N-30B-2 1 a2085569zn-30b_2.txt N-30B-2 [GRAPHIC] THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK SMALL CAP FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND THIRD QUARTER REPORT JUNE 30, 2002 ADVISED BY HARRIS ASSOCIATES L.P. [OAKMARK FAMILY OF FUNDS LOGO] THE OAKMARK FAMILY OF FUNDS 2002 THIRD QUARTER REPORT
LETTER FROM THE PRESIDENT 1 SUMMARY INFORMATION 2 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 4 THE OAKMARK FUND Letter from the Portfolio Managers 6 Schedule of Investments 7 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 10 Schedule of Investments 11 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Managers 13 Schedule of Investments 15 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 28 Global Diversification Chart 30 Schedule of Investments 31 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 36 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 38 International Diversification Chart 39 Schedule of Investments 40 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 45 International Diversification Chart 46 Schedule of Investments 47 OAKMARK PHILOSOPHY AND PROCESS 54 THE OAKMARK GLOSSARY 55 TRUSTEES AND OFFICERS 57
LETTER FROM THE PRESIDENT DEAR FELLOW SHAREHOLDERS: The first half of the year has proven challenging, as the S&P 5001 and the NASDAQ Composite(2) posted double-digit declines. We are pleased that all of our funds have performed well versus their benchmarks, and more importantly, 5 of 7 funds are positive year to date ended June 30. Our performance continues to benefit from our strong analytical efforts and focus on limiting risk in our portfolios. INVESTOR TRUST As equity investors, a sense of trust in company management is essential. Unfortunately, recent events have shaken investors' belief in corporate management, accountants and Wall Street analysts. There have been several cases of fraud and abuse of shareholders' trust. Fortunately, we do not believe this is a long-term concern. In other cycles, the market has struggled due to weakened investor confidence; after all, greed and dishonesty are not new. Ultimately, the unethical and criminal were identified and appropriately punished. It was a cyclical, not secular, problem, and the markets subsequently improved based on fundamentals. We believe this time will be no different. How do we protect our clients? We do our own analytical work and carefully make sure that management incentives are properly aligned with our clients. We believe the intensity of our efforts and willingness to ask the tough questions will help us limit our mistakes and protect the interest of our shareholders. PUTTING MARKET VOLATILITY TO WORK Assessing risk is important to the investment process. Equally important is being disciplined and unemotional--capturing the benefits of volatility, not the negatives. While anticipating the market is more difficult than reacting to it, we have found that buying stocks after a troublesome period offers the greatest investment potential. Buying yesterday's winners or selling on short-term concerns is not what a disciplined value investor does. Instead unemotional decision-making and managing risk with rigor and consistency drive successful investments. We hope to continue delivering strong investment results while managing volatility and risk. [PHOTO OF ROBERT M. LEVY] LOOKING AHEAD The NASDAQ percentage drop since March 2000 is approaching the magnitude of the market drop in 1929-1932, newspapers are loaded with negative news about the market, and for the first time ever, the S&P 500 has a good chance to be down for three straight years--it has been a tough time for many investors. While sources of concern remain, we believe many of the issues affecting the market are already reflected in individual stock prices. The market is not at a record high, and stock prices are closer to more accurately reflecting underlying business values. The best advice we can give is that successful investors stick with a long-term plan and never act emotionally as a result of short-term fears. Thank you for your continued investment in The Oakmark Family of Funds /s/ Robert M. Levy ROBERT M. LEVY PRESIDENT AND CEO July 3, 2002 1 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION
THE OAKMARK THE OAKMARK THE OAKMARK FUND SELECT SMALL CAP PERFORMANCE FOR PERIOD(3) FUND FUND ENDED JUNE 30, 2002 (OAKMX) (AOKLX) (OAKSX) ----------------------------------------------------------------------------------------------------------------------------- 3 Months* -8.36% -8.09% -6.85% 6 MONTHS* -4.54% -5.76% 4.57% 1 YEAR -3.74% -1.84% 5.42% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 0.60% 12.86% 7.10% 5 YEAR 5.34% 19.93% 4.84% 10 YEAR 15.33% N/A N/A SINCE INCEPTION 18.46% 24.88% 12.83% VALUE OF $10,000 FROM INCEPTION DATE $ 63,463 $ 35,206 $ 22,369 (8/5/91) (11/1/96) (11/1/95) TOP FIVE HOLDINGS(4) Washington Washington Ralcorp AS OF JUNE 30, 2002 Mutual, Inc. 3.9% Mutual, Inc. 18.7% Holdings, Inc. 3.5% H&R Block, Inc. 3.2% H&R Block, Inc. 7.8% Mentor Graphics Fortune Brands, Inc. 2.5% Yum! Brands, Inc. 5.0% Corporation 3.0% COMPANY AND % OF TOTAL NET ASSETS Fannie Mae 2.3% Toys 'R' Us, Inc. 4.6% Tupperware The Kroger Co. 2.3% Mattel, Inc. 4.4% Corporation 3.0% NCO Group, Inc. 3.0% Del Monte Foods Company 2.9% TOP FIVE INDUSTRIES Retail 15.1% Banks & Thrifts 18.7% Computer Software 7.6% AS OF JUNE 30, 2002 Pharmaceuticals 9.9% Retail 18.2% Food & Beverage 6.4% Other Consumer Other Consumer Medical Products 5.3% Goods &Services 8.4% Goods &Services 12.2% Other Consumer INDUSTRIES AND % OF TOTAL NET ASSETS Banks & Thrifts 6.2% Information Services 8.0% Goods & Services 5.1% Food & Beverage 6.1% Computer Services 7.6% Banks & Thrifts 5.0%
PAST PERFORMANCE IS NO GUARANTEE OFFUTURE RESULTS. Investment return and prinicipal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change * Not annualized 2
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL PERFORMANCE FOR PERIOD(3) INCOME FUND FUND ENDED JUNE 30, 2002 (OAKBX) (OAKGX) ------------------------------------------------------------------------------------------------- 3 Months* -3.19% -6.60% 6 MONTHS* 0.86% 3.54% 1 YEAR 5.77% 8.15% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 11.88% N/A 5 YEAR 13.99% N/A 10 YEAR N/A N/A SINCE INCEPTION 15.31% 13.29%(5) VALUE OF $10,000 FROM INCEPTION DATE $ 25,855 $ 14,372 (11/1/95) (8/4/99) TOP FIVE HOLDINGS(4) Synopsys, Inc. 3.0% eFunds Corporation 5.7% AS OF JUNE 30, 2002 CenturyTel, Inc. 3.0% Synopsys, Inc. 5.2% First Health Telefonaktiebolaget Group Corp. 2.9% LM Ericsson, Class B 5.0% COMPANY AND % OF TOTAL Ceridian Corporation 2.8% First Health Group NET ASSETS Phillips Petroleum Corp. 4.1% Company 2.8% Hunter Douglas N.V. 4.0% TOP FIVE INDUSTRIES U.S. Government Computer Software 8.1% AS OF JUNE 30, 2002 Notes 25.0% Banks & Thrifts 7.6% Oil & Natural Gas 9.6% Information Services 7.5% INDUSTRIES AND % OF TOTAL Pharmaceuticals 6.9% Medical Products 5.9% NET ASSETS Computer Software 5.0% Telecommunications Retail 4.6% Equipment 5.0% THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL PERFORMANCE FOR PERIOD(3) FUND SMALL CAP FUND ENDED JUNE 30, 2002 (OAKIX) (OAKEX) -------------------------------------------------------------------------------------------- 3 Months* -2.23% 2.51% 6 MONTHS* 8.97% 12.95% 1 YEAR 2.98% 19.35% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 5.61% 7.12% 5 YEAR 5.95% 7.39% 10 YEAR N/A N/A SINCE INCEPTION 12.04% 9.96% VALUE OF $10,000 FROM INCEPTION DATE $ 30,315 $ 18,831 (9/30/92) (11/1/95) TOP FIVE HOLDINGS(4) GlaxoSmithKline plc 4.4% Gurit-Heberlein AG 4.5% AS OF JUNE 30, 2002 Telefonaktiebolaget Kobenhavns LM Ericsson, Class B 3.7% Lufthavne A/S 4.2% Hunter Douglas N.V. 3.0% Carpetright plc 3.8% COMPANY AND % OF TOTAL Henkel KGaA 3.0% Neopost SA 3.7% Meitec Corporation 2.8% Ansell Limited 3.6% NET ASSETS TOP FIVE INDUSTRIES Banks & Thrifts 9.3% Retail 8.8% AS OF JUNE 30, 2002 Pharmaceuticals 8.8% Airport Maintenance 7.5% Food & Beverage 7.3% Banks & Thrifts 6.8% INDUSTRIES AND % OF TOTAL Publishing 7.4% Food & Beverage 6.2% NET ASSETS Chemicals 5.1% Machinery & Industrial Processing 5.6%
3 THE OAKMARK AND OAKMARK SELECTFUNDS At Oakmark, we look for stocks with prices less than 60% of intrinsic value, with intrinsic value that is likely to grow and WITH MANAGEMENT THAT ACTS IN THE INTEREST OF OUTSIDE SHAREHOLDERS. The combination of these factors creates our biggest competitive advantage--the ability to be more patient than most investors. [PHOTO WILLIAM C. NYGREN] Usually it's pretty easy to tell the difference between the scandal sheets and the business section. Unfortunately, in 2002 there has been great overlap. A handful of corporate scandals, one seemingly worse than the next, has led to a level of distrust in corporate leaders that hasn't been seen for at least a generation. That lack of trust has been frequently cited as one of the leading reasons for the broad market's continued decline and has resulted in tremendous losses for those companies directly involved in wrongdoing. A friend and former colleague recently called to tell me he had bought stock in one of the scandal-plagued companies and said, "This would be a perfect stock for you if only you could trust their management!" That statement makes about as much sense to us as saying that Happy Gilmore could play in the NHL if only he could skate! Trust in management and a belief that they are acting in our economic interest is an essential part of our stock selection criteria; when it is lacking, the stock is immediately rejected. We used to say we wanted management that was focused on "increasing shareholder value." To us, that means that when management makes capital investment decisions, their sole goal is to achieve the highest possible risk-adjusted return on that capital. As management considers their array of choices--re-investing in the business, making acquisitions, paying dividends, paying off debt or repurchasing stock--we want them to make the selection that maximizes per-share business value. Effectively, we want them to make the same decision that a value-maximizing shareholder would select. But, that phrase is so widely used today that it has become meaningless. Most annual reports now cite "shareholder value" as a corporate objective, and there is even a new periodical called "Shareholder Value Magazine." In a rapidly growing business, there is a natural alignment of economic interests between shareholders and management. Pursuing internal growth opportunities generally provides high rates-of-return on capital and, therefore, grows the value of the business. As the business gets bigger, the job of managing the company also becomes more financially lucrative--bigger businesses usually pay their top managers more than smaller businesses do. A company like First Data Corporation rapidly expanding its highly profitable Western Union franchise is a good example of management making their own jobs more rewarding at the same time they are growing shareholder value. HIGHLIGHTS - We want company managements to make decisions that maximize per-share business value. - Managements can grow value by investing in the business, making acquisitions, paying dividends, paying off debt, or repurchasing stock. - We favor managements with a willingness to grow value by shrinking. But not all companies have such attractive internal growth opportunities. In 1960, Henry Singleton founded Teledyne, a company that grew rapidly for a decade via a combination of internal growth and acquisitions. When the opportunities for value added acquisitions disappeared, Singleton switched gears. From 1970 to 1984 he used his cash to repurchase 82% of Teledyne's grossly undervalued common shares. The result--the stock price increased from $2 to $250. In 1971, Washington Post went public, and its stock subsequently fell to a fraction of its intrinsic business value. Warren Buffett acquired a large stake in Washington Post and convinced its CEO, Katherine Graham, that repurchasing stock with excess cash added much more to per-share value than would any capital expenditure opportunities. Graham repurchased shares in 1979 at an average price of $22. Washington Post ended last quarter at a per-share price of $545. It is no wonder she credited Buffett for being a great mentor! In 1980, Don Kelly was CEO of Esmark, an unwieldy conglomerate which owned Swift, Hunt Wesson, Playtex, Avis, Vickers Oil, Vigero Fertilizer, and other assorted businesses. As is often the case with conglomerates, the stock market valued Esmark well below the sum of the prices the individual businesses would have traded at were they pure plays. In 1981, Mobil Oil purchased shares in Esmark, then exchanged those shares for Esmark's Vickers Oil subsidiary. Not only did this transaction achieve a fair price for the oil division, but the Esmark shares that were returned were worth far more than an equivalent dollar amount of cash. The result--Esmark stock rose from $9 per share in 1980 to $60 in 1984 when the company was acquired by Beatrice Foods. 