N-30D 1 a2062787zn-30d.txt N-30D THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK SMALL CAP FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND ANNUAL REPORT SEPTEMBER 30, 2001 ADVISED BY HARRIS ASSOCIATES L.P. [LOGO]OAKMARK FAMILY OF FUNDS THE OAKMARK FAMILY OF FUNDS 2001 ANNUAL 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 11 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Managers 13 Schedule of Investments 16 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 19 Schedule of Investments 22 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 26 Global Diversification Chart 28 Schedule of Investments 29 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 33 International Diversification Chart 35 Schedule of Investments 36 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 41 International Diversification Chart 44 Schedule of Investments 45 FINANCIAL STATEMENTS Statement of Assets and Liabilities 50 Statement of Operations 52 Statement of Changes in Net Assets 54 Notes to Financial Statements 61 OAKMARK PHILOSOPHY AND PROCESS 78 THE OAKMARK GLOSSARY 79 TRUSTEES AND OFFICERS 81 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. Turn to the end of this report to read about Oakmark's Philosophy and Process and look up financial terms in the Oakmark Glossary. LETTER FROM THE PRESIDENT DEAR FELLOW SHAREHOLDERS, On September 11, 2001, our country suffered a horrible tragedy. Although more than three weeks have passed since the attack, our thoughts remain with those who were lost and the heroes who courageously came to their aid. The mutual fund industry had very strong links to the World Trade Center since it stood at the heart of New York's financial district. We've lost friends and acquaintances, but thankfully all of our staff is safe. In addition, because we are based in Chicago, there was no disruption to our business. As a firm, we collectively were horrified and fearful on September 11th. These emotions slowly evolved into a determination to look ahead. While we will never forget this tragedy, our leaders have reminded us that the country needs to get back to business--the right action for our country and the memory of the people who died. We share this view and have acted accordingly. Therefore, we were fully staffed on September 12th and realized that our responsibilities required disciplined thoughts and strategies, instead of an emotional response. Market reaction to the terrorist actions was not unexpected, and it has been a difficult quarter for all investors. As we have witnessed in the past, great uncertainty creates short-term instability in the financial markets. However, we have also experienced how markets recover from shock and then return stronger than before. Companies we invest in--like retailers, consumer products firms, telecommunications businesses, medical products companies--are priced attractively and positioned for long-term growth. In international and domestic markets, our value investment strategy resulted in taking advantage of lower prices by adding to our portfolio positions and establishing new positions. There was some erosion in our portfolios, but our conviction is intact. As a sign of our faith in the markets, we also made additional personal investments in each of our Funds. In the face of turbulent markets we continue to look for undervalued companies that have strong free cash flow, solid balance sheets, and high quality management--characteristics we believe are critical for businesses to prosper. Our strategy, which remains unchanged regardless of market conditions, is to buy bargains, minimize portfolio risk, and focus on long-term performance. Please take a look at the following letters from each of our portfolio managers, as they address strategy, holdings and our steps following the attack. Like all Americans, the tremendous support and heroism we witnessed following the tragedy inspired us. We are confident in the financial markets and, most importantly, in our country's spirit and resolve. We have quickly returned to customary business routines--travelling around the U.S. and the globe to gain insight into businesses we are considering and the managers who guide them. Please keep in mind that patient investors have been rewarded for maintaining a long-term perspective. Thank you for your support and continued investment. [PHOTO OF ROBERT M. LEVY] /s/ Robert M. Levy ROBERT M. LEVY PRESIDENT AND CEO October 5, 2001 1 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION
THE OAKMARK THE OAKMARK PERFORMANCE FOR PERIOD THE OAKMARK SELECT SMALL CAP ENDED SEPTEMBER 30, 2001(1) FUND FUND FUND -------------------------------------------------------------------------------------------------------------------- 3 MONTHS* -9.01% -3.82% -15.04% -------------------------------------------------------------------------------------------------------------------- 6 MONTHS* -0.59% 5.09% 1.18% -------------------------------------------------------------------------------------------------------------------- 1 YEAR 20.42% 25.75% 0.07% -------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 6.32% 26.74% 6.37% -------------------------------------------------------------------------------------------------------------------- 5 YEAR 9.59% N/A 6.35% -------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 19.28% 28.63% 10.46% -------------------------------------------------------------------------------------------------------------------- VALUE OF $10,000 FROM INCEPTION DATE $59,986 $34,496 $18,026 (8/5/91) (11/1/96) (11/1/95) -------------------------------------------------------------------------------------------------------------------- TOP FIVE HOLDINGS AS OF Washington Washington Catellus Development SEPTEMBER 30, 2001(3) Mutual, Inc. 3.5% Mutual, Inc. 16.1% Corporation 5.0% H&R Block, Inc. 3.1% H&R Block, Inc. 7.5% The PMI Group, Inc. 4.7% The Kroger Co. 2.7% Toys 'R' Us, Inc. 5.0% Ralcorp Holdings, Inc. 4.3% COMPANY AND % OF TOTAL AT&T Corp. 2.7% AT&T Corp. 4.7% ITT Educational NET ASSETS Fortune Brands, Inc. 2.7% Electronic Data Systems Services, Inc. 4.2% Corporation 4.5% BankAtlantic Bancorp, Inc., Class A 3.9% -------------------------------------------------------------------------------------------------------------------- TOP FIVE INDUSTRIES Retail 12.1% Retail 16.9% Bank and Thrifts 10.1% AS OF SEPTEMBER 30, 2001 Other Consumer Goods Bank and Thrifts 16.1% Computer Software 7.8% and Services 8.9% Other Consumer Goods Food and Beverage 7.2% Computer Services 6.2% and Services 11.2% Real Estate 6.8% INDUSTRIES AND % OF TOTAL Bank and Thrifts 5.6% Information Services 8.9% Medical Products 5.9% NET ASSETS Telecommunications 5.5% Telecommunications 8.8% --------------------------------------------------------------------------------------------------------------------
* Not annualized 2
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK PERFORMANCE FOR PERIOD EQUITY AND GLOBAL INTERNATIONAL INTERNATIONAL ENDED SEPTEMBER 30, 2001(1) INCOME FUND FUND FUND SMALL CAP FUND ------------------------------------------------------------------------------------------------------------------------------------ 3 MONTHS* -2.84% -16.69% -19.39% -11.35% ------------------------------------------------------------------------------------------------------------------------------------ 6 MONTHS* 4.99% -3.56% -11.34% -8.17% ------------------------------------------------------------------------------------------------------------------------------------ 1 YEAR 14.40% 1.37% -13.10% -6.18% ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 16.05% N/A 13.27% 19.41% ------------------------------------------------------------------------------------------------------------------------------------ 5 YEAR 16.40% N/A 5.28% 3.83% ------------------------------------------------------------------------------------------------------------------------------------ SINCE INCEPTION 15.73% 4.80%(2) 10.07% 5.83% ------------------------------------------------------------------------------------------------------------------------------------ VALUE OF $10,000 FROM INCEPTION DATE $23,751 $11,071 $23,728 $13,987 (11/1/95) (8/4/99) (9/30/92) (11/1/95) ------------------------------------------------------------------------------------------------------------------------------------ TOP FIVE HOLDINGS AS OF ITT Educational SEPTEMBER 30, 2001(3) PartnerRe Ltd. 3.3% Services, Inc. 5.6% Givaudan 4.0% Asatsu-DK Inc. 4.1% SAFECO Corporation 3.2% Novell, Inc. 5.3% Diageo plc 3.8% Ducati Motor UST Inc. 3.0% Synopsys, Inc. 5.0% Hunter Douglas N.V. 3.8% Holding S.p.A. 3.6% COMPANY AND % OF TOTAL XTO Energy, Inc. 3.0% Michael Page Metso Corporation 3.8% Jarvis Hotels plc 3.5% NET ASSETS Watson Pharmaceuticals, International plc 4.8% Enodis plc 3.6% Pacific Dunlop Inc. 3.0% Valassis Communications, Limited 3.3% Inc. 4.3% Fletcher Building Limited 2.9% ------------------------------------------------------------------------------------------------------------------------------------ TOP FIVE INDUSTRIES U.S. Government Computer Software 14.4% Bank and Thrifts 11.2% Food and Beverage 12.2% AS OF SEPTEMBER 30, 2001 Notes 26.4% Educational Services 9.0% Other Industrial Goods Retail 9.2% Oil and Natural Gas 8.4% Food and Beverage 7.4% and Services 9.9% Diversified Insurance 6.5% Information Services 6.6% Food and Beverage 9.5% Conglomerates 7.2% INDUSTRIES AND % OF TOTAL Computer Software 5.4% Retail 6.1% Publishing 7.5% Building Materials and NET ASSETS Pharmaceuticals 4.9% Chemicals 7.0% Construction 4.6% Publishing 4.2% ------------------------------------------------------------------------------------------------------------------------------------
3 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO] [PHOTO] The Oakmark Fund increased in value 20% for the fiscal year and 7% for the calendar year-to-date despite losing 9% of its value in the last quarter. Though we will never be satisfied when we lose money, we did lose less than most investors--the S&P 500 was down 15% for the quarter. The S&P 500 declined 27% for the fiscal year and 29% since its March 2000 peak. The bear market has been led by large capitalization growth companies, and an increasing number of them now meet our criteria. In the last quarter alone, we added positions in American Express, Fannie Mae, Gap, Honeywell, Interpublic Group and Safeway. A year or two ago these stocks were owned mostly by growth funds. We think the market is creating an unusual opportunity to purchase high-quality, large-capitalization growth companies at value prices. As value managers, we prefer to purchase companies that achieve above-average earnings growth. However, because we are unwilling to pay more than 60% of estimated intrinsic value, we are usually unable to buy them. Companies that grow earnings at above average rates, yet are priced below the market multiple, combine the best elements of "growth" and "value" investing. An increasing percentage of The Oakmark Fund is now invested in such stocks. (For more detail on our new positions, please check our website at www.oakmark.com). HAPPY ANNIVERSARY, OAKMARK Last quarter we celebrated the ten-year anniversary of the start of The Oakmark Fund. We feel that milestone is significant for several reasons. First, not many mutual funds are as old as The Oakmark Fund. According to Morningstar, there are now 7004 mutual funds that invest primarily in domestic equities, and only 868 of those, or 12%, have ten-year histories. Interestingly, there are two reasons so few funds have long-term records. The most obvious reason is the rapid proliferation of funds--there are more than three THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (9/30/01) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(4) [CHART]
THE OAKMARK FUND $59,986 S & P 500 $33,269 8/1/1991 $10,000 $10,000 12/31/1991 $13,020 $10,909 3/31/1992 $14,690 $10,634 6/30/1992 $15,230 $10,836 9/30/1992 $16,800 $11,178 12/31/1992 $19,386 $11,741 3/31/1993 $20,927 $12,253 6/30/1993 $21,494 $12,313 9/30/1993 $23,095 $12,631 12/31/1993 $25,300 $12,924 3/31/1994 $24,242 $12,434 6/30/1994 $24,951 $12,486 9/30/1994 $26,663 $13,097 12/31/1994 $26,138 $13,095 3/31/1995 $28,539 $14,370 6/30/1995 $30,303 $15,741 9/30/1995 $32,841 $16,992 12/31/1995 $35,134 $18,015 3/31/1996 $36,386 $18,982 6/30/1996 $37,661 $19,834 9/30/1996 $37,945 $20,447 12/31/1996 $40,828 $22,152 3/31/1997 $42,456 $22,746 6/30/1997 $48,917 $26,716 9/30/1997 $52,009 $28,717 12/31/1997 $54,132 $29,542 3/31/1998 $59,517 $33,663 6/30/1998 $57,909 $34,775 9/30/1998 $49,899 $31,316 12/31/1998 $56,155 $37,985 3/31/1999 $55,888 $39,877 6/30/1999 $62,332 $42,688 9/30/1999 $53,882 $40,023 12/31/1999 $50,277 $45,977 3/31/2000 $45,767 $47,032 6/30/2000 $46,950 $45,783 9/30/2000 $49,815 $45,339 12/31/2000 $56,201 $41,791 3/31/2001 $60,342 $36,837 6/30/2001 $65,927 $38,993 9/30/2001 $59,986 $33,269
AVERAGE ANNUAL TOTAL RETURNS(1) (AS OF 9/30/01) YEAR TO DATE 1-YEAR 5-YEAR 10-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (8/5/91) --------------------------------------------------------------------------- THE OAKMARK FUND 6.74% 20.42% 9.59% 18.42% 19.28% S&P 500 -20.39% -26.62% 10.22% 12.69% 12.56% Dow Jones Average(5) -16.95% -15.54% 10.36% 13.85% 13.66% Lipper Large Cap -15.91% -15.61% 9.18% 11.98% 11.97% Value Index(6) ---------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not Annualized 4 times as many funds available today compared to ten years ago. The less well-known reason that such a small percentage of funds have long-term records is that over half the funds from ten years ago no longer exist. Funds with poor performance have been closed or merged into larger funds, effectively eliminating their negative effect on the track records of the fund management companies. Another reason our ten-year anniversary is significant is that we have always encouraged evaluation of investment track records over long periods of time. Short-term records might reflect the portfolio manager's ability, but they might simply reflect luck or a briefly favorable investment climate. Eighteen months ago investors thought there were many more talented growth managers than value managers--today it's the reverse. At Oakmark, we believe a decade is enough time to experience the ups and downs of different market cycles, so track records that cover a decade are meaningful report cards. Seven out of eight mutual funds don't have such a report card. Since we do, let's look at the record. GET RICH SLOWLY Our goal for The Oakmark Fund has always been to compound wealth. A diverse group of great thinkers--Albert Einstein, Benjamin Franklin, John Maynard Keynes and Baron de Rothschild--have each been credited with the quote, "compound interest is the eighth wonder of the world." Why is compound interest so wonderful? Because of interest-on-interest, ten years of 20% returns grows capital not by 200% but by 519%. Pretty amazing! This explains why there are so many stories of surprisingly large estates left by persons of modest means or of retirement accounts that have grown to become very large assets. Although the recent market decline and concern about the economic outlook has focused investors on the near-term, it may be useful to step back and think about a longer period of time. At the beginning of 1991 we were completing the process of registration to launch The Oakmark Fund. Not only were we confident that our approach to value investing would create good long-term results but we were also excited about the short-term--the uncertainty surrounding the Gulf War led to an unusually large number of stocks selling well below our buy targets. By August 5, 1991, The Oakmark Fund's inception date, the Gulf War victory had already ended six-months earlier. The S&P 500 had increased 25% since the start of the war, a statistic that is frequently cited as we try to put today's events in perspective. We were disappointed that we were starting the fund immediately following such a strong increase in prices. In the ensuing decade we experienced the Oklahoma bombing, the depression in Asian economies, the Russian debt default and the resulting bankruptcy of Long Term Capital Management, the impeachment of a President, Y2K fears, the Internet stock bubble and its collapse, a presidential election that appeared to end in a tie and the World Trade Center and Pentagon terrorist attacks. At the time, each of these events loomed so large that investors' time horizons became very short. Throughout this period, we pursued our long-term approach of focusing on what a company might earn in five years and, unlike most investors, not worrying about the next five weeks or months. The results speak for themselves. Since its inception, The Oakmark Fund has achieved a compound return of over 19% per year--one of the highest returns of any mutual fund. That return not only substantially exceeded inflation, money market funds and bonds but also exceeded the S&P 500 by more than 6 percentage points per year. And as you would expect from a value fund, by almost any measure this return was achieved with less than the market level of risk: a beta of 0.6, nine down quarters out of 41 compared to 10 down quarters for the S&P 500, and a worst loss quarter of 13.8% compared to 14.7% for the S&P 500. But the statistic that we think best sums up our first ten years is the one shown on the performance graph on the first page of this report: $10,000 invested in The Oakmark Fund at inception on August 5, 1991 is now worth $59,986. Shifting from the past to thinking about the future, we're reminded of something Buffett said--Jimmy, not Warren--"Yesterday's over my shoulder, so I can't look back for too long. There's just too much to see waiting in front of me and I know that I can't go wrong." We think the outlook for the next decade is exciting. Economic effects of the September 11th attack will undoubtedly make most companies miss earnings estimates for 2001; many will still be negatively effected into 2002. Our judgement, however, is that corporate profitability in 2003-2005 will not be significantly reduced. For that reason, we believe stocks are attractively priced and The Oakmark Fund is structured to continue compounding capital at excellent long-term rates. Because of that belief, last month we each made a significant additional personal investment in The Oakmark Fund. Finally, this time of year usually brings a flood of e-mails asking for information about capital gains distributions. We continue to enjoy a large capital loss carry forward and will therefore have no capital gains distribution in 2001. /s/ Bill Nygren /s/ Kevin Grant ---------------------- ------------------ WILLIAM C. NYGREN, CFA KEVIN GRANT, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com kgrant@oakmark.com October 4, 2001 5 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------ COMMON STOCKS--90.4% ------------------------------------------------------------------------------------------------ FOOD & BEVERAGE--4.9% H.J. Heinz Company 1,610,000 $ 67,861,500 Kraft Foods Inc. (a) 1,445,000 49,664,650 Sara Lee Corporation 1,692,400 36,048,120 ------------ 153,574,270 RETAIL--12.1% The Kroger Co. (a) 3,450,000 $ 85,008,000 J.C. Penney Company, Inc. 3,080,700 67,467,330 Tricon Global Restaurants, Inc. (a) 1,450,000 56,869,000 Toys `R' Us, Inc. (a) 3,125,000 53,843,750 CVS Corporation 1,605,000 53,286,000 Safeway Inc. (a) 927,000 36,820,440 The Gap, Inc. 1,987,400 23,749,430 ------------ 377,043,950 HOUSEHOLD PRODUCTS--4.1% Newell Rubbermaid Inc. 2,700,000 $ 61,317,000 The Clorox Company 1,440,200 53,287,400 Energizer Holdings, Inc. (a) 670,200 11,138,724 ------------ 125,743,124 HOUSEHOLD APPLIANCES--0.9% Maytag Corporation 1,126,500 $ 27,756,960 OFFICE EQUIPMENT--1.8% Xerox Corporation 7,113,500 $ 55,129,625 HARDWARE--1.7% The Black & Decker Corporation 1,722,200 $ 53,732,640 OTHER CONSUMER GOODS & SERVICES--8.9% H&R Block, Inc. 2,530,600 $ 97,579,936 Fortune Brands, Inc. 2,484,300 83,224,050 Mattel, Inc. 4,152,800 65,032,848 Cendant Corporation (a) 2,395,100 30,657,280 ------------ 276,494,114 BANK & THRIFTS--5.6% Washington Mutual, Inc. 2,850,000 $ 109,668,000 U.S. Bancorp 2,900,000 64,322,000 ------------ 173,990,000 INSURANCE--1.5% MGIC Investment Corporation 700,000 $ 45,738,000 OTHER FINANCIAL--1.9% Fannie Mae 615,000 $ 49,236,900 American Express Company 300,000 8,718,000 ------------ 57,954,900 HOTELS & MOTELS--1.3% Starwood Hotels & Resorts Worldwide, Inc. 1,785,000 $ 39,270,000 MARKETING SERVICES--1.5% The Interpublic Group of Companies, Inc. 2,200,000 $ 44,880,000
6
