N-30B-2 1 a2055259zn-30b_2.txt N-30B-2 [PHOTO] 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 THIRD QUARTER REPORT JUNE 30, 2001 [OAKMARK LOGO] Advised by Harris Associates L.P. THE OAKMARK FAMILY OF FUNDS 2001 THIRD QUARTER REPORT LETTER FROM THE PRESIDENT 1 SUMMARY INFORMATION 2 THE OAKMARK FUND Letter from the Portfolio Managers 4 Schedule of Investments 6 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 9 Schedule of Investments 12 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Managers 14 Schedule of Investments 17 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 20 Schedule of Investments 23 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 27 Global Diversification Chart 30 Schedule of Investments 31 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 35 International Diversification Chart 38 Schedule of Investments 39 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 44 International Diversification Chart 47 Schedule of Investments 48 TRUSTEES AND OFFICERS 57 FOR MORE INFORMATION Access our web site at www.oakmark.com to obtain a prospectus, an application or periodic reports, or call 1-800-OAKMARK (1-800-625-6275) or (617) 449-6274. WEB SITE AND 24-HOUR NET ASSET VALUE HOTLINE Access our web site at www.oakmark.com to obtain the current net asset value of a fund, or call 1-800-GROWOAK (1-800-476-9625). TO COMMENT ON SHAREHOLDER SERVICES E-mail us at ServiceComments@oakmark.com. LETTER FROM THE PRESIDENT DEAR FELLOW SHAREHOLDERS, Value investors continued to benefit in the first half of the year 2001. Traditional companies led the way as technology and telecom stocks suffered from earnings problems. Our managers have strong confidence in their current portfolios, and we believe the market has only partially corrected the imbalances that were caused by the tech bubble. FINDING VALUE IN TECH? During our conversations with reporters and clients, we are often asked if we are buying tech stocks. Our activity in this area is still muted, but we do have some exposure. Our holdings share several characteristics: market leadership, strong balance sheets, experienced management, and cyclical (not secular) problems. We believe these companies offer attractive reward opportunities. Even after the sharp decline in tech stock prices over the past year, the market continues to place a significant valuation discount on more traditional companies compared to tech stocks. Thus, our portfolios continue to be significantly underweighted in the tech sector. And while other value managers may be increasing cash positions because they say they are finding fewer opportunities, our investment team continues to uncover many growing companies at attractive valuations. THE VALUE OF INDEPENDENT RESEARCH Recently, two issues have surfaced which underscore the importance of our unique research effort. First, sell-side Wall Street analysts have come under fire because of concerns about conflicts of interest with investment banking clients. Second, the SEC recently introduced Regulation FD, which ensures that all investors receive company information in a timely and fair basis. We support timely and accurate disclosure to all investors--these are vital attributes of our capital markets. Moreover, we typically do not rely on Wall Street analysts nor the company "guidance" that flourished before Reg FD, so we are not affected by these issues. Our experienced, independent research effort represents an important strength of our investment process, and this acts as an important competitive advantage in this environment. DISPASSIONATE EVALUATION OF HOLDINGS Our managers have made investment mistakes--all managers do. We believe one of the key ingredients of long-term investment success is the ability to admit a mistake, take the loss and move on to a more attractively priced, more promising idea. But many investors find it psychologically difficult to admit a mistake: when a stock or fund is down, many will wait for it to rise rather than consider better investment opportunities. This trait can often lead to the long-term erosion of capital. We try to overcome the tendency to hold on too long by constantly asking ourselves the following question: if we didn't own the stock, would we buy it today? [PHOTO] OAKMARK FUND'S 10-YEAR ANNIVERSARY We are pleased to celebrate a significant event: the 10-year anniversary for The Oakmark Fund. Its start on August 5, 1991, marked the beginning of our family of funds--now seven funds in all--each designed to address a unique objective yet managed with a consistent investment process. The Oakmark Fund, like many value investments, has successfully weathered difficult periods when value was out of favor. As value investors, we recognize that patience is a virtue and believe that, over the long term, patient investors are rewarded. We generally hold the companies in which we invest for three to five years, a time horizon that we'd encourage our shareholders to consider as well. TOP PERFORMERS While we are pleased with recent returns, long-term performance is also important to us and our shareholders. Perhaps the volatility we've all lived through over the past several years has reaffirmed a lesson: the market is unpredictable, and thus, one must invest with full consideration given to the RISK and reward potential of investment positions. Thank you for your support and continued investment. /s/ Robert M. Levy ROBERT M. LEVY PRESIDENT AND CEO July 5, 2001 1 THE OAKMARK FAMILY OF FUNDS Summary Information
THE OAKMARK THE OAKMARK PERFORMANCE FOR PERIOD THE OAKMARK SELECT SMALL CAP ENDED JUNE 30, 2001(1) FUND FUND FUND 3 MONTHS* 9.25% 9.26% 19.10% 6 MONTHS* 17.31% 21.02% 25.27% 1 YEAR 40.42% 47.45% 33.23% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 4.41% 20.55% 1.21% 5 YEAR 11.84% N/A 11.21% SINCE INCEPTION 20.96% 31.49% 14.19% VALUE OF $10,000 $65,927 $35,865 $21,218 FROM INCEPTION DATE (8/5/91) (11/1/96) (11/1/95) TOP FIVE HOLDINGS Washington Mutual, Inc. 3.8% Washington Mutual, Inc. 15.1% ITT Educational Services, AS OF JUNE 30, 2001(2) Inc. 5.8% Fortune Brands Inc. 3.2% Toys `R' Us, Inc. 6.6% Catellus Development Corporation 5.3% COMPANY AND % OF TOTAL J.C. Penney Company, Inc. 2.8% H&R Block, Inc. 6.2% Checkpoint Systems, Inc. 4.4% NET ASSETS H&R Block, Inc. 2.8% AT&T Corporation 4.7% The PMI Group, Inc. 4.1% The Kroger Company 2.8% Mattel, Inc. 4.2% MSC Software Corporation 3.9% TOP FIVE INDUSTRIES Retail 11.9% Retail 17.7% Bank & Thrifts 9.4% AS OF JUNE 30, 2001 Other Consumer Goods and Services 9.6% Bank & Thrifts 15.1% Real Estate 7.2% INDUSTRIES AND % OF TOTAL Computer Services 5.6% Other Consumer Goods and Food & Beverage 6.6% NET ASSETS Services 10.4% Bank & Thrifts 5.3% Information Services 9.2% Educational Services 5.8% Telecommunications 5.2% Telecommunications 7.7% Computer Software 4.8%
* Not annualized 2
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK PERFORMANCE FOR PERIOD EQUITY AND GLOBAL INTERNATIONAL INTERNATIONAL ENDED JUNE 30, 2001(1) INCOME FUND FUND FUND SMALL CAP FUND 3 MONTHS* 8.06% 15.76% 9.99% 3.58% 6 MONTHS* 12.53% 14.94% 0.39% 6.92% 1 YEAR 29.43% 28.02% 5.68% 1.60% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 14.40% N/A 13.26% 16.82% 5 YEAR 17.22% N/A 9.87% 6.40% SINCE INCEPTION 17.08% 15.98%(23) 13.13% 8.38% VALUE OF $10,000 $24,445 $13,289 $29,437 $15,777 FROM INCEPTION DATE (11/1/95) (8/4/99) (9/30/92) (11/1/95) TOP FIVE HOLDINGS Burlington Resources Novell, Inc. 6.3% Enodis plc 4.8% Jarvis Hotels plc 4.3% AS OF JUNE 30, 2001(2) Inc. 3.0% Somerfield plc 4.3% Somerfield plc 4.6% Ducati Motor St. Mary Land & Valassis Communications, Metso Oyj 4.3% Holding S.p.A. 3.4% COMPANY AND % OF TOTAL Exploration Company 2.9% Inc. 4.2% Diageo plc 3.9% GFI Industries SA 3.2% NET ASSETS Chiron Corporation 2.9% Learning Tree Hunter Douglas Fletcher Building Ltd.3.2% Office Depot, Inc. 2.8% International, Inc. 4.1% N.V. 3.9% Hite Brewery 2.8% C.R. Bard, Inc. 2.7% Equifax Inc. 3.9% Co., Ltd. TOP FIVE INDUSTRIES U.S. Government Information Services 11.4% Bank & Thrifts 11.2% Retail 11.1% AS OF JUNE 30, 2001 Notes 25.1% Computer Software 9.9% Other Industrial Food & Beverage 9.0% Oil & Natural Gas 10.0% Diversified Goods & Services 10.9% Diversified INDUSTRIES AND % Medical Products 6.7% Conglomerates 7.8% Food & Beverage 10.6% Conglomerates 8.0% OF TOTAL NET ASSETS Information Services 6.5% Retail 7.5% Publishing 7.3% Building Materials Retail 5.4% Food & Beverage 7.0% Chemicals 4.8% and Construction 5.0% Publishing 5.0%
3 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO][PHOTO] The Oakmark Fund gained 9% for the quarter ended June 30, increasing the nine-month fiscal-year-to-date return to 32%. Those returns compare very favorably to the S&P 500's less than 6% increase last quarter and its nine-month loss of 14%. Our performance last quarter was aided by large increases in: JC Penney, +65%, where investors gained confidence that new CEO Allen Questrom will succeed in turning around this large retailer; Xerox, +60%, where both operating results and asset sales reached targets which quieted concerns of a liquidity squeeze; and Cendant, +34%, where CEO Henry Silverman demonstrated an ability to make synergistic acquisitions that increase per-share earnings. As we enter a new quarter, our portfolio continues to be significantly underweighted in technology stocks. We said in our last quarterly report that we felt most technology businesses were worth less than their stock prices. Despite their declining earnings outlook, technology companies actually out-performed non-technology companies during the last quarter. As a result, we believe their overvaluation has increased and we continue to believe that our best opportunity is to buy growing companies outside of the tech sector. We primarily compare our portfolio to the S&P 500 Index which is currently priced at just over 20 times next year's expected cash earnings. The stocks we have been adding to the portfolio are generally growing faster than the S&P 500, yet are priced at a lower multiple of expected cash earnings. Here are brief descriptions of our new holdings: GUIDANT (GDT--36) Guidant is a leading manufacturer of medical devices primarily for cardiovascular diseases. Guidant stock peaked at $72 last year and has declined largely due to new product THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (6/30/01) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(3) [CHART]
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
6/30/01 NAV(4) $35.18 AVERAGE ANNUAL TOTAL RETURN(1) THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 8/5/91 -------------------------------------------------------------------------------- THE OAKMARK FUND 9.25% 20.96% Standard & Poor's 500 Stock Index w/inc 5.85% 14.72% Dow Jones Industrial Average w/inc(5) 6.71% 15.97% Lipper Large Cap Value Fund Index(6) 4.45% 13.85%
*Not annualized. 4 introductions from competitors. The medical device industry has historically experienced strong secular growth combined with product cycles -- companies introducing new products gain market share. Guidant has numerous new products in testing and will likely be the beneficiary of market share gains as these products are introduced in the coming years. Selling at less than 17 times estimated 2002 cash earnings, Guidant is not only selling at a large discount to its peers, but also at a discount to the S&P 500. NOTE: On July 10, an FDA advisory panel voted against approving Guidant's new device for treating congestive heart failure. The stock has declined further to $28. That decline is triple the amount we believe Guidant's business value has declined. As you would expect, we have significantly increased our position. HUGHES ELECTRONICS (GMH--21) Through its DirecTV subsidiary, Hughes Electronics is the largest provider of satellite TV service. Just last month, DirecTV announced they had reached the 10 million subscriber milestone. Hughes stock peaked last March at $47 and has declined along with the technology sector as the excitement over satellite-delivered Internet access has declined. The per-subscriber economics of satellite TV are very similar to cable TV, leading us to conclude that the per-subscriber values ought to be similar. Hughes stock is now selling at about half the per-subscriber price of the large cable stocks. KRAFT FOODS (KFT--31) In our opinion, Kraft Foods is, quite simply, the best packaged foods company. The strength of its brands, its scale advantages, and its highly talented management team are unmatched by the competition. For that reason, when Kraft was brought public at a valuation similar to other food stocks, we saw an investment opportunity. Even better, the stock declined from its initial offering price, allowing us the opportunity to purchase the majority of our shares below $30. We expect Kraft to continue growing earnings-per-share at a double-digit rate and believe the stock is undervalued selling at 15 times our estimate of next year's cash