7% dividend plus fund unique in-licensing arrangements. Takeda trades at 15x earnings, a very reasonable price given that it is run by one of the best management teams in Japan and cash represents over one-third of the market capitalization. LONG-TERM INVESTING We would be remiss in not mentioning the recent news regarding the issue of market timers in mutual funds. Harris Associates L.P. and The Oakmark Funds have remained focused on building wealth from a long-term perspective. The very idea of short-term opportunists picking off incremental pieces of our core shareholders' return has always made our blood boil. These timers primarily prey upon funds investing in non-US markets. They attempt to take advantage of time lags in market closes and the perceived short-term correlation in global equity prices. For most of the 1990's our fund operations group spent a portion of every day tracking new subscriptions into the Oakmark International and International Small Cap Funds and vetting the ones that looked suspicious. We were searching for potential traders (or, as they are not so affectionately known around here, "flippers"). This was a tedious and time-consuming process. [SIDENOTE] HIGHLIGHTS - - Given the availability of value overseas, we remain enthusiastic about the global equity markets. - - We seek to take advantage of others' impatience through a long-term, disciplined investment process. - - Pharmaceutical companies, in which we have large weightings, remain terrific economic enterprises. 36 In 1999 we were very relieved to put in place a 90-day 2% redemption fee on Oakmark International and Oakmark International Small Cap. This fee, which short-term traders pay directly into the Fund that they are selling, for all intents and purposes destroys the flipper's ability to profit from our Funds at the expense of our long-term shareholders. We believe that if a potential shareholder cannot commit to a minimum of a 90-day investment horizon, we're probably not the right fit for him or her. We take our responsibilities to our shareholders very seriously. This includes frequent and open correspondence (like this quarterly), clear disclosure, closing Funds to new investors (when appropriate), and a disciplined adherence to our investment philosophy and process. Both of us have always had and continue to maintain a substantial personal investment in The Oakmark Funds. We mean it when we start each letter with "Fellow Shareholders". Thank you for your continued confidence and support. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 37 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO AND MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (9/30/03) COMPARED TO THE MSCI WORLD EX U.S. INDEX(21)
THE OAKMARK INTERNATIONAL FUND MSCI WORLD EX U.S. INDEX 9/30/1992 $ 10,000 $ 10,000 12/31/1992 $ 10,043 $ 9,628 3/31/1993 $ 11,890 $ 10,766 6/30/1993 $ 12,300 $ 11,834 9/30/1993 $ 13,387 $ 12,562 12/31/1993 $ 15,424 $ 12,729 3/31/1994 $ 15,257 $ 13,133 6/30/1994 $ 14,350 $ 13,748 9/30/1994 $ 15,278 $ 13,830 12/31/1994 $ 14,026 $ 13,664 3/31/1995 $ 13,563 $ 13,924 6/30/1995 $ 14,749 $ 14,060 9/30/1995 $ 15,507 $ 14,631 12/31/1995 $ 15,193 $ 15,222 3/31/1996 $ 17,021 $ 15,681 6/30/1996 $ 18,383 $ 15,937 9/30/1996 $ 18,347 $ 15,950 12/31/1996 $ 19,450 $ 16,268 3/31/1997 $ 20,963 $ 16,016 6/30/1997 $ 22,700 $ 18,094 9/30/1997 $ 23,283 $ 18,027 12/31/1997 $ 20,097 $ 16,637 3/31/1998 $ 22,994 $ 19,083 6/30/1998 $ 20,253 $ 19,233 9/30/1998 $ 16,322 $ 16,404 12/31/1998 $ 18,688 $ 19,759 3/31/1999 $ 21,258 $ 20,070 6/30/1999 $ 25,728 $ 20,650 9/30/1999 $ 23,896 $ 21,535 12/31/1999 $ 26,065 $ 25,277 3/31/2000 $ 26,012 $ 25,416 6/30/2000 $ 27,856 $ 24,530 9/30/2000 $ 27,306 $ 22,663 12/31/2000 $ 29,324 $ 21,897 3/31/2001 $ 26,763 $ 18,825 6/30/2001 $ 29,437 $ 18,629 9/30/2001 $ 23,728 $ 16,062 12/31/2001 $ 27,819 $ 17,212 3/31/2002 $ 31,006 $ 17,310 6/30/2002 $ 30,315 $ 16,923 9/30/2002 $ 23,365 $ 13,603 12/31/2002 $ 25,465 $ 14,492 3/31/2003 $ 22,481 $ 13,402 6/30/2003 $ 28,198 $ 15,978 9/30/2003 $ 30,368 $ 17,269
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (9/30/92) - --------------------------------------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND 7.70% 29.97% 13.21% 8.53% 10.62% MSCI World ex. U.S. 8.08% 26.95% 1.03% 3.23% 5.09% MSCI EAFE(22) 8.13% 26.01% 0.55% 2.92% 4.86% Lipper International Fund Index(23) 7.89% 25.63% 2.14% 4.89% 6.49%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Fund was up 8% for the quarter ending September 30, 2003. This performance was in line with relevant indices for both the quarter and for the calendar year to date. Most importantly, your Fund is up 11% annualized since inception in September, 1992, comparing very favorably to the indices and our peer group. It's hard to believe we've had yet another anniversary--our 11th. It seems like we just celebrated Oakmark International's 10th birthday a few months ago! The strong price recovery in global stocks that began in March continued through the 3rd quarter. The rise in share prices has been broad-based, with most regions of the world participating. The Fund benefited this quarter from strong stock selection relative to underlying market performance, especially in the United Kingdom and in Sweden. In the UK, the share price of Enodis plc, the food and refrigeration equipment manufacturer, rebounded very strongly as the market reacted to a strengthening in demand for their products. Michael Page International plc, the recruitment consultant, also saw a very strong increase in its share price, as did LM Ericsson, the Swedish telecommunications equipment giant. Ericsson was the single biggest contributor to the Fund's NAV(24) for the quarter as its share price continued its strong recent performance from the lows of March. Overall, the performance of the Fund for the quarter was in line with the various indices despite being significantly underweight in Japan. This is worth noting, as Japan was the single strongest performer of all developed markets. Because it has a significant weighting in all non-US indices it's performance has a big impact. LOOKING FORWARD Given the quality of the holdings and the attractive valuation of the portfolio, we remain optimistic about potential price appreciation. Thank you for your continued confidence. David G. Herro Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 38 INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2003 [CHART]
% OF FUND EQUITY MARKET VALUE - ------------------------------------------------------------------------- - - EUROPE 74.5% Great Britain 21.5% * France 16.7% Switzerland 12.4% * Germany 7.7% * Netherlands 6.0% * Italy 4.0% * Ireland 2.4% Sweden 2.4% * Finland 1.4% - - PACIFIC RIM 19.8% Japan 9.3% Korea 4.6% Australia 2.7% Singapore 1.8% Hong Kong 1.4% - - LATIN AMERICA 4.1% Mexico 4.1% - - OTHER 1.6% Israel 1.6%
* Euro currency countries comprise 38.2% of the Fund. 39 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% FOOD & BEVERAGE--14.2% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 9,655,900 $ 104,492,027 Nestle SA (Switzerland) Food & Beverage Manufacturer 392,300 90,451,937 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 11,515,500 70,874,053 Pernod-Ricard SA (France) Manufactures Wines, Spirits, & Fruit Juices 615,425 58,302,180 Lotte Chilsung Beverage Co., Ltd. (Korea) (c) Soft Drinks, Juices & Sports Drinks Manufacturer 83,400 39,591,705 Fomento Economico Mexicano S.A. de C.V. (Mexico) (b) Soft Drink & Beer Manufacturer 979,700 37,375,555 ---------------- 401,087,457 HOUSEHOLD PRODUCTS--3.1% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 1,355,350 $ 86,862,687 OTHER CONSUMER GOODS & SERVICES--1.6% Swatch Group AG, Bearer Shares (Switzerland) Watch Manufacturer 457,900 $ 43,513,762 Swatch Group AG, Registered Shares (Switzerland) Watch Manufacturer 24,700 474,119 ---------------- 43,987,881 AUTOMOBILES--2.2% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 1,620,100 $ 61,259,808 AUTOMOTIVE--1.9% Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 1,454,500 $ 54,116,756 BROADCASTING & PROGRAMMING--2.4% Grupo Televisa S.A. (Mexico) (b) Television Production & Broadcasting 1,841,200 $ 67,369,508
40
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% (CONT.) HUMAN RESOURCES--2.1% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 23,736,600 $ 58,988,739 MARKETING SERVICES--3.8% Publicis Groupe (France) Advertising & Media Services 2,286,100 $ 62,814,244 Aegis Group plc (Great Britain) Media Services 30,524,200 44,524,681 ---------------- 107,338,925 PUBLISHING--4.3% John Fairfax Holdings Limited (Australia) Newspaper Publisher 32,814,100 $ 71,652,951 Reed Elsevier plc (Great Britain) Publisher 5,943,100 46,506,405 ---------------- 118,159,356 RECREATION & ENTERTAINMENT--0.9% Nintendo Company, Ltd. (Japan) Video Game Manufacturer 284,800 $ 23,916,454 RETAIL--3.1% Signet Group plc (Great Britain) Jewelry Retailer 28,446,100 $ 49,768,465 Giordano International Limited (Hong Kong) (c) Pacific Rim Clothing Retailer & Manufacturer 82,924,300 37,744,455 ---------------- 87,512,920 BANK & THRIFTS--11.0% Sanpaolo IMI S.p.A. (Italy) Banking Services 6,565,300 $ 65,294,592 Bank of Ireland (Ireland) Commercial Banking 5,347,000 63,925,871 BNP Paribas SA (France) Commercial Banking 1,156,000 56,709,921 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 6,178,368 47,876,323 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Banking 2,938,400 41,419,772 Svenska Handelsbanken AB (Sweden) Commercial Banking 1,498,800 25,437,816 Kookmin Bank (Korea) Commercial Banking 231,168 7,577,302 ---------------- 308,241,597 FINANCIAL SERVICES--1.8% Credit Suisse Group (Switzerland) Investment Services & Insurance 1,552,900 $ 49,680,101
41
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% (CONT.) OTHER FINANCIAL--7.6% Daiwa Securities Group Inc. (Japan) Stock Broker 11,688,000 $ 79,171,362 Euronext (Netherlands) Stock Exchange 3,221,600 78,495,500 Deutsche Boerse AG (Germany) Electronic Trading Systems 1,105,200 56,407,142 ---------------- 214,074,004 PHARMACEUTICALS--11.4% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 4,799,700 $ 99,971,123 Aventis S.A. (France) Pharmaceuticals 1,738,800 90,264,390 Takeda Chemical Industries, Ltd. (Japan) Pharmaceuticals & Food Supplements 2,314,000 84,496,501 Novartis AG (Switzerland) Pharmaceuticals 1,170,700 45,297,975 ---------------- 320,029,989 TELECOMMUNICATIONS--2.7% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 473,600 $ 75,766,117 TELECOMMUNICATIONS EQUIPMENT--1.4% Telefonaktiebolaget LM Ericsson, Class B (Sweden) (a) Mobile & Wired Telecommunications Products 26,012,000 $ 37,936,964 COMPUTER SERVICES--2.1% Meitec Corporation (Japan) (c) Software Engineering Services 1,613,200 $ 59,340,750 AIRPORT MAINTENANCE--0.1% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b)(c) Airport Operator 242,000 $ 3,557,400 DIVERSIFIED CONGLOMERATES--3.4% Vivendi Universal SA (France) (a) Multimedia 4,702,700 $ 83,293,282 LVMH Moet Hennessy Louis Vuitton SA (France) Diversified Luxury Goods 159,600 9,921,708 Haw Par Corporation Limited (Singapore) Healthcare & Leisure Products 58,338 144,390 ---------------- 93,359,380
42
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% (CONT.) INSTRUMENTS--1.5% Orbotech, Ltd. (Israel) (a)(c) Optical Inspection Systems 2,041,200 $ 41,722,128 MACHINERY & INDUSTRIAL PROCESSING--1.4% Metso Corporation (Finland) Paper & Pulp Machinery 3,863,000 $ 38,576,662 OTHER INDUSTRIAL GOODS & SERVICES--2.5% Enodis plc (Great Britain) (a)(c) Food Processing Equipment 33,585,320 $ 39,080,214 Chargeurs SA (France) (c) Wool, Textile Production & Trading 1,050,201 30,593,668 ---------------- 69,673,882 TRANSPORTATION SERVICES--2.1% Associated British Ports Holdings plc (Great Britain) Port Operator 8,497,299 $ 58,371,811 CHEMICALS--6.5% Akzo Nobel N.V. (Netherlands) Chemical Producer 2,576,500 $ 80,370,678 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 182,700 77,332,601 Lonza Group AG, Registered Shares (Switzerland) Industrial Organic Chemicals 492,900 23,102,646 ---------------- 180,805,925 TOTAL COMMON STOCKS (COST: $2,310,623,395) 2,661,737,201
43
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.7% U.S. GOVERNMENT BILLS--1.4% United States Treasury Bills, 0.845%-0.875% due 10/2/2003 - 10/9/2003 $ 40,000,000 $ 39,995,759 TOTAL U.S. GOVERNMENT BILLS (COST: $39,995,759) 39,995,759 REPURCHASE AGREEMENTS--3.3% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price $90,502,388 collateralized by U.S. Government Agency Securities $ 90,500,000 $ 90,500,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price $2,247,122 collateralized by a U.S. Government Agency Security 2,247,075 2,247,075 TOTAL REPURCHASE AGREEMENTS (COST: $92,747,075) 92,747,075 TOTAL SHORT TERM INVESTMENTS (COST: $132,742,834) 132,742,834 Total Investments (Cost $2,443,366,229)--99.8% $ 2,794,480,035 Other Assets In Excess Of Other Liabilities--0.2% 5,365,101 ---------------- TOTAL NET ASSETS--100% $ 2,799,845,136 ================
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 44 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO AND MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/03) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(21)
THE OAKMARK INTERNATIONAL SMALL CAP FUND MSCI WORLD EX U.S. INDEX 10/31/1995 $ 10,000 $ 10,000 12/31/1995 $ 9,630 $ 10,684 3/31/1996 $ 10,970 $ 11,006 6/30/1996 $ 11,570 $ 11,186 9/30/1996 $ 11,590 $ 11,195 12/31/1996 $ 12,038 $ 11,418 3/31/1997 $ 12,080 $ 11,241 6/30/1997 $ 13,181 $ 12,699 9/30/1997 $ 12,672 $ 12,652 12/31/1997 $ 9,642 $ 11,677 3/31/1998 $ 11,429 $ 13,394 6/30/1998 $ 9,892 $ 13,499 9/30/1998 $ 8,211 $ 11,513 12/31/1998 $ 10,529 $ 13,868 3/31/1999 $ 13,118 $ 14,086 6/30/1999 $ 15,317 $ 14,493 9/30/1999 $ 15,439 $ 15,114 12/31/1999 $ 16,190 $ 17,741 3/31/2000 $ 15,387 $ 17,839 6/30/2000 $ 15,529 $ 17,217 9/30/2000 $ 14,908 $ 15,906 12/31/2000 $ 14,756 $ 15,369 3/31/2001 $ 15,232 $ 13,213 6/30/2001 $ 15,777 $ 13,075 9/30/2001 $ 13,987 $ 11,273 12/31/2001 $ 16,671 $ 12,080 3/31/2002 $ 18,370 $ 12,149 6/30/2002 $ 18,831 $ 11,877 9/30/2002 $ 14,641 $ 9,547 12/31/2002 $ 15,818 $ 10,172 3/31/2003 $ 13,882 $ 9,406 6/30/2003 $ 17,933 $ 11,215 9/30/2003 $ 20,465 $ 12,121
ANNUAL AVERAGE TOTAL RETURNS(1) (AS OF 9/30/03)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - --------------------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND 14.12% 39.78% 20.03% 9.46% MSCI World ex. U.S.(21) 8.08% 26.95% 1.03% 2.46% Lipper International Small Cap Average(25) 15.07% 38.43% 8.26% 9.36%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Small Cap Fund was up 14% for the quarter ending September 30, 2003. This performance was in line with relevant indices for the quarter. The strong price recovery in global stocks that began in March continued through the 3rd quarter, with small cap stocks outperforming large caps over the period. Reflective of this recovery your Fund is up 47% over the past six months. A number of companies contributed to performance in the quarter. Baycorp Advantage Ltd, the Australasian (Australia & New Zealand) credit reference provider, had the strongest price appreciation and was the single biggest contributor to the Fund's NAV(24). You may recall Baycorp from our discussion in the March 31, 2003, shareholder's letter. It was one of the worst performers for that three month period, and we remarked the market's overreaction to a slow down in growth had created a significant gap between price and business value, and that we continued to add to our holding. Baycorp is now the single largest position in the Fund. Bulgari S.p.A, the Italian luxury goods company, was another very strong performer. Other contributors included two Swiss companies, Schindler Holding AG and Gurit-Heberlein AG, as well as UK-based Carpetright. In Japan the Fund benefited from very strong stock selection, due to the performance of Asatsu-DK, Square-Enix, and Ichiyoshi Securities Co. Ltd. LOOKING FORWARD Even with the strong recent performance of the portfolio, we remain optimistic about potential price appreciation. We continue to own generally good quality businesses trading a significant discount to our estimate of intrinsic value. Thank you for your continued confidence. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 45 INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2003 [CHART]