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------ COMMON STOCKS--90.4% (CONT.) ------------------------------------------------------------------------------------------------ INFORMATION SERVICES--0.7% Moody's Corporation 379,100 $ 14,026,700 Equifax Inc. 410,900 8,998,710 ------------ 23,025,410 COMPUTER SERVICES--6.2% Electronic Data Systems Corporation 1,216,500 $ 70,046,070 First Data Corporation 1,090,000 63,503,400 SunGard Data Systems Inc. (a) 2,531,600 59,163,492 ------------ 192,712,962 SEMICONDUCTORS--0.5% Teradyne, Inc. (a) 805,000 $15,697,500 TELECOMMUNICATIONS--5.5% AT&T Corp. 4,325,000 $ 83,472,500 Sprint Corporation 2,756,000 66,171,560 Citizens Communications Company (a) 2,288,400 21,510,960 ------------ 171,155,020 TELECOMMUNICATIONS EQUIPMENT--2.7% Motorola, Inc. 3,525,000 $ 54,990,000 General Motors Corporation, Class H (Hughes Electronics Corporation) (a) 2,200,000 29,326,000 ------------ 84,316,000 TV PROGRAMMING--2.1% Liberty Media Corporation, Class A (a) 5,100,000 $ 64,770,000 PUBLISHING--3.2% Knight-Ridder, Inc. 1,066,000 $ 59,536,100 Gannett Co., Inc. 684,500 41,145,295 ------------ 100,681,395 PHARMACEUTICALS--1.5% Chiron Corporation (a) 1,079,000 $ 47,875,230 MEDICAL PRODUCTS--2.3% Guidant Corporation (a) 1,730,500 $ 66,624,250 Apogent Technologies Inc. (a) 136,700 3,267,130 ------------ 69,891,380 AUTOMOBILES--1.6% Ford Motor Company 2,875,000 $ 49,881,250 AEROSPACE & DEFENSE--3.1% Honeywell International Inc. 1,550,000 $ 40,920,000 Rockwell Collins 2,646,800 37,584,560 Goodrich Corporation 970,000 18,895,600 ------------ 97,400,160 WASTE DISPOSAL--0.9% Waste Management, Inc. 1,030,000 $ 27,542,200 MACHINERY & INDUSTRIAL PROCESSING--1.1% Eaton Corporation 552,900 $ 32,737,209
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SHARES HELD/ PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------ COMMON STOCKS--90.4% (CONT.) ------------------------------------------------------------------------------------------------ BUILDING MATERIALS & CONSTRUCTION--1.5% Masco Corporation 2,333,000 $ 47,686,520 UTILITIES--2.0% TXU Corp. 1,365,000 $ 63,226,800 OIL & NATURAL GAS--5.0% Phillips Petroleum Company 992,700 $ 53,546,238 Burlington Resources Inc. 1,550,500 53,042,605 Conoco Inc., Class A 1,950,000 49,588,500 -------------- 156,177,343 DIVERSIFIED CONGLOMERATES--1.1% Textron, Inc. 1,000,000 $ 33,610,000 RECREATION & ENTERTAINMENT--3.2% Brunswick Corporation 2,576,700 $ 42,438,249 Carnival Corporation 1,500,000 33,030,000 Park Place Entertainment Corporation (a) 3,391,300 24,858,229 -------------- 100,326,478 TOTAL COMMON STOCKS (COST: $2,652,596,710) 2,810,020,440 SHORT TERM INVESTMENTS--7.0% U.S. GOVERNMENT BILLS--1.3% United States Treasury Bills, 3.35 - 3.69% due 11/15/2001 -1/31/2002 $40,000,000 $ 39,753,510 TOTAL U.S. GOVERNMENT BILLS (COST: $39,683,693) 39,753,510 COMMERCIAL PAPER--2.9% Citicorp, 3.51% due 10/1/2001 $20,000,000 $ 20,000,000 American Express Credit Corporation, 2.90% due 10/5/2001 20,000,000 20,000,000 General Electric Capital Corporation, 3.25% due 10/1/2001 50,000,000 50,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $90,000,000) 90,000,000 REPURCHASE AGREEMENTS--2.8% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $88,465,479, collateralized by U.S. Treasury Bonds $88,443,000 $ 88,443,000 TOTAL REPURCHASE AGREEMENTS (COST: $88,443,000) 88,443,000 TOTAL SHORT TERM INVESTMENTS (COST: $218,126,694) 218,196,510 Total Investments (Cost $2,870,723,403)--97.4% (b) $3,028,216,950 Other Assets In Excess Of Other Liabilities--2.6% 81,011,553 -------------- TOTAL NET ASSETS--100% $3,109,228,503 -------------- --------------
(a) Non-income producing security. (b) At September 30, 2001, net unrealized appreciation of $157,493,547, for federal income tax purposes, consisted of gross unrealized appreciation of $364,570,741 and gross unrealized depreciation of $207,077,194. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN AND HENRY BERGHOEF] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/01) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(4) [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 09/30/01 $34,496 $15,834
AVERAGE ANNUAL TOTAL RETURNS(1) (AS OF 9/30/01) YEAR TO DATE 1-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (11/1/96) ---------------------------------------------------------------------------- OAKMARK SELECT FUND 16.40% 25.75% 28.63% S&P 500 -20.39% -26.62% 9.80% S&P MidCap 400(7) -15.76% -19.00% 13.84% Lipper Mid Cap -6.88% -4.92% 8.18% Value Index(8) ----------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. The graph and table do not reflect the deduction of taxes that you would pay on Fund distributions or redemption of Fund shares. * Not annualized The Oakmark Select Fund lost 4% for the quarter, significantly outperforming the 17% loss in the S&P Midcap 400 and the 15% loss in the S&P 500. For the calendar year-to-date and fiscal year, The Oakmark Select Fund gained 16% and 26% respectively, compared to double-digit losses for both indices over both periods. During the quarter, strong performances by several of our holdings allowed us to lose so little relative to the market. First, Office Depot increased by nearly one-third with most of that gain occurring shortly after the disclosure in August that Warren Buffett's Berkshire Hathaway had acquired a stake in the company. We continue to be impressed by Office Depot's growing and profitable Internet business and the U.S. retail store turnaround being engineered by CEO Bruce Nelson. In addition to Office Depot, stocks of businesses relatively unaffected by the slowing economy also performed well--H&R Block, Sprint and Moody's each had gains of around 10%. AT&T, a relatively new holding, also appreciated about 10% in the quarter. In July, a large cable operator, Comcast, approached AT&T about the possibility of issuing Comcast stock--to be distributed to AT&T shareholders--in exchange for acquiring the cable assets known as AT&T Broadband. We purchased AT&T stock last Fall believing that its disparate business units--business and residential long distance, AT&T Wireless and AT&T Broadband--represented underlying value far in excess of the AT&T stock price. In July, AT&T distributed to shareholders its stock in AT&T Wireless and now is focusing on extracting the maximum value from the Broadband 9 assets. We believe that despite a price increase of over 40% this year, AT&T stock continues to sell at a discount to its business value and are pleased with the actions of AT&T's management and board in their pursuit of value-maximizing transactions. Looking back, it was another good fiscal year for our stock selection. In 1998 and 1999, when it seemed like everyone was outperforming us just by owning technology stocks, some wondered if our research team and its approach had become obsolete. We don't get those questions anymore! In fiscal 2001, 75% of our holdings performed better than market, and 65% actually had positive returns. Our biggest gainers were H&R Block and Office Depot, but the largest contributor to the fund's positive performance was our largest holding, Washington Mutual. In last quarter's report, we extensively discussed the many reasons why we like Washington Mutual and, despite its strong performance, continue to want it to be the Fund's largest holding. Without covering all that ground again, we should simply point out that as risk has increased in the economy, we expect more investors to appreciate Washington Mutual's lower risk profile. HIGHLIGHTS - For the fiscal year ending 9/30 the largest contributor to positive performance was Washington Mutual. Despite strong performance we believe it still deserves to be the Fund's largest holding. - Office Depot, AT&T, H&R Block, Sprint, and Moody's also turned in strong performances for the quarter. - The 2001 capital gains distribution will be zero. Among the stocks that declined in value this year were two holdings--USG and US Industries--which were sold at large losses after we concluded that business values had permanently been impaired. The other decliners--Ceridian, Energizer and Visteon--are suffering from cyclically depressed results, but we continue to believe they are undervalued businesses run by shareholder friendly management where intrinsic value is likely to be substantially higher in the future. The only good thing that resulted from selling stocks in which we lost money was that we captured tax losses. Those losses more than offset the gains we realized on profitable sales, so we will have zero taxable gains to distribute this year. When we started The Oakmark Select Fund nearly five years ago, most mutual funds were concerned only about their pre-tax returns. We, however, explicitly stated our goal of maximizing after-tax returns. While we have been very pleased with our pre-tax returns, we are especially proud of how little of our pre-tax return has been lost to taxes.
AVERAGE ANNUAL TOTAL RETURNS(1) (AS OF 9/30/01) YEAR TO DATE 1-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (11/1/96) ---------------------------------------------------------- OAKMARK SELECT(21) Return before taxes 16.40% 25.75% 28.63% Return after taxes 16.40% 23.69% 26.87% Return after taxes 9.90% 16.37% 24.04% on distributions and sale of Fund shares ----------------------------------------------------------
PAST PERFORMANCE, BEFORE AND AFTER TAXES, CANNOT PREDICT FUTURE INVESTMENT RESULTS. * NOT ANNUALIZED As explained in more detail in The Oakmark Fund report, we believe the outlook for the market and for us as stock pickers is positive. Although our portfolio has performed well, much of the market has been experiencing lower prices for the last year-and-a-half. Our goal, as always, is to concentrate The Oakmark Select Fund assets in our favorite stocks. There were no changes in our holdings last quarter, but we continue to scour the fallen angels in an attempt to either increase the portfolio's expected return or decrease its risk. Thank you for your continued support. /s/ Bill Nygren /s/ Henry Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com berghoef@oakmark.com October 4, 2001 10 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.3% APPAREL--2.3% Liz Claiborne, Inc. 2,563,200 $ 96,632,640 RETAIL--16.9% Toys `R' Us, Inc. (a)(b) 12,223,500 $ 210,610,905 The Kroger Co. (a) 7,000,000 172,480,000 Office Depot, Inc. (a) 12,546,000 170,625,600 Tricon Global Restaurants, Inc. (a) 4,015,400 157,483,988 ------------- 711,200,493 HOUSEHOLD PRODUCTS--2.4% Energizer Holdings, Inc. (a)(b) 5,997,300 $ 99,675,126 OTHER CONSUMER GOODS & SERVICES--11.2% H&R Block, Inc. 8,110,400 $ 312,737,024 Mattel, Inc. 10,073,000 157,743,180 ------------- 470,480,204 BANK & THRIFTS--16.1% Washington Mutual, Inc. 17,519,700 $ 674,158,056 INFORMATION SERVICES--8.9% Moody's Corporation 4,143,600 $ 153,313,200 The Dun & Bradstreet Corporation (a)(b) 4,928,500 137,998,000 Ceridian Corporation (a) 5,834,500 84,600,250 ------------- 375,911,450 COMPUTER SERVICES--8.6% Electronic Data Systems Corporation 3,250,900 $ 187,186,822 First Data Corporation 2,965,200 172,752,552 ------------- 359,939,374 COMPUTER SOFTWARE--2.8% The Reynolds and Reynolds Company, Class A (b) 5,079,700 $ 118,357,010 TELECOMMUNICATIONS--8.8% AT&T Corp. 10,268,000 $ 198,172,400 Sprint Corporation 7,209,000 173,088,090 ------------- 371,260,490 PUBLISHING--3.5% Knight-Ridder, Inc. 2,606,500 $ 145,573,025 PHARMACEUTICALS--3.8% Chiron Corporation (a) 3,572,400 $ 158,507,388
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SHARES HELD/ PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.3% (CONT.) AUTOMOTIVE--1.9% Visteon Corporation 6,184,400 $ 78,851,100 OIL & NATURAL GAS--4.1% Burlington Resources Inc. 5,024,500 $ 171,888,145 TOTAL COMMON STOCKS (COST: $3,081,214,225) 3,832,434,501 SHORT TERM INVESTMENTS--8.1% U.S. GOVERNMENT BILLS--0.5% United States Treasury Bills, 3.35% due 1/24/2002 $20,000,000 $ 19,851,779 TOTAL U.S. GOVERNMENT BILLS (COST: $19,785,972) 19,851,779 COMMERCIAL PAPER--5.5% Citicorp, 2.35% - 3.51% due 10/1/2001 - 10/10/2001 $60,000,000 $ 60,000,000 American Express Credit Corporation, 2.44% due 10/5/2001 - 10/15/2001 60,000,000 60,000,000 Ford Motor Credit Corp., 2.45% - 3.00% due 10/2/2001 -10/12/2001 60,000,000 60,000,000 General Electric Capital Corporation, 3.25% due 10/1/2001 50,000,000 50,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $230,000,000) 230,000,000 REPURCHASE AGREEMENTS--2.1% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $90,701,047 collateralized by U.S. Treasury Bonds $90,678,000 $ 90,678,000 TOTAL REPURCHASE AGREEMENTS (COST: $90,678,000) 90,678,000 TOTAL SHORT TERM INVESTMENTS (COST: $340,463,972) 340,529,779 Total Investments (Cost $3,421,678,197) -- 99.4% (c) $4,172,964,280 Other Assets In Excess Of Other Liabilities -- 0.6% 23,776,551 -------------- TOTAL NET ASSETS -- 100% $4,196,740,831 ==============
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (c) At September 30, 2001, net unrealized appreciation of $751,286,083, for federal income tax purposes, consisted of gross unrealized appreciation of $834,734,223 and gross unrealized depreciation of $83,448,140. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 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 (9/30/01) 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 09/30/01 $18,026 $14,788
AVERAGE ANNUAL TOTAL RETURNS(1) (as of 9/30/01) YEAR TO DATE 1-YEAR 5-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (11/1/95) ---------------------------------------------------------------------------- OAKMARK SMALL CAP 6.43% 0.07% 6.35% 10.46% FUND Russell 2000 -15.36% -21.21% 4.54% 6.83% S&P Small Cap 600(10) -11.72% -10.62% 7.76% 10.05% Lipper Small Cap -1.14% 2.33% 8.69% 10.05% Value Index(11) ----------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The third calendar quarter of 2001 was difficult as nervousness concerning the slowing economy, combined with September's tragic events, caused a steep decline in the prices of U.S. equities. Additionally, the flight to quality that typically accompanies periods of national crisis resulted in small cap stocks underperforming their larger cap peers. The Russell 2000 small cap index declined 21% for the just ended quarter and on a year-to-date basis this index of small company stocks was down 15%. We feel fortunate to report that your Fund, while down by 15% in the most recent quarter, still is in positive territory for 2001 with a gain of 6%. Despite last quarter's challenges, your Fund widened its year-to-date performance relative to the Russell 2000 from 18% at the end of June to 21% at the close of September. We believe the current jumbled investment environment has created incremental potential for our group of analysts to find fundamentally undervalued small cap stocks and we are working diligently to identify stocks with excellent expected future returns. UNCERTAIN TIMES Little did we realize three months ago, when we wrote to our shareholders about preparing the Fund's portfolio for uncertain times, that the uncertainty would reach such unprecedented levels so soon. As we wrote to you last quarter: "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 13 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 not only own companies that are well positioned to benefit when economic growth resumes, but also 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." The aforementioned comments not only remain pertinent, but by positioning the portfolio's investments in this fashion, we have entered this period of great economic uncertainty with only modest concern about the financial viability of most of the companies in which we have invested. That is not to say several of our companies will not suffer short-term hits to their operations, but rather these firms have the financial staying power to emerge from this period of uncertainty as strong and vibrant competitors in their respective businesses. As we search for new investments for the Fund, we anticipate our bias for financially robust firms will continue to be key in selecting stocks that are added to the Fund's portfolio. MANAGING INVESTMENTS DURING TURMOIL The events of recent weeks have been emotionally unsettling, but for long-term optimists like us we see numerous opportunities. After the markets reopened on September 17th, we were able to add to many of our positions at good prices as we utilized some of the cash that the Fund had been holding awaiting lower stock prices. As the markets regained some stability we undertook some trades that not only upgraded the portfolio but also brought our estimated distribution down to zero as of September 30 with one month to go in the Fund's tax year. It is our intention to try and keep the potential distribution at zero, but in a volatile stock market no firm promises can be made. The Fund's portfolio grew by four positions to stand at fifty stocks at the end of the third calendar quarter. We added six new stocks and sold two stocks. We sold Heidrick & Struggles and Spherion Corp. due to deteriorating outlooks. We initiated positions in Cabot Oil & Gas, Grey Global Group, MCSi Inc., Measurement Specialties, Mentor Graphics and Optimal Robotics. All of our new purchases are companies with well above average balance sheet strength. Cabot Oil & Gas is an asset rich petroleum company with a stock that trades at a significant discount to our estimate of what their reserves are worth. Grey Global is an advertising agency with an underappreciated ability to generate future cash flow. MCSi Inc. is the leading firm that installs and services video conferencing equipment while Measurement Specialties is a growing provider of sensors to industrial and retail consumers. Mentor Graphics, a maker of software design tools for the semiconductor industry, reentered the portfolio. We originally bought this stock at prices under $15 in March 2000 and sold those shares in December at prices above $25. We have been able to reacquire Mentor shares in the mid-teens. Finally, we purchased a small position in Optimal Robotics, a rapidly growing, cash rich manufacturer of self-service checkout systems for grocery and general merchandise retailers. We believe that these new investments in financially strong companies in diverse industries should aid the Fund's future performance. OPPORTUNITIES IN TECHNOLOGY STOCKS In general, technology stocks have been a difficult sector in which to achieve positive investment returns over the past couple of years. While we are not known for our technology investments since they typically comprise less than 15% of the Fund's total assets, we have invested in and will in the future invest in technology companies. Firms that meet our investment criteria usually have either very solid business models in non-commodity niches and/or undervalued assets on their balance sheets. This disciplined approach has only yielded ten technology related investments for your Fund since January 1, 1999. However, these ten investments have resulted in net realized and unrealized gains of over $43 million for your Fund through September 30, 2001. By being selective our [SIDENOTE] HIGHLIGHTS - Flight to quality that typically accompanies periods of national crisis resulted in small cap stocks underperforming large cap peers. However, we expect the rebound in small cap value that began in 2000 to continue despite recent volatility, and to persist for the next few years. - As the markets regained some stability after 9/17, we added to many positions at attractive prices. These trades not only upgraded the portfolio but also brought our estimated distribution to zero as of September 30. - We added six new stocks and sold two stocks. All new purchases are companies with above-average balance sheet strength operating in diverse industries. 14 technology investments have resulted in six stocks achieving significant gains, two were approximately breakeven performers and two suffered losses. Mentor Graphics fits our investment parameters. First, Mentor has a rock solid balance sheet with minimal debt and over $2 per share in net cash. Second, Mentor has a strong and growing market share with its customers, and the company's research & development efforts continue to yield exciting new products. Finally, Mentor trades at less than eight times our estimate of 2002 cash flow which is a modest valuation based upon both Mentor's expected growth rate and the current low level of interest rates. Therefore, based upon these favorable factors, we have recently reestablished a position in Mentor for your Fund. THE FUTURE Many small cap stocks are selling at very compelling valuations. Therefore, we continue to expect the rebound in small cap value stocks that began in 2000 will, despite the recent volatility, likely persist for the next few years. We sincerely thank our shareholders for your steadfast 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 October 5, 2001 15 THE OAKMARK SMALL CAP FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------ COMMON STOCKS--93.8% ------------------------------------------------------------------------------------------------------ FOOD & BEVERAGE--7.2% Ralcorp Holdings, Inc. (a) 579,000 $ 11,267,340 Del Monte Foods Company (a) 1,020,000 7,854,000 ------------- 19,121,340 APPAREL--1.4% R.G. Barry Corporation (a)(d) 907,000 $ 3,664,280 RETAIL--3.3% ShopKo Stores, Inc. (a) 936,000 $ 7,759,440 Ugly Duckling Corporation (a) 370,000 1,024,900 ------------- 8,784,340 OFFICE EQUIPMENT--2.2% InFocus Corporation (a) 357,500 $ 4,665,375 MCSi, Inc. (a) 75,000 1,208,250 ------------- 5,873,625 OTHER CONSUMER GOODS & SERVICES--3.5% Department 56, Inc. (a) 600,000 $ 3,810,000 Central Parking Corporation 250,000 3,497,500 American Greetings Corporation, Class A 150,000 1,986,000 ------------- 9,293,500 BANK & THRIFTS--10.1% BankAtlantic Bancorp, Inc., Class A 1,023,700 $ 10,339,370 People's Bank of Bridgeport, Connecticut 325,000 7,215,000 Golden State Bancorp Inc. 190,000 5,776,000 PennFed Financial Services, Inc. 150,000 3,372,000 ------------- 26,702,370 INSURANCE--4.7% The PMI Group, Inc. 200,000 $ 12,478,000 OTHER FINANCIAL--2.3% NCO Group, Inc. (a) 450,000 $ 6,156,000 HOTELS & MOTELS--2.9% Prime Hospitality Corp. (a) 860,000 $ 7,568,000 EDUCATIONAL SERVICES--4.2% ITT Educational Services, Inc. (a) 349,800 $ 11,193,600 MARKETING SERVICES--0.2% Grey Global Group Inc. 1,000 $ 553,000 DATA STORAGE--1.6% Imation Corp. (a) 200,000 $ 4,180,000