4 Singleton, Graham and Kelly were among the pioneers of maximizing shareholder value by shrinking the business. They acted against their own economic interests as professional managers but maximized value for the shareholders. Since they were also shareholders, they were maximizing their personal economics as well. At the time, share repurchase was highly controversial, and not many companies would express a desire to repurchase shares or sell off divisions. It was generally viewed as a sign of weakness, a sign of poor internal growth opportunities. Because so few companies talked about repurchasing shares, or selling pieces of their company, those that did really stood out as having their goals aligned with their shareholders. But today, most companies at least pay lip service to the idea of buying back stock when it is undervalued or selling business units when a full valuation is received. These statements have nearly become synonymous with the phrase Oshareholder value." We still monitor company actions to see how they react when presented with opportunities for profitable repurchase or restructuring, but the words alone have become useless. So what do we look for in the words of management? Any comments that suggest they are more focused on increasing business value than on furthering their own careers. Two of our companies, Mattel and Yum Brands (formerly Tricon Global Restaurants), were on a short list this year of annual reports that did not mention anything about shareholder value. In his letter to shareholders, Mattel CEO, Bob Eckert, spoke of improving Mattel's performance by building the brand and by doing a better job of managing expenses. Achieving those goals will do more to grow Mattel's business value than would any amount of asset sales or share repurchases. In the Yum Brands letter to shareholders, CEO David Novak also avoided any discussion of shareholder value. What he spoke of instead was his "customer mania"--a maniacal focus on providing an industry leading level of customer service. Mr. Novak is not serving customers to boost his ego; we believe he is doing it to boost the value of the business. We like to see our managers own stock in the company they work for, to have a reasonable number of stock options and to have incentive pay packages that focus on variables we believe drive equity values. We favor a willingness to grow value by shrinking--like the shareholder value pioneers, Singleton, Graham and Kelly. Just as important, we like to see managements that state goals that will focus their employees on business issues that will grow the company's intrinsic value. When management views the investors as their partners, focuses on maximizing per-share business value, and communicates honestly about their results, we believe the probability of achieving above-average returns on their stock increases. As for the company our friend purchased, it is still on our list of stocks to research more thoroughly if and when the management changes. /s/ William C. Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com July 3, 2002 5 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN] [PHOTO OF KEVIN GRANT] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (6/30/02) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(1) [CHART]
THE OAKMARK FUND S & P 500 8/1/91 $10,000 $10,000 12/31/91 $13,020 $10,909 3/31/92 $14,690 $10,634 6/30/92 $15,230 $10,836 9/30/92 $16,800 $11,178 12/31/92 $19,386 $11,741 3/31/93 $20,927 $12,253 6/30/93 $21,494 $12,313 9/30/93 $23,095 $12,631 12/31/93 $25,300 $12,924 3/31/94 $24,242 $12,434 6/30/94 $24,951 $12,486 9/30/94 $26,663 $13,097 12/31/94 $26,138 $13,095 3/31/95 $28,539 $14,370 6/30/95 $30,303 $15,741 9/30/95 $32,841 $16,992 12/31/95 $35,134 $18,015 3/31/96 $36,386 $18,982 6/30/96 $37,661 $19,834 9/30/96 $37,945 $20,447 12/31/96 $40,828 $22,152 3/31/97 $42,456 $22,746 6/30/97 $48,917 $26,716 9/30/97 $52,009 $28,717 12/31/97 $54,132 $29,542 3/31/98 $59,517 $33,663 6/30/98 $57,909 $34,775 9/30/98 $49,899 $31,316 12/31/98 $56,155 $37,985 3/31/99 $55,888 $39,877 6/30/99 $62,332 $42,688 9/30/99 $53,882 $40,023 12/31/99 $50,277 $45,977 3/31/00 $45,767 $47,032 6/30/00 $46,950 $45,783 9/30/00 $49,815 $45,339 12/31/00 $56,201 $41,791 3/31/01 $60,342 $36,837 6/30/01 $65,927 $38,993 9/30/01 $59,986 $33,269 12/31/01 $66,479 $36,824 3/31/02 $69,250 $36,926 6/30/02 $63,463 $31,979
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR 5-YEAR 10-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/5/91) ------------------------------------------------------------------------------ OAKMARK FUND -8.36% -3.74% 5.34% 15.33% 18.46% S&P 500 -13.40% -17.99% 3.66% 11.42% 11.24% Dow Jones Average(6) -10.82% -10.43% 5.54% 13.17% 13.26% Lipper Large Cap -10.82% -13.75% 4.00% 11.07% 10.99% Value Index(7) ------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Fund decreased in value by 8% last quarter. The market as a whole declined much more than the Fund did as shown by the 13% loss in the S&P 500. The market decline led to a number of new stocks falling to our buy targets. In addition to the new addition discussed below, we also discuss our purchases of Abbott Laboratories, Boeing, Bristol-Myers, Duke Energy, and Home Depot on our web site, www.oakmark.com. AOL TIME WARNER (AOL--$15) Oakmark takes a position in the leading Internet Service Provider--who'd have thought? Near the peak of the Internet bubble, in late 1999, AOL hit a price of $96, giving it a market capitalization in excess of $200 billion. The following year, AOL announced they would purchase, for stock, "old media" company, Time Warner, which itself had a market cap of nearly $100 billion. Today, with AOL having fallen to $15, the market cap of the combined companies has fallen from $300 billion to $68 billion. At Oakmark, we were never comfortable with the valuations placed on Internet stocks, but at the current price for AOL, the market appears to value the world's largest ISP at less than zero--that works for us! One of the big financial news stories last quarter was the conflicts that are inherent in the jobs of Wall Street research analysts--especially related to Internet stocks. In light of that, consider an article written in Fortune "magazine in February 2000 (the peak of the Internet bubble) by Carol Loomis, "AOL + TWX = ??? Do the math and you might wonder if this company's long-term annual return to investors can beat a Treasury bond's." The article took a disciplined quantitative approach to examining the growth AOL would need to achieve to produce acceptable returns for its shareholders. The article concluded by saying "to make the merger work for investors ... will be like pushing a boulder up an alp." Some analysts are able to speak their minds honestly, despite conflicts. Kudos to Carol Loomis who wrote that piece while employed by AOL Time Warner! With AOL down by over 80%, reasonable returns now appear much more achievable. Best wishes, /s/ William C. Nygren /s/ Kevin Grant WILLIAM C. NYGREN, CFA KEVIN GRANT, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com kgrant@oakmark.com July 3, 2002 6 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------- COMMON STOCKS--95.8% FOOD & BEVERAGE--6.1% H.J. Heinz Company 2,010,000 $ 82,611,000 General Mills, Inc. 1,855,000 81,768,400 Kraft Foods Inc. 1,895,000 77,600,250 -------------- 241,979,650 HOUSEHOLD PRODUCTS--3.3% Newell Rubbermaid, Inc. 1,975,000 $ 69,243,500 The Clorox Company 1,440,200 59,552,270 -------------- 128,795,770 OTHER CONSUMER GOODS & SERVICES--8.4% H&R Block, Inc. 2,753,300 $ 127,064,795 Fortune Brands, Inc. 1,745,600 97,753,600 Mattel, Inc. 3,216,300 67,799,604 Cendant Corporation (a) 2,395,100 38,034,188 -------------- 330,652,187 BUILDING MATERIALS & CONSTRUCTION--1.9% Masco Corporation 2,833,000 $ 76,802,630 CABLE & SATELLITE TV--3.5% AOL Time Warner Inc. (a) 5,750,000 $ 84,582,500 General Motors Corporation, Class H (Hughes Electronics Corporation) (a) 5,100,000 53,040,000 -------------- 137,622,500 HARDWARE--2.0% The Black & Decker Corporation 1,622,200 $ 78,190,040 MARKETING SERVICES--1.4% The Interpublic Group of Companies, Inc. 2,200,000 $ 54,472,000 PUBLISHING--3.3% Gannett Co., Inc. 934,500 $ 70,928,550 Knight-Ridder, Inc. 916,000 57,662,200 -------------- 128,590,750 RECREATION & ENTERTAINMENT--1.1% Carnival Corporation 1,500,000 $ 41,535,000 RETAIL--15.1% The Kroger Co. (a) 4,490,000 $ 89,351,000 J.C. Penney Company, Inc. 3,702,900 81,537,858 Safeway Inc. (a) 2,727,000 79,601,130 Yum! Brands, Inc (a) 2,439,000 71,340,750 McDonald's Corporation 2,300,000 65,435,000 The Home Depot, Inc. 1,500,000 55,095,000 The Gap, Inc. 3,800,000 53,960,000 Toys 'R' Us, Inc. (a) 3,000,000 52,410,000 CVS Corporation 1,605,000 49,113,000 -------------- 597,843,738 7 NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------- TV PROGRAMMING--2.0% Liberty Media Corporation, Class A (a) 7,701,400 $ 77,014,000 BANK & THRIFTS--6.2% Washington Mutual, Inc. 4,159,300 $ 154,351,623 U.S. Bancorp 3,800,000 88,730,000 -------------- 243,081,623 INSURANCE--2.0% MGIC Investment Corporation 1,137,900 $ 77,149,620 OTHER FINANCIAL--2.3% Fannie Mae 1,220,000 $ 89,975,000 MEDICAL PRODUCTS--1.9% Guidant Corporation (a) 2,546,100 $ 76,968,603 PHARMACEUTICALS--9.9% Merck & Co., Inc. 1,700,000 $ 86,088,000 Schering-Plough Corporation 3,425,000 84,255,000 Bristol-Myers Squibb Company 3,250,000 83,525,000 Abbott Laboratories 1,950,000 73,417,500 Chiron Corporation (a) 1,822,000 64,407,700 -------------- 391,693,200 TELECOMMUNICATIONS--3.3% AT&T Corp. 7,135,000 $ 76,344,500 Sprint Corporation 4,946,000 52,477,060 -------------- 128,821,560 TELECOMMUNICATIONS EQUIPMENT--1.6% Motorola, Inc. 4,475,000 $ 64,529,500 COMPUTER SERVICES--5.1% First Data Corporation 2,200,000 $ 81,840,000 Electronic Data Systems Corporation 1,701,000 63,192,150 SunGard Data Systems, Inc. (a) 2,131,600 56,444,768 -------------- 201,476,918 OFFICE EQUIPMENT--1.3% Xerox Corporation (a) 7,427,400 $ 51,768,978 AEROSPACE & DEFENSE--2.5% Honeywell International, Inc. 1,550,000 $ 54,606,500 The Boeing Company 1,000,000 45,000,000 -------------- 99,606,500 OTHER INDUSTRIAL GOODS & SERVICES--1.0% Illinois Tool Works Inc. 604,200 $ 41,266,860 8 SHARES HELD/ NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------- WASTE DISPOSAL--1.9% Waste Management, Inc. 2,874,300 $ 74,875,515 OIL & NATURAL GAS--5.2% Conoco Inc. 2,550,000 $ 70,890,000 Phillips Petroleum Company 1,192,700 70,226,176 Burlington Resources Inc. 1,671,100 63,501,800 -------------- 204,617,976 ELECTRIC UTILITIES--3.5% TXU Corp. 1,565,000 $ 80,675,750 Duke Energy Corporation 1,900,000 59,090,000 -------------- 139,765,750 TOTAL COMMON STOCKS (COST: $3,536,135,891) 3,779,095,868 SHORT TERM INVESTMENTS--4.5% U.S. GOVERNMENT BILLS--2.3% United States Treasury Bills, 1.65% - 1.885% due 7/5/2002 - 9/5/2002 $90,000,000 $ 89,833,297 TOTAL U.S. GOVERNMENT BILLS (COST: $89,833,297) 89,833,297 REPURCHASE AGREEMENTS--2.2% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $89,013,721 collateralized by U.S. Government Agency Securities $89,000,000 $ 89,000,000 TOTAL REPURCHASE AGREEMENT (COST:$89,000,000) 89,000,000 TOTAL SHORT TERM INVESTMENTS (COST: $178,833,297) 178,833,297 Total Investments (Cost $3,714,969,188)-- 100.3% $3,957,929,165 Other Liabilities In Excess Of Other Assets--(0.3%) (11,112,086) -------------- TOTAL NET ASSETS--100% $3,946,817,079 ==============
(a) Non-income producing security. 9 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN] [PHOTO OF HENRY BERGHOEF] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (6/30/02) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(1) [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 12/31/01 $37,359 $17,526 3/31/02 $38,306 $17,574 06/30/02 $35,206 $15,220