% OF FUND EQUITY MARKET VALUE - --------------------------------------------------- - - EUROPE 72.3% Switzerland 17.6% * France 14.8% * Italy 9.6% Great Britain 8.9% Denmark 6.3% * Germany 5.4% Sweden 3.0% * Spain 2.7% * Finland 2.0% * Netherlands 1.7% * Austria 0.3% - - PACIFIC RIM 23.2% Australia 8.5% Japan 7.1% Korea 3.3% New Zealand 2.2% Thailand 1.0% Philippines 0.6% Hong Kong 0.5% - - LATIN AMERICA 4.0% Mexico 4.0% - - NORTH AMERICA 0.5% Canada 0.5%
* Euro currency countries comprise 36.5% of the Fund. 46 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2003
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.8% FOOD & BEVERAGE--5.9% Campari Group (Italy) Soft Drinks, Wines, & Spirits Producer 245,200 $ 9,925,888 Baron de Ley, S.A. (Spain) (a) Wines & Spirits Manufacturer 150,985 6,069,767 Hite Brewery Co., Ltd. (Korea) Brewer 68,000 4,138,591 Alaska Milk Corporation (Philippines) (b) Milk Producer 49,394,000 2,745,362 Grupo Continental, S.A. (Mexico) Soft Drink Manufacturer 1,654,100 2,451,633 Kook Soon Dang Brewery Co., Ltd. (Korea) Wine & Spirits Manufacturer 122,676 2,191,881 -------------- 27,523,122 HOUSEHOLD PRODUCTS--0.6% Societe BIC SA (France) Consumer & Office Supplies 64,800 $ 2,763,600 OTHER CONSUMER GOODS & SERVICES--0.2% Royal Doulton plc (Great Britain) (a)(b) Tableware & Giftware 22,373,000 $ 1,069,231 BROADCASTING & PUBLISHING--2.3% Tamedia AG (Switzerland) TV Broadcasting & Publishing 184,151 $ 11,155,174 BUILDING MATERIALS & CONSTRUCTION--0.8% Fletcher Building Limited (New Zealand) Building Materials Manufacturer 1,489,800 $ 3,788,877 HUMAN RESOURCES--2.1% DIS Deutscher Industrie Service AG (Germany) Recruitment Consultancy Services 552,142 $ 10,242,665 INFORMATION SERVICES--4.6% Baycorp Advantage Limited (Australia) (b) Credit Reference Services 14,303,477 $ 22,184,264 MARKETING SERVICES--2.1% Asatsu-DK, Inc. (Japan) Advertising Services Provider 426,700 $ 9,934,384 MOTORCYCLES--1.1% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 3,238,300 $ 5,316,762
47
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.8% (CONT.) PUBLISHING--2.2% Recoletos Grupo de Comunicacion, S.A. (Spain) Publisher 880,000 $ 6,121,757 Matichon Public Company Limited, Foreign Shares (Thailand) (b) Newspaper Publisher 2,039,500 4,381,639 -------------- 10,503,396 RECREATION & ENTERTAINMENT--2.0% Square Enix Co., Ltd. (Japan) Entertainment Software 324,600 $ 8,096,070 Konami Sports Corporation (Japan) Fitness Centers 96,500 1,506,460 -------------- 9,602,530 RETAIL--9.3% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 2,170,800 $ 17,479,016 Carpetright plc (Great Britain) Carpet Retailer 1,174,500 15,326,115 D.F.S. Furniture Company plc (Great Britain) Furniture Retailer & Manufacturer 1,743,600 11,897,876 -------------- 44,703,007 BANK & THRIFTS--3.7% Jyske Bank A/S (Denmark) (a) Commercial Banking 222,400 $ 9,562,739 Vontobel Holding AG (Switzerland) Commercial Banking 469,000 7,972,627 -------------- 17,535,366 FINANCIAL SERVICES--4.6% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 49,090 $ 14,125,014 Van der Moolen Holding N.V. (Netherlands) International Trading Firm 761,200 7,920,806 -------------- 22,045,820 OTHER FINANCIAL--2.5% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 2,480,000 $ 9,545,308 TSX Group Inc. (Canada) Stock Exchanges 101,500 2,442,614 -------------- 11,987,922 MEDICAL PRODUCTS--4.2% Ansell Limited (Australia) Protective Rubber & Plastics Products 3,587,350 $ 16,398,781 Coloplast A/S, Class B Healthcare Products & (Denmark) Services Provider 46,100 3,863,128 -------------- 20,261,909
48
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.8% (CONT.) PHARMACEUTICALS--0.6% Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 265,500 $ 2,977,526 TELECOMMUNICATIONS--0.5% Asia Satellite Telecommunications Holdings Limited (Hong Kong) Satellite Operator 1,491,000 $ 2,281,436 COMPUTER SERVICES--4.2% Morse plc (Great Britain) Business & Technology Solutions 5,734,300 $ 12,153,462 Sopra Group (France) Computer Engineering 128,430 5,207,926 Alten (France) (a) Systems Consulting & Engineering 298,141 3,081,516 -------------- 20,442,904 COMPUTER SYSTEMS--2.4% Lectra (France) (a) Manufacturing Process Systems 1,718,500 $ 11,714,520 OFFICE EQUIPMENT--3.6% Neopost SA (France) Mailroom Equipment Supplier 374,800 $ 17,382,081 AIRPORT MAINTENANCE--6.5% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b)(c) Airport Operator 1,064,000 $ 15,640,800 Kobenhavns Lufthavne A/S (Copenhagen Airports A/S - CPH) (Denmark) Airport Management & Operations 162,700 15,191,529 -------------- 30,832,329 DIVERSIFIED CONGLOMERATES--6.3% Pargesa Holding AG (Switzerland) Diversified Operations 5,374 $ 12,390,739 Financiere Marc de Lacharriere SA (Fimalac) (France) Diversified Operations 346,764 9,071,299 Tae Young Corp. (Korea) Heavy Construction 213,000 8,518,889 Financiere Marc de Lacharriere SA (Fimalac), Warrants (France) Diversified Operations 31,866 83,918 -------------- 30,064,845
49
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.8% (CONT.) ENVIRONMENTAL PRODUCTS & SERVICES--0.1% Munters AB (Sweden) Cooling & Moisture Control Systems 23,500 $ 509,551 INSTRUMENTS--1.7% Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 329,700 $ 8,052,474 MACHINERY & INDUSTRIAL PROCESSING--8.1% Pfeiffer Vacuum Technology AG (Germany) (b) Vacuum Pump Manufacturer 471,140 $ 14,262,913 Alfa Laval (Sweden) Filtration & Separation Equipment 1,133,100 13,308,221 Carbone Lorraine SA (France) Electrical Systems Manufacturer 300,382 9,678,056 Andritz AG (Austria) General Industrial Machinery 41,700 1,348,398 -------------- 38,597,588 OTHER INDUSTRIAL GOODS & SERVICES--5.3% Schindler Holding AG (Switzerland) (a) Elevator & Escalator Manufacturer 71,900 $ 16,768,409 LISI (France) Industrial Fastener Manufacturer 241,813 7,044,315 Kone Oyj, Class B (Finland) Elevators 24,500 1,224,451 -------------- 25,037,175 PRODUCTION EQUIPMENT--2.4% Interpump Group S.p.A. (Italy) Pump & Piston Manufacturer 2,816,400 $ 10,656,037 NSC Groupe (France) Textile Equipment Manufacturer 12,316 1,062,708 -------------- 11,718,745 TRANSPORTATION SERVICES--1.3% Mainfreight Limited (New Zealand) (b) Logistics Services 7,765,726 $ 6,151,604 CHEMICALS--3.6% Gurit-Heberlein AG (Switzerland) Chemical Producer 27,664 $ 17,176,754 TOTAL COMMON STOCKS (COST: $383,420,899) 453,557,561
50
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.4% U.S. GOVERNMENT BILLS--1.1% United States Treasury Bills, 0.845% due 10/9/2003 $ 5,000,000 $ 4,999,061 TOTAL U.S. GOVERNMENT BILLS (COST: $4,999,061) 4,999,061 REPURCHASE AGREEMENTS--3.3% IBT Repurchase Agreement, 0.95% due 10/1/2003, repurchase price of $14,000,369 collateralized by U.S. Government Agency Securities $ 14,000,000 $ 14,000,000 IBT Repurchase Agreement, 0.75% due 10/1/2003, repurchase price of $1,838,097 collateralized by a U.S. Government Agency Security 1,838,059 1,838,059 TOTAL REPURCHASE AGREEMENTS (COST: $15,838,059) 15,838,059 TOTAL SHORT TERM INVESTMENTS (COST: $20,837,120) 20,837,120 Total Investments (Cost $404,258,019)--99.2% $ 474,394,681 Foreign Currencies (Cost $93,014)--0.0% $ 93,140 Other Assets In Excess Of Other Liabilities--0.8% 3,756,608 -------------- TOTAL NET ASSETS--100% $ 478,244,429 ==============
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (c) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF ASSETS AND LIABILITIES--SEPTEMBER 30, 2003
THE OAKMARK THE OAKMARK THE OAKMARK SELECT SMALL CAP FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 4,624,823,480 $ 4,360,576,973 $ 326,228,964 Investments in affiliated securities, at value (b) 168,308,045 735,473,071 27,153,360 Foreign currency, at value (c) 0 0 0 Receivable for: Securities sold 0 0 2,042,304 Fund shares sold 10,156,339 7,738,785 460,427 Dividends and interest 6,479,553 4,186,428 247,903 Tax reclaim 0 0 0 ---------------- ---------------- ---------------- Total receivables 16,635,892 11,925,213 2,750,634 Other assets 2,049 2,076 1,783 ---------------- ---------------- ---------------- Total assets $ 4,809,769,466 $ 5,107,977,333 $ 356,134,741 LIABILITIES AND NET ASSETS Options written, at value (d) $ 0 $ 0 $ 98,250 Payable for: Securities purchased 13,833,926 16,639,652 4,315,627 Fund shares redeemed 2,475,482 2,887,634 186,605 Due to Adviser 120,488 124,770 10,303 Due to transfer agent 531,261 316,261 80,462 Trustees fees 16,796 17,890 6,591 Deferred trustee compensation 633,260 504,425 221,776 Other 1,643,118 1,399,431 201,494 ---------------- ---------------- ---------------- Total liabilities 19,254,331 21,890,063 5,121,108 ---------------- ---------------- ---------------- Net assets applicable to fund shares outstanding $ 4,790,515,135 $ 5,086,087,270 $ 351,013,633 ================ ================ ================ ANALYSIS OF NET ASSETS Paid in capital $ 4,577,792,523 $ 4,017,762,883 $ 341,279,922 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (332,994,872) (178,322,687) (11,819,142) Net unrealized appreciation (depreciation) of investments 526,808,316 1,236,921,496 21,774,629 Net unrealized appreciation (depreciation)--other 0 0 0 Accumulated undistributed net investment income (loss) 18,909,168 9,725,578 (221,776) ---------------- ---------------- ---------------- Net assets applicable to Fund shares outstanding $ 4,790,515,135 $ 5,086,087,270 $ 351,013,633 ================ ================ ================ PRICE OF SHARES Net asset value per share: Class I $ 33.85 $ 27.55 $ 17.18 ================ ================ ================ Class I--Net assets $ 4,769,381,577 $ 4,993,029,715 $ 350,261,221 Class I--Shares outstanding (Unlimited shares authorized) 140,880,178 181,227,232 20,384,382 Net asset value per share: Class II $ 33.68 $ 27.37 $ 17.10 ================ ================ ================ Class II--Net assets $ 21,133,558 $ 93,057,555 $ 752,412 Class II--Shares outstanding (Unlimited shares authorized) 627,434 3,399,741 44,013 (a) Identified cost of investments in unaffiliated securities $ 4,145,259,797 $ 3,399,502,648 $ 287,196,683 (b) Identified cost of investments in affiliated securities 121,063,412 459,625,900 44,429,531 (c) Identified cost of foreign currency 0 0 0 (d) Premiums received on options written 0 0 116,769
52
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND - ----------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 4,249,548,997 $ 626,201,275 Investments in affiliated securities, at value (b) 103,292,500 94,454,763 Foreign currency, at value (c) 0 0 Receivable for: Securities sold 11,963,539 0 Fund shares sold 22,586,257 5,217,976 Dividends and interest 15,014,757 1,395,507 Tax reclaim 0 113,158 ---------------- ---------------- Total receivables 49,564,553 6,726,641 Other assets 1,967 12,453 ---------------- ---------------- Total assets $ 4,402,408,017 $ 727,395,132 LIABILITIES AND NET ASSETS Options written, at value (d) $ 0 $ 207,500 Payable for: Securities purchased 12,316,799 14,557,379 Fund shares redeemed 3,407,236 1,560,608 Due to Adviser 88,925 16,315 Due to transfer agent 228,292 53,826 Trustees fees 14,783 6,796 Deferred trustee compensation 280,303 174,344 Other 1,422,668 220,929 ---------------- ---------------- Total liabilities 17,759,006 16,797,697 ---------------- ---------------- Net assets applicable to fund shares outstanding $ 4,384,649,011 $ 710,597,435 ================ ================ ANALYSIS OF NET ASSETS Paid in capital $ 4,019,126,985 $ 626,594,459 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (70,194,686) 2,553,786 Net unrealized appreciation (depreciation) of investments 412,084,617 81,764,860 Net unrealized appreciation (depreciation)--other 86,868 (25,111) Accumulated undistributed net investment income (loss) 23,545,227 (290,559) ---------------- ---------------- Net assets applicable to Fund shares outstanding $ 4,384,649,011 $ 710,597,435 ================ ================ PRICE OF SHARES Net asset value per share: Class I $ 20.30 $ 16.98 ================ ================ Class I--Net assets $ 4,138,019,989 $ 704,789,043 Class I--Shares outstanding (Unlimited shares authorized) 203,828,648 41,511,169 Net asset value per share: Class II $ 20.24 $ 16.84 ================ ================ Class II--Net assets $ 246,629,022 $ 5,808,392 Class II--Shares outstanding (Unlimited shares authorized) 12,185,691 344,894 (a) Identified cost of investments in unaffiliated securities $ 3,845,345,286 $ 555,621,304 (b) Identified cost of investments in affiliated securities 95,411,594 83,370,202 (c) Identified cost of foreign currency 0 0 (d) Premiums received on options written 0 255,988 THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND - ----------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 2,483,860,976 $ 407,958,868 Investments in affiliated securities, at value (b) 310,619,059 66,435,813 Foreign currency, at value (c) 0 93,140 Receivable for: Securities sold 0 2,276,361 Fund shares sold 15,637,549 1,429,207 Dividends and interest 6,473,864 247,648 Tax reclaim 1,233,241 787,921 ---------------- ---------------- Total receivables 23,344,654 4,741,137 Other assets 1,888 1,783 ---------------- ---------------- Total assets $ 2,817,826,577 $ 479,230,741 LIABILITIES AND NET ASSETS Options written, at value (d) $ 0 $ 0 Payable for: Securities purchased 14,328,817 148,185 Fund shares redeemed 2,004,232 395,649 Due to Adviser 72,155 15,629 Due to transfer agent 183,349 41,845 Trustees fees 11,225 6,745 Deferred trustee compensation 311,238 192,332 Other 1,070,425 185,927 ---------------- ---------------- Total liabilities 17,981,441 986,312 ---------------- ---------------- Net assets applicable to fund shares outstanding $ 2,799,845,136 $ 478,244,429 ================ ================ ANALYSIS OF NET ASSETS Paid in capital $ 2,640,297,749 $ 438,410,162 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (211,075,834) (33,870,230) Net unrealized appreciation (depreciation) of investments 351,213,309 70,126,173 Net unrealized appreciation (depreciation)--other 127,745 60,059 Accumulated undistributed net investment income (loss) 19,282,167 3,518,265 ---------------- ---------------- Net assets applicable to Fund shares outstanding $ 2,799,845,136 $ 478,244,429 ================ ================ PRICE OF SHARES Net asset value per share: Class I $ 15.67 $ 13.74 ================ ================ Class I--Net assets $ 2,676,610,268 $ 477,804,840 Class I--Shares outstanding (Unlimited shares authorized) 170,773,739 34,774,368 Net asset value per share: Class II $ 15.58 $ 13.69 ================ ================ Class II--Net assets $ 123,234,868 $ 439,589 Class II--Shares outstanding (Unlimited shares authorized) 7,908,472 32,113 (a) Identified cost of investments in unaffiliated securities $ 2,175,433,085 $ 336,790,323 (b) Identified cost of investments in affiliated securities 267,933,144 67,467,696 (c) Identified cost of foreign currency 0 93,014 (d) Premiums received on options written 0 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53 STATEMENTS OF OPERATIONS--YEAR ENDED SEPTEMBER 30, 2003
THE OAKMARK THE OAKMARK THE OAKMARK SELECT SMALL CAP FUND FUND FUND - ------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 59,602,137 $ 44,753,904 $ 2,129,441 Dividends from affiliated securities 2,241,682 6,736,252 0 Interest Income 4,037,177 4,522,097 182,668 Securities lending income 0 0 0 Other income 89,785 35,751 0 Foreign taxes withheld (255,528) 0 0 ---------------- ---------------- ---------------- Total investment income 65,715,253 56,048,004 2,312,109 EXPENSES: Investment advisory fee 37,074,474 38,938,068 3,492,495 Transfer and dividend disbursing agent fees 2,825,387 1,661,800 418,413 Other shareholder servicing fees 3,073,278 2,731,432 239,250 Service fee--Class II 31,136 193,129 1,674 Reports to shareholders 2,142,621 1,259,823 297,125 Custody and accounting fees 434,075 469,750 50,691 Registration and blue sky expenses 147,168 77,419 37,320 Trustee fees 69,818 79,240 27,628 Deferred trustee compensation 179,772 191,415 71,267 Legal fees 53,468 56,404 21,291 Audit fees 55,910 64,005 12,996 Other 243,537 262,021 57,493 ---------------- ---------------- ---------------- Total expenses 46,330,644 45,984,506 4,727,643 Expense reimbursement 0 0 (654) Expense offset arrangements (170) (51) (9) ---------------- ---------------- ---------------- Net expenses 46,330,474 45,984,455 4,726,980 NET INVESTMENT INCOME (LOSS): 19,384,779 10,063,549 (2,414,871) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on unaffiliated securities (150,513,441) (103,743,922) (10,678,339) Net realized loss on affiliated securities 0 (5,847,345) (970,575) Net realized gain (loss) on options 12,672,486 7,892,086 326,790 Net realized gain on short sales 153,209 2,021 0 Net realized gain (loss) on foreign currency transactions 0 0 0 Net change in unrealized appreciation of investments and foreign currencies 867,321,548 1,121,320,614 80,258,968 Net change in appreciation (depreciation)--other 0 0 0 Net realized and unrealized gain on investments and foreign currency transactions: 729,633,802 1,019,623,454 68,936,844 ---------------- ---------------- ---------------- Net increase in net assets resulting from operations $ 749,018,581 $ 1,029,687,003 $ 66,521,973 ================ ================ ================