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NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------ COMMON STOCKS--93.8% (CONT.) ------------------------------------------------------------------------------------------------------ COMPUTER SERVICES--2.7% CIBER, Inc. (a) 960,000 $ 6,048,000 Interland, Inc. (a) 1,050,000 1,102,500 ------------- 7,150,500 COMPUTER SOFTWARE--7.8% MSC.Software Corp. (a) 625,000 $ 10,062,500 Mentor Graphics Corporation (a) 520,000 7,165,600 SilverStream Software, Inc. (a) 700,000 2,604,000 Symantec Corporation (a) 20,000 693,400 ------------- 20,525,500 COMPUTER SYSTEMS--0.5% Optimal Robotics Corp., Class A (a) 50,000 $ 1,225,000 SECURITY SYSTEMS--3.8% Checkpoint Systems, Inc. (a) 910,000 $ 9,946,300 PHARMACEUTICALS--2.1% Elan Corporation plc (a)(b) 115,000 $ 5,571,750 MEDICAL RESEARCH--1.0% Covance Inc. (a) 155,000 $ 2,776,050 MEDICAL PRODUCTS--5.9% CONMED Corporation (a) 322,500 $ 5,708,250 Sybron Dental Specialties, Inc. (a) 250,000 4,650,000 Hanger Orthopedic Group, Inc. (a)(d) 960,000 3,552,000 ORATEC Interventions, Inc. (a) 250,000 1,730,000 ------------- 15,640,250 AUTOMOTIVE--0.5% Standard Motor Products, Inc. 120,000 $ 1,404,000 AUTOMOBILE RENTALS--1.2% Dollar Thrifty Automotive Group, Inc. (a) 310,000 $ 3,084,500 TRANSPORTATION SERVICES--3.2% Teekay Shipping Corporation (c) 250,000 $ 7,795,000 Frontline Limited (c) 75,000 682,500 ------------- 8,477,500 INSTRUMENTS--4.4% IDEXX Laboratories, Inc. (a) 400,000 $ 9,348,000 Measurement Specialties, Inc. (a) 225,000 2,225,250 ------------- 11,573,250 MACHINERY & INDUSTRIAL PROCESSING--2.1% Columbus McKinnon Corporation 525,000 $ 5,460,000
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SHARES HELD/ NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------ COMMON STOCKS--93.8% (CONT.) ------------------------------------------------------------------------------------------------------ CHEMICALS--2.1% H.B. Fuller Company 70,000 $ 3,206,000 Georgia Gulf Corporation 150,000 2,410,500 ------------- 5,616,500 OIL & NATURAL GAS--4.8% St. Mary Land & Exploration Company 300,000 $ 4,779,000 Cabot Oil & Gas Corporation, Class A 200,000 3,990,000 Berry Petroleum Company, Class A 250,000 3,862,500 ------------- 12,631,500 OTHER INDUSTRIAL GOODS & SERVICES--1.3% Intergrated Electrical Services, Inc. (a) 360,000 $ 1,980,000 Gardner Denver Inc. (a) 65,000 1,443,000 ------------- 3,423,000 REAL ESTATE--6.8% Catellus Development Corporation (a) 750,000 $ 13,110,000 Trammell Crow Company (a) 500,000 5,000,000 ------------- 18,110,000 TOTAL COMMON STOCKS (COST: $255,152,479) 248,183,655 SHORT TERM INVESTMENTS--3.6% COMMERCIAL PAPER--1.9% General Electric Capital Corporation, 3.25% due 10/1/2001 $5,000,000 $ 5,000,000 TOTAL COMMERCIAL PAPER (COST: $5,000,000) 5,000,000 REPURCHASE AGREEMENTS--1.7% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $4,565,160, collateralized by U.S. Treasury Bonds $4,564,000 $ 4,564,000 TOTAL REPURCHASE AGREEMENTS (COST: $4,564,000) 4,564,000 TOTAL SHORT TERM INVESTMENTS (COST: $9,564,000) 9,564,000 Total Investments (Cost $264,716,479)--97.4% (e) $257,747,655 Other Assets In Excess Of Other Liabilities--2.6% 6,864,550 ------------- TOTAL NET ASSETS--100% $264,612,205 =============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents foreign domiciled corporation. (d) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (e) At September 30, 2001, net unrealized depreciation of $6,968,824, for federal income tax purposes, consisted of gross unrealized appreciation of $43,469,101 and gross unrealized depreciation of $50,437,925. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 18 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 (9/30/01) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(12) [CHART]
THE OAKMARK LIPPER EQUITY AND 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 09/30/01 $23,751 $16,621
AVERAGE ANNUAL TOTAL RETURNS(1) (as of 9/30/01)
YEAR TO DATE 1-YEAR 5-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (11/1/95) -------------------------------------------------------------------------------- OAKMARK EQUITY AND 9.34% 14.40% 16.40% 15.73% INCOME FUND S&P 500(4) -20.39% -26.62% 10.22% 12.08% Lehman Govt./ 8.44% 13.17% 8.00% 7.25% Corp. Bond(13) Lipper Balanced Index -9.13% -10.33% 8.19% 8.96% --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized QUARTER AND ANNUAL REVIEW Despite ending at a difficult moment, fiscal 2001 proved to be another profitable period for The Oakmark Equity and Income Fund. The return for the twelve months was 14%, which contrasts with a loss of 10% for the Lipper Balanced Fund Index, our primary standard of comparison. The September quarter itself, however, was not positive as the stock market's drastic downturn overwhelmed the moderate gains we realized from bonds. For the quarter, the Fund declined 3%, again far better than the 8% loss that the Lipper posted. Oakmark Equity and Income garnered many new shareholders over the last twelve months, so a brief refresher course on some of our firm's guiding principles may be appropriate. Our first three rules of investing are "Don't lose money," "Don't lose money," "Don't lose money." The power of negative returns has been amply demonstrated over the last 18 months. Mathematics dictates that a loss of 20% in a period requires a gain of 25% in the subsequent period just to get back to the starting point. Turning to our recent results for the Fund, we are grateful to have bested our standard of comparison in the quarter, but we are unimpressed with the absolute outcome. The quarter was the third to lose money in the Fund's 23-quarter lifespan. Our goal is to improve upon that record. OUTLOOK IN THE AFTERMATH Even before September 11th the US economy appeared to be headed for a period of torpor. Given the horrors of that date and the subsequent layoffs, bankruptcies, etc., a recession seems probable. Speaking only about the economy, September 11th not only diminished consumer and 19 investor confidence but also introduced new taxes on business in the guise of security measures. Since September 11th, economists and clients have suggested many possible paths for the economy. Over the last month our clients have frequently espoused the hypothesis that major acts of terrorism will become a regular feature of our socio-political environment. Another common model has the United States repeating the Japanese experience of the previous decade. In this model American consumers lose their natural ebullience and government fiscal and monetary policy fail to stimulate economic recovery. In either of these economic scenarios, the investing environment would be extremely difficult. We have no more ability to forecast the economy successfully than we do to predict when (or if) acts of terrorism may hit. We do believe that in our country the process of reversion to the mean is very powerful and that extreme outcomes for the economy or stocks tend to be unsustainable. In this cycle government leadership initiated efforts to head off recession far earlier than is usually the case, and the new spirit of bipartisanship may enable additional stimulus efforts to be enacted quickly. We believe our most appropriate course of action for you, our shareholders, is to continue to invest according to the tenets of our value-based investing style. In this manner we attempt to make sense of a world and investing environment that periodically does not make sense. WHAT DID WE DO? Historically this quarter's report has focused on the Fund's successful holdings of the previous 12 months. Given the unprecedented events in September, we will break with tradition and recount our actions in the last two weeks of that month. This exercise will demonstrate both our inability to forecast the future correctly and the positive attributes of adhering to our investing approach. The stock market was closed from September 11th through Friday, the 15th. This gave us time to prepare for a challenging market opening on the following Monday. Our first thought was that shareholders of all mutual funds would become more risk-averse and that redemptions from Equity and Income were likely. We also observed that during the period our markets were closed foreign stock markets sank while the prices of oil and gold rallied. We believed the equity portion of the Fund was favorably positioned with minimal exposure to the most affected industries while the largest industry exposure was in energy. Accordingly, we prepared to react to three possibilities: significant redemptions from the Fund, a strong rally in energy stocks that could be a selling opportunity, and potential buying opportunities in insurance and travel-related issues. So how effective did our preparations prove? To our surprise, the Fund received positive cash flow from our investors over the period. Second, energy prices sank like a stone on the morning the stock market reopened, pulling the prices of our energy company holdings down. Our readiness to buy issues with depressed prices, however, did prove fruitful. We initiated positions in eight stocks and two bonds after the market reopened. PartnerRe, a Bermuda-based reinsurance company and previous holding of the fund, has enjoyed such a vigorous recovery from its post-9/11 bottom that the stock is today the Fund's largest holding. Other new positions we purchased after drastic price declines include industrial conglomerates (Cooper, Dover, and Textron), a hotel company (Starwood), a retailer (Gap), an advertising agency (Interpublic), and another energy name (Cabot Oil & Gas). We also found timely buys in the fixed income sector as rattled sellers sought liquidity wherever they could find it. We purchased the bonds of Park Place Entertainment and Rite Aid at prices that we estimate to offer the return potential of an equity holding. The obvious conclusion is that we serve our clients best when we stick to our knitting: constructing a portfolio by [SIDENOTE] HIGHLIGHTS - The Fund returned 14% for the 12-month period ending 9/30, compared to a loss of 10% for the Lipper Balanced Fund Index. - We initiated positions in eight stocks and two bonds after the market reopened on 9/17, as the Fund received positive cash flow from our investors over the period. - After drastic price declines, new stock purchases we made included industrial conglomerates, a hotel company, a retailer, an advertising agency, and an energy name. We also found timely buys in the fixed-income sector as rattled sellers sought liquidity. 20 the disciplined application of our value-investing style to the opportunities the markets present to us. And, the corollary to this rule is that the best opportunities arise when we are buying from an "informationless" seller, I.E. an investor who is selling because of reasons that have nothing to do with fundamental knowledge of the investment. In closing, we once again thank you our shareholders for your support and loyalty through this difficult time. Your constancy has made our job easier. We all pray that our next letter will cover a more tranquil time period. In the meantime we welcome your e-mailed questions or comments. /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 October 4, 2001 21 THE OAKMARK EQUITY AND INCOME FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
SHARES HELD MARKET VALUE EQUITY AND EQUIVALENTS--57.6% FOOD & BEVERAGE--3.0% UST Inc. 560,000 $ 18,592,000 RETAIL--3.6% Office Depot, Inc. (a) 980,000 $ 13,328,000 J.C. Penney Company, Inc. 350,000 7,665,000 The Gap, Inc. 125,000 1,493,750 ------------- 22,486,750 HOUSEHOLD PRODUCTS--0.2% Energizer Holdings, Inc. (a) 80,000 $ 1,329,600 BANK & THRIFTS--2.2% U.S. Bancorp 610,703 $ 13,545,393 INSURANCE--6.5% PartnerRe Ltd. (b) 440,600 $ 20,752,260 SAFECO Corporation 650,000 19,714,500 ------------- 40,466,760 OTHER FINANCIAL--2.7% GATX Corporation 500,000 $ 16,820,000 HOTELS & MOTELS--0.7% Starwood Hotels & Resorts Worldwide, Inc. 200,000 $ 4,400,000 MARKETING SERVICES--0.3% The Interpublic Group of Companies, Inc. 100,000 $ 2,040,000 INFORMATION SERVICES--1.6% Ceridian Corporation (a) 705,000 $ 10,222,500 COMPUTER SOFTWARE--5.4% Novell, Inc. (a) 3,500,000 $ 12,810,000 Synopsys, Inc. (a) 275,000 11,030,222 The Reynolds and Reynolds Company, Class A 414,000 9,646,200 ------------- 33,486,422 PRINTING--1.5% Valassis Communications, Inc. (a) 289,400 $ 9,234,754 PHARMACEUTICALS--4.9% Watson Pharmaceuticals, Inc. (a) 336,000 $ 18,382,560 Chiron Corporation (a) 270,000 11,979,900 ------------- 30,362,460 MEDICAL PRODUCTS--3.4% Sybron Dental Specialties, Inc. (a) 341,666 $ 6,354,988 Edwards Lifesciences Corporation (a) 275,000 6,160,000 Guidant Corporation (a) 125,000 4,812,500 Apogent Technologies Inc. (a) 150,000 3,585,000 ------------- 20,912,488
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SHARES HELD MARKET VALUE EQUITY AND EQUIVALENTS--57.6% (CONT.) TRANSPORTATION SERVICES--0.2% Nordic American Tanker Shipping Limited (b) 96,900 $ 1,452,531 AEROSPACE & DEFENSE--1.9% Rockwell Collins 823,600 $ 11,695,120 AGRICULTURAL EQUIPMENT--0.3% Alamo Group Inc. 141,900 $ 1,827,672 INSTRUMENTS--0.7% Varian Inc. (a) 177,900 $ 4,532,892 MACHINERY & INDUSTRIAL PROCESSING--3.9% Cooper Industries, Inc. 300,000 $ 12,441,000 Rockwell International Corporation 811,000 11,905,480 ------------- 24,346,480 FORESTRY PRODUCTS--2.3% Georgia-Pacific Corporation (Timber Group) 401,200 $ 14,531,464 OIL & NATURAL GAS--8.4% XTO Energy, Inc. 1,328,000 $ 18,525,600 Conoco Inc. 675,000 17,165,250 St. Mary Land & Exploration Company 780,000 12,425,400 Berry Petroleum Company 148,100 2,288,145 Cabot Oil & Gas Corporation 85,500 1,705,725 ------------- 52,110,120 REAL ESTATE--1.9% Catellus Development Corporation (a) 695,900 $ 12,164,332 DIVERSIFIED CONGLOMERATES--2.0% Textron, Inc. 286,100 $ 9,615,821 Dover Corporation 100,000 3,011,000 ------------- 12,626,821 TOTAL EQUITY AND EQUIVALENTS (COST: $362,269,593) 359,186,559 FIXED INCOME --29.3% PREFERRED STOCK--0.5% BANK & THRIFTS--0.3% BBC Capital Trust I, Preferred, 9.50% 48,000 $ 1,183,200 Pennfed Capital Trust, Preferred, 8.90% 27,500 694,375 Fidelity Capital Trust I, Preferred, 8.375% 43,500 426,300 ------------- 2,303,875 TELECOMMUNICATIONS--0.1% MediaOne Finance Trust III, Preferred, 9.04% 20,000 $ 510,000
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SHARES HELD/ PAR VALUE MARKET VALUE FIXED INCOME--29.3% (CONT.) REAL ESTATE--0.1% Host Marriott Corporation, Preferred Class B, 10.00% 21,000 $ 483,000 Host Marriott Corporation, Preferred Class A, 10.00% 5,000 113,600 ------------- 596,600 TOTAL PREFERRED STOCK (COST: $3,350,448) 3,410,475 CORPORATE BONDS--1.5% RETAIL--0.4% Rite Aid Corporation, 7.625% due 4/15/2005, Senior Notes $ 2,000,000 $ 1,760,000 Ugly Duckling Corporation, 12.00% due 10/15/2003, Subordinated Debenture 650,000 520,000 ------------- 2,280,000 OFFICE EQUIPMENT--0.1% Xerox Capital Europe Plc, 5.75% due 5/15/2002 $ 500,000 $ 474,830 HOTELS & MOTELS--0.5% Park Place Entertainment, 7.00% due 7/15/2004, Senior Notes $ 2,700,000 $ 2,679,658 Park Place Entertainment, 7.375% due 6/1/2002, Senior Notes 320,000 322,112 ------------- 3,001,770 TV PROGRAMMING--0.3% Liberty Media Corporation, 8.25% due 2/1/2030, Debenture $ 2,500,000 $ 2,224,510 BUILDING MATERIALS & CONSTRUCTION--0.1% Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note $ 750,000 $ 690,000 UTILITIES--0.1% Midland Funding Corporation, 11.75% due 7/23/2005 $ 500,000 $ 559,375 TOTAL CORPORATE BONDS (COST: $9,369,855) 9,230,485 GOVERNMENT AND AGENCY SECURITIES--27.3% U.S. GOVERNMENT NOTES--26.4% United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed $42,576,720 $ 43,800,801 United States Treasury Notes, 10.75% due 8/15/2005 20,000,000 25,040,620 United States Treasury Notes, 7.00% due 7/15/2006 20,000,000 22,655,460 United States Treasury Notes, 6.625% due 5/15/2007 20,000,000 22,512,500 United States Treasury Notes, 11.875% due 11/15/2003 15,000,000 17,728,710 United States Treasury Notes, 7.875% due 11/15/2004 15,000,000 16,958,790 United States Treasury Notes, 7.25% due 8/15/2004 5,000,000 5,541,600 United States Treasury Notes, 5.25% due 5/15/2004 5,000,000 5,267,190 United States Treasury Notes, 5.25% due 8/15/2003 5,000,000 5,220,655 ------------- 164,726,326
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PAR VALUE MARKET VALUE FIXED INCOME--29.3% (CONT.) U.S. GOVERNMENT AGENCIES--0.9% Federal Home Loan Bank, 6.75% due 5/1/2002 $ 2,000,000 $ 2,049,550 Federal Home Loan Bank, 7.85% due 6/7/2004, Consolidated Bond 1,250,000 1,295,501 Federal Home Loan Bank, 6.50% due 10/19/2001 1,000,000 1,016,071 Federal Home Loan Mortgage Corporation, 7.00% due 2/23/2016 1,000,000 1,004,236 ------------- 5,365,358 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $165,122,927) 170,091,684 TOTAL FIXED INCOME (COST: $177,843,230) 182,732,644 SHORT TERM INVESTMENTS--14.3% GOVERNMENT AND AGENCY SECURITIES--3.2% U.S. GOVERNMENT AGENCIES--3.2% Federal Home Loan Bank, 2.75% due 10/9/2001, Discount Note $20,000,000 $ 19,987,778 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $19,987,778) 19,987,778 COMMERCIAL PAPER--8.0% Citicorp, 3.20% due 10/2/2001 $10,000,000 $ 10,000,000 American Express Credit Corporation, 3.35% due 10/1/2001 20,000,000 20,000,000 General Electric Capital Corporation, 3.25% due 10/1/2001 20,000,000 20,000,000 ------------- TOTAL COMMERCIAL PAPER (COST: $50,000,000) 50,000,000 REPURCHASE AGREEMENTS--3.1% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $18,844,789, collateralized by U.S. Treasury Bonds. $18,840,000 $ 18,840,000 TOTAL REPURCHASE AGREEMENTS (COST: $18,840,000) 18,840,000 TOTAL SHORT TERM INVESTMENTS (COST: $88,827,778) 88,827,778 Total Investments (Cost $628,940,601) - 101.2% (c) $ 630,746,981 Other Liabilities In Excess Of Other Assets - (1.2)% (7,390,585) ------------- TOTAL NET ASSETS--100% $ 623,356,396 =============
(a) Non-income producing security. (b) Represents foreign domiciled security. (c) At September 30, 2001, net unrealized appreciation of $1,806,380, for federal income tax purposes, consisted of gross unrealized appreciation of $29,993,999 and gross unrealized depreciation of $28,187,619. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25 THE OAKMARK GLOBAL FUND REPORT FROM GREGORY L. JACKSON AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF GREGORY L. JACKSON AND MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (9/30/01) AS COMPARED TO THE MSCI WORLD INDEX(14) [CHART]
THE OAKMARK MSCI WORLD GLOBAL FUND INDEX 8/1/1999 $10,000 $10,000 9/30/1999 $9,180 $9,883 12/31/1999 $9,981 $11,550 3/31/2000 $10,061 $11,668 6/30/2000 $10,381 $11,255 9/30/2000 $10,922 $10,689 12/31/2000 $11,562 $10,028 3/31/2001 $11,480 $8,739 6/30/2001 $13,289 $8,959 9/30/2001 $11,071 $7,676