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/5/91) ---------------------------------------------------------------------- OAKMARK FUND -8.09% -1.84% 19.93% 24.88% S&P 500 -13.40% -17.99% 3.66% 7.69% S&P MidCap 400(8) -9.31% -4.72% 12.57% 14.56% Lipper Mid Cap -8.69% -2.47% 6.92% 9.09% Value Index(9) ----------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Select Fund declined by 8% last quarter, bringing the calendar year loss to 6%. The S&P 500 lost 13% for both the quarter and the year-to-date, and even the S&P Midcap Index, which was so strong in the first quarter, lost 9% in the quarter. Although losing less than the market never feels as good as making money, limiting losses in difficult periods is an even more important accomplishment toward achieving our goal of compounding capital at an above average, long-term return. STILWELL FINANCIAL (SV--$18) In mid-2000, Kansas City Southern spun-off to shareholders their financial services investments in a company named Stilwell Financial. These investments include the money management firms Janus and Berger as well as a minority interest in DST Systems. Stilwell stock peaked at $54 per share in late 2000 shortly after the peak in the stock market. As the market declined so did assets under management, earnings, and the stock price--now at $18. DST Systems, the leading provider of information processing and computer software to the mutual fund industry, trades publicly under the symbol DST, and closed the quarter at $46. Stilwell owns 32% of DST--$8 of market value per Stilwell share. If that $8 is subtracted from Stilwell's market price, it leaves a price of $10 per share for the asset management business. At that price, Stilwell sells at a large discount to publicly traded asset management firms and an even larger discount to prices that have been paid in acquisitions. Janus follows an investment approach that is at the other end of the spectrum from The Oakmark Family. However, despite losses in the last two years, Janus has produced long-term returns that are above average. Further, we admire the excellent job Janus has done on some non-investment issues of running their business, such as brand building and customer service. At a price of just twelve times expected next year EPS(10), we are pleased to have the opportunity to invest in one of the leaders in our industry. Thank you for your continued support. /s/ William C. Nygren /s/ Henry R. Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnyngren@oakmark.com berghoef@oakmark.com July 3, 2002 10 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------- COMMON STOCKS--93.5% OTHER CONSUMER GOODS & SERVICES--12.2% H&R Block, Inc. 7,938,800 $ 366,375,620 Mattel, Inc. 9,754,000 205,614,320 -------------- 571,989,940 INFORMATION SERVICES--8.0% Moody's Corporation 3,984,000 $ 198,204,000 The Dun & Bradstreet Corporation (a) 5,422,400 179,210,320 -------------- 377,414,320 PUBLISHING--3.7% Knight-Ridder, Inc. 2,756,500 $ 173,521,675 RETAIL--18.2% Yum! Brands, Inc (a) 8,022,000 $ 234,643,500 Toys `R' Us, Inc. (a) 12,380,100 216,280,347 Office Depot, Inc. (a) 12,096,000 203,212,800 The Kroger Co. (a) 10,062,500 200,243,750 -------------- 854,380,397 BANK & THRIFTS--18.7% Washington Mutual, Inc. 23,731,400 $ 880,672,254 INVESTMENT MANAGEMENT--2.7% Stilwell Financial Inc 7,002,200 $ 127,440,040 HEALTH CARE SERVICES--4.0% IMS Health Incorporated 10,392,000 $ 186,536,400 PHARMACEUTICALS--4.4% Chiron Corporation (a) 5,811,400 $ 205,432,990 TELECOMMUNICATIONS--6.8% AT&T Corp. 16,548,000 $ 177,063,600 Sprint Corporation 13,661,500 144,948,515 -------------- 322,012,115 COMPUTER SERVICES--7.6% First Data Corporation 5,330,400 $ 198,290,880 Electronic Data Systems Corporation 4,344,400 161,394,460 -------------- 359,685,340 OFFICE EQUIPMENT--3.3% Xerox Corporation (a) 22,422,700 $ 156,286,219 OIL & NATURAL GAS--3.9% Burlington Resources Inc. 4,801,800 $ 182,468,400 TOTAL COMMON STOCKS (COST: $3,745,750,000) 4,397,840,090 11 SHARES HELD/ NAME PAR VALUE MARKET VALUE ---- ------------ --------------- SHORT TERM INVESTMENTS--6.7% U.S. GOVERNMENT BILLS--5.2% United States Treasury Bills, 1.64%-1.975% due 7/5/2002 - 11/21/2002 $245,000,000 $ 244,304,381 TOTAL U.S. GOVERNMENT BILLS (COST: $244,304,381) 244,304,381 REPURCHASE AGREEMENTS--1.5% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $72,011,100 collateralized by U.S. Government Agency Securities $ 72,000,000 $ 72,000,000 TOTAL REPURCHASE AGREEMENT (COST: $72,000,000) 72,000,000 TOTAL SHORT TERM INVESTMENTS (COST: $316,304,381) 316,304,381 Total Investments (Cost $4,062,054,381)-- 100.2% $4,714,144,471 Other Liabilities In Excess Of Other Assets--(0.2%) (7,427,552) -------------- TOTAL NET ASSETS--100% $4,706,716,919 ==============
(a) Non-income producing security. 12 THE OAKMARK SMALL CAP FUND REPORT FROM JAMES P. BENSON AND CLYDE S. MCGREGOR, PORTFOLIO MANAGERS [PHOTO OF JAMES P. BENSON] [PHOTO OF CLYDE S. MCGREGOR] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/02) AS COMPARED TO THE RUSSELL 2000 INDEX(11) [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 12/31/01 $21,391 $17,906 3/31/02 $24,014 $18,619 06/30/02 $22,369 $17,064
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/5/91) ---------------------------------------------------------------------- OAKMARK SMALL CAP FUND -6.85% 5.42% 4.84% 12.83% Russell 2000 -8.35% -8.69% 4.44% 8.34% S&P Small Cap 600(12) -6.53% 0.27% 8.26% 11.98% Lipper Small Cap -4.08% 5.10% 8.57% 12.28% Value Index(13) ----------------------------------------------------------------------
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 second calendar quarter of 2002 was a period most investors would just as soon forget. Declining stock market values triggered by accounting scandals and uncertain economic growth caused some investors to seek alternative investments to stocks. Housing prices and transaction activity remained active and even bank deposits, despite low interest rates, generally experienced good growth. For the just concluded quarter, stocks slumped in value as the S&P 500 Index(1) fell by over 13% and the NASDAQ Composite(2) lost 21%. The Russell 2000 Small Cap Index fell by 8% during the quarter which more than erased a 4% rise in the first quarter of 2002. Year-to-date the Russell 2000 is down by nearly 5%. Your fund experienced a loss of approximately 7% during the last three months bringing the year-to-date result to a gain of not quite 5%. While we are pleased to be able to report a gain for our investors, we are increasing our analytical focus to find those companies that we believe not only offer good investment opportunities, but also have management teams that conduct themselves in an ethical fashion. MERGERS AND ACQUISITIONS Since peaking in 1999-2000, merger and acquisition activity in the United States has declined sharply. This can have a negative impact on small cap stocks since smaller companies are often the targets of larger firms. Despite the sluggish merger and acquisition environment, we were fortunate to have two of our companies agree to be acquired during the second quarter. In May, Citigroup Inc. agreed to acquire Golden State Bancorp for a combination of cash and stock valued at approximately $40 per share at the time of the announcement. While we sold our investment in Golden State Bancorp shortly after the deal was announced, this stock illustrates our investment philosophy reasonably well. We bought Golden State in 1999 when the stock was trading in the upper-teens. At that time, we estimated a per share private market value for this company in the mid-$30's. Management did a good job of growing Golden State's private market value by gaining new customers, cross-selling current customers and maintaining excellent asset quality. By early this year our estimate of Golden State's value had increased to the mid-$40's as management's actions had a positive impact on raising the bank's value. Since this stock remained consistently below our estimate of private market value we remained an owner of this security. By exiting this position only after most of the valuation gap had been closed, we were able to keep our trading costs down and have the bulk of the gains achieve long-term tax status. Silverstream Software Corporation is the other stock held in the Fund's portfolio that agreed to be acquired during the past quarter. Novell Inc. reached an agreement to acquire Silverstream for 13 $9.00 share in cash and this represented a nice premium to our average purchase price of under $6 per share. Silverstream was a 2001 addition to the portfolio and this is a stock that we were able to buy at below net cash (total cash plus marketable securities minus all debt) per share. While finding stocks trading below net cash is rare, when we do find them we are likely to buy these issues if the operating company has decent prospects, since we are essentially getting the operating company for free. We have reduced our Silverstream holdings and if Novell completes this acquisition our remaining Silverstream shares are likely to be sold in the third quarter. FREEDOM TO CHOOSE One of the key advantages small cap investors and small cap fund managers have is the freedom to choose among several thousand potential investments. Many of these investments are likely to be overlooked by the majority of investors, thus presenting a potentially favorable investment opportunity for those of us that focus on small cap stocks. An illustration of how concentrated the market capitalization is in the United States was detailed in a mid-June report published by Lehman Brothers where they looked at all companies with market capitalizations greater than $200 million and divided these firms into quintiles. The top quintile contained only eleven firms while thirty firms were in the second quintile. Collectively, 41 companies comprise 40% of the stock market's total capitalization. At the other end of the scale, the bottom quintile contained 2,230 companies, which provides ample investment opportunities in almost any economic or stock market environment. During the past quarter three stocks were added to your Fund's portfolio. These were Callaway Golf Company, Pharmaceutical Resources Inc. and Sybase Inc. A common characteristic of all three of these firms is their strong balance sheets. Each company has a substantial net cash position, thus none of these firms are dependent on external sources of capital (such as bank borrowings) to operate their businesses. Additionally, having excess cash during a downturn in equity prices should present these financially robust companies with opportunities to make inexpensive acquisitions and/or repurchase their own shares at attractive prices. HIGHLIGHTS - Despite the sluggish merger and acquisition environment, two companies were acquired in the second quarter at premiums to our initial purchase price. - A key advantage to small cap investors is the freedom to choose among several thousand potential investments, which are likely to be overlooked by the majority of investors. - During the quarter three stocks were added: Callaway Golf, Pharmaceutical Resources, and Sybase. Callaway Golf is a leading designer and manufacturer of golf clubs, balls and accessories. In addition to their solid balance sheet, we like Callaway's strong brand position that has been developed over the years principally through design leadership. As the baby boom generation ages over the next decade, they should enter their peak golf playing years. We believe this demographic push will cause the total number of rounds of golf played to increase and, in turn, increase demand for Callaway's products. Pharmaceutical Resources is a generic drug company with a focus on proprietary active ingredients. The growth in this business is being driven by a combination of a rising number of patented drugs becoming available to generic manufacturers as their patent protection expires and growing demand as the population ages. With numerous new drugs awaiting FDA approval, we believe Pharmaceutical Resources has a bright future. Sybase Inc. is a provider of database software to large companies. Despite operating in a competitive environment, Sybase has successfully developed niches in providing database software to financial companies, retailers and other