54
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND - ----------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 23,518,559 $ 3,650,525 Dividends from affiliated securities 0 661,483 Interest Income 41,360,992 236,693 Securities lending income 0 38,886 Other income 6,277 0 Foreign taxes withheld (228,206) (460,738) ---------------- ---------------- Total investment income 64,657,622 4,126,849 EXPENSES: Investment advisory fee 23,468,519 2,982,092 Transfer and dividend disbursing agent fees 1,161,063 267,441 Other shareholder servicing fees 3,446,666 149,118 Service fee--Class II 423,874 5,196 Reports to shareholders 915,859 183,647 Custody and accounting fees 356,560 225,992 Registration and blue sky expenses 209,265 121,133 Trustee fees 64,182 27,876 Deferred trustee compensation 154,035 71,226 Legal fees 46,562 20,340 Audit fees 47,139 11,562 Other 189,829 51,789 ---------------- ---------------- Total expenses 30,483,553 4,117,412 Expense reimbursement 0 0 Expense offset arrangements (1) (9) ---------------- ---------------- Net expenses 30,483,552 4,117,403 NET INVESTMENT INCOME (LOSS): 34,174,070 9,446 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on unaffiliated securities 7,108,734 4,193,675 Net realized loss on affiliated securities 0 (151,560) Net realized gain (loss) on options 2,453,329 (227,233) Net realized gain on short sales 0 0 Net realized gain (loss) on foreign currency transactions 370,636 (168,173) Net change in unrealized appreciation of investments and foreign currencies 517,697,982 114,576,882 Net change in appreciation (depreciation)--other 87,469 (43,405) Net realized and unrealized gain on investments and foreign currency transactions: 527,718,150 118,180,186 ---------------- ---------------- Net increase in net assets resulting from operations $ 561,892,220 $ 118,189,632 ================ ================ THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND - ----------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 43,137,392 $ 9,195,319 Dividends from affiliated securities 5,858,702 1,576,048 Interest Income 872,451 142,837 Securities lending income 1,118,106 0 Other income 0 0 Foreign taxes withheld (5,707,195) (1,242,916) ---------------- ---------------- Total investment income 45,279,456 9,671,288 EXPENSES: Investment advisory fee 19,015,386 4,626,713 Transfer and dividend disbursing agent fees 941,105 212,442 Other shareholder servicing fees 1,903,171 331,936 Service fee--Class II 209,143 803 Reports to shareholders 722,282 143,097 Custody and accounting fees 1,835,731 389,671 Registration and blue sky expenses 129,664 37,788 Trustee fees 48,026 28,893 Deferred trustee compensation 119,153 72,553 Legal fees 35,759 21,472 Audit fees 32,729 8,905 Other 129,236 57,848 ---------------- ---------------- Total expenses 25,121,385 5,932,121 Expense reimbursement 0 0 Expense offset arrangements (68) (9) ---------------- ---------------- Net expenses 25,121,317 5,932,112 NET INVESTMENT INCOME (LOSS): 20,158,139 3,739,176 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on unaffiliated securities (194,022,549) (30,903,635) Net realized loss on affiliated securities (114,714) (2,571,782) Net realized gain (loss) on options 0 0 Net realized gain on short sales 0 0 Net realized gain (loss) on foreign currency transactions (659,981) (58,650) Net change in unrealized appreciation of investments and foreign currencies 712,978,826 160,461,142 Net change in appreciation (depreciation)--other 294,152 36,163 Net realized and unrealized gain on investments and foreign currency transactions: 518,475,734 126,963,238 ---------------- ---------------- Net increase in net assets resulting from operations $ 538,633,873 $ 130,702,414 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55 STATEMENTS OF CHANGES IN NET ASSETS
THE OAKMARK FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 19,384,779 $ 14,076,323 Net realized loss on investments (137,687,746) (32,394,066) Net change in unrealized appreciation (depreciation) of investments 867,321,548 (498,006,779) ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 749,018,581 (516,324,522) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (13,880,781) (19,630,178) Net investment income--Class II (29,599) (447) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (13,910,380) (19,630,625) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,533,121,113 1,648,934,264 Proceeds from shares sold--Class II 17,938,866 10,646,454 Reinvestment of distributions--Class I 13,078,556 19,105,784 Reinvestment of distributions--Class II 700 347 Payments for shares redeemed, net of fees--Class I (810,690,610) (942,439,538) Payments for shares redeemed, net of fees--Class II (6,723,524) (838,834) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 746,725,101 735,408,477 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 1,481,833,302 199,453,330 NET ASSETS: Beginning of period 3,308,681,833 3,109,228,503 ---------------- ---------------- End of period $ 4,790,515,135 $ 3,308,681,833 ================ ================ Undistributed net investment income $ 18,909,168 $ 13,434,769 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 49,341,298 48,113,112 Shares issued in reinvestment of dividends 425,457 562,595 Less shares redeemed (26,435,618) (28,259,864) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 23,331,137 20,415,843 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 576,827 298,334 Shares issued in reinvestment of dividends 23 10 Less shares redeemed (225,241) (25,887) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 351,609 272,457 ================ ================
56
THE OAKMARK SELECT FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 10,063,549 $ 4,018,416 Net realized loss on investments (101,697,160) (29,674,087) Net change in unrealized appreciation (depreciation) of investments 1,121,320,614 (635,685,201) ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 1,029,687,003 (661,340,872) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (3,934,423) (8,379,997) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (3,934,423) (8,379,997) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 917,786,177 1,260,687,129 Proceeds from shares sold--Class II 37,698,020 74,250,948 Reinvestment of distributions--Class I 3,705,408 7,956,922 Payments for shares redeemed, net of fees--Class I (654,181,633) (1,056,777,332) Payments for shares redeemed, net of fees--Class II (26,725,613) (31,085,298) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 278,282,359 255,032,369 ---------------- ---------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,304,034,939 (414,688,500) NET ASSETS: Beginning of period 3,782,052,331 4,196,740,831 ---------------- ---------------- End of period $ 5,086,087,270 $ 3,782,052,331 ================ ================ Undistributed net investment income $ 9,725,578 $ 3,596,452 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 36,086,657 47,211,312 Shares issued in reinvestment of dividends 150,625 299,856 Less shares redeemed (26,578,347) (41,080,996) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 9,658,935 6,430,172 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 1,482,025 2,801,878 Less shares redeemed (1,069,612) (1,223,864) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 412,413 1,578,014 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57
THE OAKMARK SMALL CAP FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment loss $ (2,414,871) $ (2,748,950) Net realized gain (loss) on investments (11,322,124) 325,855 Net change in unrealized appreciation (depreciation) of investments 80,258,968 (51,515,515) ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 66,521,973 (53,938,610) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 50,502,211 326,865,529 Proceeds from shares sold--Class II 216,335 777,070 Payments for shares redeemed, net of fees--Class I (123,497,018) (180,818,640) Payments for shares redeemed, net of fees--Class II (123,957) (103,465) ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS (72,902,429) 146,720,494 ---------------- ---------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (6,380,456) 92,781,884 NET ASSETS: Beginning of period 357,394,089 264,612,205 ---------------- ---------------- End of period $ 351,013,633 $ 357,394,089 ================ ================ Undistributed net investment loss $ (221,776) $ (150,509) ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 3,238,264 17,912,470 Less shares redeemed (8,156,424) (10,773,500) ---------------- ---------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING (4,918,160) 7,138,970 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 13,910 44,265 Less shares redeemed (7,871) (6,291) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 6,039 37,974 ================ ================
58
THE OAKMARK EQUITY AND INCOME FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 34,174,070 $ 28,439,569 Net realized gain (loss) on investments 9,562,063 (81,982,611) Net realized gain (loss) on foreign currency transactions 370,636 (2,938) Net change in unrealized appreciation (depreciation) of investments 517,697,982 (107,419,745) Net change in unrealized appreciation (depreciation)--other 87,469 (601) ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 561,892,220 (160,966,326) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (33,616,359) (6,931,173) Net investment income--Class II (1,569,445) (90,128) Net realized gain--Class I 0 (1,870,660) Net realized gain--Class II 0 (33,869) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (35,185,804) (8,925,830) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 2,076,491,027 2,457,322,254 Proceeds from shares sold--Class II 144,338,218 146,887,453 Reinvestment of distributions--Class I 32,429,243 8,525,720 Reinvestment of distributions--Class II 321,834 85,801 Payments for shares redeemed, net of fees--Class I (709,955,319) (683,906,125) Payments for shares redeemed, net of fees--Class II (46,269,411) (21,792,340) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 1,497,355,592 1,907,122,763 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 2,024,062,008 1,737,230,607 NET ASSETS: Beginning of period 2,360,587,003 623,356,396 ---------------- ---------------- End of period $ 4,384,649,011 $ 2,360,587,003 ================ ================ Undistributed net investment income $ 23,545,227 $ 25,964,233 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 109,874,694 132,277,123 Shares issued in reinvestment of dividends 1,796,634 477,891 Less shares redeemed (38,350,539) (37,783,411) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 73,320,789 94,971,603 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 7,706,490 7,935,953 Shares issued in reinvestment of dividends 17,840 4,809 Less shares redeemed (2,462,923) (1,205,519) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 5,261,407 6,735,243 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59
THE OAKMARK GLOBAL FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income (loss) $ 9,446 $ (18,547) Net realized gain (loss) on investments 3,814,882 (1,261,095) Net realized gain (loss) on foreign currency transactions (168,173) (37,184) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 114,576,882 (30,244,164) Net change in unrealized appreciation (depreciation)--other (43,405) 18,109 ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 118,189,632 (31,542,881) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I 0 (11,774) Net investment income--Class II 0 (61) Net realized gain--Class I 0 (1,361,493) Net realized gain--Class II 0 (7,099) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS 0 (1,380,427) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 524,732,272 228,014,650 Proceeds from shares sold--Class II 6,645,694 754,996 Reinvestment of distributions--Class I 0 1,321,517 Payments for shares redeemed, net of fees--Class I (112,770,994) (69,082,440) Payments for shares redeemed, net of fees--Class II (2,412,970) (75,625) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 416,194,002 160,933,098 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 534,383,634 128,009,790 NET ASSETS: Beginning of period 176,213,801 48,204,011 ---------------- ---------------- End of period $ 710,597,435 $ 176,213,801 ================ ================ Undistributed net investment loss $ (290,559) $ (131,833) ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 34,670,227 16,329,528 Shares issued in reinvestment of dividends 0 108,677 Less shares redeemed (8,703,761) (5,343,294) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 25,966,466 11,094,911 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 462,296 61,020 Less shares redeemed (171,894) (6,528) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 290,402 54,492 ================ ================
60
THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 20,158,139 $ 16,380,565 Net realized loss on investments (194,137,263) (2,111,019) Net realized loss on foreign currency transactions (659,981) (744,096) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 712,978,826 (199,327,235) Net change in unrealized appreciation (depreciation)--other 294,152 (155,750) ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 538,633,873 (185,957,535) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (15,119,015) (10,170,790) Net investment income--Class II (515,254) (76,332) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (15,634,269) (10,247,122) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,342,461,828 1,172,930,611 Proceeds from shares sold--Class II 210,555,153 71,056,423 Reinvestment of distributions--Class I 13,994,235 9,816,822 Reinvestment of distributions--Class II 172,223 1,669 Payments for shares redeemed, net of fees--Class I (573,914,822) (339,595,271) Payments for shares redeemed, net of fees--Class II (158,686,779) (16,218,827) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 834,581,838 897,991,427 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 1,357,581,442 701,786,770 NET ASSETS: Beginning of period 1,442,263,694 740,476,924 ---------------- ---------------- End of period $ 2,799,845,136 $ 1,442,263,694 ================ ================ Undistributed net investment income $ 19,282,167 $ 15,418,278 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 98,256,816 78,310,031 Shares issued in reinvestment of dividends 1,050,618 726,633 Less shares redeemed (43,071,914) (23,511,785) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 56,235,520 55,524,879 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 15,141,504 4,928,274 Shares issued in reinvestment of dividends 12,959 124 Less shares redeemed (11,241,101) (1,088,826) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 3,913,362 3,839,572 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 61