AVERAGE ANNUAL TOTAL RETURNS(1) (as of 9/30/01) YEAR TO DATE 1-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (8/4/99) -------------------------------------------------------------------------------- OAKMARK GLOBAL FUND -4.24% 1.37% 4.80%(2) MSCI World -23.40% -28.20% -11.48% Lipper Global Index(15) -23.18% -27.35% -6.84% --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized FELLOW SHAREHOLDERS, The Oakmark Global Fund suffered from significant declines in world equity markets this quarter, declining by 17% for the three-month period ending September 30, 2001. This performance was roughly in line with the MSCI World and the Lipper Global Fund indices, which were down 14% and 15%, respectively. For the twelve-month period ending September 30, 2001, which represents our fiscal year end, The Oakmark Global Fund returned 1% compared to large declines of 28% and 27% for the MSCI World Index and the Lipper Global Fund Index, respectively. This significant out-performance by your Fund during these times of turbulent markets is a reflection of our focus on downside protection in the portfolio as well as capital appreciation. OPPORTUNITIES We believe that in times of extraordinary share price volatility the markets usually provide greater long-term opportunity. More volatility usually creates greater gaps between share prices and intrinsic business value. In taking advantage of these opportunities, we strive to upgrade the quality of the portfolio while maintaining the same expected return. We focus on businesses with higher profitability, and higher growth; in short, companies that in most circumstances would be too expensive to meet our investment criteria. Two top ten positions that illustrate this are SYNOPSYS and MICHAEL PAGE INTERNATIONAL (UK), both of which were added during the quarter. SYNOPSYS sells design automation solutions to the manufacturers of advanced semi-conductors. These software programs help chip companies design and test new chips. So far, 26 Synopsys' underlying business has been resilient to the downturn in the industry as chip companies usually cut back on R&D as a last resort. As indicated on several occasions we prefer to own "growth" stocks but only on our own terms: where the share price fails to accurately reflect the intrinsic value of the business. Although there remains the possibility that the company will be temporarily impacted by the problems currently facing its customers, an important margin of safety lies in the company's balance sheet. An accounting change has both masked the company's true earnings power and allowed for the effective elimination of price discounting. We believe the market has misunderstood the true economic impact on the business, and as a result has caused the share price to dive. As reported earnings normalize over the next two years, most of this hidden value and the significant under-valuation of Synopsys will become visible. In the UK we have added MICHAEL PAGE INTERNATIONAL, one of the premier recruiting consultants in Europe. The company was spun-out in March of this year from the heavily indebted US holding company Spherion. Worries about a slowdown in the economy helped cause the stock to plunge, dropping from a high of 235p to 108p. Last month in London we again met with both CEO Terry Benson and CFO Stephen Puckett and came away even more impressed by their business model and financial focus. Management's record of organic growth and profitability are the envy of the industry. Further, top management's compensation is very dependent on share price appreciation. It was also clear from our discussion that they are well prepared for a slow-down in their business, and have done a better job than their competitors in weathering downturns in the past. One of the most successful aspects of their economic model is a profit-sharing scheme that keeps everyone focused on the bottom-line. Each consultant gets back 25% of his profit contribution as a bonus, so expenses feel as though they are "coming out of one's own pocket". This profit focus has also prevented management from building a lot of fixed costs that would come back to bite them in a down recruitment market. There is some cyclical risk to the short-term operating results and things have started to slow, though not dramatically. The company's financial position looks strong, and there will be net cash on the balance sheet by the end of this year. Given substantial free cash flow generation and the current depressed share price, management would look at share buybacks to the extent they have excess capital. LOOKING FORWARD These two new investments hopefully give you insight into why we are so optimistic about our current positions and future prospects. When the market allows you to buy such quality businesses at large discounts to intrinsic value, we get excited about the long-term performance prospects of your Fund. We thank you for your continued confidence in the newest fund in the Oakmark Family. We look forward to a long and prosperous future. /S/ Gregory L. Jackson -------------------------- GREGORY L. JACKSON Portfolio Manager gjackson@oakmark.com /s/ Michael J. Welsh -------------------------- MICHAEL J. WELSH, CFA, CPA Portfolio Manager 102521.2142.compuserve.com October 8, 2001 [SIDENOTE] HIGHLIGHTS - The market is providing us with opportunities to buy quality businesses at large discounts to intrinsic value. We are optimistic about current positions and excited about the Fund's long-term prospects. - In taking advantage of short-term market volatility, we strive to upgrade the quality of the portfolio by focusing on undervalued businesses with higher profitability and higher growth potential. - Two top-ten positions were added this past quarter, Synopsys and Michael Page Intl., which typify our investment approach. 27 GLOBAL DIVERSIFICATION--SEPTEMBER 30, 2001 [CHART]
% OF FUND NET ASSETS UNITED STATES 43.7% EUROPE 27.3% Great Britain 14.6% * France 3.7% * Italy 3.5% * Netherlands 3.1% Switzerland 2.4% PACIFIC RIM 14.7% Korea 7.9% Japan 5.3% Australia 1.5% LATIN AMERICA 4.1% Mexico 4.1%
* Euro currency countries comprise 10.3% of the Fund. 28 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--89.9% FOOD & BEVERAGE--7.4% Lotte Chilsung Beverage Soft Drinks, Juices, & Sport Drinks Co., Ltd. (Korea) Manufacturer 6,700 $ 1,325,613 Hite Brewery Co., Ltd. Brewer (Korea) 35,500 1,265,913 Diageo plc Beverages, Wines, & Spirits (Great Britain) Manufacturer 95,000 999,297 -------------- 3,590,823 RETAIL--6.1% Somerfield plc Food Retailer (Great Britain) 1,198,000 $ 1,571,906 ShopKo Stores, Inc. Specialty Discount Retailer (United States), (a) 166,600 1,381,114 -------------- 2,953,020 HOME FURNISHINGS--3.1% Hunter Douglas N.V. Window Coverings Manufacturer (Netherlands) 68,000 $ 1,485,201 OTHER CONSUMER GOODS & SERVICES--0.7% Royal Doulton plc Tableware & Giftware (Great Britain), (a) 1,069,700 $ 345,976 OTHER FINANCIAL 2.4% Ichiyoshi Securities Co., Stock Broker Ltd. (Japan) 354,000 $ 1,134,368 HOTELS & MOTELS--2.1% Jarvis Hotels plc Hotel Operator (Great Britain) 705,000 $ 1,026,091 HUMAN RESOURCES--4.8% Michael Page Recruitment Consultancy Services International plc (Great Britain) 1,447,000 $ 2,308,127 EDUCATIONAL SERVICES--9.0% ITT Educational Services, Postsecondary Degree Programs Inc. (United States), (a) 85,000 $ 2,720,000 Learning Tree Computer Related Education International, Inc. (United States), (a) 80,000 1,624,000 -------------- 4,344,000
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DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--89.9% (CONT.) MARKETING SERVICES--2.8% The Interpublic Group Advertising & Marketing Services of Companies, Inc. (United States) 65,000 $ 1,326,000 INFORMATION SERVICES--6.6% Ceridian Corporation Data Management Services (United States), (a) 115,000 $ 1,667,500 Equifax Inc. Consumer Credit Information (United States) 70,000 1,533,000 -------------- 3,200,500 COMPUTER SERVICES--4.9% Meitec Corporation Software Engineering Services (Japan) 55,100 $ 1,432,849 First Data Corporation Electronic Commerce Services (United States) 16,000 932,160 -------------- 2,365,009 COMPUTER SOFTWARE--14.4% Novell, Inc. Network & Internet (United States), (a) Integration Software 700,000 $ 2,562,000 Synopsys, Inc. Electonic Design Automation (United States), (a) 60,000 2,406,594 The Reynolds and Information Management Systems Reynolds Company, Class A (United States) 85,000 1,980,500 -------------- 6,949,094 COMPUTER SYSTEMS--3.1% Lectra (France), (a) Manufacturing Process Systems 516,998 $ 1,505,581 TELECOMMUNICATIONS--1.8% SK Telecom Co., Mobile Telecommunications Ltd. (Korea) 5,400 $ 861,350 BROADCASTING & CABLE TV--4.1% Grupo Televisa S.A. Television Production & (Mexico), (a)(b) Broadcasting 69,100 $ 1,983,170 PRINTING--4.3% Valassis Communications, Product Promotions Printer Inc. (United States), (a) 65,000 $ 2,074,150
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SHARES HELD/ DESCRIPTION PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--89.9% (CONT.) MEDICAL PRODUCTS--1.9% Edwards Lifesciences Respiratory Products Corporation (United States), (a) 40,000 $ 896,000 AUTOMOBILES--3.5% Ducati Motor Holding Motorcycle Manufacturer S.p.A. (Italy), (a) 1,375,500 $ 1,689,894 CHEMICALS--2.4% Givaudan Fragrance & Flavor (Switzerland), (a) Compound Manufacturer 3,800 $ 1,143,475 OTHER INDUSTRIAL GOODS & SERVICES--2.3% Enodis plc (Great Britain) Food Processing Equipment 695,000 $ 796,968 GFI Industries SA (France) Industrial Fastener Manufacturer 20,325 297,798 -------------- 1,094,766 DIVERSIFIED CONGLOMERATES--2.2% Pacific Dunlop Limited Diversified Manufacturer (Australia) 2,065,000 $ 735,446 Tae Young Corp. (Korea) Heavy Construction 16,900 335,667 1,071,113 -------------- TOTAL COMMON STOCKS (COST: $45,987,336) 43,347,708 SHORT TERM INVESTMENTS--9.6% COMMERCIAL PAPER--6.2% American Express Credit Corporation, 3.35% due 10/1/2001 $1,500,000 $ 1,500,000 General Electric Capital Corporation, 3.25% due 10/1/2001 1,500,000 1,500,000 -------------- TOTAL COMMERCIAL PAPER (COST: $3,000,000) 3,000,000 REPURCHASE AGREEMENTS--3.4% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $1,638,416, collateralized by U.S.Treasury Bonds $1,638,000 $ 1,638,000 TOTAL REPURCHASE AGREEMENTS (COST: $1,638,000) 1,638,000 TOTAL SHORT TERM INVESTMENTS (COST: $4,638,000) 4,638,000 Total Investments (Cost $50,625,336)--99.5% (c) 47,985,708
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SHARES SUBJECT DESCRIPTION TO CALL MARKET VALUE ----------------------------------------------------------------------------------------------------------------------------- CALL OPTIONS WRITTEN--(0.1%) EQUITY OPTIONS--(0.1%) EDUCATIONAL SERVICES--(0.1%) ITT Educational Services, Postsecondary Degree Programs Inc., January 45 Calls (United States) (25,000) $ (61,250) MEDICAL PRODUCTS--0.0% Edwards Lifesciences Respiratory Products Corporation, November 30 Calls (United States) (20,000) (8,000) TOTAL EQUITY OPTIONS (PREMIUMS RECEIVED: $(141,020)) (69,250) Total Call Options Written (Premiums Received: $(141,020))--(0.1)% (69,250) Foreign Currencies (Proceeds $7)--(0.0)% $ 7 Other Assets In Excess Of Other Liabilities--0.6% (d) 287,546 -------------- TOTAL NET ASSETS--100% $ 48,204,011 ==============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) At September 30, 2001, net unrealized depreciation of $2,567,858 for federal income tax purposes, consisted of gross unrealized appreciation of $4,014,151 and gross unrealized depreciation of $6,582,009. (d) Includes transaction hedges. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 32 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO AND MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (9/30/01) COMPARED TO THE MSCI WORLD EX U.S. INDEX(16) [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD 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 9/30/2001 $23,728 $16,062
AVERAGE ANNUAL TOTAL RETURNS(1) (as of 9/30/01)
YEAR TO DATE 1-YEAR 5-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (9/30/92) -------------------------------------------------------------------------------- OAKMARK -19.08% -13.10% 5.28% 10.07% INTERNATIONAL FUND MSCI World ex. U.S. -26.65% -29.23% 0.14% 5.40% MSCI EAFE(17) -26.56% -28.65% -0.14% 5.23% Lipper International -25.61% -28.60% 2.14% 6.84% Index(18) --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized FELLOW SHAREHOLDERS, The Third Quarter of 2001 was rough for both the markets and your Fund. The Oakmark International Fund was down 19% compared to declines in the MSCI World ex U.S. Index and Lipper International Fund Index of 14% and 15%. It is interesting to note that our under-performance of these benchmarks occurred after the events of September 11th. From then until the end of the quarter, Japanese stocks, where we are underweighted, did well, while smaller and mid-cap stocks, where we are overweighted, did not. Year-to-date and from inception, your Fund continues to significantly outperform both of those indices. Though there has been enormous price erosion in the world stock markets, we do not see a corresponding diminution in underlying business values. This to us means opportunity. We are extremely enthusiastic about investment opportunities going forward and are very bullish on future prospects based on the availability of so much value. BUT EVERYONE IS DOING IT... A few years ago, there was a trend in the global telecom equipment industry to grow the underlying business by acquiring other, smaller niche players within the industry at largely inflated prices. The argument was that these smaller companies had some desired technological innovation. Price did not matter because acquisitions were financed with high-priced freshly issued stock. ALL of the global "blue-chip" companies were sucked into this frenzy: Marconi of the UK, Alcatel of France, Northern Telecom and JDS Uniphase of Canada. They all jumped off similar, but slightly different cliffs. 33 As everyone can recognize today the results were catastrophic! The four mentioned entities have lost, at the time of this writing, over $550 billion in market capitalization. That is equal to the combined total stock market capitalization of Sweden, Hong Kong, New Zealand and Singapore. Four different companies in the same industry all pursuing the same failed strategy. It truly illustrates the danger of groupthink. This amount of wealth destruction in no way can be minimized. JDS Uniphase alone wrote off over US$50 billion in goodwill this year, a tacit admission that they may have over-paid a tad for their acquisitions. With that same amount of money they could have owned the entire Portuguese stock market. It is impossible to envision how much US$50 billion buys you in Research & Development! This episode illustrates two keys to successful investing: the power of independent thinking and the importance of price. MARKET VOLATILITY EQUALS INVESTMENT OPPORTUNITY! A frequent question asked over these past troubling weeks is how have we reacted to the recent wild swings in the global markets. As value investors we constantly search for high quality businesses at low prices. Volatile markets tend to, in the short run, be non-discriminating. All stocks get hit. In these instances, we try to increase quality levels within the portfolio by adding to our highest quality names or by adding new names that, because of price volatility, suddenly fall within our buy range. We aim to constantly upgrade the quality of the portfolio at no expense to expected return. These times are unique, and represent uncommon market conditions which history has proven to be good times to increase equity market exposure. Today, we are extremely excited about the make-up of our portfolio. Values today compare to the post 1987 crash and medium and long-term prospects look excellent for our businesses. Whether it is a company like GIVAUDAN, a Swiss based global leader in flavors and fragrances or media companies like AEGIS (UK based global buyer of media) and TOKYO BROADCASTING, we feel we are as well positioned as ever to profit over time. Finally, we thank our shareholders for their patience during these unique and unstable times. We are very confident that as in the past there will be a reward for this patience. /s/ David G. Herro --------------------------- DAVID G. HERRO, CFA Portfolio Manager DGH100@earthlink.net /s/ Michael J. Welsh --------------------------- MICHAEL J. WELSH, CFA, CPA Portfolio Manager 102521.2142@compuserve.com October 5, 2001 [SIDENOTE] HIGHLIGHTS - Values today compare to the post-1987 crash and medium- and long-term prospects look excellent for our businesses. - As value investors, we constantly search for high-quality businesses at low prices, and seek to upgrade portfolio quality at no expense to expected return. - We improved quality by adding to our highest quality positions and by introducing new names that, because of price volatility, suddenly fell within our buy range. 34 INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2001 [CHART]
% OF FUND NET ASSETS EUROPE 61.8% Great Britain 19.6% * Netherlands 8.5% * Finland 6.9% * France 6.8% * Italy 6.5% Sweden 6.2% Switzerland 4.1% * Ireland 2.8% * Greece 0.4% PACIFIC RIM 22.7% Japan 7.4% Korea 7.3% Australia 3.4% Singapore 2.4% Hong Kong 2.2% LATIN AMERICA 8.4% Mexico 3.5% Brazil 2.2% Panama 2.0% Argentina 0.7% OTHER 1.7% Israel 1.7%
* Euro currency countries comprise 31.9% of the Fund. 35 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
NAME DESCRIPTION SHARES HELD MARKET VALUE ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.6% FOOD & BEVERAGE--9.5% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 2,656,000 27,938,248 Lotte Chilsung Beverage Co., Ltd. (Korea), (d) Soft Drinks, Juices, & Sport Drinks Manufacturer 93,000 18,400,307 Fomento Economico Mexicano, S.A. de C.V. (Mexico), (b) Soft Drink & Beer Manufacturer 549,400 15,641,418 Quilmes Industrial S.A. (Argentina), (b) Brewer 455,500 5,238,250 Lotte Confectionery Co., Ltd. (Korea) Confection Manufacturer 20,670 3,249,501 ------------- 70,467,724 APPAREL--3.2% Fila Holding S.p.A. (Italy), (a)(b)(d) Athletic Footwear & Apparel 5,976,960 $ 23,967,610 RETAIL--5.7% Somerfield plc (Great Britain) Food Retailer 20,257,000 $ 26,579,378 Giordano International Limited (Hong Kong) Pacific Rim Clothing Retailer & Manufacturer 32,491,000 14,788,518 Swatch Group AG (Switzerland) Watch Manufacturer & Retailer 15,400 1,113,322 ------------- 42,481,218 HOME FURNISHINGS--3.8% Hunter Douglas N.V. (Netherlands) Window Coverings Manufacturer 1,277,484 $ 27,901,777 OTHER CONSUMER GOODS & SERVICES--0.2% Shimano Inc. (Japan) Bicycle Components Manufacturer 140,100 $ 1,764,031 BANK & THRIFTS--11.2% Banca Popolare di Verona (Italy) Commercial Banking 2,781,000 $ 24,194,911 Banco Latinoamericano de Exportaciones, S.A., Class E (Panama), (b) Latin American Trade Bank 515,400 14,972,370 Uniao de Bancos Brasileiros S.A. (Brazil), (c) Commercial Banking 863,500 12,520,750
36
NAME DESCRIPTION SHARES HELD MARKET VALUE ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.6% (CONT.) BANK & THRIFTS--11.2% (CONT.) BNP Paribas SA (France) Commercial Banking 153,000 $ 12,503,538 Kookmin Bank (Korea) Commercial Banking 430,000 5,309,049 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 888,968 4,829,571 Svenska Handelsbanken AB (Sweden) Commercial Banking 362,700 4,704,566 Bank of Ireland (Ireland) Commercial Banking 461,035 3,650,214 ------------- 82,684,969 OTHER FINANCIAL--2.7% Daiwa Securities Group Inc. (Japan) Stock Broker 2,870,000 $ 19,886,082 HOTELS & MOTELS--1.7% Mandarin Oriental International Limited (Singapore) Hotel Management 33,050,400 $ 12,724,404 HUMAN RESOURCES--2.2% Michael Page International plc (Great Britain) Recruitment Consultancy Services 10,271,000 $ 16,383,396 MARKETING SERVICES--2.8% Aegis Group plc (Great Britain) Media Services 9,686,000 $ 10,929,098 Cordiant Communications Group plc (Great Britain) Advertising and Media Services 10,740,070 9,473,704 ------------- 20,402,802 COMPUTER SERVICES--2.8% Meitec Corporation (Japan) Software Engineering Services 805,000 $ 20,933,645 TELECOMMUNICATIONS--2.1% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 39,620 $ 6,319,755 Telemig Celular Participacoes S.A. (Brazil) Mobile Telecommunications 2,293,200,000 3,689,024
37
NAME DESCRIPTION SHARES HELD MARKET VALUE ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.6% (CONT.) TELECOMMUNICATIONS--2.1% (CONT.) Panafon Hellenic Telecom S.A. (Greece) Mobile Telecommunications 795,000 $ 3,154,414 NTT DoCoMo, Inc. (Japan) Mobile Telecommunications 158 2,133,881 ------------- 15,297,074 BROADCASTING & CABLE TV--2.4% Tokyo Broadcasting System, Inc. (Japan) Television & Radio Broadcasting 559,000 $ 9,823,882 Grupo Televisa S.A. (Mexico), (a)(b) Television Production & Broadcasting 283,500 8,136,450 ------------- 17,960,332 PUBLISHING--7.5% Wolters Kluwer NV (Netherlands) Reference Material Publisher 1,024,000 $ 22,682,226 Independent News & Media PLC (Ireland) Newspaper Publisher 11,559,273 17,252,002 John Fairfax Holdings Limited (Australia) Newspaper Publisher 9,874,500 15,385,931 N.V. Holdingmaatschappij De Telegraaf (Netherlands) Newspaper Publisher 14,562 211,372 ------------- 55,531,531 PHARMACEUTICALS--1.1% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 292,000 $ 8,216,488 MEDICAL PRODUCTS--2.7% Gambro AB, Class A (Sweden) Manufacturer of Dialysis Procucts 3,478,000 $ 20,032,123 AUTOMOTIVE--4.2% Compagnie Generale des Establissements Michelin (France) Tire Manufacturer 632,000 $ 16,650,635 Autoliv, Inc (Sweden) Automotive Safety Systems Manufacturer 955,000 14,578,514 ------------- 31,229,149 AEROSPACE--2.2% Rolls-Royce plc (Great Britain) Aviation & Marine Power 8,402,702 $ 16,151,844
38
NAME DESCRIPTION SHARES HELD MARKET VALUE ---------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.6% (CONT.) AIRPORT MAINTENANCE--0.3% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico), (a)(b) Airport Operator 242,000 $ 2,274,800 INSTRUMENTS--1.7% Orbotech, Ltd. (Israel), (a) Optical Inspection Systems 685,700 $ 12,925,445 MACHINERY & INDUSTRIAL PROCESSING--3.8% Metso Corporation (Finland) Paper & Pulp Machinery 3,458,100 $ 27,882,802 BUILDING MATERIALS & CONSTRUCTION--2.8% Kumkang Korea Chemical Co., Ltd. (Korea) Building Materials 377,840 $ 20,601,552 CHEMICALS--7.0% Givaudan (Switzerland), (a) Fragrance & Flavor Compound Manufacturer 98,050 $ 29,504,665 Akzo Nobel N.V. (Netherlands) Chemical Producer 305,000 12,432,144 Nufarm Limited (Australia), (d) Agricultural & Industrial Chemical Producer 7,934,143 9,811,562 ------------- 51,748,371 OTHER INDUSTRIAL GOODS & SERVICES--9.9% Enodis plc (Great Britain), (d) Food Processing Equipment 23,244,700 $ 26,655,081 Kone Corporation, Class B (Finland) Elevators 350,980 23,316,876 Chargeurs SA (France), (d) Wool, Textile Production & Trading 350,067 20,866,885 FKI plc (Great Britain) Industrial Manufacturing 1,236,315 2,585,490 ------------- 73,424,332 STEEL--0.9% SSAB Svenskt Stal AB, Series A (Sweden) Steel Producer 934,520 $ 6,695,335 DIVERSIFIED CONGLOMERATES--0.2% First Pacific Company Ltd. (Hong Kong) Diversified Operations 10,436,000 $ 1,257,752 TOTAL COMMON STOCKS (COST: $863,251,267) 700,826,588
39