industries. With technology spending currently depressed, we do not look for robust near-term results from Sybase. But looking ahead several years, we believe a combination of new products and software upgrades within Sybase's customer base should result in a rebound in profitability. Sybase's strong balance sheet and positive cash flow generation during the recent technology spending downturn give us confidence in their long-term future. CONCLUSION We would like to thank our shareholders for your ongoing interest in and your support of The Oakmark Small Cap Fund. Additionally, we look forward to communicating with you over the next several years. /s/ James P. Benson /s/ Clyde S. McGregor JAMES P. BENSON, CFA CLYDE S. MCGREGOR, CFA Portfolio Manager Portfolio Manager jbenson@oakmark.com mcgregor@oakmark.com July 1, 2002 14 THE OAKMARK SMALL CAP FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME SHARES HELD MARKET VALUE -------------------------------------------------------------------------------- COMMON STOCKS--89.8% FOOD BEVERAGE--6.4% Ralcorp Holdings, Inc. (a) 579,000 $18,093,750 Del Monte Foods Company (a) 1,300,000 15,340,000 ----------- 33,433,750 HOUSEHOLD PRODUCTS--3.0% Tupperware Corporation 750,000 $15,592,500 OTHER CONSUMER GOODS & SERVICES--5.1% Department 56, Inc. (a) 800,000 $13,024,000 Callaway Golf Company 500,000 7,920,000 Central Parking Corporation 250,000 5,712,500 ----------- 26,656,500 SECURITY SYSTEMS--2.2% Checkpoint Systems, Inc. (a) 1,000,000 $11,700,000 APPAREL--3.4% Oakley, Inc. (a) 750,000 $13,050,000 R.G. Barry Corporation (a) 907,000 4,788,960 ----------- 17,838,960 AUTOMOBILE RENTALS--1.6% Dollar Thrifty Automotive Group, Inc. (a) 325,000 $ 8,417,500 BUILDING MATERIALS & CONSTRUCTION--2.3% Insituform Technologies, Inc., Class A (a) 580,000 $12,284,400 EDUCATIONAL SERVICES--2.1% ITT Educational Services, Inc. (a) 509,500 $11,107,100 HOTELS & MOTELS--2.0% Prime Hospitality Corp. (a) 810,000 $10,521,900 INFORMATION SERVICES--2.4% eFunds Corporation (a) 1,344,800 $12,760,807 MARKETING SERVICES--0.1% Grey Global Group Inc. 1,000 $ 690,010 RETAIL--4.6% ShopKo Stores, Inc. (a) 740,000 $14,948,000 Pathmark Stores Inc (a) 500,000 9,405,000 ----------- 24,353,000 15 NAME SHARES HELD MARKET VALUE -------------------------------------------------------------------------------- BANK & THRIFTS--5.0% BankAtlantic Bancorp, Inc., Class A 1,000,000 $12,400,000 People's Bank of Bridgeport, Connecticut 360,000 9,399,600 PennFed Financial Services, Inc. 150,000 4,185,000 ----------- 25,984,600 INSURANCE--2.9% The PMI Group, Inc. 400,000 $15,280,000 OTHER FINANCIAL--3.0% NCO Group, Inc. (a) 700,000 $15,463,000 REAL ESTATE--4.1% Catellus Development Corporation (a) 700,000 $14,294,000 Trammell Crow Company (a) 500,000 7,225,000 ----------- 21,519,000 MEDICAL PRODUCTS--5.3% Hanger Orthopedic Group, Inc. (a) 960,000 $14,582,400 CONMED Corporation (a) 350,000 7,815,500 Sybron Dental Specialties, Inc. (a) 300,000 5,550,000 ----------- 27,947,900 MEDICAL RESEARCH--0.7% Covance Inc. (a) 200,000 $ 3,750,000 PHARMACEUTICALS--2.2% Pharmaceutical Resources Inc (a) 400,900 $11,137,002 Elan Corporation plc (a) (b) 115,000 629,050 ----------- 11,766,052 COMPUTER SERVICES--3.4% CIBER, Inc. (a) 1,885,700 $13,671,325 Interland, Inc. (a) 1,250,000 3,937,500 ----------- 17,608,825 COMPUTER SOFTWARE--7.6% Mentor Graphics Corporation (a) 1,100,000 $15,642,000 Sybase Inc (a) 1,000,000 10,550,000 MSC.Software Corp. (a) 1,100,000 9,845,000 SilverStream Software, Inc. (a) 409,500 3,660,930 ----------- 39,697,930 COMPUTER SYSTEMS--1.0% Optimal Robotics Corp., Class A (a) (c) 750,000 $ 5,467,500 DATA STORAGE--1.4% Imation Corp. (a) 250,000 $ 7,440,000 16 NAME SHARES HELD/PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------ OFFICE EQUIPMENT--4.7% InFocus Corporation (a) 1,200,000 $ 14,136,000 MCSi, Inc. (a) 933,500 10,585,890 ------------ 24,721,890 INSTRUMENTS--3.0% IDEXX Laboratories, Inc. (a) 551,800 $ 14,230,922 Measurement Specialties, Inc. (a) 550,000 1,650,000 ------------ 15,880,922 MACHINERY & INDUSTRIAL PROCESSING--2.5% SureBeam Corporation, Class A (a) 1,600,000 $ 8,736,000 Columbus McKinnon Corporation 500,000 4,320,000 ------------ 13,056,000 OTHER INDUSTRIAL GOODS & SERVICES--0.8% Integrated Electrical Services, Inc. (a) 650,000 $ 4,062,500 TRANSPORTATION SERVICES--1.4% Teekay Shipping Corporation (c) 203,400 $ 7,507,494 CHEMICALS--2.1% Sensient Technologies Corporation 292,800 $ 6,664,128 H.B. Fuller Company 140,000 4,100,600 ------------ 10,764,728 OIL NATURAL GAS--3.5% St. Mary Land & Exploration Company 350,000 $ 8,421,000 Cabot Oil & Gas Corporation 250,000 5,712,500 Berry Petroleum Company 250,000 4,212,500 ------------ 18,346,000 TOTAL COMMON STOCKS (COST: $436,984,654) 471,620,768 SHORT TERM INVESTMENTS--10.7% U.S. GOVERNMENT BILLS--7.6% United States Treasury Bills, 1.64% - 1.71% due 7/5/2002 - 7/25/2002 $40,000,000 $ 39,973,843 TOTAL U.S. GOVERNMENT BILLS (COST: $39,973,843) 39,973,843 17 PAR VALUE/ NAME SHARES SUBJECT TO CALL MARKET VALUE ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS--3.1% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $16,002,467 collateralized by U.S. Government Agency Securities $16,000,000 $ 16,000,000 TOTAL REPURCHASE AGREEMENT (COST: $16,000,000) 16,000,000 TOTAL SHORT TERM INVESTMENTS (COST: $55,973,843) 55,973,843 Total Investments (Cost $492,958,497)--100.5% $527,594,611 CALL OPTIONS WRITTEN--(0.1%) EDUCATIONAL SERVICES--0.0% ITT Educational Services, Inc., July 25 Calls (40,000) $ (10,000) ITT Educational Services, Inc., July 22.50 Calls (80,000) (38,000) ------------ (48,000) RETAIL--(0.1%) ShopKo Stores, Inc., September 22.50 Calls (20,000) $ (18,500) ShopKo Stores, Inc., September 20 Calls (155,000) (306,125) ShopKo Stores, Inc., September 17.50 Calls (110,000) (385,000) ------------ (709,625) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(768,947))--(0.1%) (757,625) Other Liabilities In Excess Of Other Assets--(0.4%) (1,860,031) ------------ TOTAL NET ASSETS--100% $524,976,955 ============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents foreign domiciled corporation. 18 THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. MCGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. MCGREGOR] [PHOTO OF EDWARD A. STUDZINSKI] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/02) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(14) [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 12/31/01 $25,635 $17,698 03/31/02 $26,708 $17,805 06/30/02 $25,855 $16,628
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (11/1/95) -------------------------------------------------------------------------- OAKMARK EQUITY AND -3.19% 5.77% 13.99% 15.31% INCOME FUND S&P 500(1) -13.40% -17.99% 3.66% 10.01% Lehman Govt./ 3.75% 8.25% 7.47% 6.94% Corp. Bond(15) Lipper Balanced -6.61% -7.54% 4.76% 7.92% Fund Index --------------------------------------------------------------------------
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 power of accurate observation is commonly called cynicism by those who have not got it." George Bernard Shaw OUR RESULTS The Oakmark Equity and Income Fund decreased 3% for the quarter ended June 30, 2002, bringing the calendar-year gain to 1%. For the calendar year, the Fund outperformed both the market averages and our primary benchmark, the Lipper Balanced Fund Index, which has lost 6% year to date. While we are modestly pleased with performance so far this year, getting there has not been pretty. Historically, volatility has been the friend of the value investor, presenting us with opportunities to exploit mis-pricing and invest in securities selling at a substantial discount to their intrinsic value. Given the acceleration of information flows in today's world, those opportunities have tended to be relatively short-lived. In recent weeks, those opportunities have grown in frequency and duration, in what seems a direct correlation to an increased investor concern about the accuracy of financial reporting data in general and the trend of financial markets specifically. The end result was that while we have continued our activity in initiating or adding positions in those businesses that had fallen out of favor with investors, in many instances the gap between intrinsic value and share price has continued to widen beyond where we made our initial investment. Continuing a theme of past quarters, the fund has expanded its holdings in the healthcare area. New positions were initiated during the quarter in Abbott Labs, Bristol-Myers and Schering-Plough. Other new positions included CONOCO, Gemstar-TV Guide, Mentor Graphics, and Phillips Petroleum. PLAYING DEFENSE A few quarters ago, we wrote about the investor who was "only expecting a consistent 20% a year return from the conservative portion of his portfolio, and the 50% plus returns were to come from his aggressive growth investments." If you were to examine the long-term distribution of investment returns from the S&P 500, not surprisingly, you would see a bell-shaped curve. Recent experience however has differed from the normal distribution, and has been of a more fat-tailed variety, resulting in out-sized returns two or three years ago, and now out-sized losses. Thus, in today's world of either more normal (or sub-par depending on your point of view) investment returns, success in investing will be defined by those who can avoid the major "blow-up". We can see some proof of this in the returns of the major indices. As investors moved toward larger capitalization stocks for reasons other than valuation and expected returns, the effect of a "torpedo" stock disaster on a portfolio has been magnified. In 19 some months over the past year, almost 10% of all stocks in the Russell 1000(16) have underperformed by 30% or more (or, the odds of a single stock "blowing up" has been almost 6 times higher than average). Being on the wrong side of a disaster can cause substantial underperformance. What has that specifically meant to the management of your portfolio? As the size of the portfolio has grown, the impact of a single-stock debacle has somewhat lessened. Also, we have increased our focus on not just having a margin of safety, but looking for a larger margin of safety. If as has been suggested investing is the search for asymmetric payoffs with upside opportunity exceeding downside risk, the greater the discount to intrinsic value at which one makes a purchase, the greater the margin of safety. Finally, we have been looking to limit those situations with a high probability of gain but significant downside risk. WE ARE WHERE WE ARE, SO DEAL WITH IT We are often asked about things that might cause us to sell a security before it reaches our estimate of intrinsic value. Those factors have been discussed many times before. What hasn't been discussed in depth are the sorts of things that perhaps subjectively influence investment choices, especially when the discount to intrinsic value in a group of securities is approximately similar. In a nutshell, it all comes back to making sure that our egos do not get in the way of making the best investment decisions. What are some examples of this? Michael Mauboussin of CS First Boston has identified several examples of the psychological traps into which investors tend to fall. First, a tendency of all investors is to have too high an opinion of their abilities, especially in areas outside of their circle of competence (often referred to as the "smart person trap"-- I'm smart about X, therefore by definition I am smart about Y and Z). To avoid that trap, make sure you stay within your circle of competence. Next, people in general often tend to weigh heavily the first information they glean about a subject, which then leaves them with an anchored bias. We fight against this tendency by seeking information from a variety of sources (there can never be too many) and always trying to stand our assumptions on their heads. Third, as pollsters and users of polls have discovered, how a question is constructed can dictate the answer. Investors often make the same mistake, which can also impact the assessment of outcomes and expected returns. One deals with that by always looking at things from a "worst case" perspective, rather than the sugar-coated "good, better, best" scenario analysis that has led many corporate managements to destruction. Fourth, individuals