THE OAKMARK INTERNATIONAL SMALL CAP FUND - -------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 - -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 3,739,176 $ 4,016,566 Net realized gain (loss) on investments (33,475,417) 12,083,383 Net realized loss on foreign currency transactions (58,650) (31,834) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 160,461,142 (70,664,400) Net change in unrealized appreciation--other 36,163 21,128 ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 130,702,414 (54,575,157) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (3,076,432) (2,120,585) Net investment income--Class II (1,637) (921) Net realized gain--Class I (9,181,861) (1,891,258) Net realized gain--Class II (6,548) (1,136) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (12,266,478) (4,013,900) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 122,746,015 428,499,905 Proceeds from shares sold--Class II 978,707 333,324 Reinvestment of distributions--Class I 11,533,652 3,875,545 Reinvestment of distributions--Class II 4,554 0 Payments for shares redeemed, net of fees--Class I (132,515,271) (134,986,731) Payments for shares redeemed, net of fees--Class II (945,332) (34,570) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 1,802,325 297,687,473 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 120,238,261 239,098,416 NET ASSETS: Beginning of period 358,006,168 118,907,752 ---------------- ---------------- End of period $ 478,244,429 $ 358,006,168 ================ ================ Undistributed net investment income $ 3,518,265 $ 2,936,581 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 11,051,169 34,412,757 Shares issued in reinvestment of dividends 1,095,314 375,172 Less shares redeemed (12,545,416) (11,505,764) ---------------- ---------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING (398,933) 23,282,165 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 88,462 27,354 Shares issued in reinvestment of dividends 432 0 Less shares redeemed (85,057) (2,766) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 3,837 24,588 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 62 THE OAKMARK FAMILY OF FUNDS NOTES TO FINANCIAL STATEMENTS--SEPTEMBER 30, 2003 1. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies of The Oakmark Fund ("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Small Cap Fund ("Small Cap"), The Oakmark Equity and Income Fund ("Equity and Income"), The Oakmark Global Fund ("Global"), The Oakmark International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap") collectively referred to as "the Funds", each a series of Harris Associates Investment Trust (a Massachusetts business trust), which is registered as an investment company under the Investment Company Act of 1940. These policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. CLASS DISCLOSURE-- Each Fund offers two classes of shares: Class I Shares and Class II Shares. Class I Shares are offered to the general public. Class II Shares are offered to certain retirement plans such as 401(k) and profit sharing plans. Class II Shares pay a service fee at the annual rate of .25% of average net assets of Class II Shares of the Funds. This service fee is paid to an administrator for performing the services associated with the administration of such retirement plans. Expenses of the Funds that are not directly attributable to a specific class of shares are prorated among the classes based on the relative net assets of each class. Expenses directly attributable to a class of shares are recorded to the specific class. SECURITY VALUATION-- Securities traded on securities exchanges and over-the-counter securities are valued at the last sales price on the day of valuation, or lacking any reported sales that day, at the most recent bid quotation. Securities traded on the NASDAQ National Market are valued at the NASDAQ Official Closing Price ("NOCP"), or lacking an NOCP, at the most recent bid quotation on the NASDAQ National Market. Debt obligations and money market instruments maturing in more than 60 days from the date of purchase are valued at the latest bid quotation. Debt obligations and money market instruments maturing in less than 61 days from the date of purchase are valued on an amortized cost basis which approximates market value. Options are valued at the last reported sale price on the day of valuation, or lacking any reported sales that day, at the mean of the most recent bid and ask quotations. Securities for which quotations are not readily available, or securities which may have been affected by a significant event after the price was determined, and other assets are valued at a fair value as determined by or under the direction of the Board of Trustees. At September 30, 2003, the Funds held no securities for which quotations were not readily available, nor any securities that may have been affected by a significant event after the price was determined. FOREIGN CURRENCY TRANSLATIONS-- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the mean of the bid and offer prices of such currencies at the time of valuation. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. The Funds do 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 gain or loss from securities. Net realized gains or losses on foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded and the U.S. dollar equivalent of the amounts actually received or paid, and the realized gains or losses resulting from the portfolio and transaction hedges. Net unrealized foreign exchange gains and losses arise from changes in the fair value of assets and liabilities, other than investments in securities at fiscal year end, resulting from changes in exchange rates. At September 30, 2003, net unrealized appreciation (depreciation) - other includes the following components:
EQUITY AND INT'L INCOME GLOBAL INTERNATIONAL SMALL CAP - ------------------------------------------------------------------------------------ Unrealized appreciation on dividends and dividend reclaims receivable $ 86,868 $ 41,624 $ 235,195 $ 48,934 Unrealized appreciation (depreciation) on open securities purchases and sales 0 (66,735) (107,450) 11,125 ---------- ---------- ---------- ---------- Net Unrealized appreciation (depreciation) - Other $ 86,868 $ (25,111) $ 127,745 $ 60,059 ========== ========== ========== ==========
63 SECURITY TRANSACTIONS AND INVESTMENT INCOME-- Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on an accrual basis. Bond discount is accreted and premium is amortized over the expected life of each applicable security. Withholding taxes on foreign dividends have been provided for in accordance with the Funds' understanding of the applicable country's tax rules and rates. Net realized gains and losses on investments are determined by the specific identification method. FORWARD FOREIGN CURRENCY CONTRACTS-- The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions. The contractual amounts of forward foreign exchange contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values. At September 30, 2003, the Funds had no forward foreign currency contracts outstanding. DISTRIBUTIONS TO SHAREHOLDERS-- Income dividends and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. To the extent the tax and book differences are permanent in nature, such amounts are reclassified among paid in capital, undistributed net investment income and accumulated undistributed net realized gain (loss). Those differences are primarily related to foreign currency transactions, deferral of losses on wash sales, and character of capital loss carryforwards. The Funds also utilize, when appropriate, earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. COMMITTED LINE OF CREDIT-- The Funds have an unsecured committed line of credit with Investors Bank & Trust Company in the amount of $350 million. Borrowings under that arrangement bear interest at .45% above the Federal Funds Effective Rate. There were no borrowings during the year ended September 30, 2003. ACCOUNTING FOR OPTIONS-- When a Fund writes an option, the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options that expire are recorded by the Fund on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund has realized a gain or a loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Fund. In writing an option, the Fund bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Fund could result in the Fund selling or buying a security or currency at a price different from the current market value. Options written by the Funds do not give rise to counterparty credit risk, as they obligate the Funds, not its counterparties, to perform. When a Fund purchases an option, the premium paid by the Fund is recorded as a deferred credit and is subsequently adjusted to the current market value of the option purchased. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying security to determine the realized gain or loss. The risk associated with purchasing put and call options is potential loss of the premium paid. For the year ended September 30, 2003, Oakmark, Select, Small Cap, Equity & Income, and Global wrote option contracts. At September 30, 2003, Small Cap and Global had outstanding option contracts for which portfolio securities valued at $1,425,000 and $10,208,800 respectively, were held in escrow by the custodian as cover for the options written. SECURITY LENDING-- Each Fund except Oakmark Fund may lend its portfolio securities to broker-dealers and banks. Any such loan must be continuously secured by collateral in cash or cash equivalents maintained on a current basis in an amount at least equal to the value of the securities loaned by the Fund. Collateral is marked to market and monitored daily. The Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned, and would also receive an additional return that may be in the form of a fixed fee or a percentage of the earnings on the collateral. The Fund would have the right to call the loan and obtain the securities loaned at any time on notice of not more than five business days. In the event of bankruptcy or other default of the borrower, the Fund could experience delays in liquidating the loan collateral or recovering the loaned securities and incur expenses related 64 to enforcing its rights. In addition, there could be a decline in the value of the collateral or in the value of the securities loaned while the Fund seeks to enforce its rights thereto and the Fund could experience subnormal levels of income and lack of access to income during that period. At September 30, 2003, there were no outstanding securities lending transactions. SHORT SALES-- The Funds may sell a security they do not own in anticipation of a decline in the fair value of that security. When a Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. A gain, limited to the price at which the Fund sold the security short, or loss, unlimited in size, will be recognized upon the termination of a short sale. At September 30, 2003, there were no such securities sold short. 2. TRANSACTIONS WITH AFFILIATES Each Fund has an investment advisory agreement with Harris Associates L.P. ("Adviser"). For management services and facilities furnished, the Funds pay the Adviser monthly fees. Each fee is calculated on the total net assets as determined at the end of each preceding calendar month. Annual fee rates are as follows:
FUND ADVISORY FEES FUND ADVISORY FEES ------------------------------------------------------------------------------------------------------- Oakmark 1.00% up to $2 billion; Equity and Income 0.75% 0.90% on the next $1 billion; 0.80% on the next $2 billion; and 0.75% over $5 billion Select 1.00% up to $1 billion; Global 1.00% 0.95% on the next $500 million; 0.90% on the next $500 million; International 1.00% up to $2 billion; 0.85% on the next $500 million; 0.95% on the next $1 billion; and 0.80% on the next $2.5 billion; and 0.85% over $3 billion 0.75% over $5 billion Small Cap 1.00% Int'l Small Cap 1.25% up to $500 million; and 1.10% over $500 million
The Adviser is contractually obligated to reimburse the Funds, through January 31, 2004, to the extent that annual expenses are greater than 1.0% for Class I shares of the Equity and Income Fund; greater than 1.5% for Class I shares of all other domestic funds; greater than 1.75% for Class I shares of the Global Fund; and greater than 2.0% for Class I shares of all other international funds; or are greater than 1.25% for Class II shares of the Equity and Income Fund; greater than 1.75% for Class II shares of all other domestic funds; greater than 2.0% for Class II shares of the Global Fund; and greater than 2.25% for Class II shares of all other international funds. For the year ended September 30, 2003, the Funds incurred brokerage commissions, including commissions paid to an affiliate of the Adviser, Harris Associates Securities L.P., as follows:
FUND TOTAL COMMISSIONS COMMISSIONS PAID TO AFFILIATES ---------------------------------------------------------------------------- Oakmark $ 4,712,567 $ 951,853 Select 3,944,611 544,596 Small Cap 540,418 104,000 Equity & Income 4,171,306 845,629 Global 1,652,181 170,503 International 5,497,451 0 Int'l Small Cap 758,299 0
65 CDC IXIS Asset Management Services Co., an affiliate of the Adviser, provides transfer agent services to the Funds. The fees are based on the number of open accounts and the reimbursement of out-of-pocket expenses. For the year ended September 30, 2003, the Funds incurred the following transfer agent expenses:
FUND TRANSFER AGENT FEES --------------------------------------------------------- Oakmark $ 2,825,387 Select 1,661,800 Small Cap 418,413 Equity & Income 1,161,063 Global 267,441 International 941,105 Int'l Small Cap 212,442
The Adviser has entered into agreements with service providers to provide recordkeeping, processing, shareholder communications and other services to the Funds. These services would be provided by the Funds if the shares were held in accounts registered directly with the Funds' transfer agent. Accordingly, the Funds pay a portion of these fees pursuant to a separate agreement with the Adviser. These fees are reflected as other shareholder servicing fees in the Statement of Operations. The non-interested Trustees of the Trust may participate in the Trust's Deferred Compensation Plan for Independent Trustees. Participants in the plan may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Trust and represent an unfunded obligation of the Trust. The value of amounts deferred for a participant is determined by reference to the change in value of Class I shares of one or more of the Funds or a money market fund as specified by the participant. Benefits under the plan are payable upon retirement. The interested trustees are not compensated by the Funds. 3. FEDERAL INCOME TAXES It is the policy of each Fund to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required.
COST OF INVESTMENTS NET UNREALIZED FOR FEDERAL INCOME GROSS UNREALIZED GROSS UNREALIZED APPRECIATION FUND TAX PURPOSES APPRECIATION (DEPRECIATION) (DEPRECIATION) ----------------------------------------------------------------------------------------------------- Oakmark $ 4,283,226,954 $ 671,652,479 $ (161,747,908) $ 509,904,571 Select 3,871,796,681 1,320,294,049 (96,040,686) 1,224,253,363 Small Cap 331,509,517 67,217,652 (45,443,095) 21,774,557 Equity & Income 3,940,402,357 420,402,230 (7,963,090) 412,439,140 Global 639,010,996 83,774,167 (2,336,625) 81,437,542 International 2,449,270,639 385,356,290 (40,146,894) 345,209,396 Int'l Small Cap 404,668,469 89,454,335 (19,728,123) 69,726,212
As of September 30, 2003, the net capital loss carryovers noted below are available to offset future realized capital gains and thereby reduce future taxable gains distributions. NET CAPITAL LOSS CARRYOVER
FUND 2008 2009 2010 2011 ----------------------------------------------------------------------------------- Oakmark $ 23,897,178 $ 139,015,880 $ 2,634,326 $ 27,893,934 Select 0 5,156,972 43,881,611 14,649,666 Small Cap 0 0 0 8,844,719 Equity & Income 0 0 3,347,886 66,672,712 Global 0 0 0 0 International 0 0 14,901,531 29,140,687 Int'l Small Cap 0 0 0 19,830,527
66 For the year ended September 30, 2003, the Funds have elected to defer to October 1, 2003 post October 2002 capital losses of:
FUND AMOUNT ---------------------------------------------------------------------------- Oakmark $ 122,649,808 Select 101,966,303 Small Cap 2,974,352 International 161,129,206 Int'l Small Cap 13,629,253
For the year ended September 30, 2003, Global has elected to defer to October 1, 2003 post October 2002 currency losses of $167,123. At September 30, 2003, the components of distributable earnings (excluding unrealized appreciation (depreciation) disclosed below) on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG- TOTAL DISTRIBUTABLE FUND ORDINARY INCOME TERM GAIN EARNINGS ----------------------------------------------------------------------------------------- Oakmark $ 19,542,428 $ 0 $ 19,542,428 Select 10,230,003 0 10,230,003 Equity & Income 23,296,919 0 23,296,919 Global 50,908 2,829,266 2,880,174 International 19,593,405 0 19,593,405 Int'l Small Cap 3,710,597 0 3,710,597
For corporate shareholders, a portion of the ordinary dividends paid during the Funds' year ended September 30, 2003 qualified for the dividends received deduction, as follows:
FUND ---------------------------------------------------------------------------- Oakmark 100.00% Select 100.00% Equity & Income 48.19%
During the year ended September 30, 2003, the tax character of distributions paid was as follows:
DISTRIBUTIONS PAID DISTRIBUTIONS PAID FROM ORDINARY FROM LONG-TERM FUND INCOME CAPITAL GAIN ----------------------------------------------------------------- Oakmark $ 13,910,380 $ 0 Select 3,934,423 0 Equity & Income 35,185,804 0 International 15,634,269 0 Int'l Small Cap 3,098,842 9,167,636
4. INVESTMENT TRANSACTIONS Transactions in investment securities (excluding short term and U.S. Government securities) were as follows (in thousands):
EQUITY & INT'L OAKMARK SELECT SMALL CAP INCOME GLOBAL INTERNATIONAL SMALL CAP ------------------------------------------------------------------------------------------------------------------------------ Purchases $ 1,348,517 $ 1,043,382 $ 41,605 $ 1,516,171 $ 495,692 $ 1,414,439 $ 109,644 Proceeds from sales 766,678 822,236 127,941 633,717 128,418 649,070 125,084
Purchases at cost and proceeds from sales of long-term U.S. Government securities for the year ended September 30, 2003 were $1,107,455 and $789,794, respectively for Equity and Income. 67 Transactions in options written during the year ended September 30, 2003 were as follows:
OAKMARK SELECT SMALL CAP ------------------------------------------------------------------------------------------ NUMBER OF PREMIUMS NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED CONTRACTS RECEIVED ------------------------------------------------------------------------------------------------------------------------------ Options outstanding at September 30, 2002 0 $ 0 0 $ 0 0 $ 0 Options written 190,700 19,342,841 222,795 71,921,178 4,850 615,017 Options terminated in closing purchase transactions (18,300) (2,213,302) (17,355) (1,384,340) (500) (70,998) Options expired (112,379) (10,933,445) (79,228) (6,751,845) (2,400) (276,091) Options exercised (60,021) (6,196,094) (126,212) (63,784,993) (1,000) (151,159) ------------ ------------- ------------ ------------- ------ ------------ Options outstanding at September 30, 2003 0 $ 0 0 $ 0 950 $ 116,769 EQUITY & INCOME GLOBAL ------------------------------------------------------------ NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED ------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2002 10,190 $ 638,100 0 $ 0 Options written 26,510 3,633,617 12,723 1,970,518 Options terminated in closing purchase transactions (7,455) (936,662) (5,550) (855,705) Options expired (21,195) (2,314,185) (2,673) (468,115) Options exercised (8,050) (1,020,870) (1,500) (390,710) ---------- ------------ ---------- ------------ Options outstanding at September 30, 2003 0 $ 0 3,000 $ 255,988
5. INVESTMENTS IN AFFILIATED ISSUERS An affiliated issuer, as defined under the Investment Company Act of 1940, is one in which the Trust's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. A summary of each Fund's investments in securities of these issuers for the year ended September 30, 2003, is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 -------------------------------------------------------------------------------------- H&R Block, Inc. $ 19,101,014 $ 0 $ 2,241,682 $ 130,714,295 Toys 'R' Us, Inc. 0 0 0 37,593,750 ------------ ------------ ------------ ------------- TOTALS $ 19,101,014 $ 0 $ 2,241,682 $ 168,308,045
THE OAKMARK SELECT FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 --------------------------------------------------------------------------------------------- H&R Block, Inc. $ 56,001,137 $ 20,779,349 $ 6,736,252 $ 382,300,370 The Dun & Bradstreet Corporation 0 28,311,774 0 188,379,746 Toys 'R' Us, Inc. 20,391,707 11,947,271 0 164,792,955 ------------ ------------ ------------ ------------- TOTALS $ 76,392,844 $ 61,038,394 $ 6,736,252 $ 735,473,071
68 THE OAKMARK SMALL CAP FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 ------------------------------------------------------------------------------------------------------------- eFunds Corporation $ 1,082,784 $ 1,565,160 $ 0 $ 16,395,860 R.G. Barry Corporation 0 0 0 4,680,000 SureBeam Corporation, Class A 2,111,950 0 0 6,077,500 ------------- ------------- ------------- ------------- TOTALS $ 3,194,734 $ 1,565,160 $ 0 $ 27,153,360
THE OAKMARK EQUITY AND INCOME FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 ------------------------------------------------------------------------------------------------------------- First Health Group Corp. $ 47,563,042 $ 0 $ 0 $ 103,292,500 ------------- ------------- ------------- ------------- TOTALS $ 47,563,042 $ 0 $ 0 $ 103,292,500
THE OAKMARK GLOBAL FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 ------------------------------------------------------------------------------------------------------------- eFunds Corporation $ 6,637,994 $ 633,584 $ 0 $ 22,785,750 First Health Group Corp. 29,159,430 8,419,315 0 27,823,600 Grupo Aeroportuario del Sureste S.A. de C.V. 1,178,375 0 221,314 6,806,100 Lotte Chilsung Beverage Co., Ltd. 4,406,429 0 8,015 6,375,499 Meitec Corporation 5,370,188 0 141,697 14,022,250 Michael Page International plc 2,087,755 0 290,457 11,966,936 Orbotech, Ltd. 55,741 0 0 4,674,628 ------------- ------------- ------------- ------------- TOTALS $ 48,895,912 $ 9,052,899 $ 661,483 $ 94,454,763
THE OAKMARK INTERNATIONAL FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 ------------------------------------------------------------------------------------------------------------- Chargeurs SA $ 0 $ 0 $ 1,454,922 $ 30,593,668 Enodis plc 0 0 0 39,080,214 Giordano International Limited 7,084,872 0 2,020,125 37,744,455 Grupo Aeroportuario del Sureste S.A. de C.V. 0 0 115,676 3,557,400 Lotte Chilsung Beverage Co., Ltd. 16,577,455 0 82,989 39,591,705 Meitec Corporation 8,756,459 5,000,446 712,529 59,340,750 Michael Page International plc 5,519,118 2,628,656 1,472,461 58,988,739 Orbotech, Ltd. 2,161,360 0 0 41,722,128 ------------- ------------- ------------- ------------- TOTALS $ 40,099,264 $ 7,629,102 $ 5,858,702 $ 310,619,059
69 THE OAKMARK INTERNATIONAL SMALL CAP FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2003 ------------------------------------------------------------------------------------------------------------- Alaska Milk Corporation $ 0 $ 0 $ 276,386 $ 2,745,362 Baycorp Advantage Limited 11,759,166 1,794,255 0 22,184,264 Grupo Aeroportuario del Sureste S.A. de C.V. 0 713,436 508,592 15,640,800 Mainfreight Limited 0 0 322,114 6,151,604 Matichon Public Company Limited, Foreign Shares 0 0 142,407 4,381,639 Pfeiffer Vacuum Technology AG 1,090,531 3,059,827 326,549 14,262,913 Royal Doulton plc 0 0 0 1,069,231 ------------- ------------- ------------- ------------- TOTALS $ 12,849,697 $ 5,567,518 $ 1,576,048 $ 66,435,813
70 [OAKMARK FAMILY OF FUNDS LOGO] (This page has been intentionally left blank.) 71 THE OAKMARK FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 28.08 $ 32.01 $ 26.95 $ 34.37 $ 33.54 Income (Loss) From Investment Operations: Net Investment Income 0.13 0.12 0.07 0.49 0.36 Net Gains (Losses) on Securities (both realized and unrealized) 5.75 (3.85) 5.38 (2.91) 2.51 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 5.88 (3.73) 5.45 (2.42) 2.87 Less Distributions: Dividends (from net investment income) (0.11) (0.20) (0.39) (0.26) (0.44) Distributions (from capital gains) 0.00 0.00 0.00 (4.74) (1.60) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.11) (0.20) (0.39) (5.00) (2.04) ------------ ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 33.85 $ 28.08 $ 32.01 $ 26.95 $ 34.37 ============ ============ ============ ============ ============ Total Return 20.99% (11.77)% 20.42% (7.55)% 7.98% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 4,769.4 $ 3,300.9 $ 3,109.1 $ 2,038.7 $ 4,772.8 Ratio of Expenses to Average Net Assets 1.14% 1.17% 1.15% 1.21% 1.11% Ratio of Net Investment Income to Average Net Assets 0.48% 0.38% 0.73% 1.42% 1.02% Portfolio Turnover Rate 21% 44% 57% 50% 13%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 5, 2001 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 (a) - ----------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 28.04 $ 31.97 $ 32.09 Income (Loss) From Investment Operations: Net Investment Income 0.05 0.16 0.05 Net Gains (Losses) on Securities (both realized and unrealized) 5.69 (3.92) (0.17) ------------ ------------ ------------ Total From Investment Operations: 5.74 (3.76) (0.12) Less Distributions: Dividends (from net investment income) (0.10) (0.17) 0.00 Distributions (from capital gains) 0.00 0.00 0.00 ------------ ------------ ------------ Total Distributions (0.10) (0.17) 0.00 ------------ ------------ ------------ Net Asset Value, End of Period $ 33.68 $ 28.04 $ 31.97 ============ ============ ============ Total Return 20.52% (11.85)% (0.37)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 21.1 $ 7.7 $ 0.1 Ratio of Expenses to Average Net Assets 1.53% 1.44% 1.32%* Ratio of Net Investment Income to Average Net Assets 0.06% 0.35% 0.46%* Portfolio Turnover Rate 21% 44% 57%
* Data has been annualized (a) The date on which Class II shares were first sold to the public was April 5, 2001. 72 THE OAKMARK SELECT FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 21.67 $ 25.20 $ 21.45 $ 20.92 $ 16.76 Income (Loss) From Investment Operations: Net Investment Income 0.05 0.02 0.03 0.13 0.19 Net Gains (Losses) on Securities (both realized and unrealized) 5.85 (3.50) 5.17 4.32 4.73 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 5.90 (3.48) 5.20 4.45 4.92 Less Distributions: Dividends (from net investment income) (0.02) (0.05) (0.09) (0.20) (0.05) Distributions (from capital gains) 0.00 0.00 (1.36) (3.72) (0.71) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.02) (0.05) (1.45) (3.92) (0.76) ------------ ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 27.55 $ 21.67 $ 25.20 $ 21.45 $ 20.92 ============ ============ ============ ============ ============ Total Return 27.25% (13.85)% 25.75% 24.53% 30.07% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 4,993.0 $ 3,717.6 $ 4,161.4 $ 1,772.0 $ 1,638.9 Ratio of Expenses to Average Net Assets 1.02% 1.07% 1.08% 1.17% 1.16% Ratio of Net Investment Income to Average Net Assets 0.23% 0.09% 0.26% 0.76% 0.98% Portfolio Turnover Rate 20% 32% 21% 69% 67%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
DECEMBER 31, 1999 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 (a) - --------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 21.56 $ 25.10 $ 21.40 $ 18.42 Income (Loss) From Investment Operations: Net Investment Income (Loss) 0.00(b) (0.04) 0.00(b) 0.10 Net Gains (Losses) on Securities (both realized and unrealized) 5.81 (3.50) 5.10 2.88 ------------ ------------ ------------ ------------ Total From Investment Operations: 5.81 (3.54) 5.10 2.98 Less Distributions: Dividends (from net investment income) 0.00 0.00 (0.06) 0.00 Distributions (from capital gains) 0.00 0.00 (1.34) 0.00 ------------ ------------ ------------ ------------ Total Distributions 0.00 0.00 (1.40) 0.00 ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 27.37 $ 21.56 $ 25.10 $ 21.40 ============ ============ ============ ============ Total Return 26.95% (14.10)% 25.28% 16.18% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 93.1 $ 64.4 $ 35.4 $ 6.8 Ratio of Expenses to Average Net Assets 1.29% 1.36% 1.40% 1.41%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.04)% (0.19)% (0.08)% 0.59%* Portfolio Turnover Rate 20% 32% 21% 69%
* Data has been annualized. (a) The date on which Class II shares were first sold to the public was December 31, 1999. (b) Amount rounds to less than $(0.01) per share. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 73 THE OAKMARK SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 14.10 $ 14.57 $ 15.10 $ 13.88 $ 12.63 Income (Loss) From Investment Operations: Net Investment Income (Loss) (0.12) (0.11) 0.00 0.00 0.14 Net Gains (Losses) on Securities (both realized and unrealized) 3.20 (0.36) (0.02) 1.22 1.20 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 3.08 (0.47) (0.02) 1.22 1.34 Less Distributions: Dividends (from net investment income) 0.00 0.00 0.00 0.00 0.00 Distributions (from capital gains) 0.00 0.00 (0.51) 0.00 (0.09) ------------ ------------ ------------ ------------ ------------ Total Distributions 0.00 0.00 (0.51) 0.00 (0.09) ------------ ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 17.18 $ 14.10 $ 14.57 $ 15.10 $ 13.88 ============ ============ ============ ============ ============ Total Return 21.84% (3.23)% 0.07% 8.79% 10.56% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 350.3 $ 356.9 $ 264.6 $ 248.7 $ 437.1 Ratio of Expenses to Average Net Assets 1.36% 1.33% 1.27% 1.50%(a) 1.48% Ratio of Net Investment Loss to Average Net Assets (0.69)% (0.67)% (0.28)% (0.41)%(a) (0.44)% Portfolio Turnover Rate 13% 22% 47% 28% 68%
(a) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser ratios would have been as follows:
SEPTEMBER 30, 2000 - ------------------------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.59% Ratio of Net Investment Loss to Average Net Assets (0.50)%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 10, 2002 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 2003 2002 (a) - --------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 14.09 $ 19.71 Income (Loss) From Investment Operations: Net Investment Loss (0.16) (0.20)(b) Net Gains (Losses) on Securities (both realized and unrealized) 3.17 (5.42) ------------ ------------ Total From Investment Operations: 3.01 (5.62) ------------ ------------ Net Asset Value, End of Period $ 17.10 $ 14.09 ============ ============ Total Return 21.36% (28.51)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.8 $ 0.5 Ratio of Expenses to Average Net Assets 1.75%(c) 1.48%* Ratio of Net Investment Loss to Average Net Assets (1.08)%(c) (0.85)%* Portfolio Turnover Rate 13% 22%
* Data has been annualized. (a) The date on which Class II shares were first sold to the public was April 10, 2002. (b) Computed using average shares outstanding throughout the period. (c) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
SEPTEMBER 30, 2003 - ------------------------------------------------------------------------------------------------------------------ Ratio of Expenses to Average Net Assets 1.85% Ratio of Net Investment Loss to Average Net Assets (1.18)%
74 THE OAKMARK EQUITY AND INCOME FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 17.18 $ 17.45 $ 16.50 $ 15.68 $ 13.99 Income (Loss) From Investment Operations: Net Investment Income 0.17 0.33(a) 0.08 0.35 0.39 Net Gains (Losses) on Securities (both realized and unrealized) 3.19 (0.40) 2.11 2.28 1.72 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 3.36 (0.07) 2.19 2.63 2.11 Less Distributions: Dividends (from net investment income) (0.24) (0.16) (0.24) (0.45) (0.21) Distributions (from capital gains) 0.00 (0.04) (1.00) (1.36) (0.21) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.24) (0.20) (1.24) (1.81) (0.42) ------------ ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 20.30 $ 17.18 $ 17.45 $ 16.50 $ 15.68 ============ ============ ============ ============ ============ Total Return 19.75% (0.47)% 14.40% 18.51% 15.32% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 4,138.0 $ 2,241.9 $ 620.1 $ 54.5 $ 60.3 Ratio of Expenses to Average Net Assets 0.93% 0.96% 0.98% 1.24% 1.18% Ratio of Net Investment Income to Average Net Assets 1.07% 1.71% 2.07% 3.04% 2.65% Portfolio Turnover Rate 48% 73% 124% 87% 81%
(a) Computed using average shares outstanding throughout the period. FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JULY 13, 2000 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 (a) - -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 17.15 $ 17.40 $ 16.49 $ 15.51 Income (Loss) From Investment Operations: Net Investment Income 0.16 0.30(b) 0.07 0.30 Net Gains (Losses) on Securities (both realized and unrealized) 3.15 (0.40) 2.08 0.68 ------------ ------------ ------------ ------------ Total From Investment Operations: 3.31 (0.10) 2.15 0.98 Less Distributions: Dividends (from net investment income) (0.22) (0.11) (0.24) 0.00 Distributions (from capital gains) 0.00 (0.04) (1.00) 0.00 ------------ ------------ ------------ ------------ Total Distributions (0.22) (0.15) (1.24) 0.00 ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 20.24 $ 17.15 $ 17.40 $ 16.49 ============ ============ ============ ============ Total Return 19.46% (0.60)% 14.07% 6.32% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 246.6 $ 118.7 $ 3.3 $ 0.4 Ratio of Expenses to Average Net Assets 1.17% 1.20% 1.23% 1.32%* Ratio of Net Investment Income to Average Net Assets 0.84% 1.50% 1.95% 2.59%* Portfolio Turnover Rate 48% 73% 124% 87%