earnings. WASTE MANAGEMENT (WMI--31) Waste Management is the largest waste disposal company in the United States. Its stock price peaked in 1999 at $60. We started getting interested in this stock in the summer of 1999, after the price fell to $30 in response to an earnings shortfall. Although the stock met our price criteria, we could not get comfortable with either their management or computer systems. With its new CEO, Maurice Myers, and much improved management information systems, Waste Management now meets our qualitative criteria. Despite the stock price increase over the last year, the stock is just back to the level it declined to in the summer of 1999. To us, selling at 16 times next year's cash earnings estimates, Waste Management looks inexpensive. US BANCORP (USB--23) "New" US Bancorp, one of the largest banks in the US, was formed in February, when "old" US Bancorp merged with Firstar. USB stock has declined from a high of $35 two years ago, despite showing continued growth in earnings. We believe that USB's large exposure to highly stable fee-based revenue (like merchant processing, investment management fees, and trust services) should result in USB being priced at a premium to most banks. Currently, however, USB is priced at a discount, selling at just 10 times next year's cash earnings estimate. Values like these make us confident that our portfolio remains very attractive. Thank you for your continuing support. /s/ William Nygren WILLIAM C. NYGREN, CFA Portfolio Manager bnygren@oakmark.com /s/ Kevin Grant KEVIN G. GRANT, CFA Portfolio Manager kgrant@oakmark.com July 6, 2001 [SIDENOTE] HIGHLIGHTS - Performance last quarter was aided by large increases in JC Penney +65%, Xerox +60%, and Cendant +34%. - Despite their declining earnings outlook technology companies out-performed non-technology companies over the last quarter. However, we believe their overvaluation has increased and continue to find our best opportunities outside of the tech sector. - Several names were added to the portfolio including Guidant, Hughes Electronics, Kraft, Waste Management, and US Bancorp. 5 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2001 (UNAUDITED)
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.1% FOOD & BEVERAGE--4.9% H.J. Heinz Company 1,710,000 $ 69,921,900 Sara Lee Corporation 2,857,400 54,119,156 Kraft Foods Inc. (a) 865,700 26,836,700 -------------- 150,877,756 RETAIL--11.9% J.C. Penney Company, Inc. 3,305,700 $ 87,138,252 The Kroger Co. (a) 3,450,000 86,250,000 Toys `R' Us, Inc. (a) 3,000,000 74,250,000 Tricon Global Restaurants, Inc. (a) 1,450,000 63,655,000 CVS Corporation 1,430,000 55,198,000 -------------- 366,491,252 HOUSEHOLD PRODUCTS--4.9% Newell Rubbermaid Inc. 2,050,000 $ 51,455,000 The Clorox Company 1,440,200 48,750,770 The Dial Corporation 2,052,900 29,253,825 Energizer Holdings, Inc. (a) 959,400 22,018,230 -------------- 151,477,825 HOUSEHOLD APPLIANCES--1.1% Maytag Corporation 1,126,500 $ 32,961,390 OFFICE EQUIPMENT--1.9% Xerox Corporation 6,175,000 $ 59,094,750 HARDWARE--3.4% The Black & Decker Corporation 1,522,200 $ 60,066,012 The Stanley Works 1,072,600 44,920,488 -------------- 104,986,500 OTHER CONSUMER GOODS & SERVICES--9.6% Fortune Brands, Inc. 2,573,000 $ 98,700,280 H&R Block, Inc. 1,340,300 86,516,365 Mattel, Inc. 3,227,800 61,069,976 Cendant Corporation (a) 2,595,100 50,604,450 -------------- 296,891,071 BANK & THRIFTS--5.3% Washington Mutual, Inc. 3,150,000 $ 118,282,500 U.S. Bancorp 2,000,000 45,580,000 -------------- 163,862,500 INSURANCE--1.6% MGIC Investment Corporation 700,000 $ 50,848,000 HOTELS & MOTELS--1.2% Starwood Hotels & Resorts Worldwide, Inc. 990,000 $ 36,907,200 INFORMATION SERVICES--4.1% Equifax Inc. 1,720,500 $ 63,107,940 Moody's Corporation 1,489,400 $ 49,894,900 The Dun & Bradstreet Corporation (a) 517,800 14,601,960 -------------- 127,604,800
6
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.1% (CONT.) COMPUTER SERVICES--5.6% Electronic Data Systems Corporation 1,086,500 $ 67,906,250 First Data Corporation 1,040,000 66,820,000 SunGard Data Systems Inc. (a) 1,281,600 38,460,816 -------------- 173,187,066 SEMICONDUCTORS--0.7% Teradyne, Inc. (a) 655,000 $ 21,680,500 TELECOMMUNICATIONS--5.2% AT&T Corp. 3,084,200 $ 67,852,400 Sprint Corporation 2,756,000 58,868,160 Citizens Communications Company (a) 2,708,900 32,588,067 -------------- 159,308,627 TELECOMMUNICATIONS EQUIPMENT--2.8% General Motors Corporation, Class H (Hughes Electronics Corporation) 2,200,000 $ 44,550,000 Motorola, Inc. 2,575,000 42,642,000 -------------- 87,192,000 TV PROGRAMMING--1.9% AT&T Corp. - Liberty Media Group, Class A (a) 3,450,000 $ 60,340,500 PUBLISHING--3.1% Knight-Ridder, Inc. 1,066,000 $ 63,213,800 Gannett Co., Inc. 484,500 31,928,550 -------------- 95,142,350 PHARMACEUTICALS--1.4% Chiron Corporation (a) 824,000 $ 42,913,920 MEDICAL PRODUCTS--2.4% Guidant Corporation (a) 1,380,500 $ 49,698,000 Apogent Technologies Inc. (a) 1,011,700 24,887,820 -------------- 74,585,820 AUTOMOBILES--2.0% Ford Motor Company 2,500,000 $ 61,375,000 AEROSPACE & DEFENSE--1.2% The B.F. Goodrich Company 970,000 $ 36,840,600 WASTE DISPOSAL--0.9% Waste Management, Inc. 930,000 $ 28,662,600 INSTRUMENTS--1.4% Rockwell International Corporation 1,101,800 $ 42,000,616 MACHINERY & INDUSTRIAL PROCESSING--2.6% Cooper Industries, Inc. 1,029,400 $ 40,753,946 Eaton Corporation 552,900 38,758,290 -------------- 79,512,236
7
SHARES HELD/ PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.1% (CONT.) BUILDING MATERIALS & CONSTRUCTION--1.8% Masco Corporation 2,233,000 $ 55,735,680 UTILITIES--2.0% TXU Corp. 1,315,000 $ 63,369,850 OIL & NATURAL GAS--3.6% Burlington Resources Inc. 1,500,000 $ 59,925,000 Conoco Inc., Class A 1,800,000 50,760,000 -------------- 110,685,000 DIVERSIFIED CONGLOMERATES--1.8% Textron, Inc. 1,000,000 $ 55,040,000 RECREATION & ENTERTAINMENT--3.8% Brunswick Corporation 2,576,700 $ 61,918,101 Carnival Corporation 1,000,000 30,700,000 Park Place Entertainment Corporation (a) 2,100,000 25,410,000 -------------- 118,028,101 TOTAL COMMON STOCKS (COST: $2,310,620,236) 2,907,603,510 SHORT TERM INVESTMENTS--6.0% U.S. GOVERNMENT BILLS--1.3% United States Treasury Bills, 3.69% - 4.77% due 7/26/2001 - 11/15/2001 $40,000,000 $ 39,667,030 TOTAL U.S. GOVERNMENT BILLS (COST: $39,662,033) 39,667,030 COMMERCIAL PAPER--3.2% Citicorp, 3.77% due 7/5/2001 $20,000,000 $ 20,000,000 American Express Credit Corporation, 3.83% due 7/9/2001 10,000,000 10,000,000 Ford Motor Credit Corp., 3.78% due 7/3/2001 20,000,000 20,000,000 General Electric Capital Corporation, 4.08% due 7/2/2001 50,000,000 50,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $100,000,000) 100,000,000 REPURCHASE AGREEMENTS--1.5% State Street Repurchase Agreement , 3.85% due 7/2/2001 $46,685,000 $ 46,685,000 TOTAL REPURCHASE AGREEMENTS (COST: $46,685,000) 46,685,000 TOTAL SHORT TERM INVESTMENTS (COST: $186,347,033) 186,352,030 Total Investments (Cost $2,496,967,269)--100.1% $3,093,955,540 Other Liabilities In Excess Of Other Assets--(0.1)% (3,659,522) -------------- TOTAL NET ASSETS--100% $3,090,296,018 ==============
(a) Non-income producing security. 8 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS The Oakmark Select Fund gained 9% last quarter, increasing the gain for the nine-month fiscal-year-to-date to 31%. The return for the quarter exceeded the 6% return on the S&P 500 but trailed the 13% return of the S&P Midcap 400 Index. Technology stocks led the Midcap Index, and we have very little exposure to that sector. We continue to believe that most technology stocks are overvalued, so our portfolio is invested elsewhere, consistent with our goal of owning undervalued stocks. Our best performing stock for the quarter was H&R Block, up nearly 30%. In an environment where many companies reported disappointing earnings, H&R Block showed strong earnings gains. Management's increased focus on the tax preparation business and intelligent reinvestment of excess cashflow bolstered confidence that annual earnings-per-share growth can be 15% for many years to come. Even with the stock price gain, H&R Block still sells at just two-thirds of the S&P 500 multiple of expected year ahead cash earnings. That discount seems unwarranted for a low-risk company that is growing faster than the market. Some of our value-investing peers have been holding more cash in their portfolios claiming they can no longer find attractively priced stocks. Our largest holdings -- Washington Mutual, Toys `R' Us, H&R Block -- are industry leaders that will likely achieve above average growth, while selling at 10-15 times expected cash earnings. Compare that to the S&P 500, which sells at over 20 times. We believe our holdings represent outstanding values relative to the market, as well as relative to either cash or bond alternatives. It continues to be a great time to be a stock picker! [PHOTO] [PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (6/30/01) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(3) [CHART]
THE OAKMARK SELECT FUND S&P 500 10/31/96 $10,000 $10,000 12/31/96 $11,420 $10,543 03/31/97 $12,140 $10,826 06/30/97 $14,180 $12,715 09/30/97 $16,340 $13,668 12/31/97 $17,704 $14,060 03/31/98 $20,078 $16,021 06/30/98 $20,462 $16,551 09/30/98 $16,936 $14,904 12/31/98 $20,575 $18,078 03/31/99 $22,766 $18,979 06/30/99 $24,482 $20,317 09/30/99 $22,028 $19,048 12/31/99 $23,557 $21,882 03/31/00 $25,667 $22,384 06/30/00 $24,324 $21,790 09/30/00 $27,432 $21,578 12/31/00 $29,637 $19,890 03/31/01 $32,826 $17,532 06/30/01 $35,865 $18,558
6/30/01 NAV(4) $26.20
AVERAGE ANNUAL TOTAL RETURN(1) THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 11/1/96 -------------------------------------------------------------------------------- THE OAKMARK SELECT FUND 9.26% 31.49% Standard & Poor's 500 Stock Index w/inc 5.85% 14.17% Standard & Poor's MidCap 400 Index w/inc(7) 13.16% 19.18% Lipper Mid Cap Value Fund Index(8) 10.43% 11.74%
*Not annualized. 9 WASHINGTON MUTUAL As portfolio managers, we are frequently given credit that really belongs to our analysts. And with a large holding that has performed as well as Washington Mutual, we're reminded of a comment from former New York Mets manager Casey Stengel, "Managing is getting paid for homeruns someone else hits." In the case of Washington Mutual, that "someone else" is our analyst and Oakmark Small Cap Fund manager, Jim Benson. In 1998, Jim identified this under-appreciated savings and loan company that was growing more rapidly than almost any other large financial service provider, was run by a CEO who had most of his family's wealth invested in the stock, and yet sold at a P/E (24) near the low end of both the industry and the overall stock market. After a difficult stock performance year in 1999, Washington Mutual has truly emerged as a homerun. Thanks, Jim! In fact, after the stock more than doubled last year, our most frequent shareholder e-mail has gone something like this: "Congratulations on being so right on Washington Mutual. Since it's up so much, why don't you claim victory and reduce the size of our holding?" As a reminder, there are three qualities we look for in any stock we consider purchasing: 1. A stock price that is below 60% of the price we estimate an acquirer who pays in cash would pay to own the entire business today. 2. An expected annual growth rate in per-share value that, when added to the dividend yield, exceeds 10% per year. 3. A successful management with economic incentive to behave like owners. When a stock meets all three criteria, we purchase it and wait patiently for the market price to increase to 90% of our value estimate. Then, we sell it. In The Oakmark Select Fund, we have often been willing to take very large position sizes -- 15% of the portfolio -- for our favorite ideas. These large positions are reserved not necessarily for the stocks with the largest return POTENTIAL, but rather for those stocks we believe have the best PROBABILITY of achieving a large return. Why, in our judgement, does Washington Mutual still deserve to account for 15% of our assets? 1. Price -- Washington Mutual is priced at less than 10 times our estimate of next year's cash earnings -- less than half the S&P 500 multiple and less than two-thirds the multiple accorded other leading financial service companies. Acquisitions of inferior companies in the financial sector have occurred at multiples in the teens. 2. Value growth -- Washington Mutual's existing markets have above-average population growth, and Washington Mutual has consistently gained market share and increased its number of accounts per customer. In addition, Washington Mutual has used its industry leading low-cost structure to make acquisitions that add to both current earnings and growth opportunities. Washington Mutual's recently announced acquisition of Dime Savings Bank fits that mold: it adds a few pennies to next year's expected cash earnings and creates many new growth opportunities along the East Coast. 