NAME DESCRIPTION PAR VALUE MARKET VALUE ---------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.9% COMMERCIAL PAPER--2.7% General Electric Capital Corporation, 3.25% due 10/1/2001 $ 20,000,000 $ 20,000,000 TOTAL COMMERCIAL PAPER (COST: $20,000,000) 20,000,000 REPURCHASE AGREEMENTS--2.2% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $15,935,049, collateralized by U.S. Treasury Bonds $ 15,931,000 $ 15,931,000 TOTAL REPURCHASE AGREEMENTS (COST: $15,931,000) 15,931,000 TOTAL SHORT TERM INVESTMENTS (COST: $35,931,000) 35,931,000 Total Investments (Cost $899,182,267) - 99.5% (e) $736,757,588 Foreign Currencies (Proceeds $3,051,361) - 0.4% 3,037,758 Other Assets In Excess Of Other Liabilities - 0.1% (f) 681,578 ------------- TOTAL NET ASSETS --100% $740,476,924 =============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a Global Depository Receipt. (d) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (e) At September 30, 2001, net unrealized depreciation of $162,438,282, for federal income tax purposes, consisted of gross unrealized appreciation of $69,531,993 and gross unrealized depreciation of $231,970,275. (f) Includes transaction hedges. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 40 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO] [PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/01) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(16) [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD SMALL CAP FUND EX U.S. INDEX $10,000 $10,000 $9,630 $10,684 $10,970 $11,006 $11,570 $11,186 $11,590 $11,195 $12,038 $11,418 $12,080 $11,241 $13,181 $12,699 $12,672 $12,652 $9,642 $11,677 $11,429 $13,394 $9,892 $13,499 $8,211 $11,513 $10,529 $13,868 $13,118 $14,086 $15,317 $14,493 $15,439 $15,114 $16,190 $17,741 $15,387 $17,839 $15,529 $17,217 $14,908 $15,906 $14,756 $15,369 $15,232 $13,213 $15,777 $13,075 $13,987 $11,273
AVERAGE ANNUAL TOTAL RETURNS(1) (AS OF 9/30/01) YEAR TO DATE 1-YEAR 5-YEAR SINCE TOTAL RETURN* INCEPTION (AS OF 9/30/01) (11/1/95) ---------------------------------------------------------------------------------- OAKMARK INTERNATIONAL -5.21% -6.18% 3.83% 5.83% SMALL CAP FUND MSCI World ex. U.S. -26.65% -29.23% 0.14% 2.05% Micropal Equity -30.32% -38.86% 4.40% 5.94% International Small Cap(19) Lipper International -28.99% -37.46% 5.29% 8.27% Small Cap Average(20)
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized FELLOW SHAREHOLDERS, The Oakmark International Small Cap Fund lost 11% in the recent quarter ending September 30, 2001, compared to larger declines of 18% and 14% in the Lipper International Small Cap Average and the MSCI World ex U.S. Index, respectively. While we are always disappointed to be down, year-to-date your Fund's 5% decline on a relative basis remains very strong. The Lipper International Small Cap Average is down 29% and the MSCI World ex U.S. Index is down 27%. Over the past three years, The Oakmark International Small Cap Fund is up 19% annually. It appears that international small cap stocks as an asset class may finally be gaining some recognition after a long period of hibernation. TRAVELER'S LOG: FRANCE On a recent trip to France we met with a number of companies from disparate industries. While each business has its individual challenges and opportunities, one overriding theme was the difficulty of restructuring their cost bases inside France. The French labor market remains one of the most inflexible in Europe. At the time of our meetings most businesses were already experiencing slowdowns in demand, so we spent part of the time talking about management's flexibility (and desire) to address costs. Many had already started the reduction of staff. With almost comical regularity, their US, Latin American, and Asian operations were always the first targets for personnel cuts, no matter how immaterial they were to the overall business. Next, maybe a few cuts were planned here and there on the periphery in Europe. Finally, after 41 prodding, came a comment about how difficult it is to fire staff in France. This year financial results, especially those in service industries, have been hit by the imposition of the 35-hour work week. During one meeting a CEO of a IT services company threw up his hands in exasperation trying to explain the damage to his business, "Have you ever heard of anything more ridiculous? A consultant working 35 hour weeks!?" Larry Ellison, Chairman of Oracle, recently summed it up well saying that if they hire 100 people in France and later fire 5, the French government does not view it as 95 jobs created, but 5 destroyed. "If we can't fire people, we just won't hire them in the future," he acknowledged. The French labor minister just last week received funding to "create" 50,000 new jobs, basically training programs and temporary student worker programs which serve no real purpose other than to pad employment statistics. I suppose we should give the Jospin Government at least some credit that the situation is not worse considering that the Communist Party is a part of his ruling coalition! There is nothing more illustrative than a concrete example, and the sad saga of Moulinex provides a great one in this case. Moulinex is a well-known supplier of small appliances, best known in the US for their Krups coffee machines. Throughout the 1990s as their competitors outsourced and moved more and more of their production to low-cost locales, Moulinex remained saddled with their French cost base. As profitability waned, debts started piling up. Starting in 1996, management tried to implement a number of restructuring plans, all of them really too tame to address their long-term structural disadvantages. Finally, after a series of big losses, an Italian company, Elettro Finanziaria, recapitalized the company, by buying a 74% stake. None of these actions addressed the underlying problem: you cannot be profitable building low-end microwaves and vacuum cleaners in France with high-wage, 35-hour a week employees. This August management submitted another plan to try and save the company. It called for a cut of 4,000 employees (only 1,500 in France) out of the total workforce of 21,500, and would include the shuttering of three antiquated French production sites. Workers responded by dumping microwave ovens in front of government offices and staging protest strikes. Apparently, the argument that the company had continually piled up losses since 1998 and had little hope of surviving in its present state had little impact on the workers council. They responded by accusing management of blackmailing workers into approving the cuts. The restructuring plan was rejected. The Italians and the bankers pulled the plug, and Moulinex is now in bankruptcy. A lot more than 4,000 workers are going to lose their jobs. The latest proposal bankruptcy administrators are entertaining is from a French competitor, SEB, which would "preserve" 2,500 French jobs (implying 7,500 job losses). One of the saddest lessons from Moulinex is that not only is it difficult to cut staff from profitable French businesses, but even from those on the verge of extinction! LOOKING FORWARD We will not write off all French companies because of this one negative. It is our job as analysts to make sure all of the negatives as well as the positives are imputed into our appraisal of business value. Your Fund has made some very successful investments in France and we expect that to continue. There are some terrific management teams there that are able to overcome regulatory impediments to build attractive businesses. Neopost, one of our largest positons, is a current example. [SIDENOTE] HIGHLIGHTS - As an asset class, international small cap stocks may finally be gaining some recognition after a long period of hibernation. - It is our job as analysts to ensure that all of the negatives and positives are considered when appraising business value. - Many companies in which the Fund invests are very inexpensive and have terrific secular growth prospects ahead of them. These include two European temporary employment companies that have illustrated the ability to thrive in a difficult regulatory environment. 42 The Fund also has investments in two European temporary employment companies, Creyf's and United Services Group, that thrive in the kind of inflexible regulatory environment described above. We believe they are both very cheap and have terrific secular growth ahead of them. Corporate restructuring in Europe is a theme that keeps coming in and out of favor with many global investors. Rather than believing in the faddish nature of macro themes, we stick to the belief that in nearly any regulatory environment there can be interesting investment opportunities. This is why we are bottom-up, stock-specific investors. /s/ David G. Herro DAVID G. HERRO, CFA Portfolio Manger DGH100@earthlink.net /s/ Michael J. Welsh MICHAEL J. WELSH, CFA, CPA Portfolio Manager 102521.2142@compuserve.com October 8, 2001 43 INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2001 [CHART]
% OF FUND NET ASSETS EUROPE 46.9% Great Britain 12.5% * Italy 10.1% * France 7.8% * Germany 3.7% Spain 2.7% Denmark 2.1% * Netherlands 2.1% * Belguim 1.7% * Ireland 1.7% Switzerland 1.4% Sweden 0.9% * Finland 0.2%
* Euro currency countries comprise 27.3% of the Fund.
% OF FUND NET ASSETS PACIFIC RIM 42.0% Japan 13.7% Hong Kong 7.0% Korea 5.6% New Zealand 4.6% Singapore 4.0% Australia 3.3% Philippines 1.9% Thailand 1.9% LATIN AMERICA 2.2% Mexico 2.2% OTHER 2.4% Bermuda 2.4%
44 SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2001
DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% FOOD & BEVERAGE--12.2% Hite Brewery Co., Ltd. Brewer (Korea) 93,400 $ 3,330,598 Baron De Ley, S.A. Wines & Spirits Manufacturer (Spain), (a) 167,985 3,210,369 Campari Group (Italy), (a) Soft Drinks, Wines, & Spirits Producer 92,500 2,293,894 Mikuni Coca-Cola Soft Drink Manufacturer Bottling Co., Ltd. (Japan) 219,000 2,162,260 Alaska Milk Corporation Milk Producer (Philippines), (c) 49,394,000 1,962,293 Grupo Continental, Soft Drink Manufacturer S.A. (Mexico) 1,237,000 1,495,375 ------------- 14,454,789 APPAREL--1.7% Kingmaker Footwear Athletic Footwear Manufacturer Holdings Limited (Hong Kong) 10,527,000 $ 2,024,553 RETAIL--9.2% Carpetright plc Carpet Retailer (Great Britain) 307,000 $ 2,173,182 Signet Group plc Jewelry Retailer (Great Britain) 1,948,000 1,754,109 House of Fraser Plc Department Store (Great Britain) 1,542,000 1,700,228 Dairy Farm International Supermarket Chain Holdings Limited (Singapore), (a) 2,502,000 1,513,710 Jusco Stores (Hong Kong) Department Stores Co., Limited (Hong Kong) 5,486,000 1,202,777 Harvey Nichols plc High Fashion Clothing Retailer (Great Britain) 356,400 885,495 Dickson Concepts Jewelry Wholesaler & Retailer (International) Limited (HongKong) 3,587,000 717,446 Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 79,000 586,654 Denny's Japan Co., Ltd. Restaurant Chain (Japan) 29,000 444,937 ------------- 10,978,538
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DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% (CONT.) HOME FURNISHINGS--2.0% Industrie Natuzzi S.p.A. Home Furniture Manufacturer (Italy), (b) 216,500 $ 2,370,675 OFFICE EQUIPMENT--2.4% Neopost SA (France), (a) Mailroom Equipment Supplier 114,300 $ 2,912,523 OTHER CONSUMER GOODS & SERVICES--2.2% Royal Doulton PLC Tableware & Giftware (Great Britain), (a)(c) 4,387,000 $ 1,418,900 Ilshin Spinning Co., Ltd. Fabric & Yarn Manufacturer (Korea) 44,550 1,233,324 ------------- 2,652,224 INSURANCE--2.9% IPC Holdings, Ltd. Reinsurance Provider (Bermuda) 87,700 $ 1,999,560 Hannover Reinsurance Servies Rueckversicherungs-AG (Germany) 27,800 1,487,604 ------------- 3,487,164 OTHER FINANCIAL--3.9% Ichiyoshi Securities Co., Stock Broker Ltd. (Japan) 902,000 $ 2,890,395 JCG Holdings Limited Consumer Finance (Hong Kong) 3,321,000 1,798,990 ------------- 4,689,385 HOTELS & MOTELS--3.5% Jarvis Hotels plc Hotel Operator (Great Britain) 2,886,000 $ 4,200,423 HUMAN RESOURCES--3.8% United Services Group Temporary Staffing Services NV (Netherlands) 169,000 $ 2,422,325 Creyf's NV (Belgium) Temporary Staffing Services 146,500 2,053,163 ------------- 4,475,488 MARKETING SERVICES--4.1% Asatsu-DK Inc. (Japan) Advertising Services Provider 207,000 $ 4,862,008 COMPUTER SOFTWARE--2.6% Enix Corporation (Japan) Entertainment Software 173,100 $ 3,078,366
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DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% (CONT.) COMPUTER SYSTEMS--2.1% Lectra (France), (a) Manufacturing Process Systems 858,412 $ 2,499,833 BROADCASTING & CABLE TV--0.7% Ulster Television plc Television Operator (Great Britain) 185,500 $ 586,332 ABS-CBN Broadcasting Television & Broadcasting Operator Corporation (Philippines) 685,000 303,481 ------------- 889,813 PUBLISHING--4.2% Matichon Public Newspaper Publisher Company Limited, Foreign Shares (Thailand), (c) 2,039,500 $ 2,292,088 Edipresse S.A. Newspaper & Magazine Publisher (Switzerland) 6,950 1,610,387 VLT AB, Class B (Sweden) Newspaper Publisher 153,450 1,049,088 ------------- 4,951,563 PRINTING--0.9% Hung Hing Printing Printing Company Group Limited (Hong Kong) 3,085,000 $ 1,087,730 AUTOMOBILES--3.6% Ducati Motor Holding Motorcycle Manufacturer S.p.A. (Italy), (a) 3,457,200 $ 4,247,403 TRANSPORTATION SERVICES--3.0% Mainfreight Limited Logistics Services (New Zealand), (c) 3,993,551 $ 1,997,983 DelGro Corporation Bus, Taxi, & Car Leasing Limited (Singapore) 1,066,000 1,562,457 ------------- 3,560,440 AIRPORT MAINTENANCE--3.1% Kobenhavns Lufthavne Airport Management & Operations A/S (Copnehagen Airports A/S) (Denmark) 50,200 $ 2,457,051
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DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% (CONT.) Grupo Aeroportuario Airport Operator del Sureste S.A. de C.V. (Mexico), (a)(b) 124,900 1,174,060 ------------- 3,631,111 INSTRUMENTS--1.1% Halma plc (Great Britain) Detection Systems Producer 521,000 $ 1,072,327 Vaisala Oyj, Class A Atmospheric Observation Equipment (Finland) 11,200 265,006 ------------- 1,337,333 MACHINERY & INDUSTRIAL PROCESSING--3.0% Pfeiffer Vacuum Vacuum Pump Manufacturer Technology AG (Germany) 76,500 $ 2,043,312 ASM Pacific Technology Semiconductor Machinery Limited (Hong Kong) 1,282,500 1,488,124 ------------- 3,531,436 BUILDING MATERIALS & CONSTRUCTION--4.6% Fletcher Building Limited Building Materials Manufacturer (New Zealand) 3,224,000 $ 3,409,541 Grafton Group plc Building Materials Distributor (Ireland) 723,000 2,006,796 ------------- 5,416,337 CHEMICALS--2.4% Taiyo Ink Mfg. Co., Ltd. Manufacturer of Resist Inks (Japan) 117,800 $ 2,885,463 PRODUCTION EQUIPMENT--4.1% Interpump Group Pump and Piston Manufacturer S.p.A. (Italy) 737,500 $ 2,563,838 NSC Groupe (France) Textile Equipment Manufacturer 17,466 1,438,491 Krones AG (Germany) Production Machinery Manufacturer 29,300 919,924 ------------- 4,922,253 OTHER INDUSTRIAL GOODS & SERVICES--3.0% GFI Industries SA (France) Industrial Fastener Manufacturer 166,000 $ 2,432,199 Coats plc (Great Britain) Textile Manufacturer 1,460,000 1,105,405 ------------- 3,537,604
48
SHARES HELD/ DESCRIPTION PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% (CONT.) DIVERSIFIED CONGLOMERATES--7.2% Pacific Dunlop Limited Diversified Manufacturer (Australia) 11,014,626 $ 3,922,838 Haw Par Corporation Healthcare & Leisure Products Limited (Singapore) 903,000 1,696,590 Jardine Strategic Holdings Diversified Operations Limited (Bermuda) 340,700 810,866 Tae Young Corp. (Korea) Heavy Construction 106,600 2,117,285 ------------- 8,547,579 TOTAL COMMON STOCKS (COST: $130,902,511) 111,232,034 SHORT TERM INVESTMENTS--6.6% COMMERCIAL PAPER--3.4% General Electric Capital Corporation, 3.25% due 10/1/2001 $4,000,000 $ 4,000,000 TOTAL COMMERCIAL PAPER (COST: $4,000,000) 4,000,000 REPURCHASE AGREEMENTS--3.2% State Street Repurchase Agreement, 3.05% due 10/1/2001, repurchase price $3,836,975, collateralized by U.S. Treasury Bonds $3,836,000 $ 3,836,000 TOTAL REPURCHASE AGREEMENTS (COST: $3,836,000) 3,836,000 TOTAL SHORT TERM INVESTMENTS (COST: $7,836,000) 7,836,000 Total Investments (Cost $138,738,511)--100.1% (d) $ 119,068,034 Foreign Currencies (Proceeds $7,841)--(0.0)% 7,749 Other Liabilities In Excess Of Other Assets--(0.1)% (e) (168,031) ------------- TOTAL NET ASSETS--100% $ 118,907,752 =============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (d) At September 30, 2001, net unrealized depreciation of $19,670,569 for federal income tax purposes, consisted of gross unrealized appreciation of $7,333,336 and gross unrealized depreciation of $27,003,905. (e) Includes transaction hedges. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 49 THE OAKMARK FAMILY OF FUNDS STATEMENT OF ASSETS AND LIABILITIES--SEPTEMBER 30, 2001
THE OAKMARK THE OAKMARK THE OAKMARK FUND SELECT FUND SMALL CAP FUND ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments, at value $ 3,028,216,950 $ 4,172,964,280 $ 257,747,655 (cost: 2,870,723,403) (cost: 3,421,678,197) (cost: 264,716,479) Cash 45 518 83 Foreign currency, at value 0 0 0 (cost: 0) (cost: 0) (cost: 0) Receivable for: Securities sold 88,230,109 17,323,567 6,525,606 Fund shares sold 11,162,232 14,378,904 1,269,441 Dividends and interest 4,921,945 2,533,189 88,015 --------------- --------------- --------------- Total receivables 104,314,286 34,235,660 7,883,062 Other Assets 165,445 38,625 20,224 --------------- --------------- --------------- Total assets $ 3,132,696,726 $ 4,207,239,083 $ 265,651,024 LIABILITIES AND NET ASSETS Options sold, at fair value $ 0 $ 0 $ 0 (premiums received: 0) (premiums received: 0) (premiums received: 0) Cash overdraft 0 0 0 Payable for: Securities purchased 15,867,552 2,197,533 0 Fund shares redeemed 3,939,245 3,552,515 580,018 Due to advisor 2,735,792 3,322,104 257,615 Other 925,634 1,426,100 201,186 --------------- --------------- --------------- Total liabilities 23,468,223 10,498,252 1,038,819 --------------- --------------- --------------- Net assets applicable to fund shares outstanding $ 3,109,228,503 $ 4,196,740,831 $ 264,612,205 =============== =============== =============== Fund shares outstanding 97,136,566 166,547,439 18,163,572 =============== =============== =============== ANALYSIS OF NET ASSETS Paid in capital $ 3,095,658,945 $ 3,484,448,155 $ 271,605,643 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (162,913,058) (46,951,440) (24,614) Net unrealized appreciation (depreciation) of investments 157,493,547 751,286,083 (6,968,824) Net unrealized appreciation (depreciation)--other 0 0 0 Accumulated undistributed net investment income (loss) 18,989,069 7,958,033 0 --------------- --------------- --------------- Net assets applicable to Fund shares outstanding $ 3,109,228,503 $ 4,196,740,831 $ 264,612,205 =============== =============== =============== PRICE OF SHARES Net asset value per share: Class I $ 32.01 $ 25.20 $ 14.57 Class I--Net assets $ 3,109,120,815 $ 4,161,366,347 $ 264,612,205 Class I--Shares outstanding 97,133,198 165,134,650 18,163,572 Net asset value per share: Class II $ 31.97 $ 25.10 Class II--Net assets $ 107,688 $ 35,374,484 Class II--Shares outstanding 3,368 1,409,314
50
THE OAKMARK EQUITY THE OAKMARK AND INCOME FUND GLOBAL FUND ------------------------------------------------------------------------------------------------------------------ ASSETS Investments, at value $ 630,746,981 $ 47,985,708 (cost: 628,940,601) (cost: 50,625,336) Cash 189 512 Foreign currency, at value 0 7 (cost: 0) (cost: 7) Receivable for: Securities sold 20,633,736 777,574 Fund shares sold 9,548,344 143,994 Dividends and interest 3,560,729 41,915 --------------- --------------- Total receivables 33,742,809 963,483 Other Assets 2,385 24,771 --------------- --------------- Total assets $ 664,492,364 $ 48,974,481 LIABILITIES AND NET ASSETS Options sold, at fair value $ 0 $ 69,250 (premiums received: 0) (premiums received: 141,020) Cash overdraft 0 0 Payable for: Securities purchased 40,150,021 363,626 Fund shares redeemed 273,507 152,879 Due to advisor 378,821 47,943 Other 333,617 136,772 --------------- --------------- Total liabilities 41,135,967 770,470 --------------- --------------- Net assets applicable to fund shares outstanding $ 623,356,396 $ 48,204,011 =============== =============== Fund shares outstanding 35,725,297 4,449,792 =============== =============== ANALYSIS OF NET ASSETS Paid in capital $ 614,648,633 $ 49,569,174 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions 1,896,893 1,361,553 Net unrealized appreciation (depreciation) of investments 1,806,380 (2,567,858) Net unrealized appreciation (depreciation)--other 0 185 Accumulated undistributed net investment income (loss) 5,004,490 (159,043) --------------- --------------- Net assets applicable to Fund shares outstanding $ 623,356,396 $ 48,204,011 =============== =============== PRICE OF SHARES Net asset value per share: Class I $ 17.45 $ 10.83 Class I--Net assets $ 620,066,215 $ 48,204,011 Class I--Shares outstanding 35,536,256 4,449,792 Net asset value per share: Class II $ 17.40 Class II--Net assets $ 3,290,181 Class II--Shares outstanding 189,041 THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND ------------------------------------------------------------------------------------------------------------- ASSETS Investments, at value $ 736,757,588 $ 119,068,034 (cost: 899,182,267) (cost: 138,738,511) Cash 0 224 Foreign currency, at value 3,037,758 7,749 (cost: 3,051,361) (cost: 7,841) Receivable for: Securities sold 7,753,065 272,134 Fund shares sold 1,923,427 3,162,341 Dividends and interest 2,356,226 278,127 --------------- --------------- Total receivables 12,032,718 3,712,602 Other Assets 53,328 3,123 --------------- --------------- Total assets $ 751,881,392 $ 122,791,732 LIABILITIES AND NET ASSETS Options sold, at fair value $ 0 $ 0 (premiums received: 0) (premiums received: 0) Cash overdraft 7,280 0 Payable for: Securities purchased 9,621,892 3,475,117 Fund shares redeemed 394,479 45,307 Due to advisor 728,601 128,642 Other 652,216 234,914 --------------- --------------- Total liabilities 11,404,468 3,883,980 --------------- --------------- Net assets applicable to fund shares outstanding $ 740,476,924 $ 118,907,752 =============== =============== Fund shares outstanding 59,168,878 11,894,824 =============== =============== ANALYSIS OF NET ASSETS Paid in capital $ 907,829,486 $ 135,724,166 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (14,827,551) 928,412 Net unrealized appreciation (depreciation) of investments (162,438,282) (19,670,569) Net unrealized appreciation (depreciation)--other (10,657) 2,768 Accumulated undistributed net investment income (loss) 9,923,928 1,922,975 --------------- --------------- Net assets applicable to Fund shares outstanding $ 740,476,924 $ 118,907,752 =============== =============== PRICE OF SHARES Net asset value per share: Class I $ 12.51 $ 10.00 Class I--Net assets $ 738,536,696 $ 118,870,993 Class I--Shares outstanding 59,013,340 11,891,136 Net asset value per share: Class II $ 12.47 $ 9.97 Class II--Net assets $ 1,940,228 $ 36,759 Class II--Shares outstanding 155,538 3,688