* Data has been annualized. (a) The date on which Class II shares were first sold to the public was July 13, 2000. (b) Computed using average shares outstanding throughout the period. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 75 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
AUGUST 4, 1999 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 (a) - --------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 11.30 $ 10.83 $ 10.91 $ 9.18 $ 10.00 Income (Loss) From Investment Operations: Net Investment Income 0.01 0.00(b)(c) 0.03 0.11 0.01 Net Gains (Losses) on Securities (both realized and unrealized) 5.67 0.76(d) 0.12 1.63 (0.83) ---------- ---------- ---------- ---------- ---------- Total From Investment Operations: 5.68 0.76 0.15 1.74 (0.82) Less Distributions: Dividends (from net investment income) 0.00 0.00 (0.17) (0.01) 0.00 Distributions (from capital gains) 0.00 (0.29) (0.06) 0.00 0.00 ---------- ---------- ---------- ---------- ---------- Total Distributions 0.00 (0.29) (0.23) (0.01) 0.00 ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period $ 16.98 $ 11.30 $ 10.83 $ 10.91 $ 9.18 ========== ========== ========== ========== ========== Total Return 50.27% 6.84% 1.37% 18.97% (8.20)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 704.8 $ 175.6 $ 48.2 $ 27.2 $ 24.0 Ratio of Expenses to Average Net Assets 1.28% 1.55% 1.75%(f) 1.75%(f) 1.75%*(f) Ratio of Net Investment Income (Loss) to Average Net Assets 0.00%(e) (0.01)% 0.00(f) 0.54%(f) 0.98%*(f) Portfolio Turnover Rate 42% 86% 114% 147% 7%
* Data has been annualized. (a) The date which Fund shares were first offered for sale to the public was August 4, 1999. (b) Amount rounds to less than $(0.01) per share. (c) Computed using average shares outstanding throughout the period. (d) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. (e) Rounds to less than 0.01%. (f) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser ratios would have been as follows:
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.80% 1.96% 2.22%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.05)% 0.34% 0.51%*
76 FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
OCTOBER 10, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 2003 2002 (a) - -------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 11.24 $ 11.25 Income (Loss) From Investment Operations: Net Investment Income (Loss) 0.02 (0.03) Net Gains on Securities (both realized and unrealized) 5.58 0.31(b) ------------ ------------ Total From Investment Operations: 5.60 0.28 Less Distributions: Dividends (from net investment income) 0.00 0.00 Distributions (from capital gains) 0.00 (0.29) ------------ ------------ Total Distributions 0.00 (0.29) ------------ ------------ Net Asset Value, End of Period $ 16.84 $ 11.24 ============ ============ Total Return 49.82% 2.31% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 5.8 $ 0.6 Ratio of Expenses to Average Net Assets 1.46% 1.86%* Ratio of Net Investment Loss to Average Net Assets (0.01)% (0.26)%* Portfolio Turnover Rate 42% 86%
* Data has been annualized. (a) The date on which Class II shares were first offered for sale to the public was October 10, 2001. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 77 THE OAKMARK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 12.17 $ 12.51 $ 15.40 $ 13.95 $ 10.42 Income (Loss) From Investment Operations: Net Investment Income (Loss) 0.11 0.14 0.20 1.02 (0.34) Net Gains (Losses) on Securities (both realized and unrealized) 3.52 (0.31) (2.07) 0.92 4.89 ---------- ---------- ----------- ---------- ---------- Total From Investment Operations: 3.63 (0.17) (1.87) 1.94 4.55 Less Distributions: Dividends (from net investment income) (0.13) (0.17) (0.51) (0.49) (0.24) Distributions (from capital gains) 0.00 0.00 (0.51) 0.00 (0.78) ---------- ---------- ----------- ---------- ---------- Total Distributions (0.13) (0.17) (1.02) (0.49) (1.02) ---------- ---------- ----------- ---------- ---------- Net Asset Value, End of Period $ 15.67 $ 12.17 $ 12.51 $ 15.40 $ 13.95 ========== ========== =========== ========== ========== Total Return 29.97% (1.53)% (13.10)% 14.27% 46.41% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 2,676.6 $ 1,393.8 $ 738.5 $ 782.4 $ 811.1 Ratio of Expenses to Average Net Assets 1.25% 1.31% 1.30% 1.30% 1.29% Ratio of Net Investment Income to Average Net Assets 1.03% 1.34% 1.40% 1.87% 1.94% Portfolio Turnover Rate 34% 24% 58% 64% 54%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
NOVEMBER 4, 1999 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 (a) - --------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 12.13 $ 12.47 $ 15.37 $ 14.36 Income (Loss) From Investment Operations: Net Investment Income 0.08 0.15 0.17 0.96 Net Gains (Losses) on Securities (both realized and unrealized) 3.48 (0.37) (2.10) 0.54 ------------ ------------ ------------ ------------ Total From Investment Operations: 3.56 (0.22) (1.93) 1.50 Less Distributions: Dividends (from net investment income) (0.11) (0.12) (0.49) (0.49) Distributions (from capital gains) 0.00 0.00 (0.48) 0.00 ------------ ------------ ------------ ------------ Total Distributions (0.11) (0.12) (0.97) (0.49) ------------ ------------ ------------ ------------ Net Asset Value, End of Period $ 15.58 $ 12.13 $ 12.47 $ 15.37 ============ ============ ============ ============ Total Return 29.52% (1.76)% (13.44)% 10.79% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 123.2 $ 48.5 $ 1.9 $ 0.1 Ratio of Expenses to Average Net Assets 1.67% 1.58% 1.64% 1.50%* Ratio of Net Investment Income to Average Net Assets 0.69% 1.33% 0.62% 1.98%* Portfolio Turnover Rate 34% 24% 58% 64%
* Data has been annualized. (a) The date on which Class II shares were first sold to the public was November 4, 1999. 78 THE OAKMARK INTERNATIONAL SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 10.17 $ 10.00 $ 11.51 $ 12.64 $ 6.89 Income (Loss) From Investment Operations: Net Investment Income 0.11 0.11 0.13 0.23 0.24 Net Gains (Losses) on Securities (both realized and unrealized) 3.82 0.36(a) (0.81) (0.66) 5.71 -------- -------- -------- -------- -------- Total From Investment Operations: 3.93 0.47 (0.68) (0.43) 5.95 Less Distributions: Dividends (from net investment income) (0.09) (0.16) (0.34) (0.11) (0.20) Distributions (from capital gains) (0.27) (0.14) (0.49) (0.59) 0.00 --------- -------- -------- -------- -------- Total Distributions (0.36) (0.30) (0.83) (0.70) (0.20) -------- --------- -------- -------- -------- Net Asset Value, End of Period $ 13.74 $ 10.17 $ 10.00 $ 11.51 $ 12.64 ======== ======== ======== ======== ======== Total Return 39.78% 4.68% (6.18)% (3.44)% 88.02% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 477.8 $ 357.7 $ 118.9 $ 90.3 $ 155.4 Ratio of Expenses to Average Net Assets 1.57% 1.64% 1.74% 1.77% 1.79% Ratio of Net Investment Income to Average Net Assets 0.99% 1.28% 1.83% 1.99% 2.31% Portfolio Turnover Rate 30% 42% 49% 40% 126%
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating market values of the Fund. FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JANUARY 8, 2001 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2001 (a) - ------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 10.14 $ 9.97 $ 10.73 Income (Loss) From Investment Operations: Net Investment Income 0.08 0.13(b) 0.15 Net Gains (Losses) on Securities (both realized and unrealized) 3.81 0.30(b)(c) (0.91) ------- ------- ------- Total From Investment Operations: 3.89 0.43 (0.76) Less Distributions: Dividends (from net investment income) (0.07) (0.12) 0.00 Distributions (from capital gains) (0.27) (0.14) 0.00 ------- ------- ------- Total Distributions (0.34) (0.26) 0.00 ------- ------- ------- Net Asset Value, End of Period $ 13.69 $ 10.14 $ 9.97 ======= ======= ======= Total Return 39.39% 4.25% (7.08)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.4 $ 0.3 $ 0.0 Ratio of Expenses to Average Net Assets 1.81% 1.87% 1.97%* Ratio of Net Investment Income to Average Net Assets 0.72% 1.06% 1.76%* Portfolio Turnover Rate 30% 42% 49%
* Data has been annualized. (a) The date on which Class II shares were first sold to the public was January 8, 2001. (b) Computed using average shares outstanding throughout the period. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating market values of the Fund. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 79 OAKMARK FAMILY OF FUNDS INDEPENDENT AUDITORS' REPORT TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF HARRIS ASSOCIATES INVESTMENT TRUST: WE HAVE AUDITED THE ACCOMPANYING STATEMENTS OF ASSETS AND LIABILITIES, INCLUDING THE SCHEDULES OF INVESTMENTS, OF HARRIS ASSOCIATES INVESTMENT TRUST COMPRISING THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK SMALL CAP FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK GLOBAL FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND (COLLECTIVELY, THE "FUNDS") AS OF SEPTEMBER 30, 2003, THE RELATED STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, AND THE STATEMENTS OF CHANGES IN NET ASSETS AND FINANCIAL HIGHLIGHTS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED. THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE THE RESPONSIBILITY OF THE FUNDS' MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS BASED ON OUR AUDITS. THE FUNDS' FINANCIAL HIGHLIGHTS FOR THE PERIODS ENDED PRIOR TO SEPTEMBER 30, 2002, WERE AUDITED BY OTHER AUDITORS WHO HAVE CEASED OPERATIONS. THOSE AUDITORS EXPRESSED AN UNQUALIFIED OPINION ON THOSE FINANCIAL HIGHLIGHTS IN THEIR REPORT DATED OCTOBER 26, 2001. WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDITS TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. OUR PROCEDURES INCLUDED CONFIRMATION OF SECURITIES OWNED AS OF SEPTEMBER 30, 2003, BY CORRESPONDENCE WITH THE FUNDS' CUSTODIAN AND BROKERS; WHERE REPLIES WERE NOT RECEIVED FROM BROKERS, WE PERFORMED OTHER AUDITING PROCEDURES. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION. IN OUR OPINION, THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF EACH OF THE FUNDS AS OF SEPTEMBER 30, 2003, THE RESULTS OF THEIR OPERATIONS FOR THE YEAR THEN ENDED, AND THE CHANGES IN THEIR NET ASSETS AND THEIR FINANCIAL HIGHLIGHTS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. /s/ DELOITTE & TOUCHE LLP Chicago, Illinois October 27, 2003 80 FEDERAL TAX INFORMATION (UNAUDITED) International and Int'l Small Cap paid qualifying foreign taxes of $5,707,195 and $1,334,360 and earned $48,996,094 and $10,763,639 foreign source income during the year ended September 30, 2003, respectively. Pursuant to Section 853 of the Internal Revenue Code, International and Int'l Small Cap designated $0.04829 and $0.03839 per share as foreign taxes paid and $0.41455 and $0.30964 per share as income earned from foreign sources for the year ended September 30, 2003, respectively. The funds intend to designate the maximum amount of qualified dividend income allowed. 81 This material must be preceded or accompanied by a prospectus. To order a prospectus, which explains management fees and expenses and the special risks of investing in the funds, visit www.oakmark.com or call 1-800-OAKMARK. Please read the prospectus carefully before investing. The discussion of investments and investment strategy of the Funds represents the investments of the Funds and the views of fund managers and Harris Associates L.P., the Funds' investment adviser, at the time of this article, and are subject to change without notice. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than original cost. INVESTING IN VALUE STOCKS PRESENTS THE RISK THAT VALUE STOCKS MAY FALL OUT OF FAVOR WITH INVESTORS AND UNDERPERFORM GROWTH STOCKS DURING GIVEN PERIODS. THE OAKMARK SELECT FUND CLOSED TO NEW INVESTORS AS OF 5/4/01. BECAUSE THE OAKMARK SELECT FUND IS NON-DIVERSIFIED, THE PERFORMANCE OF EACH HOLDING WILL HAVE A GREATER IMPACT ON THE FUND'S TOTAL RETURN, AND MAY MAKE THE FUND'S RETURN MORE VOLATILE THAN A MORE DIVERSIFIED FUND. THE OAKMARK INTERNATIONAL SMALL CAP FUND CLOSED TO NEW INVESTORS AS OF 5/10/02. INVESTING IN FOREIGN SECURITIES REPRESENTS RISKS WHICH IN SOME WAY MAY BE GREATER THAN IN U.S. INVESTMENTS. THOSE RISKS INCLUDE: CURRENCY FLUCTUATION; DIFFERENT REGULATION, ACCOUNTING STANDARDS, TRADING PRACTICES AND LEVELS OF AVAILABLE INFORMATION; GENERALLY HIGHER TRANSACTION COSTS; AND POLITICAL RISKS. THE STOCKS OF SMALLER COMPANIES OFTEN INVOLVE MORE RISK THAN THE STOCKS OF LARGER COMPANIES. STOCKS OF SMALL COMPANIES TEND TO BE MORE VOLATILE AND HAVE A SMALLER PUBLIC MARKET THAN STOCKS OF LARGER COMPANIES. SMALL COMPANIES MAY HAVE A SHORTER HISTORY OF OPERATIONS THAN LARGER COMPANIES, MAY NOT HAVE AS GREAT AN ABILITY TO RAISE ADDITIONAL CAPITAL AND MAY HAVE A LESS DIVERSIFIED PRODUCT LINE, MAKING THEM MORE SUSCEPTIBLE TO MARKET PRESSURE. THE OAKMARK EQUITY AND INCOME FUND INVESTS IN MEDIUM AND LOWER-QUALITY DEBT SECURITIES WHICH HAVE HIGHER YIELD POTENTIAL BUT PRESENT GREATER INVESTMENT AND CREDIT RISK THAN HIGHER-QUALITY SECURITIES. 1. Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. The performance information for The Oakmark Select Fund, The Oakmark Small Cap Fund, The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap Fund does not reflect the imposition of a 2% redemption fee on shares held by an investor less than 90 days. The purpose of this redemption fee is to deter market timers. 2. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. 3. During the period since inception (8/4/99 - 9/30/03), IPO's contributed an annualized 2.05% to the performance of the Oakmark Global Fund. As the IPO environment changes and the total net assets of the Fund grow, the impact of IPOs on performance is expected to diminish. "IPO" stands for Initial Public Offering, which is the first sale of stock by a company to the public. 4. The quoted passages by Dennis Kozlowski, Bernie Ebbers and Ken Lay are taken from "Lessons from the Top" written by Thomas J. Neff and James Citrin and published in 1999 by Doubleday, a division of Random House Inc. 5. The excerpted quotes by Congressman Thomas G. Tancredo are taken from a letter dated September 13, 2001 from United States Congressman Thomas G. Tancredo of Colorado to Chairman Harvey L. Pitt of the United States Securities and Exchange Commission. 6. The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index. 82 7. The NASDAQ Composite Index is a market value weighted index of all common stocks listed on NASDAQ. This index is unmanaged and investors cannot actually make investments in this index. 8. The Price-Earnings Ratio ("P/E") is the most common measure of how expensive a stock is. 9. The Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. This index is unmanaged and investors cannot actually make investments in this index. 10. The Lipper Large Cap Value Fund Index measures the performance of the 30 largest U.S. large-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 11. The S&P MidCap 400 is an unmanaged broad market-weighted index of 400 stocks that are in the next tier down from the S&P 500 and that are chosen for market size, liquidity, and industry group representation. This index is unmanaged and investors cannot actually make investments in this index. 12. The Lipper Mid Cap Value Fund Index measures the performance of the 30 largest U.S. mid-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 13. The Russell 2000 Index is an unmanaged, market-weighted index, with dividends reinvested, of 2,000 small companies, formed by taking the largest 3,000 small companies and eliminating the largest 1,000 of those companies. This index is unmanaged and investors cannot actually make investments in this index. 14. The S&P Small Cap 600 Index measures the performance of selected U.S. stocks with small market capitalizations. This index is unmanaged and investors cannot actually make investments in this index. 15. The Lipper Small Cap Value Fund Index measures the performance of the 30 largest U.S. small-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 16. The Lipper Balanced Fund Index measures the performance of the 30 largest U.S. balanced funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 17. The Lehman Govt./Corp. Bond Index is an unmanaged index that includes the Lehman Government and Lehman Corporate indices. This index is unmanaged and investors cannot actually make investments in this index. 