and investors have a tendency to seek out confirming information that supports their existing point of view while dismissing or avoiding any contradictory inputs. We have found that one good way to avoid this trap is to seek out and examine the information that "short" investors have either about a particular company or industry. Finally and not surprisingly, both individual and institutional investors tend to make choices that justify past decisions (throwing good money after bad), notwithstanding a change in circumstances. The most common example of this is the retail investor who says "I'll sell when I get even" and the institutional investor who says "I could have sold this last week for X+$5, I'm not going to sell here for X." That is why we make a practice, when examining your portfolio, of asking ourselves, "Looking at this as a new investment and knowing what we know now, would we still make it?" There is no place for the "woulda, coulda, shoulda" analysis. Sunk costs are sunk costs. Our interest is the future return of and on your investment, so our due diligence is ongoing. We are where we are now. HIGHLIGHTS - Opportunities allowed us to initiate or add to positions in businesses that had fallen out of favor with investors. - Continuing a theme of past quarters, the Fund has expanded its holdings in the healthcare area. - We are not going to be swayed by short-term market fluctuations, but are more concerned with what a business is actually worth. HAS ANYTHING WORKED Several of our best performing stocks in the quarter have been in the portfolio for a while, and include Rockwell Collins, Saint Mary Land & Exploration and Catellus. They also reflect our commitment to continuing with investments where the price to intrinsic value discount continues to be fairly wide, notwithstanding that these are investments that have gone up in price from when they first went into the portfolio. As we have stated in the past, our holding period for an investment would ideally be forever if the price and intrinsic value lines continue on parallel rather than intersecting courses. At the same time, two of our worst performers during the quarter were Ceridian and UST, both for non-company specific reasons, in the one instance having to do with the payroll processing industry in general and the other with tobacco company litigation (which does not apply to UST). In that instance too, it reflects a continuation of what we have said to you is our philosophy in investing your money--we are not going to be swayed by short-term market fluctuations, but are more concerned with what a business is actually worth. We reiterate our commitment to seeking out investments with a considerable margin of safety, selling at a substantial discount to our assessment of intrinsic value. As this letter is being written, a great deal of concern and focus is being devoted to the question of accounting issues and management fraud. Those are issues that have followed the investment world from the beginning of time, and given the part that greed plays in the human psyche, will always be present in the investment arena. We recognize that while we have no unique abilities to uncover deceptive managements or fraudulent practices, we do expend our time trying to identify those businesses run by real people (whose shareholder orientation we get comfortable 20 with) and that are selling in the marketplace at a discount to their real intrinsic value. Looking at a lot of different businesses and talking to many different managements (and people) is a good way to assess those differences in both management intelligence and management integrity that confront us every day. We thank you for your continued support of the Fund and we look forward to reporting to you, our partners, at the end of the next quarter. /s/ Clyde S. McGregor /s/ Edward A. Studzinski CLYDE S. MCGREGOR, CFA EDWARD A. STUDZINSKI, CFA Portfolio Manager Portfolio Manager mcgregor@oakmark.com estudzinski@oakmark.com July 2, 2002 21 THE OAKMARK EQUITY AND INCOME FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--62.3% COMMON STOCK--61.9% FOOD & BEVERAGE--2.5% UST Inc. 1,700,000 $ 57,800,000 BROADCASTING & PUBLISHING--1.1% Gemstar-TV Guide International Inc. (a) 5,000,000 $ 26,950,000 INFORMATION SERVICES--2.8% Ceridian Corporation (a) 3,500,000 $ 66,430,000 MARKETING SERVICES--0.5% The Interpublic Group of Companies, Inc. 500,000 $ 12,380,000 PRINTING--0.6% Valassis Communications, Inc. (a) 399,400 $ 14,578,100 RECREATION & ENTERTAINMENT--0.8% International Game Technology (a) 345,000 $ 19,561,500 RETAIL--4.1% CVS Corporation 1,000,000 $ 30,600,000 Albertson's, Inc. 881,000 26,835,260 J.C. Penney Company, Inc. 1,000,000 22,020,000 Office Depot, Inc. (a) 980,000 16,464,000 -------------- 95,919,260 BANK & THRIFTS--0.3% U.S. Bancorp 280,703 $ 6,554,415 INSURANCE--3.0% SAFECO Corporation 2,000,000 $ 61,780,000 PartnerRe, Ltd. (b) 200,000 9,790,000 -------------- 71,570,000 OTHER FINANCIAL--1.1% GATX Corporation 846,900 $ 25,491,690 REAL ESTATE--2.2% Catellus Development Corporation (a) 1,881,500 $ 38,420,230 Hospitality Properties Trust 200,000 7,300,000 Legacy Hotels Real Estate Investment Trust (b) 1,125,000 6,220,993 -------------- 51,941,223 22 NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- HEALTH CARE SERVICES--3.0% IMS Health Incorporated 2,300,000 $ 41,285,000 Omnicare, Inc. 1,100,000 28,886,000 -------------- 70,171,000 MANAGED CARE SERVICES--2.9% First Health Group Corp. (a) 2,420,000 $ 67,856,800 MEDICAL PRODUCTS--2.8% Apogent Technologies Inc. (a) 1,500,800 $ 30,871,456 Guidant Corporation (a) 500,000 15,115,000 Techne Corporation (a) 450,000 12,699,000 Edwards Lifesciences Corporation (a) 275,000 6,380,000 -------------- 65,065,456 PHARMACEUTICALS--6.7% Bristol-Myers Squibb Company 1,500,000 $ 38,550,000 Watson Pharmaceuticals, Inc. (a) 1,451,400 36,676,878 Abbott Laboratories 937,600 35,300,640 Schering-Plough Corporation 1,042,600 25,647,960 Chiron Corporation (a) 648,100 22,910,335 -------------- 159,085,813 TELECOMMUNICATIONS--3.6% CenturyTel, Inc. 2,400,000 $ 70,800,000 Citizens Communications Company (a) 1,700,000 14,212,000 -------------- 85,012,000 COMPUTER SOFTWARE--5.0% Synopsys, Inc. (a) 1,300,000 $ 71,253,000 Novell, Inc. (a) 8,000,000 25,680,000 Mentor Graphics Corporation (a) 1,500,000 21,330,000 -------------- 118,263,000 COMPUTER SYSTEMS--1.4% The Reynolds and Reynolds Company, Class A 1,164,000 $ 32,533,800 AEROSPACE & DEFENSE--1.9% Rockwell Collins, Inc. 1,652,200 $ 45,303,324 AGRICULTURAL EQUIPMENT--0.1% Alamo Group Inc. 141,900 $ 2,128,500 INSTRUMENTS--1.8% Varian Inc. (a) 1,267,500 $ 41,764,125 23 SHARES HELD/ NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- MACHINERY & INDUSTRIAL PROCESSING--2.6% Cooper Industries, Ltd. 849,000 $ 33,365,700 Rockwell Automation International Corporation 1,420,000 28,371,600 -------------- 61,737,300 TRANSPORTATION SERVICES--0.1% Nordic American Tanker Shipping Limited (b) 154,900 $ 2,114,385 FORESTRY PRODUCTS--1.4% Plum Creek Timber Company, Inc. 1,059,644 $ 32,531,071 OIL & NATURAL GAS--9.6% Phillips Petroleum Company 1,100,000 $ 64,768,000 Burlington Resources Inc. 1,600,000 60,800,000 Conoco Inc. 1,100,000 30,580,000 XTO Energy, Inc. 1,378,000 28,386,800 St. Mary Land & Exploration Company 1,030,000 24,781,800 Cabot Oil & Gas Corporation 768,000 17,548,800 Berry Petroleum Company 43,000 724,550 -------------- 227,589,950 TOTAL COMMON STOCK (COST: $1,430,153,377) 1,460,332,712 CONVERTIBLE BONDS--0.4% CABLE & SATELLITE TV--0.2% EchoStar Communications Corporation, 4.875% due 1/1/2007 $ 7,000,000 $ 5,433,750 PHARMACEUTICALS--0.2% Sepracor Inc., 7.00% due 12/15/2005 $ 7,285,000 $ 4,990,225 TOTAL CONVERTIBLE BONDS (COST: $11,307,994) 10,423,975 TOTAL EQUITY AND EQUIVALENTS (COST: $1,441,461,371) 1,470,756,687 FIXED INCOME--27.3% PREFERRED STOCKS--0.1% BANK & THRIFTS--0.1% BBC Capital Trust I, Preferred, 9.50% 48,000 $ 1,190,880 Pennfed Capital Trust, Preferred, 8.90% 27,500 689,700 Fidelity Capital Trust I, Preferred, 8.375% 43,500 435,435 -------------- 2,316,015 TELECOMMUNICATIONS--0.0% MediaOne Finance Trust III, Preferred, 9.04% 20,000 $ 405,800 TOTAL PREFERRED STOCKS (COST: $2,715,762) 2,721,815 24 NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- CORPORATE BONDS--1.3% BUILDING MATERIALS & CONSTRUCTION--0.0% Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note $ 750,000 $ 772,500 HOTELS & MOTELS--0.3% HMH Properties, 7.875% due 8/1/2005, Senior Note Series A $ 3,450,000 $ 3,363,750 Park Place Entertainment, 7.00% due 7/15/2004, Senior Notes 2,750,000 2,782,109 Prime Hospitality Corporation, 9.25% due 1/15/2006, 2006 1st Mortgage Note 413,000 422,293 -------------- 6,568,152 RETAIL--0.5% The Gap, Inc., 6.90% due 9/15/2007 $ 9,187,000 $ 8,385,149 Rite Aid Corporation, 7.625% due 4/15/2005, Senior Notes 4,900,000 3,724,000 Ugly Duckling Corporation, 12.00% due 10/23/2003, Subordinated Debenture 650,000 551,688 -------------- 12,660,837 TV PROGRAMMING--0.4% Liberty Media Corporation, 8.25% due 2/1/2030, Debenture $ 9,225,000 $ 8,593,438 MACHINERY & INDUSTRIAL PROCESSING--0.1% Columbus McKinnon Corporation New York, 8.50% due 4/1/2008 $ 3,000,000 $ 2,760,000 ELECTRIC UTILITIES--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 $ 500,000 $ 506,651 TOTAL CORPORATE BONDS (COST: $31,965,829) 31,861,578 GOVERNMENT AND AGENCY SECURITIES--25.9% U.S. GOVERNMENT NOTES--25.0% United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed $ 145,180,160 $ 151,010,015 United States Treasury Notes, 3.375% due 1/15/2012, Inflation Indexed 141,684,200 145,204,202 United States Treasury Notes, 3.00% due 11/30/2003 75,000,000 75,595,875 United States Treasury Notes, 8.75% due 11/15/2008 50,000,000 54,191,400 United States Treasury Notes, 5.75% due 11/15/2005 50,000,000 53,359,400 United States Treasury Notes, 7.875% due 11/15/2004 25,000,000 27,705,525 United States Treasury Notes, 5.25% due 5/15/2004 25,000,000 26,129,600 United States Treasury Notes, 3.00% due 1/31/2004 25,000,000 25,163,025 United States Treasury Notes, 3.00% due 2/29/2004 25,000,000 25,145,500 United States Treasury Notes, 7.25% due 8/15/2004 5,000,000 5,438,280 -------------- 588,942,822 25 NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCIES--0.9% Fannie Mae, 5.06% due 12/6/2006 $ 5,000,000 $ 5,103,745 Fannie Mae, 3.875% due 9/7/2004 5,000,000 5,056,250 Federal Home Loan Mortgage Corporation, 4.75% due 8/23/2004 5,000,000 5,018,465 Federal Home Loan Bank, 5.10% due 12/26/2006 2,035,000 2,082,059 Fannie Mae, Principal Only, Zero Coupon, due 10/3/2011 1,065,000 1,058,903 Federal Home Loan Bank, 3.875% due 12/15/2004 1,000,000 1,012,011 Federal Home Loan Bank, 5.125% due 8/6/2008 500,000 504,795 -------------- 19,836,228 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $598,544,702) 608,779,050 TOTAL FIXED INCOME (COST: $633,226,293) 643,362,443 SHORT TERM INVESTMENTS--9.9% U.S. GOVERNMENT BILLS--7.2% United States Treasury Bills, 1.62% - 1.70% due 7/5/2002 - 8/22/2002 $ 170,000,000 $ 169,785,241 TOTAL U.S. GOVERNMENT BILLS (COST: $169,785,241) 169,785,241 REPURCHASE AGREEMENTS--2.7% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $64,509,944 collateralized by U.S. Government Agency Securities $ 64,500,000 $ 64,500,000 TOTAL REPURCHASE AGREEMENT (COST: $64,500,000) 64,500,000 TOTAL SHORT TERM INVESTMENTS (COST: $234,285,241) 234,285,241 Total Investments (Cost $2,308,972,905)--99.5% $2,348,404,371 26 NAME SHARES SUBJECT TO CALL MARKET VALUE -------------------------------------------------------------------------------------------------------------- CALL OPTIONS WRITTEN--0.0% BROADCASTING & PUBLISHING--0.0% Gemstar-TV Guide International Inc, August 10 Calls (941,400) $ (188,280) MARKETING SERVICES--0.0% The Interpublic Group of Companies, Inc., July 35 Calls (351,000) $ (87,750) PHARMACEUTICALS--0.0% Abbott Laboratories, August 40 Calls (150,000) $ (165,000) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(2,071,593))--0.0% $ (441,030) Other Assets In Excess Of Other Liabilities--0.5% 10,935,628 --------------- TOTAL NET ASSETS--100% $ 2,358,898,969 ===============
(a) Non-income producing security. (b) Represents foreign domiciled corporation. 27 THE OAKMARK GLOBAL FUND REPORT FROM GREGORY L. JACKSON AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF GREGORY L. JACKSON] [PHOTO OF MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (6/30/02) AS COMPARED TO THE MSCI WORLD INDEX(17) [CHART]