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 STATEMENT OF OPERATIONS--SEPTEMBER 30, 2001
THE OAKMARK THE OAKMARK THE OAKMARK SMALL CAP FUND SELECT FUND FUND INVESTMENT INCOME: Dividends $ 39,013,317 $ 29,342,773 $ 1,541,906 Interest Income 10,547,765 12,868,682 936,378 Other Income 480,819 250 0 Foreign taxes (withheld) rebated 0 0 0 ------------- ------------- ------------- Total investment income 50,041,901 42,211,705 2,478,284 EXPENSES: Investment advisory fee 25,662,135 27,774,016 2,490,470 Transfer and dividend disbursing agent fees 1,672,623 1,102,906 195,952 Other shareholder servicing fees 1,345,487 2,676,981 149,645 Service Fee--Class II 68 47,698 0 Reports to shareholders 961,814 812,175 115,271 Custody and accounting fees 320,261 384,591 73,162 Registration and blue sky expenses 253,289 774,324 38,971 Trustee fees 219,167 196,659 74,580 Legal fees 38,604 43,590 12,807 Audit fees 23,691 22,452 18,452 Other 150,144 168,330 21,003 ------------- ------------- ------------- Total expenses 30,647,283 34,003,722 3,190,313 Expense reimbursement 0 0 0 Expense offset arrangements (21,424) (16,667) (1,392) ------------- ------------- ------------- Net expenses 30,625,859 33,987,055 3,188,921 Net Investment Income (loss): 19,416,042 8,224,650 (710,637) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on investments 195,984,944 (46,951,440) 1,334,090 Net realized gain (loss) on foreign currency transactions 0 0 0 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 126,130,060 564,071,103 (10,475,705) Net change in appreciation (depreciation) of forward currency exchange contracts 0 0 0 Net change in appreciation (depreciation)--other 0 0 0 Net realized and unrealized gain (loss) on investments and foreign currency transactions: 322,115,004 517,119,663 (9,141,615) ------------- ------------- ------------- Net increase (decrease) in net assets resulting from operations $ 341,531,046 $ 525,344,313 $ (9,852,252) ============= ============= =============
52
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INTERNATIONAL INTERNATIONAL INCOME FUND FUND FUND SMALL CAP FUND INVESTMENT INCOME: Dividends $ 2,595,485 $ 641,990 $ 22,873,826 $ 3,756,393 Interest Income 4,833,457 119,411 1,621,223 214,576 Other Income 1,544 187 841 98,660 Foreign taxes (withheld) rebated 22,297 (70,706) (2,299,513) (473,009) ------------- ------------- ---------------- -------------- Total investment income 7,452,783 690,882 22,196,377 3,596,620 EXPENSES: Investment advisory fee 1,591,905 387,377 8,269,717 1,238,024 Transfer and dividend disbursing agent fees 97,008 42,032 409,713 69,273 Other shareholder servicing fees 207,337 17,818 491,219 56,049 Service Fee--Class II 3,503 0 1,258 64 Reports to shareholders 55,727 24,858 338,781 45,069 Custody and accounting fees 89,154 81,658 922,824 197,605 Registration and blue sky expenses 241,639 59,642 54,706 35,792 Trustee fees 66,126 59,840 104,854 62,968 Legal fees 11,396 9,899 19,739 10,636 Audit fees 18,452 23,751 22,685 25,841 Other 15,110 5,494 54,115 12,025 ------------- ------------- ---------------- -------------- Total expenses 2,397,357 712,369 10,689,611 1,753,346 Expense reimbursement 0 (20,815) 0 0 Expense offset arrangements (448) (617) (2,145) (944) ------------- ------------- ---------------- -------------- Net expenses 2,396,909 690,937 10,687,466 1,752,402 Net Investment Income (loss): 5,055,874 (55) 11,508,911 1,844,218 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on investments 1,909,621 1,479,943 (13,334,222) 1,136,757 Net realized gain (loss) on foreign currency transactions (518) 71,444 2,323,657 591,541 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (5,101,055) (4,901,265) (118,037,625) (12,360,111) Net change in appreciation (depreciation) of forward currency exchange contracts 0 (76,462) (2,048,003) (289,441) Net change in appreciation (depreciation)--other 0 1,700 169,583 28,453 Net realized and unrealized gain (loss) on investments and foreign currency transactions: (3,191,952) (3,424,640) (130,926,610) (10,892,801) ------------- ------------- ---------------- -------------- Net increase (decrease) in net assets resulting from operations $ 1,863,922 $ (3,424,695) $ (119,417,699) $ (9,048,583) ============= ============= ================ ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53 STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 2001
THE OAKMARK FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 19,416,042 $ 39,618,068 Net realized gain (loss) on investments 195,984,944 (358,898,002) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 126,130,060 (135,635,885) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 341,531,046 (454,915,819) DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income (28,565,025) (32,700,105) Net realized short-term gain 0 (100,782,239) Net realized long-term gain 0 (487,248,675) --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (28,565,025) (620,731,019) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,499,450,622 290,642,873 Proceeds from shares sold--Class II 122,635 0 Reinvestment of dividends and capital gain distributions 27,842,716 603,462,527 Payments for shares redeemed, net of fees--Class I (769,874,783) (2,552,562,124) Payments for shares redeemed, net of fees--Class II (7,515) 0 --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 757,533,675 (1,658,456,724) --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 1,070,499,696 (2,734,103,562) NET ASSETS: Beginning of period 2,038,728,807 4,772,832,369 --------------- --------------- End of period $ 3,109,228,503 $ 2,038,728,807 =============== =============== Undistributed net investment income $ 18,989,069 $ 38,561,304 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0.3872 $ 0.2632 Net realized short-term gain 0 0.8111 Net realized long-term gain 0 3.9217 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 0.3872 $ 4.9960 =============== ===============
54
THE OAKMARK SELECT FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 8,224,650 $ 12,054,873 Net realized gain (loss) on investments (46,951,440) 161,052,611 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 564,071,103 159,978,754 --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 525,344,313 333,086,238 DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income--Class I (7,393,194) (14,709,648) Net investment income--Class II (21,608) 0 Net realized short-term gain (23,966,532) (8,341,169) Net realized long-term gain (93,492,833) (268,872,301) --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (124,874,167) (291,923,118) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 2,438,122,791 628,490,960 Proceeds from shares sold--Class II 33,209,296 7,021,801 Reinvestment of dividends and capital gain distributions 121,465,993 287,179,516 Payments for shares redeemed, net of fees--Class I (569,095,434) (823,014,435) Payments for shares redeemed, net of fees--Class II (6,168,435) (1,013,300) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 2,017,534,211 98,664,542 --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,418,004,357 139,827,662 NET ASSETS: Beginning of period 1,778,736,474 1,638,908,812 --------------- --------------- End of period $ 4,196,740,831 $ 1,778,736,474 =============== =============== Undistributed net investment income $ 7,958,033 $ 8,584,306 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0.0861 $ 0.1972 Net realized short-term gain 0.2779 0.1118 Net realized long-term gain 1.0832 3.6040 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 1.4472 $ 3.9130 =============== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55
THE OAKMARK SMALL CAP FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income (loss) $ (710,637) $ (1,173,696) Net realized gain (loss) on investments 1,334,090 25,233,378 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (10,475,705) (12,748,906) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (9,852,252) 11,310,776 DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income 0 0 Net realized short-term gain 0 0 Net realized long-term gain (8,165,109) 0 --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (8,165,109) 0 FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 133,704,823 51,615,294 Reinvestment of dividends and capital gain distributions 8,045,937 0 Payments for shares redeemed, net of fees (107,824,806) (251,361,737) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 33,925,954 (199,746,443) --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 15,908,593 (188,435,667) NET ASSETS: Beginning of period 248,703,612 437,139,279 --------------- --------------- End of period $ 264,612,205 $ 248,703,612 =============== =============== Undistributed net investment income $ 0 $ 0 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0 $ 0 Net realized short-term gain 0 0 Net realized long-term gain 0.5102 0 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 0.5102 $ 0 =============== ===============
56
THE OAKMARK EQUITY AND INCOME FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 5,055,874 $ 1,666,618 Net realized gain (loss) on investments 1,909,621 4,310,645 Net realized gain (loss) on foreign currency transactions (518) (645) Net change in unrealized appreciation (depreciation) of investments and foreign currencies (5,101,055) 3,084,969 Net change in unrealized appreciation (depreciation)--other 0 159 --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 1,863,922 9,061,746 DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income--Class I (897,529) (1,718,499) Net investment income--Class II (7,433) 0 Net realized short-term gain 0 0 Net realized long-term gain (3,733,470) (5,192,802) --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (4,638,432) (6,911,301) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 682,515,057 11,520,117 Proceeds from shares sold--Class II 2,887,484 418,255 Reinvestment of dividends and capital gain distributions 4,457,698 6,650,712 Payments for shares redeemed, net of fees--Class I (118,553,446) (26,121,233) Payments for shares redeemed, net of fees--Class II (111,704) (50) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 571,195,069 (7,532,199) --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 568,420,559 (5,381,754) NET ASSETS: Beginning of period 54,935,837 60,317,591 --------------- --------------- End of period $ 623,356,396 $ 54,935,837 =============== =============== Undistributed net investment income $ 5,004,490 $ 1,007,663 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0.2427 $ 0.4509 Net realized short-term gain 0 0 Net realized long-term gain 1.0013 1.3625 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 1.2440 $ 1.8134 =============== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57
THE OAKMARK GLOBAL FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ (55) $ 146,742 Net realized gain (loss) on investments 1,479,943 96,088 Net realized gain (loss) on foreign currency transactions 71,444 132,840 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (4,901,265) 4,122,450 Net change in unrealized appreciation (depreciation) of forward currency exchange contracts (76,462) 81,181 Net change in unrealized appreciation (depreciation)--other 1,700 (1,568) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (3,424,695) 4,577,733 DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income (435,138) (29,834) Net realized short-term gain (92,927) 0 Net realized long-term gain (37,007) 0 --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (565,072) (29,834) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 42,948,303 12,896,002 Reinvestment of dividends and capital gain distributions 560,498 28,883 Payments for shares redeemed, net of fees (18,542,262) (14,198,899) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 24,966,539 (1,274,014) --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 20,976,772 3,273,885 NET ASSETS: Beginning of period 27,227,239 23,953,354 --------------- --------------- End of period $ 48,204,011 $ 27,227,239 =============== =============== Undistributed (Distribution in excess of) net investment income $ (159,043) $ 280,910 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0.1742 $ 0.0098 Net realized short-term gain 0.0372 0 Net realized long-term gain 0.0145 0 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 0.2259 $ 0.0098 =============== ===============
58
THE OAKMARK INTERNATIONAL FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 11,508,911 $ 14,664,615 Net realized gain (loss) on investments (13,334,222) 60,562,992 Net realized gain (loss) on foreign currency transactions 2,323,657 10,609,055 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (118,037,625) 13,902,115 Net change in unrealized appreciation (depreciation) of forward currency exchange contracts (2,048,003) 2,556,178 Net change in unrealized appreciation (depreciation)--other 169,583 (111,145) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (119,417,699) 102,183,810 DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income--Class I (24,851,611) (27,231,383) Net investment income--Class II (3,245) (1,053) Net realized short-term gain (16,422,539) 0 Net realized long-term gain (8,281,127) 0 --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (49,558,522) (27,232,436) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 282,295,504 172,133,473 Proceeds from shares sold--Class II 2,588,328 143,284 Reinvestment of dividends and capital gain distributions 47,893,421 26,258,587 Payments for shares redeemed, net of fees--Class I (205,510,100) (302,066,042) Payments for shares redeemed, net of fees--Class II (327,974) (48,697) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 126,939,179 (103,579,395) --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (42,037,042) (28,628,021) NET ASSETS: Beginning of period 782,513,966 811,141,987 --------------- --------------- End of period $ 740,476,924 $ 782,513,966 =============== =============== Undistributed net investment income $ 9,923,928 $ 24,309,333 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0.5074 $ 0.4861 Net realized short-term gain 0.3353 0 Net realized long-term gain 0.1690 0 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 1.0117 $ 0.4861 =============== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59
THE OAKMARK INTERNATIONAL SMALL CAP FUND ---------------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 ---------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 1,844,218 $ 2,268,614 Net realized gain (loss) on investments 1,136,757 4,863,798 Net realized gain (loss) on foreign currency transactions 591,541 991,046 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (12,360,111) (13,182,275) Net change in unrealized appreciation (depreciation) of forward currency exchange contracts (289,441) 281,817 Net change in unrealized appreciation (depreciation)--other 28,453 (28,709) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (9,048,583) (4,805,709) DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income (2,566,080) (1,252,257) Net realized short-term gain 0 (3,278,736) Net realized long-term gain (3,663,064) (3,226,904) --------------- --------------- TOTAL DISTRIBUTION TO SHAREHOLDERS (6,229,144) (7,757,897) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 72,931,617 39,669,014 Proceeds from shares sold--Class II 39,964 0 Reinvestment of dividends and capital gain distributions 6,071,794 7,637,609 Payments for shares redeemed, net of fees--Class I (35,203,678) (99,763,438) Payments for shares redeemed, net of fees--Class II 0 0 --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 43,839,697 (52,456,815) --------------- --------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 28,561,970 (65,020,421) NET ASSETS: Beginning of period 90,345,782 155,366,203 --------------- --------------- End of period $ 118,907,752 $ 90,345,782 =============== =============== Undistributed net investment income $ 1,922,975 $ 2,967,277 =============== =============== (1) DISTRIBUTIONS PER SHARE: Net investment income $ 0.3402 $ 0.1135 Net realized short-term gain 0 0.2972 Net realized long-term gain 0.4853 0.2923 --------------- --------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 0.8255 $ 0.7030 =============== ===============
60 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies of The Oakmark Fund ("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Small Cap Fund ("Small Cap"), The Oakmark Equity and Income Fund ("Equity and Income"), The Oakmark Global Fund ("Global"), The Oakmark International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap") collectively referred to as "the Funds", each a series of the Harris Associates Investment Trust (a Massachusetts business trust). These policies are in conformity with accounting principles generally accepted in the United States ("GAAP"). The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. CLASS DISCLOSURE-- Each Fund offers two classes of shares: Class I Shares and Class II Shares. Class I Shares are offered to the general public. Class II Shares are offered to certain retirement plans such as 401(k) and profit sharing plans. Class II Shares pay a service fee at the annual rate of .25% of average net assets of Class II Shares of the Fund. This service fee is paid to an administrator for performing the services associated with the administration of such retirement plans. Expenses of the Funds that are not directly attributable to a specific class of shares are prorated between the classes based on the relative net assets of each class. Expenses directly attributable to a class of shares are recorded to the specific class. At this time, expenses directly attributable to each class are transfer agent fees, service fees and other shareholder servicing fees. SECURITY VALUATION-- Investments are stated at market value. Securities traded on securities exchanges and securities traded on the NASDAQ National Market are valued at the last sales price on the day of valuation, or if lacking any reported sales that day, at the most recent bid quotation. Over-the-counter securities not so traded are valued at the most recent bid quotation. Money market instruments having a maturity of 60 days or less from the date of valuation are valued on an amortized cost basis which approximates market value. Securities for which quotations are not readily available are valued at a fair value as determined by the Pricing Committees appointed by the Board of Trustees. FOREIGN CURRENCY TRANSLATIONS-- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the mean of the bid and offer prices of such currencies at the time of valuation. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized gain or loss from investments. Net realized gains on foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds' books, and the U.S. dollar equivalent of the amounts actually received or paid, and the realized gains or losses resulting from the portfolio and transaction hedges. At September 30, 2001, the Global, International and Int'l Small Cap Funds had foreign currency transactions. Net unrealized appreciation (depreciation) - other includes the following components:
INT'L GLOBAL INTERNATIONAL SMALL CAP ----------------------------------------------------------------------------- Unrealized appreciation (depreciation) on dividends and dividend reclaims receivable $ 145 $(21,490) $ 1,484 Unrealized appreciation (depreciation) on open securities purchases and sales 216 42,322 23,584 Unrealized appreciation (depreciation) on transaction hedge purchases and sales (195) (31,702) (22,432) Unrealized appreciation (depreciation) on tax expense payable 19 213 132 ----- -------- -------- Net Unrealized appreciation (depreciation) - Other $ 185 $(10,657) $ 2,768 ===== ======== ========