3. Management -- CEO Kerry Killenger continues to have most of his personal wealth invested in Washington Mutual stock. Killenger's track record is impressive. Over the last decade of his tenure, earnings-per-share have grown at a compound rate of 17%, and the stock has returned 26% per year. When we consider the risk of being wrong in our assessment of Washington Mutual, we conclude the probability is much less than with other stocks. Washington Mutual has targeted the middle-market customer, who is much less sensitive to stock market declines or economic slowdowns than the upper income customer that most [SIDENOTE] HIGHLIGHTS - We continue to believe that most technology stocks are overvalued, so our portfolio is invested elsewhere, consistent with our goal of owning undervalued stocks. - Best performing stock for the quarter was H&R Block, up nearly 30%. Even with the price gain it still sells at just two-thirds of the S&P 500 multiple of expected year-ahead cash earnings. - Washington Mutual remains our largest holding. It has a relatively low-risk business model, is being managed for the benefit of its shareholders, and is likely to continue growing at a rate significantly above most other companies. 10 financial institutions prefer. Also, loans on owner-occupied, middle-market homes that account for so much of Washington Mutual's asset base are not nearly as risky as the consumer and corporate loans at most financial service companies. We conclude that Washington Mutual has a relatively low-risk business model, is being managed for the benefit of its shareholders, and is likely to continue growing at a rate significantly above most other companies. Best of all, despite the business success and the strong stock performance, this company is still priced at a bargain level. So, when shareholders ask why we are still taking the risk of having such a big position in Washington Mutual, it's because this stock still has a much better risk-return tradeoff than anything else we have found. FUND CLOSING Perhaps the most significant event last quarter was our decision to close The Oakmark Select Fund to new investors. Just five years ago, when we launched the Fund, skeptics argued we could never attract enough assets to make it worthwhile. In May, with Fund assets approaching $4 billion, we felt it was appropriate to stop accepting money from new shareholders. (Investments into existing accounts will still be accepted.) By constraining inflows, the Fund can continue investing in both midcap and large cap companies with the highly concentrated approach we have used since the Fund opened in 1996. Once, when accepting an award, Yogi Berra said, "I want to thank everyone who made this day necessary." We want to thank you, our shareholders, for making the Fund closing necessary by trusting us to continue taking good care of your assets. /s/ William Nygren WILLIAM C. NYGREN, CFA Portfolio Manager bnygren@oakmark.com /s/ Henry Berghoef HENRY R. BERGHOEF, CFA Portfolio Manager berghoef@oakmark.com July 6, 2001 11 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2001 (UNAUDITED)
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.9% APPAREL--3.1% Liz Claiborne, Inc. 2,523,200 $ 127,295,440 RETAIL--17.6% Toys `R' Us, Inc. (a) 11,023,500 $ 272,831,625 The Kroger Co. (a) 6,800,000 170,000,000 Tricon Global Restaurants, Inc. (a) 3,515,400 154,326,060 Office Depot, Inc. (a) 12,546,000 130,227,480 -------------- 727,385,165 HOUSEHOLD PRODUCTS--3.1% Energizer Holdings, Inc. (a) 5,489,500 $ 125,984,025 OTHER CONSUMER GOODS & SERVICES--10.4% H&R Block, Inc. 3,969,400 $ 256,224,770 Mattel, Inc. 9,165,000 173,401,800 -------------- 429,626,570 BANK & THRIFTS--15.1% Washington Mutual, Inc. 16,619,700 $ 624,069,735 INFORMATION SERVICES--9.2% Moody's Corporation 4,143,600 $ 138,810,600 The Dun & Bradstreet Corporation (a) 4,547,500 128,239,500 Ceridian Corporation 5,834,500 111,847,365 -------------- 378,897,465 COMPUTER SERVICES--7.6% Electronic Data Systems Corporation 2,755,900 $ 172,243,750 First Data Corporation 2,210,200 142,005,350 -------------- 314,249,100 COMPUTER SOFTWARE--3.2% The Reynolds and Reynolds Company, Class A 5,979,700 $ 131,254,415 TELECOMMUNICATIONS--8.4% AT&T Corp. 8,804,000 $ 193,688,000 Sprint Corporation 7,209,000 153,984,240 -------------- 347,672,240 PUBLISHING--3.8% Knight-Ridder, Inc. 2,606,500 $ 154,565,450 PHARMACEUTICALS--3.6% Chiron Corporation (a) 2,867,400 $ 149,334,192
12
SHARES HELD/ PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.9% (CONT.) AUTOMOTIVE--2.7% Visteon Corporation 5,984,400 $ 109,993,272 OIL & NATURAL GAS--4.1% Burlington Resources Inc. 4,225,000 $ 168,788,750 TOTAL COMMON STOCKS (COST: $2,845,432,540) 3,789,115,819 COMMON STOCKS SOLD SHORT--(0.7%) TELECOMMUNICATIONS--(0.7%) AT&T Wireless Group (1,646,400) $ (26,918,640) TOTAL COMMON STOCKS SOLD SHORT (PROCEEDS: $(33,279,975)) (26,918,640) SHORT TERM INVESTMENTS--7.3% U.S. GOVERNMENT BILLS--1.0% United States Treasury Bills, 4.59% - 4.77% due 7/26/2001 - 9/6/2001 $40,457,000 $ 40,255,734 TOTAL U.S. GOVERNMENT BILLS (COST: $40,222,278) 40,255,734 COMMERCIAL PAPER--4.1% Citicorp, 3.77% due 7/6/2001 $20,000,000 $ 20,000,000 American Express Credit Corporation, 3.83% due 7/5/2001 - 7/9/2001 40,000,000 40,000,000 Ford Motor Credit Corp., 3.78% - 3.83% due 7/2/2001 - 7/3/2001 40,000,000 40,000,000 General Electric Capital Corporation, 4.08% due 7/2/2001 70,000,000 70,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $170,000,000) 170,000,000 REPURCHASE AGREEMENTS--2.2% State Street Repurchase Agreement , 3.85% due 7/2/2001 $89,773,000 $ 89,773,000 TOTAL REPURCHASE AGREEMENTS (COST: $89,773,000) 89,773,000 TOTAL SHORT TERM INVESTMENTS (COST: $299,995,278) 300,028,734 Total Investments (Cost $3,112,147,843)--98.5% $4,062,225,913 Other Assets In Excess Of Other Liabilities--1.5% 60,086,599 -------------- TOTAL NET ASSETS--100% $4,122,312,512 ==============
(a) Non-income producing security. 13 THE OAKMARK SMALL CAP FUND REPORT FROM JAMES P. BENSON AND CLYDE S. MCGREGOR, PORTFOLIO MANAGERS [PHOTO] [PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/01) AS COMPARED TO THE RUSSELL 2000 INDEX(9) [CHART]
THE OAKMARK SMALL CAP FUND RUSSELL 2000 10/31/95 $10,000 $10,000 12/31/95 $10,330 $10,695 03/31/96 $11,460 $11,241 06/30/96 $12,470 $11,803 09/30/96 $13,250 $11,843 12/31/96 $14,440 $12,459 03/31/97 $15,220 $11,815 06/30/97 $17,660 $13,730 09/30/97 $20,340 $15,774 12/31/97 $20,290 $15,245 03/31/98 $21,732 $16,779 06/30/98 $20,467 $15,997 09/30/98 $14,976 $12,774 12/31/98 $17,620 $14,857 03/31/99 $16,069 $14,051 06/30/99 $18,205 $16,237 09/30/99 $16,558 $15,210 12/31/99 $16,224 $18,015 03/31/00 $15,974 $19,292 06/30/00 $15,926 $18,562 09/30/00 $18,014 $18,768 12/31/00 $16,937 $17,471 03/31/01 $17,816 $16,335 06/30/01 $21,218 $18,688
6/30/01 NAV(4) $17.15
AVERAGE ANNUAL TOTAL RETURN(1) THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 11/1/95 -------------------------------------------------------------------------------- THE OAKMARK SMALL CAP FUND 19.10% 14.19% Lipper Small Cap Value Fund Index(10) 12.72% 13.60% Russell 2000 w/inc 14.41% 11.66% S&P Small Cap 600 w/inc.(11) 13.70% 14.19%
*Not annualized. We are pleased to report that your Fund had a gain of 19% for the just ended quarter which was the best quarterly performance in the Fund's five and one-half year history. The second quarter of calendar 2001 witnessed generally rising stock prices as investors seemed more hopeful that the Federal Reserve's interest rate reductions will keep the country out of recession. The Russell 2000 small cap index rose 14% for the just ended quarter and at the mid-year mark this index of small company stocks was up 7%. Thus far in 2001, your Fund has recorded a 25% gain which places the Fund 18% ahead of the Russell 2000 and 31% ahead of the S&P 500 Index. Our focus on identifying undervalued businesses continues to be the key to our success. We have a terrific group of analysts whose constant attention to sound fundamental equity analysis provides us with excellent investment ideas. PREPARING FOR UNCERTAIN TIMES Despite the interest rate reductions and the recently enacted tax cuts, economic growth remains anemic. During the past few quarters we have actively migrated the investments within the portfolio toward companies that have an above average probability of thriving during sluggish economic times. If you were to view the Fund's portfolio as a single entity you would notice that we have been upgrading the portfolio's financial dynamics. We have been buying stocks in companies that have strong balance sheets, good levels of cash flow per dollar invested, growth potential over time and bright managements that are committed to enhancing shareholder value. Our goal is to own companies that are well positioned to benefit when economic growth resumes, and also to 14 own those firms that can handle a period of economic contraction. By positioning your Fund's investments in this fashion, we hope to realize above average investment returns regardless of the economic environment. PORTFOLIO ADDITIONS AND DELETIONS The Fund's portfolio stayed at forty-six stocks during the second calendar quarter, yet our turnover increased as we bought five new stocks and sold five stocks. We sold M&F Worldwide after the company made an acquisition that we thought was not in the best interest of shareholders. We also sold Sames Corp., Sensient Technologies (formerly Universal Foods), Stoneridge Inc. and U.S. Industries due to deteriorating financial strength. We added positions in Heidrick & Struggles, Oratec Interventions, Silverstream Software, St. Mary Land & Exploration and Sybron Dental Specialties. The common theme of our five new purchases is balance sheet strength. Heidrick & Struggles, Oratec and Silverstream all have a substantial amount of "net cash" on the balance sheet (Note: "Net cash" is calculated by subtracting all short-term and long-term debt from a company's cash plus marketable securities balances). St. Mary Land is an asset rich oil & gas producer with minimal debt. Sybron, on the other hand, is the one company that we bought that has a sizable amount of debt, but their dental supply business is a high cash flow business that has historically weathered recessions very well. By buying these types of companies we believe we will be well positioned to ride out any near-term economic fluctuations. CASH IS KING Heidrick & Struggles and Oratec Interventions are two new Fund holdings that we would like to review. Heidrick is a leading executive recruitment firm whose earnings growth has been disrupted by the economic slowdown. This earnings slowdown caused Heidrick's stock to plummet from over $70 to its current price of about $21. While we anticipate Heidrick's earnings will be under pressure for at least a few quarters, what attracted us to the stock was its well known brand name, its variable cost structure (commissions on successful placements make up a significant portion of the payroll) and its strong balance sheet. As of the end of the first quarter of 2001, Heidrick had over $9.00 in net cash per share, thus at current prices we are paying about $12 per share for Heidrick's business. At the current stock price, less net cash, we believe we are buying Heidrick's operating business at less than ten times normalized earnings. We believe this valuation level is very attractive. Oratec Interventions produces minimally invasive surgical products for use in arthroscopic and spinal surgeries. Oratec is another company with an excellent balance sheet (over $2.00 in net cash per share) combined with innovative products. Oratec's most interesting product, SpineCATH, is a minimally invasive system for treating degenerative disc disease. Although still a relatively new treatment option for patients suffering from degenerative discs, over the past two years over 30,000 patients have availed themselves of this procedure that uses a self-navigating intra-disc catheter which treats degenerative disc disease by heating the disc. About 70% of the people treated experience a statistically significant improvement in back pain with the attendant elimination or reduction in usage of pain killing drugs. The catalyst that we expect to accelerate Oratec's growth should be the willingness of insurers to reimburse patients for the procedure. Thus far, Oratec's treatment has been catagorized as a "new" treatment and most insurance plans will not reimburse patients for a new treatment. However, the needed two-year follow-up data in various peer review journals should be out later this year and at that time the company will be in an excellent position to push for acceptance and coverage for the SpineCATH treatment. Given the company's low stock price and excellent balance sheet, we believe that we have an opportunity to share in the potential rewards of this technology without undue financial risk. [SIDENOTE] HIGHLIGHTS - The Fund's gain of 19% for the just-ended quarter was the best quarterly performance in the Fund's 5 1/2-year history. We believe that the rebound in small cap value stocks that began in 2000 will, with some increased volatility, persist for an extended period of time. - Our goal is to own companies that are well positioned to benefit when economic growth resumes, and also to own those firms that can handle a period of economic contraction. - Common theme of our five new purchases is balance sheet strength. These include: Heidrick & Struggles, Oratec Interventions, Silverstream Software, St. Mary Land & Exploration, and Sybron Dental Specialties. 15 OUTLOOK As the aforementioned companies illustrate, there continue to be small cap stocks selling at compelling valuations. Thus, we continue to expect that the rebound in small cap value stocks that began in 2000 will, with some increased volatility, persist for an extended period of time. Once again we would like to thank you, our shareholders, for your support of The Oakmark Small Cap Fund. /s/ James P. Benson JAMES P. BENSON, CFA Portfolio Manager jbenson@oakmark.com /s/ Clyde S. McGregor CLYDE S. MCGREGOR, CFA Portfolio Manager mcgregor@oakmark.com July 5, 2001 16 THE OAKMARK SMALL CAP FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2001 (UNAUDITED)