THE OAKMARK GLOBAL FUND MSCI WORLD INDEX 8/1/99 $10,000 $10,000 9/30/99 $ 9,180 $ 9,883 12/31/99 $ 9,981 $11,550 3/31/00 $10,061 $11,668 6/30/00 $10,381 $11,255 9/30/00 $10,922 $10,689 12/31/00 $11,562 $10,028 3/31/01 $11,480 $ 8,739 6/30/01 $13,289 $ 8,959 9/30/01 $11,071 $ 7,676 12/31/01 $13,880 $ 8,335 3/31/02 $15,387 $ 8,364 6/30/02 $14,372 $ 7,601
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/4/99) ------------------------------------------------------------------- OAKMARK GLOBAL FUND -6.60% 8.15% 13.29%(5) MSCL World -9.13% -15.22% -8.97% Lipper Balanced Fund Index(18) -7.88% -13.42% -4.49% -------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Global Fund declined 7% for the quarter ending June 30 2002, roughly in line with the 9% decline of the MSCI World Index and the 8% decline of the Lipper Global Fund Index. For the first six months of 2002, and for the past twelve months, your Fund gained 4% and 8%, respectively, compared to the 9% and 15% declines in the MSCI World Index and the 7% and 13% declines in the Lipper Global Fund index over the same periods. The past three months were a continuation of the price volatility and market skittishness we have seen since the tech bubble burst in early 2000. In times like these, it is critical to keep focused on what is important: Times of extraordinary share price volatility may often provide excellent long-term opportunity, as greater volatility creates larger gaps between share prices and intrinsic business value. We continue to strive to upgrade the quality of the portfolio while maintaining the same degree of discount or greater to intrinsic value. NEW OPPORTUNITIES Two of your Fund's newest positions, Gemstar-TV Guide and LM Ericsson, were poor performers over the quarter. While news flow and sentiment remains uniformly negative regarding these companies, we think the recent share price declines have created significant appreciation potential. We have made each of these companies very significant positions in the Fund. Gemstar-TV Guide invented the VCR Plus+ instant programming system that is now the defacto standard in 40 countries for VCR programming. It has become the primary provider of television guides across many platforms including print (TV Guide, Cable Guide), cable/satellite/telco (Interactive Programming Guide, TV Guide Channel), consumer electronics devices, and the Internet. The company's share price has declined over 90% from its early 2000 high, to a current price of around $5 per share. Gemstar makes money several ways: 1) by licensing their technology, 2) through sales of TV Guides (both the print guide and the channel), and 3) through their interactive services (advertising and interactive commerce). Throughout its history, Gemstar has been very aggressive at defending their patents. A recent negative ruling from the International Trade Commission (ITC) Judge validated several Gemstar patents but also ruled that several companies may continue to import their cable TV set-top boxes into the U.S. While on balance, this was a negative ruling, we believe the resultant share price decline was an overreaction. 28 We calculate that on a sum of the parts basis, Gemstar's non-Interactive Program Guide businesses are worth about $7 per share and additional cash of another $.50 per share (net of debt), thus creating a downside valuation of $7.50 per share. We also calculate the Interactive Program Guide business currently at $5 per share, creating a combined value of roughly $12.50 per share. Therefore, with the stock price trading near $5 per share, we believe we are paying less than our estimated value for the non-Interactive Program Guide businesses and getting the Interactive Program Guide business and cash for free. In addition, the company is trading for a mere 5.5 times our estimate of free cashflow versus peer companies that trade for 12 to 18 times free cashflow. Ericsson, the Swedish-based mobile phone giant, had been an awful performer and declined 80% from its high before we became interested. Unfortunately, as with Gemstar, we did not pick the bottom, and the share price has continued to decline. At current levels, we think the market is significantly undervaluing the long-term prospects of the company. Ericsson has been the largest supplier of mobile infrastructure in the world, with a worldwide market share of 40% in GSM (mobile standard), double its closest competitors--Nokia (22%) and Siemens/NEC (18%). The infrastructure business has historically been very good, with huge barriers to entry, double-digit growth and solid profitability (20% margins). However, the group's success in the infrastructure business has been over-shadowed by its poorly performing handset operations. In handsets, Ericsson finally bit the bullet last year, outsourcing all production to Flextronics and forming a 50/50 joint venture with Sony. Recently, the mobile infrastructure business has been hit by weakness from its the customer base. Mobile operators have sharply curtailed their capital expenditure plans due to worries of a demand slow down as well as weakened balance sheets. Long term, Ericsson's position in the various mobile standards (GSM, 2.5G, and 3G) remains the best in the industry worldwide. Further, unlike the handsets business where competition is becoming more fierce due to strong new market entrants (especially the Koreans and Japanese), a number of competitors in the mobile infrastructure market have been significantly weakened by the recent market downturn. Nortel Networks, Alcatel, and Lucent all are facing major financial and technological issues, while the barriers to new entrants remain intact. We believe the long-term growth prospects for mobile telephony (especially new data applications) remain bright, albeit significantly diminished from the pie-in-the-sky dreams of three years ago. Reality is somewhere in between. At current prices, Ericsson is valued at less than one times depressed revenue and about 7 times normal operating profit. We do not very often get the opportunity to buy such a high quality business with good long-term secular growth prospects at this level of valuation. HIGHLIGHTS - Times of extraordinary price volatility provide excellent long-term opportunity, as greater volatility creates large gaps between share prices and intrinsic business values. - We have made two of the Fund's newest holdings, Gemstar-TV Guide and LM Ericsson, very significant positions in the Fund. - In panic times, we believe thorough analysis and a focus on intrinsic value is important--we do not let stock prices influence our analysis. PHILOSOPHY AND DISCIPLINE Recent price declines in Gemstar and Ericsson remind us of two examples of companies that we owned in The Oakmark Global Fund that had very similar panic selling periods: Nova Corporation in 2000 and ITT Educational in 1999. Both situations worked out extremely well for the portfolio. In panic times like these, we feel it is very important to be sure we have done a thorough analysis of what we estimate the true value of the company to be and not let the stock price influence that analysis. We will continue to search for companies that are priced at a substantial discount to their true business value and are run by managers who think and act as owners. We remain excited about the values in the portfolio and have each added to our personal holdings in the Fund. Thank you for your support. /s/ Gregory L. Jackson /s/ Michael J. Welsh GREGORY L. JACKSON MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager gjackson@oakmark.com 102521.2142@compuserve.com July 8, 2002 29 THE OAKMARK GLOBAL FUND GLOBAL DIVERSIFICATION--JUNE 30, 2002 [CHART]
% OF FUND NET ASSETS -------------------------------------------- - UNITED STATES 50.4% - EUROPE 29.8% Great Britain 7.4% *Netherlands 5.8% Sweden 5.0% *Germany 3.6% *Italy 3.3% Switzerland 2.1% *Ireland 1.7% *France 0.9% - PACIFIC RIM 9.4% Japan 5.5% Korea 3.0% Australia 0.9% - LATIN AMERICA 3.7% Mexico 3.7% - OTHER 1.1% Israel 1.1%
* Euro currency countries comprise 15.3% of the Fund. 30 THE OAKMARK GLOBAL FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------ COMMON STOCKS--95.3% FOOD & BEVERAGE--3.0% Lotte Chilsung Beverage Soft Drinks, Juices & Sports Drinks Co., Ltd. (Korea) Manufacturer 4,800 $ 3,311,721 Hite Brewery Co., Ltd. Brewer (Korea) 48,700 3,003,774 ---------------- 6,315,495 HOUSEHOLD PRODUCTS--3.6% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 118,000 $ 7,536,674 AUTOMOBILES--1.4% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 1,933,500 $ 3,049,207 BROADCASTING & CABLE TV--1.7% Grupo Televisa S.A. (Mexico) (b) Television Production & Broadcasting 96,100 $ 3,592,218 BROADCASTING & CABLE TV--2.2% Gemstar-TV Guide Electronic Program Guide Services Internation, Inc. (United States) (a) 850,000 $ 4,581,500 HOME FURNISHINGS--4.0% Hunter Douglas N.V. Window Coverings Manufacturer (Netherlands) 271,800 $ 8,358,470 HUMAN RESOURCES--4.0% Michael Page International Recruitment Consultancy Services plc (Great Britain) 2,236,000 $ 5,455,482 INFORMATION SERVICES--7.5% eFunds Corporation Electronic Debit Payment Services (United States) (a) 1,261,400 $ 11,969,425 Ceridian Corporation Data Management Services (United States) (a) 205,000 $ 3,890,900 ---------------- 15,860,325 MARKETING SERVICES--4.7% Omnicom Group Inc. Advertising Agencies (United States) 125,000 $ 5,725,000 31 NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------ Cordiant Communications Advertising & Media Services Group plc (Great Britain) (a) 3,630,000 $ 4,234,571 ---------------- 9,959,571 PUBLISHING--3.5% Wolters Kluwer NV Reference Material Publisher (Netherlands) 203,400 $ 3,853,249 Independent News & Newspaper Publisher Media PLC (Ireland) 1,865,000 3,676,474 ---------------- 7,529,723 RETAIL--5.0% The Kroger Co. Supermarkets (United States) (a) 340,000 $ 6,766,000 Somerfield plc Food Retailer (Great Britain) (a) 2,121,000 3,832,661 ---------------- 10,598,661 TV PROGRAMMING--2.4% Liberty Media Corporation, Class A Broadcast Services & Programming (United States) (a) 500,000 $ 5,000,000 BANK & THRIFTS--7.6% U.S. Bancorp Commercial Bank (United States) 335,000 $ 7,822,250 Washington Mutual, Inc. Thrift (United States) 115,000 4,267,650 Banco Popolare di Commercial Bank Verona e Novara Scrl (Italy) 301,500 3,901,888 ---------------- 15,991,788 OTHER FINANCIAL--2.7% Daiwa Securities Group Stock Broker Inc. (Japan) 579,000 $ 3,754,030 Ichiyoshi Securities Co., Stock Broker Ltd. (Japan) 523,000 1,976,961 ---------------- 5,730,991 MANAGED CARE SERVICES--4.1% First Health Group Corp. Health Benefits Company (United States) (a) 310,000 $ 8,692,400 32 NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------ MEDICAL PRODUCTS--5.9% Guidant Corporation (United States) (a) Medical Instruments 145,000 $ 4,383,350 Cytyc Corporation Diagnostic Equipment (United States) (a) 500,000 3,810,000 Techne Corporation Biological Products (United States) (a) 80,000 2,257,600 Ansell Limited (Australia) Protective Rubber & Plastics Products 559,000 1,976,247 ---------------- 12,427,197 PHARMACEUTICALS--3.1% Abbott Laboratories Pharmaceuticals (United States) 120,000 $ 4,518,000 GlaxoSmithKline plc Pharmaceuticals (Great Britain) 96,500 2,088,099 ---------------- 6,606,099 TELECOMMUNICATIONS--2.4% AT&T Corp. Telecommunication Services & (United States) Products 475,000 $ 5,082,500 TELECOMMUNICATIONS EQUIPMENT--5.0% Telefonaktiebolaget Mobile & Wired LM Ericsson, Class B Telecommunications Products (Sweden) (a) 7,056,500 $ 10,646,754 COMPUTER SERVICES--4.7% Meitec Corporation Software Engineering Services (Japan) 175,900 $ 5,812,450 First Data Corporation Data Processing & Management (United States) 110,000 4,092,000 ---------------- 9,904,450 COMPUTER SOFTWARE--8.1% Synopsys, Inc. Electronic Design Automation (United States) (a) 200,000 $ 10,962,000 Novell, Inc. Network & Internet Integration (United States) (a) Software 1,886,000 6,054,060 ---------------- 17,016,060 COMPUTER SYSTEMS--1.9% The Reynolds and Information Management Systems Reynolds Company, Class A (United States) 76,200 $ 2,129,790 Lectra (France) (a) Manufacturing Process Systems 477,000 1,857,112 ---------------- 3,986,902 33 SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------ AIRPORT MAINTENANCE--2.0% Grupo Aeroportuario