18. The MSCI World Index is made up of 20 country sub-indexes, including the stock exchanges of the U.S., Europe, Canada, Australia and New Zealand, and the Far East. This index is unmanaged and investors cannot actually make investments in this index. 19. The Lipper Global Fund Index measures the performance of the 30 largest mutual funds that invest in securities throughout the world. This index is unmanaged and investors cannot actually make investments in this index. 20. Lipper, Inc. is an independent monitor of mutual fund performance. Based on total return for the one-year, three-year, and since inception periods through 9/30/03, Lipper ranked The Oakmark Global Fund 2 of 319 (top 1%), 1 of 227, and 3 of 187 (top 2%) global funds, respectively. Lipper rankings are based upon changes in net asset value with dividends reinvested. 21. The Morgan Stanley World Ex U.S. Index is made up of 19 country sub-indexes, excluding the U.S. This index is unmanaged and investors cannot actually make investments in this index. 22. Morgan Stanley Capital International Europe, Australasia and Far East Index ("EAFE") is an unmanaged index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada. This index is unmanaged and investors cannot actually make investments in this index. 23. The Lipper International Fund Index reflects the net asset value weighted total return of the 30 largest international equity funds. This index is unmanaged and investors cannot actually make investments in this index. 24. NAV stands for Net Asset Value. NAV is the dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities divided by the number of shares outstanding. 25. The Lipper International Small Cap Average includes 100 mutual funds that invest in securities whose primary markets are outside of the U.S. This index is unmanaged and investors cannot actually make investments in this index. 83 THE OAKMARK FAMILY OF FUNDS TRUSTEES AND OFFICERS The board of trustees has overall responsibility for the conduct of the affairs of Harris Associates Investment Trust ("Trust"), and its seven series, The Oakmark Family of Funds. Each trustee serves until the next annual meeting of shareholders and until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. Each trustee must retire at the end of the calendar year in which the trustee attains the age of 72. The board of trustees may fill any vacancy on the board provided that after such appointment, at least two-thirds of the trustees have been elected by the shareholders. No person shall be appointed or elected to serve as a trustee after attaining the age of 65. The shareholders may remove a trustee by a vote of two-thirds of the outstanding shares of the Trust at any meeting of shareholders called for the purpose of removing such trustee. The board of trustees elects or appoints the officers of the Trust. The president, any vice president, treasurer and secretary serves until the election and qualification of his or her successor, or until he or she dies, resigns, or is removed or disqualified. Each other officer shall serve at the pleasure of the board of trustees. The board of trustees may remove any officer at any time, with or without cause, by the vote of a majority of the trustees then in office. The names and ages of the trustees and officers, the position each holds with the Trust, the date each was first elected to office, their principal business occupations during the last five years and other directorships held are shown below. NAME AND AGE AT SEPTEMBER 30, 2003, POSITIONS HELD WITH THE TRUST, DATE FIRST ELECTED OR APPOINTED TO OFFICE, PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS, OTHER DIRECTORSHIPS HELD TRUSTEES WHO ARE "INTERESTED PERSONS"* Peter S. Voss, 57, Trustee, 1995 President and Chief Executive Officer, CDC IXIS Asset Management North America, L.P., formerly known as Nvest Companies, L.P. and its predecessor firms (investment management); Director, Harris Associates, Inc. ("HAI"). Chairman of the Board, AEW Real Estate Income Fund (a closed-end investment company); Chairman of the Board and Chief Executive Officer, CDC Nvest Funds (an open-end investment company--14 portfolios). John R. Raitt, 48, Trustee and Executive Vice President, 2003 President and Chief Executive Officer, HAI, Harris Associates Securities L.P. ("HASLP") and Harris Associates L.P. ("HALP"), since 2003, Chief Operating Officer, HALP, since 2001; Director of Research, HALP since 1998; Associate Director of Research and Analyst, HALP, prior thereto. None. TRUSTEES WHO ARE NOT "INTERESTED PERSONS" Victor A. Morgenstern, 61, Trustee and Chairman of the Board of Trustees, 1991 Chairman of the Board and Chief Executive Officer, Resolute Advisors (private investment management firm); Chairman and Principal, Valor Equity Partners, LLC (private equity fund); formerly, Chairman of the Board, HAI, 1996-2000 and President and Chief Executive Officer, prior thereto; Chairman, Harris Partners, L.L.C., 1995-2000, Director, Bio-Sante Pharmaceuticals, Inc. (early stage pharmaceutical company). Michael J. Friduss, 61, Trustee, 1995 Principal, MJ Friduss & Associates, Inc. (telecommunications consultants). None. 84 Thomas H. Hayden, 52, Trustee, 1995 Executive Vice President, Campbell Mithun (advertising and marketing communication agency). None. Christine M. Maki, 42, Trustee, 1995 Vice President--Tax, Hyatt Corporation (hotels and resorts). Director, Illinois CPA Society. None. Allan J. Reich, 55, Trustee, 1993 Partner of the law firm, Seyfarth Shaw LLP (formerly D'Ancona & Pflaum LLC). None. Marv R. Rotter, 58, Trustee, 1996 Senior Advisor to President and CEO of AXA Advisors, LLC (formerly named Rotter & Associates), since 1999, and President, prior thereto (financial services firm). None. Burton W. Ruder, 59, Trustee, 1995 President, The Academy Financial Group (venture capital investment and transaction financing firm); Manager, Cedar Green Associates (real estate management firm). None. Gary N. Wilner, M.D., 62, Trustee, 1993 Senior Attending Physician, Evanston Hospital; Medical Director--CardioPulmonary Wellness Program, Evanston Hospital Corporation. Director, North America Scientific, Inc. OFFICERS OF THE TRUST James P. Benson, 46, Vice President and Portfolio Manager (The Oakmark Small Cap Fund), 2000 Portfolio Manager and Analyst, HALP, since 1997. None. Henry R. Berghoef, 54, Vice President and Portfolio Manager (The Oakmark Select Fund), 2000 Associate Director of Research, Portfolio Manager and Analyst, HALP. None. Kevin G. Grant, 39, Vice President and Portfolio Manager (The Oakmark Fund), 2000 Portfolio Manager and Analyst, HALP. None. David G. Herro, 42, Vice President and Portfolio Manager (The Oakmark International Fund and The Oakmark International Small Cap Fund), 1992 Portfolio Manager and Analyst, HALP. None. Gregory L. Jackson, 37, Vice President and Portfolio Manager (The Oakmark Global Fund), 2000 Portfolio Manager and Analyst, HALP, since July 1998; Portfolio Manager and Analyst, Yacktman Asset Management Inc., prior thereto. None. John J. Kane, 32, Assistant Treasurer, 1999 Manager--Mutual Fund and Institutional Services, HALP. None. Robert Levy, 53, President, 2001 Chairman, HAI, Chief Investment Officer, HALP, since 2001; President and Chief Executive Officer, HAI, HALP and HASLP, 1997-2002; Portfolio Manager, HALP. None. Clyde S. McGregor, 50, Vice President and Portfolio Manager (The Oakmark Equity and Income Fund), 1995 Portfolio Manager and Analyst, HALP. None. 85 William C. Nygren, 44, Vice President and Portfolio Manager (The Oakmark Fund and The Oakmark Select Fund), 1996 Portfolio Manager and Analyst, HALP; formerly, Director of Research, HALP, 1990-1998. None. Vineeta D. Raketich, 32, Vice President, 2003 Manager, International Operations & Client Relations, HALP since 2003; Supervisor, Mutual Fund & Institutional Services, HALP, prior thereto. None. Janet L. Reali, 52, Vice President and Secretary, 2001 Vice President, General Counsel and Secretary, HALP, since 2001; formerly, Senior Executive Vice President, General Counsel and Secretary, Everen Capital Corp. and Everen Securities, Inc. 1995-1999 (broker/dealer). None. Ann W. Regan, 55, Vice President--Shareholder Operations and Assistant Secretary, 1996 Director of Mutual Fund Operations, HALP. None. Kristi L. Rowsell, 37, Treasurer, 2000 Director, Chief Financial Officer and Treasurer, HAI; Chief Financial Officer, HALP and HASLP, since 1999; Assistant Treasurer, HALP, prior thereto. None. Edward A. Studzinski, 54, Vice President and Portfolio Manager (The Oakmark Small Cap Fund and The Oakmark Equity and Income Fund), 2000 Portfolio Manager and Analyst, HALP. None. Michael J. Welsh, 40, Vice President and Portfolio Manager (The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap Fund), 1997 Portfolio Manager and Analyst, HALP. None. * Mr. Voss is a trustee who is an "interested person" of the Funds as defined in the Investment Company Act of 1940, because he is a director of HAI, the general partner and manager of HALP, the investment adviser to the Funds. Mr. Voss is also the President and Chief Executive Officer of CDC IXIS Asset Management North America, L.P. the parent company of HALP. Mr. Raitt is a trustee who is an "interested person" of the Funds because he is the President and Chief Executive Officer of HAI, HASLP (the Funds' distributor) and HALP. The business address of the officers and trustees is Two North LaSalle Street, #500, Chicago, Illinois 60602. The Statement of Additional Information (SAI) contains further information about the trustees and is available without charge upon your request by calling 1-800-625-6275. 86 THE OAKMARK FAMILY OF FUNDS INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with management teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: A UNIFIED EFFORT AIMED AT IDENTIFYING THE BEST VALUES IN THE MARKETPLACE. FROM THE LIST OF APPROVED STOCKS, EACH FUND MANAGER CONSTRUCTS A RELATIVELY FOCUSED PORTFOLIO, BUILT ON A STOCK-BY-STOCK BASIS FROM THE BOTTOM UP. WHO SHOULD INVEST Any investor who is seeking a disciplined value manager for the purposes of growing and diversifying a portfolio should consider one of the Oakmark funds, keeping in mind that all equity investments should be considered long-term investments. As value investors, we recognize that patience is a virtue and believe that, over the long term, investors are rewarded for their patience. We generally hold the companies in which we invest for three to five years, a time horizon that we encourage our shareholders to consider as well. HOW TO USE VALUE FUNDS IN AN OVERALL PORTFOLIO Investment styles tend to move in cycles. One style may be in favor for a few years while the other is out of favor, and vice versa. Diversifying the stock portion of your portfolio to include value and momemtum/growth investment styles may help reduce overall volatility--and potentially provide more consistent returns over time. INVEST Managers select stocks from the approved list for their specific funds APPROVED LIST Securities available for investment QUANTITATIVE AND QUALITATIVE RESEARCH Rigorous analysis is performed to ensure that the stock meets our strict value standards CRITERIA SCREENS Managers and research team screen for stocks that are worth further consideration UNIVERSE OF THOUSANDS OF EQUITY SECURITIES All stocks available for investment BOTTOM-UP INVESTMENT PROCESS 87 THE OAKMARK GLOSSARY BOOK VALUE - A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. A company's book value often differs substantially from economic value, especially in industries such as media. BUSINESS VALUE/INTRINSIC VALUE - The perceived or estimated actual value of a security, as opposed to its current market price or book value. Business value can be evaluated based on what a knowledgeable buyer would pay for a business if the company were sold in its entirety. GROWTH INVESTING - Investors who look for companies based on whether the stock of a company is growing earnings and/or revenue faster than the industry as a whole or the overall market. Growth investors generally expect high rates of growth to persist, and the stock, in turn, to deliver returns exceeding the market's. A growth mutual fund is generally one that emphasizes stocks believed to offer above-average growth prospects, with little to no emphasis on the stock's current price. M & A (MERGERS & ACQUISITIONS) - Merger: the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Acquisition: can also be called a takeover, and is defined as acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. MARKET CAPITALIZATION (MARKET CAP OR CAP) - The market price of an entire company on any given day, calculated by multiplying the number of shares outstanding by the price per share. MOMENTUM INVESTING - Approach to investing based on the belief that stock price trends are likely to continue. Momentum investors tend to buy stocks that have been outperforming the market and to sell those stocks when their relative performance deteriorates. Momentum investors do not consider a company's underlying value or fundamentals in their investment decisions. MULTIPLE - A ratio used to measure a stock's valuation, usually greater than 1. Sometimes used to mean price/earnings ratio. P/B OR PRICE-TO-BOOK RATIO - A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. P/E OR PRICE-TO-EARNINGS RATIO - The most common measure of a stock's valuation. It is equal to a stock's capitalization divided by its after-tax earnings over a 12-month period. The value is the same whether the calculation is done for the whole company or on a per-share basis. Equivalently, the cost an investor in a given stock must pay per dollar of current annual earnings. Also called earnings multiple. SHARE REPURCHASE - Program through which a corporation buys back its own shares in the open market, typically an indication that the corporation's management believes the stock price is undervalued. VALUE INVESTING - Investors who utilize valuation measures such as business value (including growth rate), price/earnings ratio, price/book ratio, and yield to gauge the attractiveness of a company. Managers who employ a value investment style believe that the true, underlying value of a company is not reflected in its current share price, and, over time, the price has potential to increase as the market recognizes the overall value of the business. Value stocks sell at relatively low prices in relation to their underlying business value, earnings, or book value. Stocks become undervalued for a variety of reasons, including an overall market decline, or when a specific industry falls into disfavor and investors view all companies in that industry in the same light. Consequently, an individual company's stock price may fall, even though it may be only temporarily affected by the industry's problems and its underlying value has remained unchanged. "x TIMES EARNINGS" ("12 TIMES EARNINGS") - Another way to express a stock's price-to-earnings (P/E) ratio. A stock with a P/E ratio of 12 sells at 12 times earnings. 88 THE OAKMARK FAMILY OF FUNDS OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT CDC IXIS Asset Management Services, Inc. Boston, Massachusetts LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT AUDITORS Deloitte & Touche LLP Chicago, Illinois CONTACT US Please call 1-800-OAKMARK (1-800-625-6275) or 617-449-6274 WEBSITE www.oakmark.com TO OBTAIN A PROSPECTUS, AN APPLICATION OR PERIODIC REPORTS, ACCESS OUR WEB SITE AT www.oakmark.com, OR CALL 1-800-OAKMARK (1-800-625-6275) OR (617) 449-6274. This report is submitted for the general information of the shareholders of the Funds. The report is not authorized for distribution to prospective investors in the Funds unless it is accompanied or preceded by a currently effective prospectus of the Funds. No sales charge to the shareholder or to the new investor is made in offering the shares of the Funds, however, a shareholder may incur a 2% redemption fee on an exchange or redemption of shares held 90 days or less from any Fund except The Oakmark Fund or The Oakmark Equity and Income Fund. P.O. BOX 219558 KANSAS CITY, MO 64121-9558 [OAKMARK FAMILY OF FUNDS LOGO] 1-800-OAKMARK www.oakmark.com The Oakmark Funds are distributed by Harris Associates Securities L.P., member NASD. Date of first use: November 2003. EX-99.CERT 3 sarbanescode.htm