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--89.4% FOOD & BEVERAGE--6.6% Ralcorp Holdings, Inc. 579,000 $ 10,850,460 Del Monte Foods Company (a) 995,400 8,341,452 ------------ 19,191,912 APPAREL--1.4% R.G. Barry Corporation (a) 907,000 $ 4,172,200 RETAIL--2.9% ShopKo Stores, Inc. (a) 918,800 $ 6,688,864 Ugly Duckling Corporation (a) 370,000 1,616,900 ------------ 8,305,764 OTHER CONSUMER GOODS & SERVICES--4.0% Department 56, Inc. (a) 642,500 $ 4,915,125 American Greetings Corporation, Class A 300,000 3,300,000 Central Parking Corporation 175,000 3,272,500 ------------ 11,487,625 BANK & THRIFTS--9.4% BankAtlantic Bancorp, Inc., Class A 1,100,000 $ 9,559,000 People's Bank of Bridgeport, Connecticut 325,000 7,650,500 Golden State Bancorp Inc. (a) 190,000 5,852,000 PennFed Financial Services, Inc. 177,000 3,955,950 ------------ 27,017,450 INSURANCE--4.1% The PMI Group, Inc. 165,000 $ 11,823,900 OTHER FINANCIAL--2.8% NCO Group, Inc. (a) 260,000 $ 8,041,800 HOTELS & MOTELS--3.5% Prime Hospitality Corp. (a) 850,000 $ 10,072,500 HUMAN RESOURCES--2.6% Heidrick & Struggles International, Inc. (a) 307,000 $ 6,186,050 Spherion Corporation (a) 150,000 1,342,500 ------------ 7,528,550 EDUCATIONAL SERVICES--5.8% ITT Educational Services, Inc. (a) 374,600 $ 16,857,000 DATA STORAGE--1.1% Imation Corp. (a) 125,000 $ 3,150,000 COMPUTER EQUIPMENT--1.5% Infocus Corporation (a) 250,000 $ 4,187,500
17
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--89.4% (CONT.) COMPUTER SERVICES--3.7% CIBER, Inc. (a) 1,013,700 $ 9,630,150 Micron Electronics, Inc. (a) 698,000 1,130,760 ------------ 10,760,910 COMPUTER SOFTWARE--4.8% MSC.Software Corp. (a) 600,000 $ 11,250,000 SilverStream Software, Inc. (a) 253,000 1,783,650 Symantec Corporation (a) 20,000 865,400 ------------ 13,899,050 SECURITY SYSTEMS--4.4% Checkpoint Systems, Inc. (a) 713,200 $ 12,694,960 PHARMACEUTICALS--2.6% Elan Corporation plc (a)(b) 125,000 $ 7,625,000 MEDICAL RESEARCH--1.6% Covance Inc. (a) 200,000 $ 4,530,000 MEDICAL PRODUCTS--4.5% CONMED Corporation (a) 215,000 $ 5,611,500 Sybron Dental Specialties, Inc. (a) 200,000 4,098,000 Hanger Orthopedic Group, Inc. (a) 937,600 2,390,880 ORATEC Interventions, Inc. (a) 110,100 963,375 ------------ 13,063,755 AUTOMOTIVE--0.6% Standard Motor Products, Inc. 139,500 $ 1,855,350 AUTOMOBILE RENTALS--1.8% Dollar Thrifty Automotive Group, Inc. (a) 219,400 $ 5,265,600 TRANSPORTATION SERVICES--2.9% Teekay Shipping Corporation (c) 195,000 $ 7,803,900 Frontline Limited (b) 40,000 684,000 ------------ 8,487,900 INSTRUMENTS--1.2% IDEXX Laboratories, Inc. (a) 109,400 $ 3,373,896 MACHINERY & INDUSTRIAL PROCESSING--1.8% Columbus McKinnon Corporation 525,000 $ 5,223,750 CHEMICALS--1.8% H.B. Fuller Company 70,000 $ 3,496,500 Georgia Gulf Corporation 100,000 1,550,000 ------------ 5,046,500
18
SHARES HELD/ PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------- COMMON STOCKS--89.4% (CONT.) OIL & NATURAL GAS--3.1% St. Mary Land & Exploration Company 250,000 $ 5,315,000 Berry Petroleum Company, Class A 250,000 3,625,000 ------------ 8,940,000 OTHER INDUSTRIAL GOODS & SERVICES--1.7% Intergrated Electrical Services, Inc. (a) 360,000 $ 3,510,000 Gardner Denver Inc. (a) 65,000 1,335,750 ------------ 4,845,750 REAL ESTATE--7.2% Catellus Development Corporation (a) 875,000 $ 15,268,750 Trammell Crow Company (a) 500,000 5,525,000 ------------ 20,793,750 TOTAL COMMON STOCKS (COST: $217,709,545) 258,242,372 SHORT TERM INVESTMENTS--10.6% COMMERCIAL PAPER--7.6% American Express Credit Corporation, 3.90% due 7/6/2001 8,000,000 $ 8,000,000 Ford Motor Credit Corp., 3.78% due 7/3/2001 6,000,000 6,000,000 General Electric Capital Corporation, 4.08% due 7/2/2001 8,000,000 8,000,000 ------------ TOTAL COMMERCIAL PAPER (COST: $22,000,000) 22,000,000 REPURCHASE AGREEMENTS--3.0% State Street Repurchase Agreement, 3.85% due 7/2/2001 8,581,000 $ 8,581,000 TOTAL REPURCHASE AGREEMENTS (COST: $8,581,000) 8,581,000 TOTAL SHORT TERM INVESTMENTS (COST: $30,581,000) 30,581,000 CALL OPTIONS WRITTEN--(0.2%) EQUITY OPTIONS--(0.2%) COMPUTER SOFTWARE--0.0% Symantec Corporation, July 55 Calls (20,000) $ (1,000) PHARMACEUTICALS--(0.2%) Elan Corporation plc, July 60 Calls (125,000) $ (437,500) MEDICAL RESEARCH--0.0% Covance Inc., August 20 Calls (45,000) $ (99,000) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(575,929)) (537,500) TOTAL INVESTMENTS (COST $247,714,616)--99.8% $288,285,872 Other Assets In Excess Of Other Liabilities--0.2% 575,074 ------------ TOTAL NET ASSETS--100% $288,860,946 ============
(a) Non-income producing security. (b) Represents American Depository Receipt (c) Represents foreign domiciled corporation. 19 THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. MCGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO][PHOTO] ------------------------------------------------------------------------------- THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/01) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(12) [CHART]
THE OAKMARK LIPPER EQUITY & BALANCED INCOME FUND FUND INDEX 10/31/95 $10,000 $10,000 12/31/95 $10,240 $10,473 03/31/96 $10,500 $10,707 06/30/96 $11,040 $10,925 09/30/96 $11,110 $11,213 12/31/96 $11,805 $11,840 03/31/97 $12,153 $11,895 06/30/97 $13,430 $13,178 09/30/97 $14,810 $14,024 12/31/97 $14,941 $14,243 03/31/98 $16,233 $15,370 06/30/98 $16,320 $15,599 09/30/98 $15,191 $14,701 12/31/98 $16,792 $16,392 03/31/99 $16,792 $16,655 06/30/99 $18,457 $17,402 09/30/99 $17,518 $16,682 12/31/99 $18,119 $17,863 03/31/00 $18,924 $18,396 06/30/00 $18,886 $18,174 09/30/00 $20,761 $18,535 12/31/00 $21,723 $18,290 03/31/01 $22,621 $17,374 06/30/01 $24,445 $17,984
6/30/01 NAV(4) $17.96 AVERAGE ANNUAL TOTAL RETURN(1) THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 11/1/95 --------------------------------------------------------------------------------- THE OAKMARK EQUITY & INCOME FUND 8.06% 17.08% Lipper Balanced Fund Index 3.51% 10.91% Lehman Govt./Corp. Bond(13) 0.30% 6.71% S&P 500 w/inc.(3) 5.85% 15.85% *Not annualized.
"If all economists were laid end to end, they would not reach a conclusion." George Bernard Shaw OUR RESULTS The Oakmark Equity and Income Fund increased 8% for the quarter ended June 30, bringing the calendar-year gain to 13%. For both the quarter and the calendar year, the Fund continued to outperform both the market averages and our primary benchmark, the Lipper Balanced Fund Index, which has lost 2% for the year. While we continue to be pleased with both our relative and absolute performance this year, we remain extremely vigilant to avoid complacency. This year there have been a number of value traps to avoid, such as assuming that a security now selling for 20% of what it was selling for twelve months ago represents compelling business value. A focus on intrinsic business value rather than market price assists us in both avoiding the traps and seizing the opportunities when presented. Our goal remains to compound your (and our) investment in the Fund through achieving consistent above-average real rates of return over the long-term, while undertaking considerably less risk than the market as a whole. This focus on understanding the relationship that exists between risk and return has stood us in good stead in the past, and we expect it to continue to do so in the future. INDEXING AND CLOSET INDEXING There has been a great deal of commentary about the debacle of both dot.com issues and technology stocks in general. Little has been said about the growth of assets under management utilizing indexing strategies. Likewise ignored is the fact that growth in assets under management at many of the huge mutual 20 fund complexes has effectively made some of the megasized ($25B on up) mutual funds, regardless of espoused style, closet index funds. A couple of different phenomena have played out here. Indexing was originally intended as a style of investment management giving an investor a diversified slice of a particular market such as the S&P 500 at lower transaction, tax, and investment management costs. As a result of a period of outperformance relative to active managers, indexing attracted so much in the way of new asset flows that performance of the S&P500 index began to be driven by the investment of those asset flows into the equities that composed the index. Children will recognize this as a variation on musical chairs--adults have been a little slower off the mark. At a certain point as the flows begin to slow, so does the performance, which causes the flows to stop and even reverse. After all, investors have made it quite clear that they are always looking backwards, chasing performance, causing fund flows to gravitate to that area now outperforming the index. A by-product of indexing has been closet indexing, a corollary of which is sometimes called capitalization creep. The preconditions for closet indexing are usually found in linking the compensation of investment managers to how much they outperform a relevant index. As the night follows the day it becomes almost a certainty that the composition of the portfolio will take on a remarkable likeness to the index. A tremendous amount of time is then spent on trying to add value RELATIVE TO THE INDEX while concurrently minimizing deviations from that index. You will observe that not much time in this process is spent on whether an idea may be compelling in terms of intrinsic value, only on gaming the index. Closet indexing is a result of the same fund flows attracted into indexing. To avoid significant under performance, especially if you are a $25B megafund, the fund manager is forced into larger and larger capitalization stocks without regard to valuation. As bottom-up fundamental investors who invest when and where we find value, we are able to avoid these pitfalls. Put another way, if we make an investment error, it is not going to be because we were gaming a benchmark index. As 2001 has progressed, opportunities for value investors have continued to present themselves, albeit of a slightly different character than before. The opportunities to overpay for mediocre or declining businesses (categorized by some as "cigar-butt" businesses) have increased as new moneys have been attracted to the "value" category. This reflects a market that lacks discrimination and presents better than average to very good businesses selling at discounts to intrinsic business value. Two examples of such investments initiated during the quarter are our investments in both C.R. Bard (BCR) and Valassis Communications (VCI). OUR RESEARCH PROCESS--VALUE AFFIRMATION It is nice when outside confirmation of our investment process is provided by a takeover bid for one of our portfolio investments. This quarter saw two such bids. Nova Corporation, one of our larger positions where our average cost was under $18 a share, is to be acquired by U.S. Bancorp for $31 a share in stock. C.R. Bard, an investment we had initiated this quarter at an average cost of $44.50 is to be acquired by Tyco for $60 a share in stock. In both instances, attractive businesses were available and ignored in the marketplace notwithstanding good and improving fundamentals. In the case of Bard, improving product lines and a management perhaps looking to cash out served as catalysts in attracting a buyer. Clearly, both value investors in the public equity marketplace and value investors running companies are looking to exploit the gap between market price and intrinsic business value. We reiterate our commitment to seeking out investments with a considerable margin of safety supported by a real rather than illusory valuation gap. This letter is being written in a climate of continued interest rate cuts by the Federal Reserve and a growing concern about the domestic [SIDENOTE] HIGHLIGHTS - The Fund increased 8% for the quarter, with a calendar-year gain of 13%. It also continued to outperform the primary benchmark, the Lipper Balanced Fund Index, which was down 2% for the year. - As 2001 progressed, opportunities for value investors continued to present themselves. Two examples are C.R. Bard (BCR) and Valassis Communications (VCI). - Two stocks in the portfolio had takeover announcements: Nova Corporation, one of our larger positions is to be acquired by U.S. Bancorp for $31 a share in stock, and C.R. Bard is to be acquired by Tyco for $60 a share in stock. 21 and global economies. Nonetheless we are heartened by the opportunities we see for those with investment time-horizons beyond the next day, week, month, quarter, or year. We believe that assessing business value over the long-term, rather than worrying about macro-economic issues over which we have no control, will always be the best use of our time. We thank you for your continued support of the Fund and we look forward to reporting to you, our partners, at the end of the next quarter. /s/Clyde S. McGregor CLYDE S. MCGREGOR, CFA Portfolio Manager mcgregor@oakmark.com /s/Edward A. Studzinski EDWARD A. STUDZINSKI, CFA Portfolio Manager estudzinski@oakmark.com July 9, 2001 22 SCHEDULE OF INVESTMENTS--JUNE 30, 2001 (UNAUDITED)
SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--61.6% FOOD & BEVERAGE--4.9% UST Inc. 320,000 $ 9,235,200 General Mills, Inc. 195,000 8,537,100 ---------------- 17,772,300 RETAIL--5.3% Office Depot, Inc. (a) 980,000 $ 10,172,400 J.C. Penney Company, Inc. 350,000 9,226,000 ---------------- 19,398,400 HOUSEHOLD PRODUCTS--0.5% Energizer Holdings, Inc. (a) 80,000 $ 1,836,000 OTHER CONSUMER GOODS & SERVICES--1.0% H&R Block, Inc. 56,000 $ 3,614,800 BANK & THRIFTS 0.3% Washington Mutual, Inc. 25,500 $ 957,525 INSURANCE--1.2% The PMI Group, Inc. 60,000 $ 4,299,600 OTHER FINANCIAL--2.6% GATX Corporation 235,000 $ 9,423,500 MARKETING SERVICES--1.5% Harte-Hanks Incorporated 225,000 $ 5,571,000 INFORMATION SERVICES--6.5% Ceridian Corporation 505,000 $ 9,680,850 NOVA Corporation (a) 300,000 9,435,000 Equifax Inc. 125,000 4,585,000 ---------------- 23,700,850 COMPUTER SERVICES--0.3% SunGard Data Systems Inc. (a) 30,000 $ 900,300 Electronic Data Systems Corporation 5,000 312,500 ---------------- 1,212,800 COMPUTER SOFTWARE--1.6% The Reynolds and Reynolds Company, Class A 260,000 $ 5,707,000 TELECOMMUNICATIONS--2.7% Telephone and Data Systems, Inc. 90,000 $ 9,787,500 TV PROGRAMMING--0.8% AT&T Corp. - Liberty Media Group, Class A (a) 170,000 $ 2,973,300 PRINTING--1.0% Valassis Communications, Inc. (a) 100,000 $ 3,580,000 23 EQUITY AND EQUIVALENTS--61.6% PHARMACEUTICALS--4.1% Chiron Corporation (a) 200,000 $ 10,416,000 Abbott Laboratories 93,000 4,464,930 ---------------- 14,880,930 MEDICAL PRODUCTS--6.7% C. R. Bard, Inc. 175,000 $ 9,966,250 Apogent Technologies Inc. (a) 200,000 4,920,000 Sybron Dental Specialties, Inc. (a) 236,666 4,849,286 Edwards Lifesciences Corporation (a) 175,000 4,613,000 ---------------- 24,348,536 TRANSPORTATION SERVICES--0.7% Florida East Coast Industries, Inc. 58,500 $ 2,065,050 Nordic American Tanker Shipping Limited 32,500 558,350 ---------------- 2,623,400 AEROSPACE & DEFENSE--0.1% Rockwell Collins 15,000 $ 352,650 AGRICULTURAL EQUIPMENT--0.6% Alamo Group Inc. 141,900 $ 2,022,075 INSTRUMENTS--2.6% Rockwell International Corporation 250,000 $ 9,530,000 OIL & NATURAL GAS--10.0% Burlington Resources Inc. 270,000 $ 10,786,500 St. Mary Land & Exploration Company 500,000 10,630,000 Conoco Inc. 350,000 9,870,000 XTO Energy, Inc. 200,000 2,870,000 Berry Petroleum Company 142,000 2,059,000 ---------------- 36,215,500 REAL ESTATE--2.4% Catellus Development Corporation (a) 490,728 $ 8,563,204 DIVERSIFIED CONGLOMERATES--4.2% Textron, Inc. 155,000 $ 8,531,200 Viad Corp. 260,000 6,864,000 ---------------- 15,395,200 TOTAL EQUITY AND EQUIVALENTS (COST: $198,290,941) 223,766,070 24 SHARES HELD/ PAR VALUE FIXED INCOME--27.7% PREFERRED STOCK--0.9% BANK & THRIFTS--0.6% BBC Capital Trust I, Preferred, 9.50% 47,000 $ 1,132,700 Pennfed Capital Trust, Preferred, 8.90% 27,500 715,000 Fidelity Capital Trust I, Preferred, 8.375% 43,500 430,650 ---------------- 2,278,350 TELECOMMUNICATIONS--0.1% MediaOne Finance Trust III, Preferred, 9.04% 20,000 $ 507,000 REAL ESTATE--0.2% Host Marriott Corporation, Preferred Class B, 10.00% 21,000 $ 548,100 TOTAL PREFERRED STOCK (COST: $3,211,923) 3,333,450 CORPORATE BONDS--0.6% RETAIL--0.1% Ugly Duckling Corporation, 12.00% due 10/15/2003, Subordinated Debenture 650,000 $ 520,000 OFFICE EQUIPMENT--0.1% Xerox Capital Europe Plc, 5.75% due 5/15/2002 500,000 $ 469,920 BUILDING MATERIALS & CONSTRUCTION--0.2% Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note 750,000 $ 720,000 UTILITIES--0.2% Midland Funding Corporation, 11.75% due 7/23/2005 500,000 $ 548,750 TOTAL CORPORATE BONDS (COST: $2,250,093) 2,258,670 25 PAR VALUE GOVERNMENT AND AGENCY SECURITIES--26.2% U.S. GOVERNMENT NOTES--25.1% United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed $20,092,500 $ 20,337,388 United States Treasury Notes, 3.50% due 1/15/2011, Inflation Indexed 15,241,950 15,299,107 United States Treasury Notes, 10.75% due 8/15/2005 10,000,000 12,126,200 United States Treasury Notes, 11.875% due 11/15/2003 10,000,000 11,640,480 United States Treasury Notes, 7.00% due 7/15/2006 10,000,000 10,849,360 United States Treasury Notes, 7.25% due 8/15/2004 5,000,000 5,369,110 United States Treasury Notes, 6.125% due 8/15/2007 5,000,000 5,249,525 United States Treasury Notes, 5.25% due 8/15/2003 5,000,000 5,089,760 United States Treasury Notes, 5.25% due 5/15/2004 5,000,000 5,087,890 ---------------- 91,048,820 U.S. GOVERNMENT AGENCIES--1.1% Federal Home Loan Bank, 6.75% due 5/1/2002 $ 2,000,000 $ 2,045,410 Federal Home Loan Bank, 6.50% due 10/19/2001 1,000,000 1,008,246 Federal Home Loan Mortgage Corporation, 7.00% due 2/23/2016 1,000,000 979,494 ---------------- 4,033,150 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $94,919,706) 95,081,970 TOTAL FIXED INCOME (COST: $100,381,722) 100,674,090 SHORT TERM INVESTMENTS--10.4% COMMERCIAL PAPER--7.5% American Express Credit Corporation, 3.83% due 7/9/200 $ 6,000,000 $ 6,000,000 Ford Motor Credit Corp., 3.78% - 3.83% due 7/2/2001 - 7/3/2001 11,000,000 11,000,000 General Electric Capital Corporation, 4.08% due 7/2/2001 10,000,000 10,000,000 ---------------- TOTAL COMMERCIAL PAPER (COST: $27,000,000) 27,000,000 REPURCHASE AGREEMENTS--2.9% State Street Repurchase Agreement, 3.85% due 7/2/2001 $10,648,000 $ 10,648,000 TOTAL REPURCHASE AGREEMENTS (COST: $10,648,000) 10,648,000 TOTAL SHORT TERM INVESTMENTS (COST: $37,648,000) 37,648,000 Total Investments (Cost $336,320,663)--99.7% $ 362,088,160 Other Assets In Excess Of Other Liabilities--0.3% 1,215,979 ---------------- TOTAL NET ASSETS--100% $ 363,304,139 =================
(a) Non-income producing security. 26 THE OAKMARK GLOBAL FUND REPORT FROM MICHAEL J. WELSH AND GREGORY L. JACKSON, PORTFOLIO MANAGERS FELLOW SHAREHOLDERS, The Oakmark Global Fund increased 16% for the three-month period ending June 30, 2001. As with last quarter's results, we are pleased with these results especially when compared to the increase of 3% for both the MSCI World Index and the Lipper Global Fund Index. For the twelve-month period ending June 30, 2001, The Oakmark Global Fund returned 28% compared to declines of 20% and 17% for the MSCI World Index and the Lipper Global Fund Index respectively. The 28% gain for the twelve-month period ending June 30, 2001, places The Oakmark Global Fund as the #1 performing global fund out of 260 funds according to Lipper Inc. and in the top 1% of funds classified by Morningstar as World Stock funds.(16) CONCENTRATION BENEFITS One of the primary drivers of The Oakmark Global Fund's strong investment performance is our concentrated investment philosophy. We define concentrated investing as placing a large portion of the Fund's assets in our best ideas and limiting our holdings to position sizes that can have a meaningful impact on the overall portfolio. When our current fiscal year began last October, The Oakmark Global Fund's four largest positions comprised 24% of the total assets in the fund. The top four positions were Nova Corporation: 6.9% of assets, ITT Educational: 6% of assets, Reynolds & Reynolds: 5.5% of assets, and Somerfield PLC: 5.2% of assets. Given their large weighting in the fund, we thought we would review how these positions have performed since the current fiscal year began. [PHOTO][PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (6/30/01) AS COMPARED TO THE MSCI WORLD INDEX(14) [CHART]
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
AVERAGE ANNUAL TOTAL RETURN(1) 6/30/01 NAV(4) $13.00 THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 8/4/99 THE OAKMARK GLOBAL FUND 15.76% 15.98%(23) MSCI World Index w/inc. 2.52% -5.57% Lipper Global Fund Index(15) 3.22% 0.52%
*Not annualized. 27 NOVA CORPORATION - Since September 30, 2000, Nova Corporation's stock price has appreciated 84%. In July of 2000, Nova Corporation experienced problems in one of their acquired merchant portfolios, which caused a significant decline in the company's stock price. After reviewing the situation, we felt the problems Nova was experiencing were temporary and viewed the stock price decline as an opportunity to make Nova the Fund's largest position. On May 7, 2001, Nova Corporation agreed to be acquired by US Bancorp for $31 per share or an 81% premium to the September 30, 2000 closing stock price. ITT EDUCATIONAL SERVICES - Since September 30, 2000, ITT Educational's stock price has appreciated 66%. In the fall of 2000, ITT Educational faced two issues: 1) The company changed its core curriculum to be more Information Technology oriented, which caused enrollment erosion in their old programs of study (Core Electronics and Computer Aided Design). 2) The Office of Inspector General (OIG) began an investigation into ITT's compensation practices for student recruiters. After extensive research, we concluded that ITT's new curriculum was exceptional and that the erosion in the older programs of study was a temporary issue while the company worked to add more Information Technology content to the older core programs. In addition, we found ITT's compensation practices to be in line with industry standards and felt the OIG investigation would not have a material impact on the company. Since September 30, 2000, both of ITT's issues have been resolved favorably and the stock price has responded accordingly. REYNOLDS & REYNOLDS - Since September 30, 2000, Reynolds & Reynolds' stock price has appreciated 10.4%. In April of 2000, Reynolds decided to sell their slower growth forms business and focus exclusively on their computer services division. Given that REY was the dominant player in providing computer-based dealer management systems to automotive dealers, which have high recurring revenues and 19% operating margins, we felt that investors would begin to place a much higher valuation on the company. However, the economic slowdown has dampened Reynolds' growth prospects temporarily, causing investors to react more slowly than we had originally estimated in revaluing the business. We continue to like Reynolds' business and future prospects and the company remains one of the largest positions in the Fund. SOMERFIELD PLC - Since September 30, 2000, Somerfield's stock price has appreciated 58% in U.S. dollars. In April of 2000, John Von Spreckelsen and his team took over the management of the Somerfield. John's team quickly implemented basic retailing standards and stabilized Somerfield's market share, restored its financial health and brought the company back to profitability. Over the next few years, we expect John and his team to revitalize the store base and push Somerfield closer to industry-wide levels of profitability, and we expect the share price to continue to follow these improvements upward. As you can see from the performance of our largest holdings over the past nine months, we believe we have some of the highest quality research analysts in the industry [SIDENOTE] HIGHLIGHTS - The Fund increased 16% for the quarter, compared to a return of 3% for both the MSCI World Index and the Lipper Global Fund Index. - A primary driver of the Fund's strong performance is our concentrated philosophy--allowing our best ideas to have a significant impact on performance. Top holdings include Nova Corporation, ITT Educational, Reynolds & Reynolds, and Somerfield PLC. - We believe we have some of the highest quality research analysts in the industry who continue to find attractive ideas. 28 who continue to find these attractive ideas. It is important to note that the level of concentration in the Fund will vary depending upon the investment opportunities available. However, we always strive to have a large portion of the Fund's assets concentrated in the best ideas we see around the world. While we experienced solid performance over the past quarter and year, we continue to find many attractive investment ideas which we will highlight in the next quarterly letter. Thank you for your continued confidence and support. /s/Michael J. Welsh MICHAEL J. WELSH, CFA, CPA Portfolio Manager 102521.2142.compuserve.com /s/Gregory L. Jackson GREGORY L. JACKSON Portfolio Manager gjackson@oakmark.com July 10, 2001 29 GLOBAL DIVERSIFICATION--JUNE 30, 2001 [CHART] UNITED STATES EUROPE PACIFIC RIM LATIN AMERICA OTHER