SECURITY TRANSACTIONS AND INVESTMENT INCOME-- Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on the accrual basis. 61 Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of regular trading on the New York Stock Exchange on each day the Exchange is open for trading by dividing the total value of the Fund's investments and other assets, less liabilities, by the number of Fund shares outstanding. FORWARD FOREIGN CURRENCY CONTRACTS-- At September 30, 2001, Global, International and Int'l Small Cap had entered into forward foreign currency contracts under which they are obligated to exchange currencies at specified future dates. The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions. The contractual amounts of forward foreign exchange contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values. The Global Fund had the following outstanding contracts at September 30, 2001: TRANSACTION HEDGES: FOREIGN CURRENCY PURCHASES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS SOLD FOREIGN CURRENCY PURCHASED SETTLEMENT DATE SEPTEMBER 30, 2001 -------------------------------------------------------------------------------------------- $ 9,642 1,132,825 Japanese Yen October 2001 $(139) 15,929 1,875,678 Japanese Yen October 2001 (195) 19,938 2,385,950 Japanese Yen October 2001 77 22,502 2,689,869 Japanese Yen October 2001 62 ----- $(195) =====
The International Fund had the following outstanding contracts at September 30, 2001: TRANSACTION HEDGES: FOREIGN CURRENCY PURCHASES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS SOLD FOREIGN CURRENCY PURCHASED SETTLEMENT DATE SEPTEMBER 30, 2001 -------------------------------------------------------------------------------------------- $ 502,689 803,046 Swiss Franc October 2001 $ (6,492) 1,564,498 1,696,301 Euro Currency October 2001 (20,780) 989,783 671,039 Pound Sterling October 2001 (3,255) 1,503,916 1,019,396 Pound Sterling October 2001 (5,251) 482,036 326,959 Pound Sterling October 2001 (1,357) 342,227 232,255 Pound Sterling October 2001 (778) 1,239,855 841,435 Pound Sterling October 2001 (2,819) -------- $(40,732) ========
TRANSACTION HEDGES: FOREIGN CURRENCY SALES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 2001 -------------------------------------------------------------------------------------------- $ 424,183 459,919 Euro Currency October 2001 $ 5,634 840,348 911,143 Euro Currency October 2001 11,162 1,897,621 2,069,380 Euro Currency October 2001 14,382 79,714 87,626 Euro Currency October 2001 (31) 3,083,744 33,150,250 Swedish Krona October 2001 (20,880) 1,169,084 12,496,338 Swedish Krona Ocotber 2001 (1,237) --------- $ 9,030 =========
62 The Int'l Small Cap Fund had the following outstanding contracts at September 30, 2001: TRANSACTION HEDGES: FOREIGN CURRENCY PURCHASES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS SOLD FOREIGN CURRENCY PURCHASED SETTLEMENT DATE SEPTEMBER 30, 2001 -------------------------------------------------------------------------------------------- $240,219 1,960,188 Danish Krone October 2001 $ (364) 147,682 159,829 Euro Currency October 2001 (2,230) 325,067 352,453 Euro Currency October 2001 (4,318) 112,228 122,386 Euro Currency October 2001 (851) 535,857 584,358 Euro Currency October 2001 (4,061) 759,196 827,913 Euro Currency October 2001 (5,754) 238,739 260,348 Euro Currency October 2001 (1,809) 67,499 74,199 Euro Currency October 2001 26 258,041 175,097 Pound Sterling October 2001 (622) 301,313 204,280 Pound Sterling October 2001 (991) 158,967 107,884 Pound Sterling October 2001 (361) 155,223 18,277,482 Japanese Yen October 2001 (1,901) 49,176 5,867,712 Japanese Yen October 2001 45 25,520 3,045,078 Japanese Yen October 2001 24 100,716 12,039,531 Japanese Yen October 2001 279 22,502 2,689,869 Japanese Yen October 2001 62 -------- $(22,826) ========
TRANSACTION HEDGES: FOREIGN CURRENCY SALES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 2001 -------------------------------------------------------------------------------------------- $ 91,752 10,820,316 Japanese Yen October 2001 $ 985 44,734 5,358,262 Japanese Yen October 2001 (214) 136,043 16,262,569 Japanese Yen October 2001 (377) ----- $ 394 =====
At September 30, 2001, Global, International and Int'l Small Cap Funds each had sufficient cash and/or securities to cover any commitments under these contracts. 63 FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS-- No provision is made for Federal income taxes. The Funds elect to be taxed as "regulated investment companies" and make such distributions to their shareholders as to be relieved of all Federal income taxes under provisions of current Federal tax law. The funds hereby designate the approximate long term capital gains for purposes of the dividends paid deduction (in thousands): Equity and Income -- $1,897; and, Global -- $1,362. Income dividends and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. To the extent these tax and book differences are permanent in nature, such amounts are reclassified among paid in capital, undistributed net investment income and undistributed net realized gain (loss) on investments. These differences are primarily related to foreign currency transactions, deferral of losses on wash sales, and character of capital loss carryforwards. The Funds also utilize earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. At September 30, 2001, the capital loss carryforwards for U.S. Federal income tax purposes are as follows (in thousands): Oakmark -- $162,914 (begins to expire 9/30/08); and Select -- $5,157 (expires 9/30/09). For the period subsequent to October 31, 2000, through the fiscal year end, the following Funds incurred net capital losses for which each Fund intends to treat as having been incurred in the following fiscal year (in thousands): Select -- $41,794; International -- $14,828; and International Small Cap -- $889. BANK LOANS-- The Funds have an unsecured line of credit with a syndication of banks. It is a committed line of $250 million. Borrowings under this arrangement bear interest at .45% above the Federal Funds Effective Rate. As of September 30, 2001, there were no outstanding borrowings. ACCOUNTING FOR OPTIONS-- When the Fund writes an option, the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options, which expire unexercised, are recorded by the Fund on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund has realized a gain or a loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Fund. In writing an option, the Fund bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Fund could result in the Fund selling or buying a security or currency at a price different from the current market value. During the twelve months ended September 30, 2001, Oakmark, Select, Small Cap, and Global wrote option contracts. At September 30, 2001, Global had outstanding option contracts. Portfolio securities valued at $1,248,000 were being held in escrow by the custodian as cover for call options written by Global. 2. TRANSACTIONS WITH AFFILIATES Each fund has an investment advisory agreement with Harris Associates L.P. (Adviser). For management services and facilities furnished, the Funds pay the Adviser monthly fees at annual rates as follows. Oakmark pays 1% on the first $2 billion of net assets, .90% on the next $1 billion of net assets, .80% on the next $2 billion of net assets, and .75% on the excess of $5 billion of net assets. Select pays 1% on the first $1 billion of net assets, .95% on the next $500 million of net assets, .90% on the next $500 million of net assets, .85% on the next $500 million of net assets, .80% on the next $2.5 billion of net assets, and .75% on the excess of $5 billion of net assets. Small Cap pays 1.00% of net assets. Equity and Income pays .75% of net assets. Global pays 1.00% of net assets. International pays 1% on the first $2 billion of net assets, .95% on the next $1 billion of net assets, and .85% on the excess of $3 billion of net assets. Int'l Small Cap pays 1.25% on the first $500 million and 1.10% on the excess of $500 million of net assets. Each fee is calculated on the total net assets as determined at the end of each preceding calendar month. The Adviser has voluntarily agreed to reimburse the Funds to the extent that annual expenses, excluding certain expenses, for Class I shares, exceed 1.5% for domestic funds, 2.0% for international funds, 1.75% for Global and 1.0% for Equity and Income; or for Class II shares, exceed 1.75% for domestic funds, 2.25% for international funds, 2% for Global and 1.25% for Equity and Income. In connection with the organization of the Funds, expenses of approximately $3,500 were advanced to Select by the Adviser. These expenses are being amortized on a straight line basis through October, 2001 for Select. During the twelve months ended September 30, 2001, the Funds incurred brokerage commissions of $7,022,538, $5,729,975, $564,432, $1,040,655, $237,309, $2,693,614, and $429,077 of which $2,164,964, $1,346,463, $162,683, $447,443, $52,458, $0, and $0 were paid by Oakmark, Select, Small Cap, Equity and Income, Global, International and Int'l Small Cap, respectively, to an affiliate of the Adviser. The Funds' Trustees may participate in a Deferred Compensation Plan which may be terminated at any time. The obligations of the Plan are paid solely out of the assets of the Funds. 64 3. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the Statement of Changes in Net Assets are in respect of the following number of shares (in thousands):
TWELVE MONTHS ENDED SEPTEMBER 30, 2001 --------------------------------------------------------------------------------------------------- EQUITY & INT'L OAKMARK SELECT SMALL CAP INCOME GLOBAL INTERNATIONAL SMALL CAP --------------------------------------------------------------------------------------------------- Shares sold 44,685 101,275 8,459 39,023 3,516 18,926 6,680 Shares issued in reinvestment of dividends 994 5,908 585 293 53 3,303 588 Less shares redeemed (24,202) (23,567) (7,348) (6,921) (1,614) (13,874) (3,226) ------- ------- ------ ------ ------ ------- ------ Net increase (decrease) in shares outstanding 21,477 83,616 1,696 32,395 1,955 8,355 4,042 ======= ======= ====== ====== ====== ======= ======
TWELVE MONTHS ENDED SEPTEMBER 30, 2000 --------------------------------------------------------------------------------------------------- EQUITY & INT'L OAKMARK SELECT SMALL CAP INCOME GLOBAL INTERNATIONAL SMALL CAP --------------------------------------------------------------------------------------------------- Shares sold 11,007 32,899 3,743 784 1,361 11,610 3,311 Shares issued in reinvestment of dividends 21,629 15,744 0 463 3 1,898 656 Less shares redeemed (95,833) (44,043) (18,761) (1,763) (1,477) (20,847) (8,406) ------- ------- ------ ------ ------ ------- ------ Net increase (decrease) in shares outstanding (63,197) (4,600) (15,018) (516) (113) (7,339) (4,439) ======= ======= ====== ====== ====== ======= ======
4. INVESTMENT TRANSACTIONS Transactions in investment securities (excluding short term securities) were as follows (in thousands):
EQUITY & INT'L OAKMARK SELECT SMALL CAP INCOME GLOBAL INTERNATIONAL SMALL CAP ---------------------------------------------------------------------------------------------------------- Purchases $2,019,231 $2,258,505 $129,112 $730,401 $63,068 $541,098 $83,641 Proceeds from sales $1,409,888 $ 587,358 $106,706 $238,509 $42,530 $457,405 $46,690
Transactions in options written by Oakmark during the year ended September 30, 2001 were as follows:
NUMBER OF CONTRACTS PREMIUMS RECEIVED -------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2000 0 $ 0 Options written 19,250 1,890,470 Options terminated in closing purchase transactions (500) (3,500) Options expired (7,706) (785,674) Options exercised (11,044) (1,101,296) ------- ----------- Options outstanding at September 30, 2001 0 $ 0
65 Transactions in options written by Select during the year ended September 30, 2001 were as follows:
NUMBER OF CONTRACTS PREMIUMS RECEIVED ------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2000 0 $ 0 Options written 1,000 136,842 Options terminated in closing purchase transactions 0 0 Options expired (1,000) (136,842) Options exercised 0 0 ------- --------- Options outstanding at September 30, 2001 0 $ 0
Transactions in options written by Small Cap during the year ended September 30, 2001 were as follows:
NUMBER OF CONTRACTS PREMIUMS RECEIVED ------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2000 210 $ 64,578 Options written 10,220 1,573,462 Options terminated in closing purchase transactions (4,950) (231,352) Options expired (5,030) (1,314,043) Options exercised (450) (92,645) ------ ----------- Options outstanding at September 30, 2001 0 $ 0
Transactions in options written by Global during the year ended September 30, 2001 were as follows:
NUMBER OF CONTRACTS PREMIUMS RECEIVED ------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2000 0 $ 0 Options written 630 172,759 Options terminated in closing purchase transactions 0 0 Options expired 0 0 Options exercised (180) (31,739) ---- -------- Options outstanding at September 30, 2001 450 $141,020
5. TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS Affiliated issuers, as defined under the Investment Company Act of 1940, are those in which a fund's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. A summary of Select, Small Cap, International, and International Small Cap's transactions in the securities of these issuers during the year ended September 30, 2001 is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SELECT FUND
MARKET VALUE PURCHASE SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2001 --------------------------------------------------------------------------------------------------------- The Dun & Bradstreet Corporation $ 65,981,623 $ 0 $ 0 $137,998,000 Energizer Holdings, Inc. 61,041,062 0 0 99,675,126 The Reynolds and Reynolds Company, Class A 0 22,189,359 1,973,301 118,357,010 Toys 'R' Us, Inc. 78,087,413 0 0 210,610,905 ------------ ----------- ---------- ------------ TOTALS $205,110,098 $22,189,359 $1,973,301 $566,641,041
66 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SMALL CAP FUND
MARKET VALUE PURCHASE SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2001 --------------------------------------------------------------------------------------------------------- Hanger Orthopedic Group, Inc. $210,872 $436,322 $0 $3,552,000 R.G. Barry Corporation 139,659 0 0 3,664,280 -------- -------- -- ---------- TOTALS $350,531 $436,322 $0 $7,216,280
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL FUND
MARKET VALUE PURCHASE SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2001 ------------------------------------------------------------------------------------------------- Chargeurs SA $ 0 $ 4,647,299 $ 651,249 $20,866,885 Enodis plc 38,857,310 7,084,781 1,983,266 26,655,081 Fila Holding S.p.A. 13,463,234 0 0 23,967,610 Lotte Chilsung Beverage Co., Ltd. 442,181 0 61,854 18,400,307 Nufarm Limited 0 3,700,346 958,007 9,811,562 ----------- ----------- ---------- ----------- TOTALS $52,762,725 $15,432,426 $3,654,376 $99,701,445
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL SMALL CAP FUND
MARKET VALUE PURCHASE SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2001 ----------------------------------------------------------------------------------------------- Alaska Milk Corporation $193,224 $ 0 $291,982 $1,962,293 Royal Doulton plc 520,262 378,841 0 1,418,900 Mainfreight Limited 0 196,511 126,577 1,997,983 Matichon Public Company Limited, Foreign Shares 0 0 201,908 2,292,088 -------- -------- -------- ---------- TOTALS $713,486 $575,352 $620,467 $7,671,264
67 THE OAKMARK FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 5, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED YEAR ENDED YEAR ENDED 2001 2001 SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, CLASS I CLASS II(a) 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 26.95 $ 32.09 $ 34.37 $ 33.54 $ 41.21 Income From Investment Operations: Net Investment Income (Loss) 0.07 0.05 0.49 0.36 0.47 Net Gains or Losses on Securities (both realized and unrealized) 5.38 (0.17) (2.91) 2.51 (1.73) -------- -------- -------- -------- -------- Total From Investment Operations: 5.45 (0.12) (2.42) 2.87 (1.26) Less Distributions: Dividends (from net investment income) (0.39) 0.00 (0.26) (0.44) (0.40) Distributions (from capital gains) 0.00 0.00 (4.73) (1.60) (6.01) -------- -------- -------- -------- -------- Total Distributions (0.39) 0.00 (5.00) (2.04) (6.41) -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 32.01 $ 31.97 $ 26.95 $ 34.37 $ 33.54 ======== ======== ======== ======== ======== Total Return 20.42% (0.37)% (7.55)% 7.98% (4.06)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $3,109.1 $ 0.1 $2,038.7 $4,772.8 $6,924.0 Ratio of Expenses to Average Net Assets 1.15% 1.32%* 1.21% 1.11% 1.08% Ratio of Net Investment Income (Loss) to Average Net Assets 0.73% 0.46%* 1.42% 1.02% 1.22% Portfolio Turnover Rate 57% 57% 50% 13% 43% ELEVEN MONTHS ENDED YEAR ENDED SEPTEMBER 30, OCTOBER 31, 1997(b) 1996 --------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 32.39 $ 28.47 Income From Investment Operations: Net Investment Income (Loss) 0.36 0.34 Net Gains or Losses on Securities (both realized and unrealized) 10.67 4.70 -------- -------- Total From Investment Operations: 11.03 5.04 Less Distributions: Dividends (from net investment income) (0.34) (0.28) Distributions (from capital gains) (1.87) (0.84) -------- -------- Total Distributions (2.21) (1.12) -------- -------- Net Asset Value, End of Period $ 41.21 $ 32.39 ======== ======== Total Return 39.24%* 18.07% Ratios/Supplemental Data: Net Assets, End of Period ($million) $6,614.9 $3,933.9 Ratio of Expenses to Average Net Assets 1.08%* 1.18% Ratio of Net Investment Income (Loss) to Average Net Assets 1.19%* 1.13% Portfolio Turnover Rate 17% 24%
* Data has been annualized. (a) The date which Class II shares were first sold to the public was April 5, 2001. (b) A move to a September 30th fiscal year end from an October 31st fiscal year end resulted in an eleven-month fiscal year in 1997. 68 THE OAKMARK SELECT FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
DECEMBER 31, 1999 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED 2001 2001 2000 2000 SEPTEMBER 30, CLASS I CLASS II CLASS I CLASS II(a) 1999 ---------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 21.45 $ 21.40 $ 20.92 $ 18.42 $ 16.76 Income From Investment Operations: Net Investment Income (Loss) 0.03 0.00 0.13 0.10 0.19 Net Gains or Losses on Securities (both realized and unrealized) 5.17 5.10 4.32 2.88 4.73 -------- --------- -------- --------- -------- Total From Investment Operations: 5.20 5.10 4.45 2.98 4.92 Less Distributions: Dividends (from net investment income) (0.09) (0.06) (0.20) 0.00 (0.05) Distributions (from capital gains) (1.36) (1.34) (3.72) 0.00 (0.71) -------- --------- -------- --------- -------- Total Distributions (1.45) (1.40) (3.91) 0.00 (0.76) -------- --------- -------- --------- -------- Net Asset Value, End of Period $ 25.20 $ 25.10 $ 21.45 $ 21.40 $ 20.92 ======== ========= ======== ========= ======== Total Return 25.75% 25.28% 24.53% 16.18% 30.07% Ratios/Supplemental Data: Net Assets, End of Period ($million) $4,161.4 $ 35.4 $1,772.0 $ 6.8 $1,638.9 Ratio of Expenses to Average Net Assets 1.08% 1.40% 1.17% 1.41%* 1.16% Ratio of Net Investment Income (Loss) to Average Net Assets 0.26% (0.08)% 0.76% 0.59%* 0.98% Portfolio Turnover Rate 21% 21% 69% 69% 67% ELEVEN MONTHS YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997(b) ---------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 16.34 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.03 (0.01) Net Gains or Losses on Securities (both realized and unrealized) 0.56 6.35 -------- --------- Total From Investment Operations: 0.59 6.34 Less Distributions: Dividends (from net investment income) 0.00 0.00 Distributions (from capital gains) (0.17) 0.00 -------- --------- Total Distributions (0.17) 0.00 -------- --------- Net Asset Value, End of Period $ 16.76 $ 16.34 ======== ========= Total Return 3.64% 69.16%* Ratios/Supplemental Data: Net Assets, End of Period ($million) $1,227.9 $ 514.2 Ratio of Expenses to Average Net Assets 1.22% 1.12%* Ratio of Net Investment Income (Loss) to Average Net Assets 0.17% (0.11)%* Portfolio Turnover Rate 56% 37%