HARRIS ASSOCIATES INVESTMENT TRUST

Code of Ethics for Principal Executive Officer
and Senior Financial Officers

I. Covered Officers/Purpose of the Code

This code of ethics (the Code) for Harris Associates Investment Trust (the Trust) applies to the Trust's Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer (the Covered Officers) for the purpose of promoting:

-  honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between their personal relationships and their professional relationships;

-  full, fair, accurate, timely and understandable disclosure in reports and documents that the Trust files with, or submits to, the Securities and Exchange Commission ("SEC"), and in other public communications made by the Trust;

-  compliance with applicable laws and governmental rules and regulations;

-  prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and

-  accountability for adherence to the Code.

Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.

II. Administration of the Code

The Code shall be administered by the chief legal officer of the Trust (the "Chief Legal Officer"), or in the absence of the Chief Legal Officer, his or her designee, but only on a temporary basis.

The Trust has designated its Chief Legal Officer for purposes of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The Chief Legal Officer is responsible for applying this Code to specific situations in which questions are presented under it (in consultation with Trust counsel, where appropriate) and has the authority to interpret this Code in any particular situation. However, any waiver sought by a Covered Officer must be approved by the Audit Committee of the Trust (the "Audit Committee").

III. Actual and Apparent Conflicts of Interest

Overview. A conflict of interest occurs when a Covered Officer's private interest interferes with the interests of, or his/her service to, the Trust. For example, a conflict of interest would arise if a Covered Officer, or a family member, receives improper personal benefits as a result of the Covered Officer's position with the Trust.

Certain conflicts of interest arise out of the relationships between Covered Officers and the Trust and already are subject to conflict of interest provisions in the Investment Company Act of 1940 (the "Company Act") and the Investment Advisers Act of 1940 (the "Advisers Act"). For example, Covered Officers generally may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Trust because of their status as affiliated persons of the Trust. The Trust's and its investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code.

Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Trust and its investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Trust or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Trust. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Trust. Thus, if performed in conformity with the provisions of the Company Act and the Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Trust's Board of Trustees (the "Board") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes.

Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions of the Company Act and the Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Trust.

Each Covered Officer must:

-  not use personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Trust whereby the Covered Officer or a family member would benefit personally to the detriment of the Trust;

-  not cause the Trust to take action, or fail to take action, for the individual personal benefit of the Covered Officer or a family member rather than the benefit of the Trust; and

-  not use material non-public knowledge of portfolio transactions made or contemplated for the Trust to trade personally or cause others to trade personally in contemplation of the market effect of such transactions.[1]

There are some conflict of interest situations that must be approved by the Chief Legal Officer. Those situations include, but are not limited to,:

-  service as director on the board of any public or private company;

-  receipt of any gifts from any person with whom the Trust has current or prospective business dealings having an aggregate value in excess of $250 from a third party during any 12-month period;

-  receipt of any entertainment from any company with which the Trust has current or prospective business dealings, unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety;

-  any ownership interest in, or any consulting or employment relationship with, any service provider to the Trust, other than its investment adviser, principal underwriter, administrator or any affiliated person thereof;

-  a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Trust for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership.

IV. Disclosure and Compliance

Each Covered Officer should:

-  be familiar with the disclosure requirements generally applicable to the Trust;

-  not knowingly misrepresent, or cause others to misrepresent, facts about the Trust to others, whether within or outside the Trust, including to the Board and auditors, and to governmental regulators and self-regulatory organizations;

-  to the extent appropriate within his/her area of responsibility, consult with other officers and employees of the Trust and the adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Trust files with, or submits to, the SEC and in other public communications made by the Trust; and

-  promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.

V. Reporting and Accountability

Each Covered Officer must:

-  upon adoption of the Code (or after becoming a Covered Officer), affirm in writing to the Board that he/she has received, read and understands the Code;

-  annually thereafter affirm to the Board compliance with the requirements of the Code;

-  not retaliate against any other Covered Officer or any employee of the Trust or their affiliated persons for reports of potential violations that are made in good faith;

-  notify the Chief Legal Officer promptly if he/she knows of any violation of this Code; and

-  respond to the trustee and officer questionnaires circulated periodically in connection with the preparation of disclosure documents for the Trust.

The Chief Legal Officer shall maintain records of all activities related to this Code.

The Trust will follow these procedures in investigating and enforcing this Code:

-  The Chief Legal Officer will take all appropriate action to investigate any potential violations reported to him/her;

-  If, after such investigation, the Chief Legal Officer believes that no violation has occurred, no further action is required;

-  Any matter that the Chief Legal Officer believes is a violation will be reported to the Audit Committee;

-  If the Audit Committee concurs that a violation has occurred, it will inform and make a recommendation to the Board, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to the Chief Executive Officer of the Trust; or a recommendation to dismiss the Covered Officer;

-  The Audit Committee will be responsible for granting waivers in its sole discretion; and

-  Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.

VI. Other Policies and Procedures

This Code shall be the sole code of ethics adopted by the Trust for the purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other polices or procedures of the Trust, the Trust's advisers, principal underwriter or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The code(s) of ethics of the Trust and its investment adviser and principal underwriter under Rule 17j‑1 under the Company Act and the advisers' more detailed policies and procedures are separate requirements applying to the Covered Officers and others and are not part of this Code.

VII. Amendments

Any amendment to this Code must be approved or ratified by the Board, including a majority of independent Board members.

VIII. Confidentiality

All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Board, the Covered Officers, the Chief Legal Officer, outside audit firms and legal counsel to the Trust and the adviser, and senior management of the adviser.

IX. Internal Use

The Code is intended solely for the internal use by the Trust and does not constitute an admission, by or on behalf of the Trust, as to any fact, circumstance, or legal conclusion.

 

Adopted July 16, 2003

 


[1] For purposes of this Code, personal trading activity of the Covered Officers shall be monitored in accordance with the advisers' code. Each Covered Officer shall be considered an "Access Person" under such code.

 EX-99.906 CERT 4 haitformncsr.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

 CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-06279

Harris Associates Investment Trust
(Exact name of registrant as specified in charter)

Two North La Salle Street, Suite 500
Chicago, Illinois 60602-3790
(Address of principal executive offices) (Zip Code)

 

Robert M. Levy                                       Cameron S. Avery
Harris Associates L.P.                              Bell, Boyd & Lloyd LLC
Two North La Salle Street, #500             Three First National Plaza, #3300
Chicago, Illinois 60602                             Chicago, Illinois 60602

(Name and address of agents for service)

Registrant's telephone number, including area code: (312) 621-0600

Date of fiscal year end: 09/30/03

Date of reporting period: 09/30/03

 

Item 1. Reports to Shareholders.

 [Copy of annual report will be filed here]

 Item 2. Code of Ethics.

 (a) Registrant has adopted a code of ethics that applies to its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer the Code.

 (c) During the period covered by the report, no amendments were made to the provisions of the Code.

 (d) During the period covered by the report, Registrant did not grant any waivers, including implicit waivers, from the provisions of the Code.

 (e) Not applicable.

 (f)(1) A copy of the Code is filed as Exhibit (a)(1) to this Form N-CSR. Copies of the Code will also be made available free of charge upon request, by writing or calling The Oakmark Funds, P.O. Box 8510, Boston, MA 02266-8510, 1-800-OAKMARK, (1-800-625-6275).

Item 3. Audit Committee Financial Expert.

Registrant's board of trustees has determined that each of the following five members of the Registrant's audit committee qualifies as an audit committee financial expert, as such term is defined in Instruction 2(b) to Item 3 of Form N-CSR: Thomas H. Hayden, Christine M. Maki, Allan J. Reich, Marv R. Rotter and Gary N. Wilner, M.D. Each of those members of Registrant's audit committee is independent as such term is defined in paragraph (a)(2) of Item 3 of Form N-CSR.

Item 4. Principal Accountant Fees and Services.

Not applicable.

Item 5. Audit Committee of Listed Registrants.

Not applicable.

Item 6. [Reserved]

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

Item 8. [Reserved]

Item 9. Controls and Procedures.

 a) Based on an evaluation of the disclosure controls and procedures (as defined in Rule 30a-3(b) under the Investment Company Act of 1940, the "Disclosure Controls") as of a date within 90 days prior to the filing date (the "Filing Date") of this Form N-CSR (the "Report"), the Disclosure Controls are effectively designed to ensure that information required to be disclosed by the Registrant in the Report is recorded, processed, summarized and reported by the Filing Date, including ensuring that information required to be disclosed in the Report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) There were no changes in the Registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant's second fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.

Item 10. Exhibits.

 (a)

 

Code of Ethics for Principal Executive Officer and Senior Financial Officers (as referenced in Item 2 above), attached hereto as Exhibit (a).

 

 

(b)

(1)

Certifications of Robert M. Levy, Principal Executive Officer, and Kristi L. Rowsell, Principal Financial Officer, pursuant to Rule 30a-2 under the Investment Company Act of 1940 (17 CFR 270.30a-2), attached hereto as Exhibits (b)(1)(i) and (b)(1)(ii)

 

 

 

(2)

Certification of Robert M. Levy, Principal Executive Officer and Kristi L. Rowsell, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto as Exhibit (b)(2)

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 Harris Associates Investment Trust

By:

/s/ Robert M. Levy

 

 

Robert M. Levy

 

 

Principal Executive Officer

 

Date:

November , 2003

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 By:

/s/ Robert M. Levy

 

 

Robert M. Levy

 

 

Principal Executive Officer

 

Date:

November , 2003

 

 

 

 

 

 

 

By:

/s/ Kristi L. Rowsell

 

 

Kristi L. Rowsell

 

 

Principal Financial Officer

 

Date:

November , 2003

 

 

Exh. (b)(1)(i)

 

I, Robert M. Levy, certify that:

1. I have reviewed this report on Form N-CSR of Harris Associates Investment Trust (the Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the Registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, which has no consolidated subsidiaries, is made known to us by others within the Registrant, particularly during the period in which this report is being prepared;

b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent second fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed to the Registrant's auditors and the audit committee of the Registrant's board of directors:

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls.

 Date:                                 , 2003

/s/ Robert M. Levy

 

Robert M. Levy

 

Principal Executive Officer

 

 

Exh. (b)(1)(ii)

 

I, Kristi L. Rowsell, certify that:

1. I have reviewed this report on Form N-CSR of Harris Associates Investment Trust (the Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in this report;

4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the Registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, which has no consolidated subsidiaries, is made known to us by others within the Registrant, particularly during the period in which this report is being prepared;

b. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

c. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent second fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5. The Registrant's other certifying officer and I have disclosed to the Registrant's auditors and the audit committee of the Registrant's board of directors:

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls.

Date: November   , 2003

/s/ Kristi L. Rowsell

 

Kristi L. Rowsell

 

Principal Financial Officer

 


Exh. (b)(2)

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code)

 

In connection with the attached Report of Harris Associates Investment Trust (the Registrant) on Form N-CSR to be filed with the Securities and Exchange Commission (the "Report"), each of the undersigned officers of the Registrant does hereby certify that, to the best of such officer's knowledge:

1. The Report fully complies with the requirements of 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant as of, and for, the periods presented in the Report.

Dated: November    , 2003

/s/ Robert M. Levy

 

Robert M. Levy

 

Principal Executive Officer

 

Dated: November    , 2003

/s/ Kristi L. Rowsell

 

Kristi L. Rowsell

 

Principal Financial Officer

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

 

 -----END PRIVACY-ENHANCED MESSAGE-----