% OF FUND % OF FUND NET ASSETS NET ASSETS | | UNITED STATES 47.5% | | PACIFIC RIM 13.0% Korea 5.0% | | EUROPE 31.6% Japan 4.8% Great Britain 14.7% Australia 3.2% *Italy 4.5% *France 4.1% | | LATIN AMERICA 3.1% *Netherlands 2.8% Mexico 1.9% *Finland 2.7% Panama 1.2% Switzerland 2.4% *Germany 0.4% | | OTHER 1.5% Israel 1.5%
* Euro currency countries comprise 14.5% of the Fund. 30 SCHEDULE OF INVESTMENTS--JUNE 30, 2001
DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--96.7% FOOD & BEVERAGE--7.0% Diageo plc Beverages, Wines, & Spirits (Great Britain) Manufacturer 130,000 $ 1,427,101 Hite Brewery Co., Ltd. Brewer (Korea) 35,500 1,198,347 Lotte Chilsung Beverage Soft Drinks, Juices, & Sport Drinks Company (Korea) Manufacturer 6,700 984,006 ----------- 3,609,454 APPAREL--0.7% Fila Holding S.p.A. Athletic Footwear & Apparel (Italy), (a)(b) 91,900 $ 344,625 RETAIL--7.5% Somerfield plc Food Retailer (Great Britain) 1,198,000 2,210,158 ShopKo Stores, Inc. Specialty Discount Retailer (United States), (a) 166,800 1,214,304 House of Fraser Plc Department Store (Great Britain) 320,000 432,629 ----------- 3,857,091 HOME FURNISHINGS--2.8% Hunter Douglas N.V. Window Coverings Manufacturer (Netherlands) 52,300 $ 1,467,046 OTHER CONSUMER GOODS & SERVICES--1.6% Royal Doulton plc Tableware & Giftware (Great Britain), (a) 1,340,000 $ 802,027 BANK & THRIFTS--1.2% Banco Latinoamericano Latin American Trade Bank de Exportaciones, S.A., Class E (Panama), (b) 17,300 $ 636,121 OTHER FINANCIAL--1.9% Ichiyoshi Securities Co., Stock Broker Ltd. (Japan) 228,000 $ 996,392 HOTELS & MOTELS--1.8% Jarvis Hotels plc Hotel Operator (Great Britain) 565,000 $ 942,892 31 COMMON STOCKS--96.7% (CONT.) HUMAN RESOURCES--2.2% Heidrick & Struggles Executive Search Firm International, Inc. (United States), (a) 57,000 $ 1,148,550 EDUCATIONAL SERVICES--6.3% Learning Tree Computer Related Education International, Inc. (United States), (a) 92,000 2,109,560 ITT Educational Services, Postsecondary Degree Programs Inc. (United States), (a) 25,000 1,125,000 ---------- 3,234,560 MARKETING SERVICES--0.7% Arbitron Inc. Media & Marketing Research (United States) 15,300 $ 368,730 INFORMATION SERVICES--11.4% Equifax Inc. Consumer Credit Information (United States) 55,000 2,017,400 Ceridian Corporation Data Management Services (United States) 105,000 2,012,850 NOVA Corporation (United States), (a) Transaction Processing Services 60,000 1,887,000 ---------- 5,917,250 COMPUTER EQUIPMENT--2.5% Infocus Corporation Data/Video Projection Products (United States), (a) 78,000 $ 1,306,500 COMPUTER SERVICES--2.9% Meitec Corporation Software Engineering Services (Japan) 45,100 $ 1,508,035 COMPUTER SOFTWARE--9.9% Novell, Inc. Network & Internet Integration (United States), (a) Software 625,000 $ 3,262,500 The Reynolds and Information Management Systems Reynolds Company, Class A (United States) 85,000 1,865,750 ---------- 5,128,250 32 COMPUTER SYSTEMS--2.0% Lectra Systemes Manufacturing Process Systems (France), (a) 268,000 $ 1,056,092 TELECOMMUNICATIONS--2.0% CenturyTel, Inc. Telecommunications (United States) 35,000 $ 1,060,500 BROADCASTING & CABLE TV--1.9% Grupo Televisa S.A Television Production & (Mexico), (a)(b) Broadcasting 24,700 $ 988,247 PRINTING--4.2% Valassis Communications, Product Promotions Printer Inc. (United States), (a) 60,000 $ 2,148,000 MEDICAL PRODUCTS--2.0% Edwards Lifesciences Respiratory Products Corporation (United States), (a) 40,000 $ 1,054,400 AUTOMOBILES--3.9% Ducati Motor Holding Motorcycle Manufacturer S.p.A. (Italy), (a) 1,328,000 $ 1,991,981 INSTRUMENTS--1.5% Orbotech, Ltd. Optical Inspection Systems (Israel), (a) 21,300 $ 767,865 MACHINERY & INDUSTRIAL PROCESSING--2.7% Metso Oyj Paper & Pulp Machinery (Finland) 124,000 $ 1,376,597 CHEMICALS--2.4% Givaudan Fragrance & Flavor Compound (Switzerland), (a) Manufacturer 4,500 $ 1,248,678 PRODUCTION EQUIPMENT--0.4% Krones AG Production Machinery (Germany) Manufacturer 5,250 $ 185,973 33 SHARES HELD/ PAR VALUE OTHER INDUSTRIAL GOODS & SERVICES--5.5% Enodis plc Food Processing Equipment (Great Britain) 906,700 $ 1,806,821 GFI Industries SA Industrial Fastener Manufacturer (France) 42,800 1,056,570 ----------- 2,863,391 DIVERSIFIED CONGLOMERATES--7.8% Viad Corp. Payment Services & Convention (United States) Organizer 75,000 $ 1,980,000 Pacific Dunlop Limited Diversified Manufacture (Australia) 3,850,000 1,649,502 Tae Young Corporation Heavy Construction (Korea) 16,900 409,342 ----------- 4,038,844 TOTAL COMMON STOCKS (COST: $44,950,469) 50,048,091 SHORT TERM INVESTMENTS--3.6% COMMERCIAL PAPER--1.9% General Electric Capital Corporation, 4.08% due 7/2/2001 $1,000,000 $ 1,000,000 TOTAL COMMERCIAL PAPER (COST: $1,000,000) 1,000,000 REPURCHASE AGREEMENTS--1.7% State Street Repurchase Agreement, 3.85% due 7/2/2001 869,000 869,000 TOTAL REPURCHASE AGREEMENTS (COST: $869,000) 869,000 TOTAL SHORT TERM INVESTMENTS (COST: $1,869,000) 1,869,000 Total Investments (Cost $46,819,469)--100.3% $ 51,917,091 Foreign Currencies (Proceeds $4,846)--(0.0)% $ 4,826 Other Liabilities In Excess Of Other Assets--(0.3)% (c) (180,492) ----------- TOTAL NET ASSETS--100% $ 51,741,425 ============ (a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Includes portfolio hedges.
34 THE OAKMARK INTERNATIONAL FUND Report from David G. Herro and Michael J. Welsh, Portfolio Managers [PHOTOS] [CHART]
THE OAKMARK MSCI WORLD INTERNATIONAL FUND 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
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (6/30/01) COMPARED TO THE MSCI WORLD EX U.S. INDEX(17)
AVERAGE ANNUAL TOTAL RETURN(1) 6/30/01 NAV(4) $15.52 THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 9/30/92 ------------------------------------------------------------------------------------ THE OAKMARK INTERNATIONAL FUND 9.99% 13.13% MSCI World ex U.S. Index w/inc. -1.04% 7.37% MSCI EAFE Index w/inc.(18) -1.32% 7.18% Lipper International Fund Index(19) 0.59% 9.05% *Not annualized.
FELLOW SHAREHOLDERS, Your fund achieved an outstanding 10% return in the 2nd calendar quarter of this year. This compares very favorably with the MSCI World ex U.S. Index, which lost 1% and the Lipper International Fund Index, which was up 1%. Since its inception almost 9 years ago, your fund has achieved an annual rate of return of 13%. This compares to a 7% return for MSCI World ex U.S. Index and a 9% return for the Lipper International Fund Index. Since inception, the Fund's 13% return put it in the top 5% of all international funds in the Lipper Universe ranking 4th of 89 funds.(20) PATIENCE AND DISCIPLINE DO PAY OFF! The results you have just read about are derived from what we think are our two strongest attributes as managers: our very sound value investment philosophy and the disciplined execution of that same philosophy. A clear example of this is embodied in our investment in SOMERFIELD PLC, the UK based grocery store chain. We have been involved in this company twice over the last 4 years. The first time we bought it at a low price, and sold it at a healthy profit less than 2 years later as the share hit its sell price. We started to repurchase the shares on price weakness at around 200p after management disappointed the market with a poorly executed acquisition. The stock continued to plummet as a result of problems related to this acquisition. When the dust finally settled in April of 2000, the market was valuing the company at just 50p. Even though the market hated the business, we were firmly convinced, given the company's 35 competitive advantages, financial strength and new, proven management, that the underlying value of Somerfield was worth several multiples of its 50p price. While the "street" in London was talking bankruptcy, we saw firm financial footing based on the low debt levels and the intrinsic value of the company's owned real estate. We also recognized the natural advantage of their urban locations as well as the strength of the new management team, which had a long track record of retail success. As a result of the unrealistic market price, we substantially increased our holdings making it one of your fund's largest positions. Over the last year, Somerfield's share price has risen over 145%! In this last quarter alone, almost two percentage points of return to the Fund are attributable to this stock. More importantly, the company is growing business value again, is turning around the division that caused the original troubles and has maintained its pristine balance sheet. And, like clockwork, the "street" now loves the stock. The same sell-side analyst who said the company was going under just over one year ago, presently says its worth over 200p. Now we actually agree with him! This illustrates the strength of our independent thinking and the adherence to our value philosophy. THESE ELEMENTS ARE THE SOURCE OF OUR SUCCESS. Certainly, every stock we own does not always give us the excitement of Somerfield, but we hope this example has provided insight into how we think and behave as investors. AND HERE IS ONE THAT HAS NOT WORKED SO WELL For a long time, we have held shares in the Italian athletic footwear and apparel maker, FILA. We originally bought the company when it was first floated, more than doubled our money and sold as the shares hit fair value. At that point we should have moved on. However, on rising market share and sales momentum, the stock soared from the $30's (where we sold it) to over $120 dollars! We thought the stock was grossly overpriced until it fell back into the low $40's. The company's sales and profits were much higher than before, but growth had slowed. We began to rebuild a position, although we later realized we overestimated the quality of the management and underestimated the weakness of the brand in the USA. The operating situation of Fila got worse before finally stabilizing. Management was replaced with more astute people and sales continued to grow outside of the USA. These factors as well as the financial security of a major Italian company being the majority shareholder, let us to believe the company had bottomed. However, the hidden mistakes of the old management kept surfacing. Sadly, costs grew as fast as revenues in the glory years and when revenues dropped, costs did not. This presented the new management with problems that distracted them from brand building. Excess warehouse space, the ludicrous Grant Hill endorsement contract, and poorly managed foreign subsidiaries represented assets that were not carrying their weight. The vast value destruction caused by previous management, much of which appeared in the form of delayed "landmines," has taken its toll. Today, we still think the company has merits, especially since much has been done to repair the mistakes of the past. Fila had the biggest negative impact for the quarter costing the Fund almost one-half percent. Today, the Fila brand is gaining strength, albeit slowly, and is more visible in the US. Fila is a major global brand that has unique attributes tied to its Italian heritage. Fila remains undervalued but is, unfortunately, worth only a fraction of our original appraisal. The lessons learned from this investment were painful but we hope to put them to good use in our research process in the future. [SIDEBAR] HIGHLIGHTS - The Fund increased 10% in the 2nd quarter, which compares favorably with the MSCI World ex U.S. Index, which lost 1%, and the Lipper International Fund Index, which was up 1%. - A clear example of our disciplined adherence to our value philosophy is Somerfield plc, the UK based grocery store chain, which has risen over 145% over the past year. - Foreign currencies, the Euro and a number in emerging markets, are substantially under priced. Though investment decisions are not predicated on currency movement, we believe owning these currencies at attractive prices will enhance return. 36 LOOKING AHEAD We continue to find many companies across countries and industries that fit our strict investment criteria. We also believe foreign currencies such as the Euro and some of those in emerging markets are substantially under priced. Though our investment decisions are not predicated on currency movements, we believe that owning some of these currencies at these prices will enhance return going forward. Finally, we thank our loyal shareholders that continue to place their trust and hard earned savings with us. We will continue to work hard to deliver strong results. [/s/ DAVID G. HERRO] DAVID G. HERRO, CFA Portfolio Manger dherro@compuserve.com [/s/ MICHAEL J. WELSH MICHAEL J. WELSH, CFA, CPA Portfolio Manager 102521.2142@compuserve.com July 11, 2001 37 THE OAKMARK INTERNATIONAL FUND INTERNATIONAL DIVERSIFICATION--JUNE 30, 2001 [CHART]