del Airport Operator Sureste S.A. de C.V. (Mexico) (b) 325,000 $ 4,192,500 INSTRUMENTS--1.1% Orbotech, Ltd. Optical Inspection Systems (Israel) (a) 104,500 $ 2,372,150 WASTE DISPOSAL--3.0% Waste Management, Inc. Waste Management Services (United States) 240,000 $ 6,252,000 CHEMICALS--2.1% Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 10,970 $ 4,412,711 TOTAL COMMON STOCKS (COST: $200,984,104) 201,151,828 SHORT TERM INVESTMENTS--7.3% U.S. GOVERNMENT BILLS--4.7% United States Treasury Bills, 1.64% - 1.65% due 7/5/2002 - 7/11/2002 $ 10,000,000 $ 9,995,892 TOTAL U.S. GOVERNMENT BILLS (COST: $9,995,892) 9,995,892 REPURCHASE AGREEMENTS--2.6% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $5,500,848 collateralized by a U.S. Government Agency Security $ 5,500,000 $ 5,500,000 TOTAL REPURCHASE AGREEMENT (COST: $5,500,000) 5,500,000 TOTAL SHORT TERM INVESTMENTS (COST: $15,495,892) 15,495,892 Total Investments (Cost $216,479,996)--102.6% $ 216,647,720 34 NAME DESCRIPTION SHARES SUBJECT TO OPTION MARKET VALUE -------------------------------------------------------------------------------------------------------------------- CALL OPTIONS WRITTEN--0.00% BROADCASTING & PUBLISHING--0.0% Gemstar-TV Guide Electronic Program Guide Services International Inc, August 12.50 Calls (United States) (100,000) $ (7,500) Gemstar-TV Guide Electronic Program Guide Services International Inc, August 15 Calls (United States) (450,000) $ (45,000) ---------------- (52,500) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(548,983))--0.0% (52,500) PUT OPTIONS WRITTEN--(0.9%) BROADCASTING & PUBLISHING(0.9%) Gemstar-TV Guide Electronic Program Guide Services International Inc, August 7.50 Puts (United States) (350,000) $ (866,250) Gemstar-TV Guide Electronic Program Guide Services International Inc, August 10 Puts (United States) (200,000) (960,000) ---------------- (1,826,250) TOTAL PUT OPTIONS WRITTEN (PREMIUMS RECEIVED: $(654,980))--(0.9%) (1,826,250) Foreign Currencies (Proceeds $214,852)--0.1% $ 227,038 Other Liabilities In Excess Of Other Assets--(1.8%) (3,859,565) ---------------- TOTAL NET ASSETS--100% $ 211,136,443 ================
(a) Non-income producing security. (b) Represents an American Depository Receipt. 35 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS FELLOW SHAREHOLDERS, The Oakmark International and International Small Cap Funds lost 2% and gained 3% respectively for the quarter ending June 30, 2002, while both the MSCI World ex-U.S.(19) and the Lipper International Fund(20) indices were down 2%, and the MSCI Small Cap World ex-U.S. Index(21) and the Lipper International Small Cap Average(22) were up 4% and 0%, respectively. For the year to date, The Funds were up 9% and 13%, respectively, while the MSCI World ex-U.S. and the Lipper International Fund indices were down 2% and up 1% respectively, and the MSCI Small Cap World ex-U.S. Index and the Lipper International Small Cap Average, were up 10% and 5%, respectively. Though the quarter was very volatile, we remain focused on our search for value in spite of terrorist threats, accounting scandals and exchange rate movements. PLAYING WITH NUMBERS The headlines are full of stories regarding fraudulent accounting practices and unethical behavior at a number of US-based companies. For us, these events demonstrate more than anything a fundamental weakness in corporate governance. The purpose of a public company should be to make money for its owners. Sadly, in some cases, the owners (and employees) are instead being taken to the cleaners. Why is this happening? Lavish rewards for short-term performance can breed a species of management that place their own interests before their employers--the shareholders. Corporate boards, which are supposed to represent the interests of the owners, have often abdicated their oversight responsibilities. Instead of truly independent directors monitoring and evaluating management decisions and practices, a number of current boards are comprised of insiders or their friends. As a result, management is left to oversee themselves, including to the point of setting their own compensation packages and incentive schemes. This blatant conflict of interest must end. Asymmetric compensation practices need to be curbed. The pay difference between great performance and mediocre performance is often far too small in the US. Even failure and dismissal is often richly rewarding for management. As an aside, this is in contrast to Europe, where the problem is just the opposite: high quality managers with proven track records as value creators oftentimes have a hard time earning materially more than their less successful peers. In the UK, there is a set of corporate governance guidelines called the Cadbury Principles. One of the linchpins of these rules is the mandate that corporate boards be led by a non-executive, independent chairman. In the US, the Chairman of the Board tends to be the CEO as well, fostering the tendency for boards here to represent more the interests of management as opposed to the owners. While the concept of a non-executive chairman is no guarantee against management impropriety, it nonetheless provides one additional check for shareholders. We find corporate governance standards vary widely throughout the world; places like Sweden, which has the involvement of large shareholders on their boards, and the UK, which at least in theory should have more independent boards, may be examples from which the US can learn. At the Oakmark Funds--both Domestic and International--we have always considered corporate governance and management incentives to be important factors that are central to our stock selection process. We feel that strong boards, sensible incentives and managers that intuitively think like owners of the business are essential to superior investment returns. [PHOTO OF DAVID G. HERRO] [PHOTO OF MICHAEL J. WELSH] HIGHLIGHTS - Corporate governance and management incentives are factors central to our stock selection process. - European governments are warming to the fundamentals of free-market capitalism--addFrance to the list of progressive governments already in place in Italy, Spain, and Germany. - Corporate governance standards vary widely throughout the world; places like Sweden and the UK may provide examples from which the US can learn. Ultimately, these abuses will have devastating consequences if left unchecked. Equity prices will trade at even higher risk premiums, thus deflating returns, as prudent investors rightly assume the worst in the absence of full and reliable disclosure. Corporate governance changes should happen rapidly and must recognize that companies exist to make money for those who own them. Managements, anywhere, which steal from their owners, must be dealt with severely. EUROPE IS LOOKING BETTER With the ignominious defeat of the Left in France this June, Europe appears to be warming up to politicians who are sensitive to the fundamentals of free-market capitalism. 36 Add France to progressive governments already in place in Italy, Spain and Germany and there exists a real possibility that economic policies in Europe will continue to evolve from statism to capitalism. We believe his will be good for European share prices. Lower taxes, less regulation, freer labor markets, and the introduction of private pension schemes may ultimately lead to greater economic growth and corporate profits critical elements for higher share prices. Though we have learned in the past not to get too overly enthusiastic over the potential for real change in Europe, we remain cautiously optimistic. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com 102521.2142@compuserve.com July 8, 2002 37 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO] [PHOTO OF MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (6/30/02) COMPARED TO THE MSCI WORLD EX U.S. INDEX(19) [CHART]
THE OAKMARK MSCI WORLD INTERNATIONAL FUND EX U.S. INDEX 9/30/92 $10,000 $10,000 12/31/92 $10,043 $ 9,628 3/31/93 $11,890 $10,766 6/30/93 $12,300 $11,834 9/30/93 $13,387 $12,562 12/31/93 $15,424 $12,729 3/31/94 $15,257 $13,133 6/30/94 $14,350 $13,748 9/30/94 $15,278 $13,830 12/31/94 $14,026 $13,664 3/31/95 $13,563 $13,924 6/30/95 $14,749 $14,060 9/30/95 $15,507 $14,631 12/31/95 $15,193 $15,222 3/31/96 $17,021 $15,681 6/30/96 $18,383 $15,937 9/30/96 $18,347 $15,950 12/31/96 $19,450 $16,268 3/31/97 $20,963 $16,016 6/30/97 $22,700 $18,094 9/30/97 $23,283 $18,027 12/31/97 $20,097 $16,637 3/31/98 $22,994 $19,083 6/30/98 $20,253 $19,233 9/30/98 $16,322 $16,404 12/31/98 $18,688 $19,759 3/31/99 $21,258 $20,070 6/30/99 $25,728 $20,650 9/30/99 $23,896 $21,535 12/31/99 $26,065 $25,277 3/31/00 $26,012 $25,416 6/30/00 $27,856 $24,530 9/30/00 $27,306 $22,663 12/31/00 $29,324 $21,897 3/31/01 $26,763 $18,825 6/30/01 $29,437 $18,629 9/30/01 $23,728 $16,062 12/31/01 $27,819 $17,212 3/31/02 $31,006 $17,310 6/30/02 $30,315 $16,923
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (9/30/92) ----------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND -2.23% 2.98% 5.95% 12.04% MSCI World ex. U.S. -2.24% -9.42% -1.33% 5.54% MSCI EAFE(23) -2.12% -9.49% -1.55% 5.37% Lipper International -1.89% -7.29% 0.21% 7.25% Fund Index(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 The Oakmark International Fund finished the quarter ending June 30, 2002 down 2%, in line with the 2% decline for the MSCI World ex-US Index, and the 2% decline in the Lipper International Average. The first half of 2002 was marked by price volatility and market skittishness. As mentioned in The Oakmark Global Fund letter, what we try to accomplish as portfolio managers in times of extraordinary share price volatility is to upgrade the quality of the portfolio while maintaining the same degree of discount to intrinsic value. Looking at the portfolio as it stands today we believe we have accomplished this objective. PORTFOLIO UPDATE After looking expensive to us for a number of years, the prices of some European "Blue Chip" companies have finally become interesting. Two in particular are now your Fund's largest positions, LM Ericsson and GlaxoSmithKline. Both are quality businesses with global leadership positions, and each have had significant share price weakness in the past quarter. We write in detail on Ericsson in this quarter's Oakmark Global Fund letter. We have searched diligently through the rubble of the tech-media-telecom implosion, and we believe this is one of the few legitimate investment opportunities that has emerged. The share price two and a half years ago implied massive growth into perpetuity whereas today's price implies very little future growth. The truth is somewhere in between. At less than 1 times revenue, we think it is very attractive. GlaxoSmithKline has one of the best records of organic growth and cash flow returns of any of the world's blue chip pharmaceutical firms and has traditionally been priced as such. Luckily, recent share price weakness has caused its valuation to fall to that of far inferior businesses, giving us the opportunity to make GlaxoSmithKline one of the largest positions in The Oakmark International Fund. LOOKING FORWARD We remain optimistic based on current valuations around the world. We want to thank you for your continued confidence. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com 102521.2142@compuserve.com July 8, 2002 38 THE OAKMARK INTERNATIONAL FUND GLOBAL DIVERSIFICATION--JUNE 30,2002 [CHART]
% OF FUND NET ASSETS ----------------------------------- -EUROPE 67.4% Great Britain 20.5% *Netherlands 10.4% *France 10.3% Sweden 8.2% *Italy 3.5% *Finland 3.4% Switzerland 3.3% *Germany 3.1% *Ireland 2.6% *Greece 2.1% % OF FUND NET ASSETS ----------------------------------- -PACIFIC RIM 19.6% Japan 9.6% Korea 4.9% Australia 2.6% Hong Kong 1.9% Singapore 0.6% -LATIN AMERICA 5.4% Mexico 3.0% Brazil 2.0% Panama 0.4% -OTHER 2.3% Israel 2.3%