*Data has been annualized. (a) The date which Class II shares were first sold to the public was December 31, 1999. (b) A move to a September 30th fiscal year end from an October 31st fiscal year end resulted in an eleven-month fiscal year in 1997. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 69 THE OAKMARK SMALL CAP FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ELEVEN MONTHS YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 1999 1998 1997(b) ----------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 15.10 $ 13.88 $ 12.63 $ 20.34 $ 13.19 Income From Investment Operations: Net Investment Income (Loss) 0.00 0.00 0.14 (0.12) (0.01) Net Gains or Losses on Securities (both realized and unrealized) (0.02) 1.22 1.20 (4.73) 7.16 -------- --------- -------- --------- -------- Total From Investment Operations: (0.02) 1.22 1.34 (4.85) 7.15 Less Distributions: Dividends (from net investment income) 0.00 0.00 0.00 0.00 0.00 Distributions (from capital gains) (0.51) 0.00 (0.09) (2.86) 0.00 -------- --------- -------- --------- -------- Total Distributions (0.51) 0.00 (0.09) (2.86) 0.00 -------- --------- -------- --------- -------- Net Asset Value, End of Period $ 14.57 $ 15.10 $ 13.88 $ 12.63 $ 20.34 ======== ========= ======== ========= ======== Total Return 0.07% 8.79% 10.56% (26.37)% 59.14%* Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 264.6 $ 248.7 $ 437.1 $ 618.0 $1,513.4 Ratio of Expenses to Average Net Assets 1.27% 1.50%(a) 1.48% 1.45% 1.37%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.28)% (0.41)%(a) (0.44)% (0.40)% (0.25)%* Portfolio Turnover Rate 47% 28% 68% 34% 27% YEAR ENDED OCTOBER 31, 1996 ------------------------------------------------------------ Net Asset Value, Beginning of Period $ 10.00 Income From Investment Operations: Net Investment Income (Loss) (0.02) Net Gains or Losses on Securities (both realized and unrealized) 3.21 -------- Total From Investment Operations: 3.19 Less Distributions: Dividends (from net investment income) 0.00 Distributions (from capital gains) 0.00 -------- Total Distributions 0.00 -------- Net Asset Value, End of Period $ 13.19 ======== Total Return 31.94% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 218.4 Ratio of Expenses to Average Net Assets 1.61% Ratio of Net Investment Income (Loss) to Average Net Assets (0.29)% Portfolio Turnover Rate 23%
*Data has been annualized. (a) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
SEPTEMBER 30, 2000 -------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.59% Ratio of Net Income (Loss) to Average Net Assets (0.50)%
(b) A move to a September 30th fiscal year end from an October 31st fiscal year end resulted in an eleven-month fiscal year in 1997. 70 THE OAKMARK EQUITY AND INCOME FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JULY 13, 2000 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH YEAR SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ENDED 2001 2001 2000 2000 SEPTEMBER 30, CLASS I CLASS II CLASS I CLASS II(a) 1999 ---------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 16.50 $ 16.49 $ 15.68 $ 15.51 $ 13.99 Income From Investment Operations: Net Investment Income (Loss) 0.08 0.07 0.35 0.30 0.39 Net Gains or Losses on Securities (both realized and unrealized) 2.11 2.08 2.28 0.68 1.72 -------- --------- -------- --------- -------- Total From Investment Operations: 2.19 2.15 2.63 0.98 2.11 Less Distributions: Dividends (from net investment income) (0.24) (0.24) (0.45) 0.00 (0.21) Distributions (from capital gains) (1.00) (1.00) (1.36) 0.00 (0.21) -------- --------- -------- --------- -------- Total Distributions (1.24) (1.24) (1.81) 0.00 (0.42) -------- --------- -------- --------- -------- Net Asset Value, End of Period $ 17.45 $ 17.40 $ 16.50 $ 16.49 $ 15.68 ======== ========= ======== ========= ======== Total Return 14.40% 14.07% 18.51% 6.32% 15.32% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 620.1 $ 3.3 $ 54.5 $ 0.4 $ 60.3 Ratio of Expenses to Average Net Assets 0.98% 1.23% 1.24% 1.32%* 1.18% Ratio of Net Investment Income (Loss) to Average Net Assets 2.07% 1.95% 3.04% 2.59%* 2.65% Portfolio Turnover Rate 124% 124% 87% 87% 81% YEAR ELEVEN MONTHS YEAR ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31, 1998 1997(c) 1996 ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 14.49 $ 11.29 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.29 0.21 0.10 Net Gains or Losses on Securities (both realized and unrealized) 0.04 3.24 1.19 -------- --------- --------- Total From Investment Operations: 0.33 3.45 1.29 Less Distributions: Dividends (from net investment income) (0.24) (0.12) 0.00 Distributions (from capital gains) (0.59) (0.13) 0.00 -------- --------- --------- Total Distributions (0.83) (0.25) 0.00 -------- --------- --------- Net Asset Value, End of Period $ 13.99 $ 14.49 $ 11.29 ======== ========= ========= Total Return 2.57% 34.01%* 12.91% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 57.7 $ 33.5 $ 13.8 Ratio of Expenses to Average Net Assets 1.31% 1.50%*(b) 2.50%(b) Ratio of Net Investment Income (Loss) to Average Net Assets 2.39% 2.38%*(b) 1.21%(b) Portfolio Turnover Rate 46% 53% 66%
*Data has been annualized. (a) The date which Class II shares were first sold to the public was July 13, 2000. (b) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
SEPTEMBER 30, OCTOBER 31, 1997 1996 ---------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.70% 2.64% Ratio of Net Income (Loss) to Average Net Assets 2.18% 1.08%
(c) A move to a September 30th fiscal year end from an October 31st fiscal year end resulted in an eleven-month fiscal year in 1997. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 71 OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED PERIOD ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999(a) ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 10.91 $ 9.18 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.03 0.11 0.01 Net Gains or Losses on Securities (both realized and unrealized) 0.12 1.63 (0.83) --------- --------- --------- Total From Investment Operations: 0.15 1.74 (0.82) Less Distributions: Dividends (from net investment income) (0.17) (0.01) 0.00 Distributions (from capital gains) (0.06) 0.00 0.00 --------- --------- --------- Total Distributions (0.23) (0.01) 0.00 --------- --------- --------- Net Asset Value, End of Period $ 10.83 $ 10.91 $ 9.18 ========= ========= ========= Total Return 1.37% 18.97% (8.20)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 48.2 $ 27.2 $ 24.0 Ratio of Expenses to Average Net Assets 1.75%(b) 1.75%(b) 1.75%*(b) Ratio of Net Investment Income (Loss) to Average Net Assets 0.00%(b) 0.54%(b) 0.98%*(b) Portfolio Turnover Rate 114% 147% 7%
*Data has been annualized (a) The date which Fund shares were first offered for sale to the public was August 4, 1999. (b) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.80% 1.96% 2.22%* Ratio of Net Income (Loss) to Average Net Assets (0.05%) 0.34% 0.51%*
72 THE OAKMARK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
NOVEMBER 4, 1999 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED 2001 2001 2000 2000 SEPTEMBER 30, CLASS I CLASS II CLASS I CLASS II(a) 1999 --------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 15.40 $ 15.37 $ 13.95 $ 14.36 $ 10.42 Income From Investment Operations: Net Investment Income (Loss) 0.20 0.17 1.02 0.96 (0.34) Net Gains or Losses on Securities (both realized and unrealized) (2.07) (2.10) 0.92 0.54 4.89 -------- --------- -------- --------- -------- Total From Investment Operations: (1.87) (1.93) 1.94 1.50 4.55 Less Distributions: Dividends (from net investment income) (0.51) (0.49) (0.49) (0.49) (0.24) Distributions (from capital gains) (0.51) (0.48) 0.00 0.00 (0.78) -------- --------- -------- --------- -------- Total Distributions (1.02) (0.97) (0.49) (0.49) (1.02) -------- --------- -------- --------- -------- Net Asset Value, End of Period $ 12.51 $ 12.47 $ 15.40 $ 15.37 $ 13.95 ======== ========= ======== ========= ======== Total Return (13.10)% (13.44)% 14.27% 10.79% 46.41% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 738.5 $ 1.9 $ 782.4 $ 0.1 $ 811.1 Ratio of Expenses to Average Net Assets 1.30% 1.64% 1.30% 1.50%* 1.29% Ratio of Net Investment Income (Loss) to Average Net Assets 1.40% 0.62% 1.87% 1.98%* 1.94% Portfolio Turnover Rate 58% 58% 64% 64% 54% ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31, 1998 1997(b) 1996 ------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.77 $ 14.92 $ 12.97 Income From Investment Operations: Net Investment Income (Loss) 0.41 0.27 0.09 Net Gains or Losses on Securities (both realized and unrealized) (5.32) 3.74 2.90 -------- -------- -------- Total From Investment Operations: (4.91) 4.01 2.99 Less Distributions: Dividends (from net investment income) (0.58) (0.16) 0.00 Distributions (from capital gains) (2.86) 0.00 (1.04) -------- -------- -------- Total Distributions (3.44) (0.16) (1.04) -------- -------- -------- Net Asset Value, End of Period $ 10.42 $ 18.77 $ 14.92 ======== ======== ======== Total Return (29.90)% 29.63%* 24.90% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 756.1 $1,647.3 $1,172.8 Ratio of Expenses to Average Net Assets 1.32% 1.26%* 1.32% Ratio of Net Investment Income (Loss) to Average Net Assets 1.95% 2.09%* 1.45% Portfolio Turnover Rate 43% 61% 42%
*Data has been annualized. (a) The date which Class II shares were first sold to the public was November 4, 1999. (b) A move to a September 30th fiscal year end from an October 31st fiscal year end resulted in an eleven-month fiscal year in 1997. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 73 OAKMARK INTERNATIONAL SMALL CAP FUND FINANCIAL HIGHLIGHTS FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
JANUARY 9, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED YEAR ENDED YEAR ENDED 2001 2001 SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, CLASS I CLASS II(c) 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 11.51 $ 10.73 $ 12.64 $ 6.89 $ 12.20 Income From Investment Operations: Net Investment Income (Loss) 0.13 0.15 0.23 0.24 0.18 Net Gains or Losses on Securities (both realized and unrealized) (0.81) (0.91) (0.66) 5.71 (4.09) -------- --------- -------- --------- -------- Total From Investment Operations: (0.68) (0.76) (0.43) 5.95 (3.91) Less Distributions: Dividends (from net investment income) (0.34) 0.00 (0.11) (0.20) (0.06) Distributions (from capital gains) (0.49) 0.00 (0.59) 0.00 (1.34) -------- --------- -------- --------- -------- Total Distributions (0.83) 0.00 (0.70) (0.20) (1.40) -------- --------- -------- --------- -------- Net Asset Value, End of Period $ 10.00 $ 9.97 $ 11.51 $ 12.64 $ 6.89 ======== ========= ======== ========= ======== Total Return (6.18)% (7.08)% (3.44)% 88.02% (35.20)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 118.9 $ 0.0 $ 90.3 $ 155.4 $ 51.8 Ratio of Expenses to Average Net Assets 1.74% 1.97%* 1.77% 1.79% 1.96% Ratio of Net Investment Income (Loss) to Average Net Assets 1.83% 1.76%* 1.99% 2.31% 2.17% Portfolio Turnover Rate 49% 49% 40% 126% 69% ELEVEN MONTHS ENDED YEAR ENDED SEPTEMBER 30, OCTOBER 31, 1997(b) 1996 --------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 11.41 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.13 0.04 Net Gains or Losses on Securities (both realized and unrealized) 1.10 1.37 -------- -------- Total From Investment Operations: 1.23 1.41 Less Distributions: Dividends (from net investment income) (0.08) 0.00 Distributions (from capital gains) (0.36) 0.00 -------- -------- Total Distributions (0.44) 0.00 -------- -------- Net Asset Value, End of Period $ 12.20 $ 11.41 ======== ======== Total Return 12.07%* 14.15% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 66.0 $ 39.8 Ratio of Expenses to Average Net Assets 1.93%* 2.50%(a) Ratio of Net Investment Income (Loss) to Average Net Assets 1.23%* 0.65%(a) Portfolio Turnover Rate 63% 27%
*Data has been annualized. (a) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
OCTOBER 31, 1996 --------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 2.65% Ratio of Net Income (Loss) to Average Net Assets 0.50%
(b) A move to a September 30th fiscal year end from an October 31st fiscal year end resulted in an eleven-month fiscal year in 1997. (c) The date which Class II shares were first sold to the public was January 9, 2001. 74 THE OAKMARK FAMILY OF FUNDS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF HARRIS ASSOCIATES INVESTMENT TRUST: WE HAVE AUDITED THE ACCOMPANYING STATEMENTS OF ASSETS AND LIABILITIES OF THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK SMALL CAP FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK GLOBAL FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND (EACH A SERIES OF HARRIS ASSOCIATES INVESTMENT TRUST), INCLUDING THE SCHEDULES OF INVESTMENTS ON PAGES 6-8, 11-12, 16-18, 22-25, 28-32, 35-40, AND 44-49, AS OF SEPTEMBER 30, 2001, AND THE RELATED STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, THE STATEMENTS OF CHANGES IN NET ASSETS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED, AND THE FINANCIAL HIGHLIGHTS FOR THE PERIODS INDICATED THEREON. THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE THE RESPONSIBILITY OF THE TRUST'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS BASED ON OUR AUDITS. WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDITS TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. OUR PROCEDURES INCLUDED CONFIRMATION OF SECURITIES OWNED AS OF SEPTEMBER 30, 2001, BY CORRESPONDENCE WITH THE CUSTODIAN AND BROKERS. AS TO SECURITIES PURCHASED BUT NOT RECEIVED, WE REQUESTED CONFIRMATION FROM BROKERS, AND WHEN REPLIES WERE NOT RECEIVED, WE CARRIED OUT ALTERNATIVE AUDITING PROCEDURES. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION. IN OUR OPINION, THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITIONS OF THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK SMALL CAP FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK GLOBAL FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND OF THE HARRIS ASSOCIATES INVESTMENT TRUST AS OF SEPTEMBER 30, 2001, THE RESULTS OF THEIR OPERATIONS FOR THE YEAR THEN ENDED, THE CHANGES IN THEIR NET ASSETS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED, AND THEIR FINANCIAL HIGHLIGHTS FOR THE PERIODS INDICATED THEREON IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES. ARTHUR ANDERSEN LLP Chicago, Illinois October 26, 2001 75 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. During the period since inception (8/4/99), IPOs contributed an annualized 3.51% 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. 3. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. 4. The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. 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. 76 10. The S&P Small Cap 600 Index measures the performance of selected U.S. stocks with small market capitalizations. 11. The Lipper Small Cap Value Fund Index measures the performance of the thirty largest U.S. small-cap value funds tracked by Lipper. 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. The MSCI World Ex U.S. Index is an unmanaged index made up of 19 country sub-indexes, excluding the U.S. 17. 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. 18. 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. 19. The Micropal Equity International Small Cap Index is an unmanaged, unweighted index comprised of all funds within the international small company fund sector. 20. The Lipper International Small Cap Average includes 76 mutual funds that invest in securities whose primary markets are outside the U.S. 21. After tax returns are presented as supplemental information to comments in the report from the portfolio managers. The Fund's "Return after taxes on distributions" shows the effect of taxable distributions, but assumes that you still hold the Fund shares at the end of the period. The Fund's "Return after taxes on distributions and sale of Fund shares" shows the effect of both taxable distributions and any taxable gain or loss that would be realized if the Fund shares were purchased at the beginning and sold at the end of the specified period. After-tax returns are calculated using the historical individual federal marginal income tax rates in effect at the time of each distribution and assumed sale, but do not reflect the impact of local and state taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred accounts such as 401(k) plans or individual retirement accounts. PAST PERFORMANCE, BEFORE AND AFTER TAXES, CANNOT PREDICT FUTURE INVESTMENT RESULTS. 77 INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with management teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: A UNIFIED EFFORT AIMED AT IDENTIFYING THE BEST VALUES IN THE MARKETPLACE. FROM THE LIST OF APPROVED STOCKS, EACH FUND MANAGER CONSTRUCTS A RELATIVELY FOCUSED PORTFOLIO, BUILT ON A STOCK-BY-STOCK BASIS FROM THE BOTTOM UP. [SIDENOTE] WHO SHOULD INVEST Any investor who is seeking a disciplined value manager for the purposes of growing and diversifying a portfolio should consider one of the Oakmark funds, keeping in mind that all equity investments should be considered long-term investments. As value investors, we recognize that patience is a virtue and believe that, over the long term, investors are rewarded for their patience. We generally hold the companies in which we invest for three to five years, a time horizon that we encourage our shareholders to consider as well. HOW TO USE VALUE FUNDS IN AN OVERALL PORTFOLIO Investment styles tend to move in cycles. One style may be in favor for a few years while the other is out of favor, and vice versa. Diversifying the stock portion of your portfolio to include value and momemtum/growth investment styles may help reduce overall volatility--and potentially provide more consistent returns over time. INVEST Managers select stocks from the approved list for their specific funds APPROVED LIST Securities available for investment QUANTITATIVE AND QUALITATIVE RESEARCH Rigorous analysis is performed to ensure that the stock meets our strict value standards CRITERIA SCREENS Managers and research team screen for stocks that are worth further consideration UNIVERSE OF THOUSANDS OF EQUITY SECURITIES All stocks available for investment BOTTOM-UP INVESTMENT PROCESS 78 THE OAKMARK GLOSSARY BOOK VALUE - A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. A company's book value often differs substantially from economic value, especially in industries such as media. BUSINESS VALUE/INTRINSIC VALUE - The perceived or estimated actual value of a security, as opposed to its current market price or book value. Business value can be evaluated based on what a knowledgeable buyer would pay for a business if the company were sold in its entirety. GROWTH INVESTING - Investors who look for companies based on whether the stock of a company is growing earnings and/or revenue faster than the industry as a whole or the overall market. Growth investors generally expect high rates of growth to persist, and the stock, in turn, to deliver returns exceeding the market's. A growth mutual fund is generally one that emphasizes stocks believed to offer above-average growth prospects, with little to no emphasis on the stock's current price. M & A (MERGERS & ACQUISITIONS) - Merger: the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Acquisition: can also be called a takeover, and is defined as acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. MARKET CAPITALIZATION (MARKET CAP OR CAP) - The market price of an entire company on any given day, calculated by multiplying the number of shares outstanding by the price per share. MOMENTUM INVESTING - Approach to investing based on the belief that stock price trends are likely to continue. Momentum investors tend to buy stocks that have been outperforming the market and to sell those stocks when their relative performance deteriorates. Momentum investors do not consider a company's underlying value or fundamentals in their investment decisions. MULTIPLE - A ratio used to measure a stock's valuation, usually greater than 1. Sometimes used to mean price/earnings ratio. P/B OR PRICE-TO-BOOK RATIO - A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. P/E OR PRICE-TO-EARNINGS RATIO - The most common measure of a stock's valuation. It is equal to a stock's capitalization divided by its after-tax earnings over a 12-month period. The value is the same whether the calculation is done for the whole company or on a per-share basis. Equivalently, the cost an investor in a given stock must pay per dollar of current annual earnings. Also called earnings multiple. SHARE REPURCHASE - Program through which a corporation buys back its own shares in the open market, typically an indication that the corporation's management believes the stock price is undervalued. VALUE INVESTING - Investors who utilize valuation measures such as business value (including growth rate), price/earnings ratio, price/book ratio, and yield to gauge the attractiveness of a company. Managers who employ a value investment style believe that the true, underlying value of a company is not reflected in its current share price, and, over time, the price has potential to increase as the market recognizes the overall value of the business. Value stocks sell at relatively low prices in relation to their underlying business value, earnings, or book value. Stocks become undervalued for a variety of reasons, including an overall market decline, or when a specific industry falls into disfavor and investors view all companies in that industry in the same light. Consequently, an individual company's stock price may fall, even though it may be only temporarily affected by the industry's problems and its underlying value has remained unchanged. "x TIMES EARNINGS" ("12 TIMES EARNINGS") - Another way to express a stock's price-to-earnings (P/E) ratio. A stock with a P/E ratio of 12 sells at 12 times earnings. 79 [GRAPHIC] OAKMARK FAMILY OF FUNDS 80 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, including the audited financial statements contained herein, 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: November 2001.