% OF FUND NET ASSETS -------------------------------- - EUROPE 59.9% Great Britain 21.4% *Netherlands 7.4% *Finland 7.0% *France 6.7% Sweden 6.5% *Italy 3.5% Switzerland 3.1% *Ireland 2.3% *Greece 1.5% *Austria 0.5%
% OF FUND NET ASSETS -------------------------------- - PACIFIC RIM 21.8% Japan 6.4% Korea 6.1% Australia 4.2% Singapore 2.6% Hong Kong 2.5%
% OF FUND NET ASSETS -------------------------------- - LATIN AMERICA 12.6% Mexico 4.8% Brazil 3.3% Panama 2.3% Argentina 2.2%
% OF FUND NET ASSETS -------------------------------- - OTHER 1.4% Israel 1.4%
*Euro currency countries comprise 28.9% of the Fund. 38 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2001 (UNAUDITED)
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% FOOD & BEVERAGE--10.6% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 3,104,000 $ 34,074,775 Fomento Economico Soft Drink & Beer Manufacturer Mexicano, S.A. de C.V. (Mexico), (b) 531,600 22,757,796 Quilmes Industrial S.A. Brewer (Argentina), (b) 935,600 19,647,600 Lotte Chilsung Beverage Soft Drinks, Juices, & Sport Drinks Company (Korea) Manufacturer 93,000 13,658,593 Lotte Confectionery Co., Confection Manufacturer Ltd. (Korea) 20,670 2,797,324 ---------- 92,936,088 APPAREL--3.1% Giordano International Pacific Rim Clothing Retailer & Limited (Hong Kong) Manufacturer 32,491,000 $ 17,079,041 Fila Holding S.p.A. Athletic Footwear & Apparel (Italy), (a)(b) 2,716,800 10,188,000 ---------- 27,267,041 RETAIL--4.6% Somerfield plc Food Retailer (Great Britain) 22,130,000 $ 40,827,038 HOUSEHOLD PRODUCTS--1.2% Reckitt Benckiser plc Household Cleaners & (Great Britain) Air Fresheners 417,200 $ 6,016,438 Kimberly-Clark de Mexico, Hygiene Products Manufacturer S.A. de C.V., Class A (Mexico), (a) 1,182,000 3,499,660 Societe BIC SA (France) Basic Consumer Products Manufacturer 28,500 1,038,549 ---------- 10,554,647 HOME FURNISHINGS--3.9% Hunter Douglas N.V. Window Coverings Manufacturer (Netherlands) 1,206,984 $ 33,856,608 OTHER CONSUMER GOODS & SERVICES--1.0% Shimano Inc. (Japan) Bicycle Components Manufacturer 598,000 $ 8,813,439
39
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- BANK & THRIFTS--11.2% Uniao de Bancos Brasileiros Commercial Banking S.A. (Brazil), (c) 863,500 $ 21,976,075 Banca Popolare di Verona Commercial Banking (Italy) 2,195,000 20,796,501 Banco Latinoamericano Latin American Trade Bank de Exportaciones, S.A., Class E (Panama), (b) 555,100 20,411,027 BNP Paribas SA (France) Commercial Banking 153,000 13,329,028 Kookmin Bank (Korea) Commercial Banking 430,000 5,769,704 United Overseas Bank Commercial Banking Limited, Foreign Shares (Singapore) 888,968 5,610,940 Svenska Handelsbanken AB Commercial Banking (Sweden) 362,700 5,187,147 Bank of Ireland (Ireland) Commercial Banking 453,000 4,453,563 National Australia Bank Commercial Banking Limited (Australia) 65,000 1,162,088 ---------- 98,696,073 OTHER FINANCIAL--2.9% Daiwa Securities Group Inc. Stock Broker (Japan) 2,424,000 $ 25,365,408 HOTELS & MOTELS--2.0% Mandarin Oriental Hotel Management International Limited (Singapore) 33,134,400 $ 17,561,232 HUMAN RESOURCES--1.4% Michael Page International Recruitment Consultancy Services plc (Great Britain), (a) 5,123,000 $ 10,100,609 Vedior NV (Netherlands) Temporary Staffing 284,000 2,575,230 ---------- 12,675,839 MARKETING SERVICES--0.7% Cordiant Communications Advertising and Media Services Group plc (Great Britain) 2,469,000 $ 6,171,839 COMPUTER SERVICES--2.5% Meitec Corporation (Japan) Software Engineering Services 667,200 $ 22,309,550
40
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS--3.1% Panafon Hellenic Telecom Mobile Telecommunications S.A. (Greece) 2,365,000 $ 12,826,999 Telemig Celular Mobile Telecommunications Participacoes S.A. (Brazil), (a) 2,293,200,000 7,261,054 SK Telecom Co., Ltd. Mobile Telecommunications (Korea) 45,370 6,680,781 ---------- 26,768,834 BROADCASTING & CABLE TV--1.3% Grupo Televisa S.A. Television Production & (Mexico), (a)(b) Broadcasting 283,500 $ 11,342,835 Publishing--7.3% John Fairfax Holdings Newspaper Publisher Limited (Australia) 9,874,500 $ 20,397,781 Wolters Kluwer NV Reference Material Publisher (Netherlands) 634,000 17,058,739 Independent News & Newspaper Publisher Media PLC (Ireland) 7,674,400 15,283,620 N.V. Holdingmaatschappij Newspaper Publisher De Telegraaf (Netherlands) 652,100 11,605,061 ---------- 64,345,201 MEDICAL PRODUCTS--2.8% Gambro AB, Class A Manufacturer of Dialysis Procucts (Sweden) 4,000,000 $ 24,464,269 AUTOMOTIVE--4.2% Compagnie Generale des Tire Manufacturer Establissements Michelin (France) 632,000 $ 20,014,932 Autoliv, Inc (Sweden) Automotive Safety Systems Manufacturer 789,200 13,573,108 Dongah Tire Industry Innertube Manufacturer Company (Korea) 166,290 3,561,074 ---------- 37,149,114 AEROSPACE--2.5% Rolls-Royce plc Aviation & Marine Power (Great Britain) 7,142,702 $ 22,029,357
41
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- AIRPORT MAINTENANCE--1.0% Grupo Aeroportuario del Airport Operator Sureste S.A. de C.V. (Mexico), (a)(b) 242,000 $ 4,525,400 Flughafen Wien AG Airport Management & (Austria) Operations 125,522 4,068,790 ---------- 8,594,190 INSTRUMENTS--1.4% Orbotech, Ltd. (Israel), (a) Optical Inspection Systems 336,000 $ 12,112,800 MACHINERY & INDUSTRIAL PROCESSING--4.3% Metso Oyj (Finland) Paper & Pulp Machinery 3,402,100 $ 37,768,724 BUILDING MATERIALS & CONSTRUCTION--2.4% Kumkang Korea Chemical Building Materials Co., Ltd. (Korea) 377,840 $ 21,470,493 COMPONENTS--2.5% IMI plc (Great Britain) Components Manufacturer 4,624,000 $ 14,586,833 Morgan Crucible Company Crucible & Components plc (Great Britain) Manufacturer 1,556,000 7,012,207 ---------- 21,599,040 CHEMICALS--4.8% Givaudan (Switzerland), (a) Fragrance & Flavor Compound Manufacturer 98,050 $ 27,207,306 Nufarm Limited (Australia) Agricultural & Industrial Chemical Producer 10,127,815 15,161,307 ---------- $ 42,368,613 OTHER INDUSTRIAL GOODS & SERVICES--10.9% Enodis plc (Great Britain) Food Processing Equipment 21,270,000 42,385,674 Chargeurs SA (France) Wool, Textile Production & Trading 350,067 24,623,127 Kone Corporation, Elevators Class B (Finland) 351,160 24,253,622 FKI plc (Great Britain) Industrial Manufacturing 1,236,315 4,761,915 ---------- 96,024,338 STEEL--1.6% SSAB Svenskt Stal AB, Steel Producer Series A (Sweden) 1,575,920 $ 13,624,251
42
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- DIVERSIFIED CONGLOMERATES--0.5% First Pacific Company Diversified Operations Limited (Hong Kong) 21,587,752 $ 4,677,466 TOTAL COMMON STOCKS (COST: $849,473,514) 841,374,327 SHORT TERM INVESTMENTS--4.3% COMMERCIAL PAPER--2.8% Ford Motor Credit Corp., 3.78% - 3.83% due 7/2/2001 - 7/3/2001 15,000,000 $ 15,000,000 General Electric Capital Corporation, 4.08% due 7/2/2001 10,000,000 10,000,000 ---------- TOTAL COMMERCIAL PAPER (COST: $25,000,000) 25,000,000 REPURCHASE AGREEMENTS--1.5% State Street Repurchase Agreement, 3.85% due 7/2/2001 12,915,000 12,915,000 TOTAL REPURCHASE AGREEMENTS (COST: $12,915,000) $ 12,915,000 TOTAL SHORT TERM INVESTMENTS (COST: $37,915,000) 37,915,000 Total Investments (Cost $ 887,388,514)--100.0% $ 879,289,327 Foreign Currencies (Proceeds $ 333,129)--0.0% $ 332,631 Other Liabilities In Excess Of Other Assets--(0.0)% (d) (288,289) ---------- TOTAL NET ASSETS--100% $ 879,333,669 ---------- ----------
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a Global Depository Receipt. (d) Includes portfolio hedges. 43 THE OAKMARK INTERNATIONAL SMALL CAP FUND Report from David G. Herro and Michael J. Welsh, Portfolio Managers [PHOTOS] [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD SMALL CAP FUND 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
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/01) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(17)
AVERAGE ANNUAL TOTAL RETURN(1) 6/30/01 NAV(4) $11.28 THROUGH 6/30/01 TOTAL RETURN FROM FUND INCEPTION LAST 3 MONTHS* 11/1/95 -------------------------------------------------------------------------------------- THE OAKMARK INTERNATIONAL SMALL CAP FUND 3.58% 8.38% MSCI World ex U.S. Index w/inc. -1.04% 4.84% Lipper International Small Cap Fund Average(21) 0.28% 11.45% Micropal Equity International Small Cap Index(22) -0.42% 10.17%
*Not annualized. FELLOW SHAREHOLDERS: The recent quarter ending June 30, 2001, was another positive one for the Oakmark International Small Cap Fund. The portfolio gained 4% compared to a return of less than and 1% in the Lipper International Small Cap Average and a 1% decline in the MSCI World ex U.S. index. For the first six months of 2001 your fund has returned 7% compared to a loss in the Lipper International Small Cap Average of 13% and a decline in the MSCI World ex U.S. index of 15%. The Fund's positive performance is especially heartening given the difficulties in overseas markets so far this year. It is in times like these that disciplined value investors pause to give thanks and then continue poking around for gems among the debris. PORTFOLIO PERFORMANCE The strength of your Fund's performance this year is due to stock selection. Geographically, the parts of the world where the out-performance has been most pronounced are the United Kingdom, Hong Kong, and Singapore. In the United Kingdom, the market is down approximately 13% while our investments are up 10%. Two outstanding performers include House of Fraser and Jarvis Hotels, which returned 56% and 16%, respectively. We still see tremendous upside in Jarvis Hotels, so much so that it is the largest position in the Fund. Management is proactively taking action, both strategic and financial, to close the gap between the current share price and business value. In Hong Kong, stocks are down on average around 15%. Your Fund's 44 investments have substantially outperformed the index returning over 20% so far in 2001. Kingmaker Footware and Jusco Stores are the two standouts, with six month total returns of 40% and 117%. Our investment in Jusco Stores is a wonderful example of the virtue of patience. As the company steadily built business value over the past three years, the share price languished. Of course, it is our job as analysts to pay more attention to the former than the latter. In May, the share price shot up 70% in the two days after the company announced annual results and a massive increase in the dividend, both of which reflected the fine work management had quietly been doing. Jusco, even after this share price move, still trades for 8 times our estimate of current earnings and yields over 8%. Our investments in Singapore returned over 20% in the last six months, compared with a ugly 20% drop in the local market. Dairy Farm International and Delgro Corporation have both been terrific. Dairy Farm has appreciated 50% from our average cost, while Delgro has returned over 20% so far this year. CURRENCY IMPACT OF THE STRONG US DOLLAR One of the reasons investment returns in overseas markets have lagged those achieved at home in recent years is the continued strength of the US Dollar ("USD"). In the first six months of this year your Fund lost approximately 6% on foreign currency. The USD has been on a bull run since the dark nadir of the first quarter of 1995. Long time shareholders of The Oakmark International Fund will recall that at that time we thought the USD was very undervalued relative to the currencies of the rest of the developed world. You may remember all of the trend-extrapolating pundits warning that the USD was in a permanent bear market, that it was losing its reserve currency status, that it was going to parity with the Deutsche mark, etcetera, etcetera. Our belief in the under-valuation of the USD was so strong at that time that we hedged nearly 80% of our European currency exposure. That was then; this is now. The USD has now been appreciating for over six years, with the Deutsche mark losing nearly 40% of its value over that time. The value of the Euro since its inception has been flimsy at best. Currently, the USD is at a 28-year high on a trade-weighted basis. Foreign investors cannot get enough of the mighty greenback, with portfolio and direct investment continuing to push its value higher. At the same time, there are some worrisome economic signals, most important of which appears to be the dramatic slowdown of productivity growth. While currencies are completely unpredictable in the short-term, in the end they do reflect economic fundamentals. In this environment we are even more excited about investing your money in overseas opportunities. We believe there is a good chance that, over the medium term, part of your future return from the Fund will come from holding the underlying foreign currencies in which these investments are denominated. [SIDEBAR] HIGHLIGHTS - The Fund's performance this year is heartening given the difficulties in overseas markets. For the first six months of 2001 it returned 7% compared to a loss in the Lipper International Small Cap Average of 8% and a decline in the MSCI World ex U.S. index of 15%. - Geographically, out-performance has been most pronounced in the United Kingdom, Hong Kong, and Singapore. - Overseas markets have lagged in recent years because of the continued strength of the US Dollar--currently at a 28-year high on a trade-weighted basis. We believe that over the intermediate term a portion of Fund returns will come from holding our investment's underlying foreign currencies. 45 OPPORTUNITY AHEAD Even with the Fund's strong recent performance, we remain extremely optimistic about investment prospects going forward. International small cap investing is starting to return to investor's radar screens as an asset class that not only can provide strong diversification to US-based investors but, more importantly, can provide strong absolute investment returns. [/s/ DAVID G. HERRO DAVID G. HERRO, CFA Portfolio Manger dherro@compuserve.com [/s/ MICHAEL J. WELSH MICHAEL J. WELSH, CFA, CPA Portfolio Manager 102521.2142@compuserve.com July 11, 2001 46 THE OAKMARK INTERNATIONAL SMALL CAP FUND INTERNATIONAL DIVERSIFICATION--JUNE 30, 2001 [CHART]
% OF FUND NET ASSETS -------------------------------- - EUROPE 46.5% Great Britain 14.2% *France 8.9% *Italy 7.6% *Germany 2.9% *Finland 2.4% *Netherlands 2.0% *Ireland 1.9% Denmark 1.7% *Belguim 1.6% Switzerland 1.6 Sweden 1.1% Spain 0.6%
% OF FUND NET ASSETS -------------------------------- - PACIFIC RIM 41.6% Japan 9.7% Hong Kong 8.5% Korea 6.2% Singapore 5.1% New Zealand 4.8% Australia 2.8% Thailand 2.3% Phillippines 2.2%
% OF FUND NET ASSETS -------------------------------- - LATIN AMERICA 4.2% Mexico 3.7% Brazil 0.5%
% OF FUND NET ASSETS -------------------------------- - OTHER 2.8% Bermuda 2.8%
*Euro currency countries comprise 27.3% of the Fund. 47 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2001 (UNAUDITED)
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% FOOD & BEVERAGE--9.0% Hite Brewery Co., Ltd. Brewer (Korea) 93,400 $ 3,152,833 Mikuni Coca-Cola Soft Drink Manufacturer Bottling Co., Ltd. (Japan) 219,000 2,432,163 Alaska Milk Milk Producer Corporation (Philippines) 49,394,000 1,959,743 Grupo Continental, Soft Drink Manufacturer S.A. (Mexico) 1,237,000 1,796,416 Baron De Ley, Wines & Spirits Manufacturer S.A. (Spain), (a) 31,750 613,469 --------- 9,954,624 APPAREL--1.9% Kingmaker Footwear Athletic Footwear Manufacturer Holdings Limited (Hong Kong) 9,570,000 $ 2,098,092 RETAIL--11.1% Dairy Farm International Holdings Supermarket Chain Limited (Singapore) 2,502,000 $ 1,751,400 House of Fraser Department Store Plc (Great Britain) 1,180,000 1,595,322 Carpetright plc Carpet Retailer (Great Britain) 189,000 1,563,741 Dickson Concepts Jewlery Wholesaler & Retailer (International) Limited (Hong Kong) 4,345,000 1,448,371 Denny's Japan Co., Ltd. Restaurant Chain (Japan) 88,000 1,432,443 York-Benimaru Co., Ltd. Supermarket Chain (Japan) 53,100 1,319,942 Jusco Stores Department Stores (Hong Kong) Co., Limited (Hong Kong) 5,486,000 1,097,228 MFI Furniture Group plc Household Furniture Retailer (Great Britain) 658,000 1,081,877 Harvey Nichols plc High Fashion Clothing Retailer (Great Britain) 356,400 1,033,952 --------- 12,324,276
48
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- HOME FURNISHINGS--2.0% Industrie Natuzzi S.p.A. Home Furniture Manufacturer (Italy), (b) 163,200 $ 2,261,952 OFFICE EQUIPMENT--2.6% Neopost SA (France), (a) Mailroom Equipment Supplier 114,300 $ 2,930,121 OTHER CONSUMER GOODS & SERVICES--3.4% Royal Doulton plc Tableware & Giftware (Great Britain), (a) 4,387,000 $ 2,625,740 Il Shin Spinning Fabric & Yarn Manufacturer Company (Korea) 44,550 1,162,993 --------- 3,788,733 INSURANCE--3.8% Hannover Rueckversicherungs-AG Reinsurance Servies (Germany) 27,800 $ 2,164,375 IPC Holdings, Ltd. Reinsurance Provider (Bermuda) 87,700 2,102,169 --------- 4,266,544 OTHER FINANCIAL--4.6% Ichiyoshi Securities Co., Stock Broker Ltd. (Japan) 713,000 $ 3,115,909 JCG Holdings Ltd. Consumer Finance (Hong Kong) 3,321,000 1,979,878 --------- 5,095,787 HOTELS & MOTELS--4.3% Jarvis Hotels plc Hotel Operator (Great Britain) 2,836,000 $ 4,732,817 HUMAN RESOURCES--3.6% United Services Group Temporary Staffing Services NV (Netherlands) 127,300 $ 2,195,365 Creyf's NV (Belgium) Temporary Staffing Services 95,000 1,811,424 --------- 4,006,789 MARKETING SERVICES--2.2% Asatsu-DK Inc. (Japan) Advertising Services Provider 119,000 $ 2,414,161 COMPUTER SYSTEMS--1.7% Lectra Systemes Manufacturing Process Systems (France), (a) 475,400 $ 1,873,381
49
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- TELECOMMUNICATIONS--0.5% Telemig Celular Mobile Telecommunications Participacoes S.A. (Brazil), (a) 190,000,000 $ 601,605 BROADCASTING & CABLE TV--0.5% ABS-CBN Broadcasting Television & Broadcasting Operator Corporation (Philippines) 685,000 $ 522,651 PUBLISHING--5.0% Matichon Public Newspaper Publisher Company Limited, Foreign Shares (Thailand) 2,039,500 $ 2,546,558 Edipresse S.A. Newspaper & Magazine Publisher (Switzerland) 5,660 1,824,180 VLT AB, Class B Newspaper Publisher (Sweden) 153,450 1,185,487 --------- 5,556,225 PRINTING--1.2% Hung Hing Printing Group Printing Company Limited (Hong Kong) 3,373,000 $ 1,318,963 AUTOMOBILES--3.4% Ducati Motor Holding Motorcycle Manufacturer S.p.A. (Italy), (a) 2,545,000 $ 3,817,464 TRANSPORTATION SERVICES--3.3% Mainfreight Limited Logistics Services (New Zealand) 3,993,551 $ 1,811,027 DelGro Corporation Bus, Taxi, & Car Leasing Limited (Singapore) 1,126,000 1,792,207 --------- 3,603,234 AIRPORT MAINTENANCE--3.9% Grupo Aeroportuario Airport Operator del Sureste S.A. de C.V. (Mexico), (a)(b) 124,900 $ 2,335,630 Kobenhavns Lufthavne Airport Management & Operations A/S (Copnehagen Airports A/S) (Denmark) 24,800 1,933,531 --------- 4,269,161
50
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- INSTRUMENTS--2.1% Halma plc (Great Detection Systems Producer Britain) 521,000 $ 1,148,279 Rotork plc (Great Industrial Controls & Instruments Britain) Supplier 182,000 916,310 Vaisala Oyj, Class A Atmospheric Observation Equipment (Finland) 11,200 284,743 --------- 2,349,332 MACHINERY & INDUSTRIAL PROCESSING--1.3% ASM Pacific Semiconductor Machinery Technology Limited (Hong Kong) 815,000 $ 1,468,083 BUILDING MATERIALS & CONSTRUCTION--5.0% Fletcher Building Building Materials Manufacturer Limited (New Zealand) 3,652,000 $ 3,504,506 Grafton Group plc Building Materials Distributor (Ireland) 723,000 2,077,074 --------- 5,581,580 CHEMICALS--2.1% Kemira Oyj (Finland) Chemicals 459,400 $ 2,335,910 PRODUCTION EQUIPMENT--4.4% Interpump Group Spa Pump and Piston Manufacturer (Italy) 700,500 $ 2,392,363 NSC Groupe (France) Textile Equipment Manufacturer 17,466 1,423,170 Krones AG (Germany) Production Machinery Manufacturer 29,300 1,037,906 --------- 4,853,439 OTHER INDUSTRIAL GOODS & SERVICES--4.2% GFI Industries SA Industrial Fastener Manufacturer (France) 145,800 $ 3,599,249 Coats Viyella plc Textile Manufacturer (Great Britain) 1,460,000 1,074,322 --------- 4,673,571
51
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- DIVERSIFIED CONGLOMERATES--8.0% Pacific Dunlop Limited Diversified Manufacturer (Australia) 7,299,626 $ 3,127,466 Haw Par Corporation Healthcare & Leisure Products Ltd. (Singapore) 903,000 2,150,944 Jardine Strategic Diversified Operations Holdings Limited (Bermuda) 340,700 974,402 Tae Young Corporation Heavy Construction (Korea) 106,600 2,582,007 --------- 8,834,819 TOTAL COMMON STOCKS (COST: $110,332,177) 105,533,314 SHORT TERM INVESTMENTS--4.8% COMMERCIAL PAPER--3.6% Ford Motor Credit Corp., 3.83% due 7/2/2001 $ 2,000,000 $ 2,000,000 General Electric Capital Corporation, 4.08% due 7/2/2001 2,000,000 2,000,000 TOTAL COMMERCIAL PAPER (COST: $4,000,000) 4,000,000 REPURCHASE AGREEMENTS--1.2% State Street Repurchase Agreement, 3.85% due 7/2/2001 $ 1,301,000 $ 1,301,000 TOTAL REPURCHASE AGREEMENTS (COST: $1,301,000) 1,301,000 TOTAL SHORT TERM INVESTMENTS (COST: $5,301,000) 5,301,000 Total Investments (Cost $115,633,177)--99.9% $ 110,834,314 Foreign Currencies (Proceeds $25,730)--0.0% $25,713 Other Assets In Excess Of Other Liabilities--0.1% (c) 71,359 --------- TOTAL NET ASSETS--100% $ 110,931,386 --------- ---------
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Includes portfolio hedges. 52 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. 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. 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) The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. (4) 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. (5) The Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. (6) The Lipper Large Cap Value Fund Index measures the performance of the thirty largest U.S. large-cap value funds tracked by Lipper. (7) 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. (8) The Lipper Mid Cap Value Fund Index measures the performance of the thirty largest U.S. mid-cap value funds tracked by Lipper. (9) 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. (10) The Lipper Small Cap Fund Index measures the performance of the thirty largest U.S. small-cap value funds tracked by Lipper. 53 (11) The S&P Small Cap 600 Index measures the performance of selected U.S. stocks with small market capitalizations. (12) The Lipper Balanced Fund Index measures the performance of the thirty largest U.S. balanced funds tracked by Lipper. (13) The Lehman Govt./Corp. Bond Index is an unmanaged index that includes the Lehman Government and Lehman Corporate indices. (14) 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. (15) The Lipper Global Fund Index is an unmanaged index that includes 30 mutual funds that invest in securities throughout the world. (16) Lipper, Inc. is an independent monitor of mutual fund performance. The Oakmark Global Fund ranked #7 of 237 funds in the global funds category since inception (8/4/99) as of 6/30/01. Morningstar is an independent monitor of mutual fund performance. There were 228 funds in the World Stock category for the 1-year period ending 6/30/01. Morningstar does not provide a Morningstar Rating for a Fund that is less than three years old (Fund inception 8/4/99). (17) The MSCI World Ex U.S. Index is an unmanaged index made up of 19 country sub-indexes, excluding the U.S. (18) The MSCI EAFE Index is the Morgan Stanley Europe, Australia, and Far East Index, which is an unmanaged, market-value weighted index designed to measure the overall condition of overseas markets. (19) The Lipper International Fund Index is an unmanaged index that includes 30 mutual funds that invest in securities whose primary markets are outside the U.S. (20) Lipper, Inc. is an independent monitor of mutual fund performance. The Oakmark International Fund ranked #6 of 716, #31 of 325 and #4 of 89 funds in the international funds category for the one and five year periods and since inception, respectively as of 6/30/01. (21) The Lipper International Small Cap Average includes 76 mutual funds that invest in securities whose primary markets are outside the U.S. (22) The Micropal Equity International Small Cap Index is an unmanaged, unweighted index comprised of all funds within the international small company fund sector. (23) During the period since inception (8/4/99), IPOs contributed an annualized 3.54% 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. (24) The Price-Earnings Ratio ("P/E") is the most common measure of how expensive a stock is. 54 [GRAPHIC] 55 [GRAPHIC] 56 THE OAKMARK FAMILY OF FUNDS TRUSTEES AND OFFICERS TRUSTEES Victor A. Morgenstern--CHAIRMAN Michael J. Friduss Thomas H. Hayden Christine M. Maki Allan J. Reich Marv Rotter Burton W. Ruder Peter S. Voss Gary Wilner, M.D. OFFICERS Robert M. Levy--PRESIDENT James P. Benson--VICE PRESIDENT Henry R. Berghoef--VICE PRESIDENT Kevin G. Grant--VICE PRESIDENT David G. Herro--VICE PRESIDENT Gregory L. Jackson--VICE PRESIDENT Clyde S. McGregor--VICE PRESIDENT Anita M. Nagler--VICE PRESIDENT William C. Nygren--VICE PRESIDENT Janet Reali--VICE PRESIDENT AND SECRETARY Ann W. Regan--VICE PRESIDENT-- SHAREHOLDER OPERATIONS AND ASSISTANT SECRETARY Edward A. Studzinski--VICE PRESIDENT Michael J. Welsh--VICE PRESIDENT Kristi L. Rowsell--TREASURER John J. Kane--ASSISTANT TREASURER OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT CDC IXIS Asset Management Services, Inc. Attention: The Oakmark Family of Funds P.O. Box 8510 Boston, Massachusetts 02266-8510 LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP Chicago, Illinois FOR MORE INFORMATION: Please call 1-800-OAKMARK (1-800-625-6275) or 617-449-6274 WEBSITE www.oakmark.com 24-HOUR NAV HOTLINE 1-800-GROWOAK (1-800-476-9625) E-MAIL ADDRESS ServiceComments@oakmark.com 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. P.O. Box 8510 Boston, MA 02266-8510 [LOGO] OAKMARK FAMILY OF FUNDS 1-800-OAKMARK www.oakmark.com The Oakmark Funds are distributed by Harris Associates Securities L.P., Member NASD. Date of first use: July 2001.