* Euro currency countries comprise 35.4% of the Fund. 39 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------ COMMON STOCKS--94.7% FOOD & BEVERAGE--7.3% Lotte Chilsung Beverage Soft Drinks, Juices & Sports Drinks Co., Ltd. (Korea) Manufacturer 49,700 $ 34,290,108 Pernod-Ricard SA Manufactures Wines, Spirits, & (France) Fruit Juices 340,500 33,292,891 Diageo plc Beverages, Wines, & Spirits (Great Britain) Manufacturer 2,410,000 31,255,952 Fomento Economico Soft Drink & Beer Manufacturer Mexicano S.A. de C.V. (Mexico) (a) 549,400 21,547,468 ---------------- 120,386,419 HOUSEHOLD PRODUCTS--3.0% Henkel KGaA Consumer Chemical Products (Germany) Manufacturer 755,000 $ 48,221,941 OTHER CONSUMER GOODS & SERVICES--0.3% Shimano, Inc. (Japan) Bicycle Components Manufacturer 350,600 $ 4,756,973 APPAREL--0.7% Fila Holdings S.p.A. Athletic Footwear & Apparel (Italy) (a) 5,894,760 $ 11,789,520 AUTOMOTIVE--3.5% Autoliv Inc Automotive Safety Systems (Sweden) (b) Manufacturer 1,248,000 $ 30,344,199 Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 632,000 25,558,851 ---------------- 55,903,050 BROADCASTING & CABLE TV--3.6% Tokyo Broadcasting Television & Radio Broadcasting System, Inc. (Japan) 1,511,000 $ 33,853,763 Grupo Televisa S.A. Television Production & (Mexico) (a) Broadcasting 650,200 24,304,476 ---------------- 58,158,239 BUILDING MATERIALS & CONSTRUCTION --1.1% Kumkang Korea Chemical Building Materials Co., Ltd. (Korea) 180,140 $ 17,370,108 HOME FURNISHINGS--3.0% Hunter Douglas N.V. Window Coverings Manufacturer (Netherlands) 1,580,284 $ 48,597,336 40 NAME DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------------- HUMAN RESOURCES--2.1% Michael Page International Recruitment Consultancy plc (Great Britain) Services 14,255,900 $ 34,782,115 MARKETING SERVICES--3.4% Aegis Group plc Media Services (Great Britain) 20,105,500 $ 27,669,636 Cordiant Communications Advertising & Media Group plc Services (Great Britain) (c) 23,659,270 27,599,686 ---------------- 55,269,322 PUBLISHING--7.4% John Fairfax Holdings Newspaper Publisher Limited (Australia) 22,427,800 $ 41,791,166 Wolters Kluwer NV Reference Material Publisher (Netherlands) 2,128,900 40,330,292 Independent News & Newspaper Publisher Media PLC (Ireland) 18,735,373 36,933,041 ---------------- 119,054,499 RETAIL--3.6% Giordano International Pacific Rim Clothing Retailer & Limited (Hong Kong) Manufacturer 50,401,000 $ 31,016,994 Somerfield plc Food Retailer (Great Britain) (c) 15,128,500 27,337,298 ---------------- 58,354,292 BANK & THRIFTS--9.3% Banco Popolare di Commercial Banking Verona e Novara Scrl (Italy) 3,493,000 $ 45,204,955 BNP Paribas SA (France) Commercial Banking 631,700 34,867,566 Uniao de Bancos Commercial Banking Brasileiros S.A. (Brazil) (d) 1,658,700 27,368,550 Kookmin Bank (Korea) Commercial Banking 269,968 13,105,678 United Overseas Bank Commercial Banking Limited, Foreign Shares (Singapore) 1,426,968 10,260,435 Svenska Handelsbanken Commercial Banking AB (Sweden) 508,000 7,747,349 Banco Latinoamericano de Latin American Trade Bank Exportaciones, S.A., Class E (Panama) (a) 515,400 6,468,270 41 NAME DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------------- DePfa Bank plc Mortgage Bank (Ireland) (c) 83,000 $ 4,540,397 Aareal Bank AG Mortgage Bank (Germany) (c) 83,000 1,330,214 ---------------- 150,893,414 OTHER FINANCIAL--4.7% Daiwa Securities Stock Broker Group Inc. (Japan) 5,939,000 $ 38,506,367 Euronext (Netherlands) Stock Exchange 1,968,900 36,872,279 ---------------- 75,378,646 MEDICAL PRODUCTS--2.1% Gambro AB, Class A Manufacturer of Dialysis Products (Sweden) 5,191,000 $ 34,089,409 PHARMACEUTICALS--8.8% GlaxoSmithKline plc Pharmaceuticals (Great Britain) 3,321,800 $ 71,878,208 Takeda Chemical Pharmaceuticals & Food Industries, Ltd. (Japan) Supplements 739,000 32,436,081 Aventis S.A. (France) Pharmaceuticals 370,300 26,187,759 Novartis AG (Switzerland) Pharmaceuticals 298,500 13,097,898 ---------------- 143,599,946 TELECOMMUNICATIONS--3.3% Panafon Hellenic Mobile Telecommunications Telecom S.A. (Greece) 6,717,900 $ 33,902,070 SK Telecom Co., Ltd. Mobile Telecommunications (Korea) 64,860 14,530,150 Telemig Celular Mobile Telecommunications Participacoes S.A. (Brazil) 2,273,095,600 4,419,239 ---------------- 52,851,459 TELECOMMUNICATIONS EQUIPMENT--3.7% Telefonaktiebolaget LM Mobile & Wired Ericsson, Class B Telecommunications Products (Sweden) (c) 39,571,500 $ 59,704,956 COMPUTER SERVICES--2.8% Meitec Corporation Software Engineering Services (Japan) 1,387,100 $ 45,835,414 42 NAME DESCRIPTION SHARES HELD MARKET VALUE ---------------------------------------------------------------------------------------------------------------- AEROSPACE--2.6% Rolls-Royce plc Aviation & Marine Power (Great Britain) 17,225,595 $ 42,356,037 AIRPORT MAINTENANCE--0.2% Grupo Aeroportuario del Airport Operator Sureste S.A. de C.V. (Mexico) (a) 242,000 $ 3,121,800 DIVERSIFIED CONGLOMERATES--1.3% Vivendi Universal SA Multimedia (France) 1,007,100 $ 21,719,141 INSTRUMENTS--2.3% Orbotech, Ltd. (Israel) (c) Optical Inspection Systems 1,646,100 $ 37,366,469 MACHINERY & INDUSTRIAL PROCESSING--2.5% Metso Corporation Paper & Pulp Machinery (Finland) 3,187,400 $ 41,155,757 OTHER INDUSTRIAL GOODS & SERVICES--4.9% Enodis plc Food Processing Equipment (Great Britain) (c) 29,924,920 $ 36,277,846 Chargeurs SA Wool, Textile Production & (France) Trading 1,050,201 27,948,527 Kone Corporation Elevators (Finland) 477,080 14,107,017 FKI plc (Great Britain) Industrial Manufacturing 1,020,000 2,387,536 ---------------- 80,720,926 TRANSPORTATION SERVICES--2.1% Associated British Ports Port Operator Holdings Plc (Great Britain) 4,966,629 $ 33,986,586 CHEMICALS--5.1% Akzo Nobel N.V. Chemical Producer (Netherlands) 957,900 $ 41,627,756 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 100,100 40,265,487 ---------------- 81,893,243 TOTAL COMMON STOCKS (COST: $1,497,720,174) 1,537,317,017 43 NAME DESCRIPTION PAR HELD MARKET VALUE ----------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--5.2% U.S. GOVERNMENT BILLS--2.4% United States Treasury Bills, 1.60% - 1.695% due 7/5/2002 - 7/25/2002 $ 40,000,000 $ 39,971,269 TOTAL U.S. GOVERNMENT BILLS (COST: $39,971,269) 39,971,269 REPURCHASE AGREEMENTS--2.8% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $44,506,860 collateralized by U.S. Government Agency Securities $ 44,500,000 44,500,000 TOTAL REPURCHASE AGREEMENT (COST: $44,500,000) 44,500,000 TOTAL SHORT TERM INVESTMENTS (COST: $84,471,269) 84,471,269 Total Investments (Cost $1,582,191,443)--99.9% $ 1,621,788,286 Foreign Currencies (Proceeds $4,258,976)--0.3% $ 4,374,769 Other Liabilities In Excess Of Other Assets--(0.2%) (2,507,380) ---------------- TOTAL NET ASSETS--100% $ 1,623,655,675 ================
(a) Represents an American Depository Receipt. (b) Represents a Swedish Depository Receipt. (c) Non-income producing security. (d) Represents a Global Depository Receipt. 44 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO] [PHOTO OF MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/02) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(19) [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD SMALL CAP FUND EX U.S. INDEX 10/31/95 $10,000 $10,000 12/31/95 $ 9,630 $10,684 3/31/96 $10,970 $11,006 6/30/96 $11,570 $11,186 9/30/96 $11,590 $11,195 12/31/96 $12,038 $11,418 3/31/97 $12,080 $11,241 6/30/97 $13,181 $12,699 9/30/97 $12,672 $12,652 12/31/97 $ 9,642 $11,677 3/31/98 $11,429 $13,394 6/30/98 $ 9,892 $13,499 9/30/98 $ 8,211 $11,513 12/31/98 $10,529 $13,868 3/31/99 $13,118 $14,086 6/30/99 $15,317 $14,493 9/30/99 $15,439 $15,114 12/31/99 $16,190 $17,741 3/31/00 $15,387 $17,839 6/30/00 $15,529 $17,217 9/30/00 $14,908 $15,906 12/31/00 $14,756 $15,369 3/31/01 $15,232 $13,213 6/30/01 $15,777 $13,075 9/30/01 $13,987 $11,273 12/30/01 $16,671 $12,080 3/31/02 $18,370 $12,149 6/30/02 $18,831 $11,877
AVERAGE ANNUAL TOTAL RETURNS(3)
(AS OF 6/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (11/1/95) ----------------------------------------------------------------------- OAKMARK INTERNATIONAL 2.51% 19.35% 7.39% 9.96% SMALL CAP FUND MSCI World ex. U.S. -2.24% -9.42% -1.33% 2.61% Lipper International 0.00% -5.10% 3.79% 9.51% Small Cap Average(22) -----------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Small Cap Fund finished the quarter ending June 30, 2002 up 3%, compared to a 2% decline in the MSCI World ex-US Index and roughly in line with the 4% and 0% increases in the MSCI Small Cap World ex-US(21) and Lipper International Small Cap Fund Average indices, respectively. While small caps around the world have had a nice run relative to other asset classes, we still see tremendous value among the companies in your portfolio. PORTFOLIO UPDATE As many of you know, we closed The Oakmark International Small Cap Fund to new investors during the quarter. Limiting asset growth allows us to remain true to the Fund's mandate--to invest in small-cap companies based outside of the U.S.--and to maintain investment flexibility. We've closed other Funds in our family before, always with our shareholders' best interests in mind. Closing to new investors at this time leaves us ample capacity to allow existing investors to continue to add to their holdings. Generating superior investment results for our existing shareholders has always been our single-minded focus at The Oakmark Funds. LOOKING FORWARD Despite the strong performance of your Fund over the past few years, we still believe the portfolio remains undervalued. The appreciation potential of our companies remains significant. We want to thank you for your continued confidence. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com 102521.2142@compuserve.com July 8, 2002 45 THE OAKMARK INTERNATIONAL SMALL CAP FUND GLOBAL DIVERSIFICATION--JUNE 30, 2002 [CHART]
% OF FUND NET ASSETS ---------------------------------- - EUROPE 67.8% Switzerland 16.6% Great Britain 12.4% * Italy 9.8% * France 6.9% Denmark 6.6% * Germany 3.3% * Netherlands 2.9% * Belgium 2.7% Sweden 2.3% * Spain 1.9% * Finland 1.0% Norway 0.8% * Ireland 0.6% % OF FUND NET ASSETS ---------------------------------- -PACIFIC RIM 20.6% Japan 5.3% New Zealand 4.4% Australia 3.6% Hong Kong 2.8% Korea 1.6% Philippines 1.4% Singapore 0.9% Thailand 0.6% -LATIN AMERICA 6.2% Mexico 4.0% Panama 2.2% -OTHER 1.0% Bermuda 0.5% United States 0.5%
* Euro currency countries comprise 29.1% of the Fund. 46 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--JUNE 30, 2002 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE -------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.6% FOOD & BEVERAGE--6.2% Campari Group Soft Drinks, Wines, & (Italy) (a) Spirits Producer 287,700 $ 9,499,645 Mikuni Coca-Cola Soft Drink Manufacturer Bottling Co., Ltd. (Japan) 896,000 7,312,150 Baron De Ley, S.A. Wines & Spirits Manufacturer (Spain) (a) 194,985 5,684,890 Hite Brewery Co., Ltd. Brewer (Korea) 65,700 4,052,319 Grupo Continental, S.A. Soft Drink Manufacturer (Mexico) 2,760,000 3,791,817 Alaska Milk Corporation Milk Producer (Philippines) 49,394,000 2,257,451 ------------- 32,598,272 OTHER CONSUMER GOODS & SERVICES--0.9% Royal Doulton plc Tableware & Giftware (Great Britain) (a) 22,373,000 $ 3,155,784 Ilshin Spinning Co., Ltd. Fabric & Yarn Manufacturer (Korea) 44,550 1,559,065 ------------- 4,714,849 APPAREL--0.7% Kingmaker Footwear Athletic Footwear Manufacturer Holdings Limited (Hong Kong) 10,721,000 $ 3,505,055 AUTOMOBILES--1.6% Ducati Motor Holding Motorcycle Manufacturer S.p.A. (Italy) (a) 5,177,200 $ 8,164,652 BROADCASTING & CABLE TV--1.0% ABS-CBN Broadcasting Television & Broadcasting Corporation Operator (Philippines) (a) 11,920,000 $ 5,329,359 BROADCASTING & PUBLISHING--1.6% Tamedia AG TV Broadcasting & Publishing (Switzerland) (a) 115,780 $ 8,150,241 BUILDING MATERIALS & CONSTRUCTION--4.1% Fletcher Building Limited Building Materials Manufacturer (New Zealand) 13,616,500 $ 18,226,536 Grafton Group plc Building Materials Distributor (Ireland) 723,000 3,135,550 ------------- 21,362,086 47 NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------- HOME FURNISHINGS--3.2% Natuzzi S.p.A. (Italy) (b) Home Furnishings 1,099,100 $ 16,695,329 HOTELS & MOTELS--2.5% Jarvis Hotels plc (Great Britain) Hotel Operator 7,252,000 $ 12,827,947 HUMAN RESOURCES--3.8% Solvus S.A. (Belgium) Temporary Staffing Services 763,120 $ 13,915,131 United Services Group Temporary Staffing Services NV (Netherlands) 279,347 5,534,301 ------------- 19,449,432 MARKETING SERVICES--1.9% Asatsu-DK, Inc. (Japan) Advertising Services Provider 445,100 $ 9,693,850 PUBLISHING--3.7% Edipresse S.A. Newspaper & Magazine Publisher (Switzerland) 18,274 $ 7,228,252 Recoletos Grupo de Publisher Comunicacion, S.A. (Spain) 880,000 4,041,954 Matichon Public Company Newspaper Publisher Limited, Foreign Shares (Thailand) 2,039,500 3,287,933 Hollinger International Newspaper Publisher Inc. (United States) 210,000 2,520,000 VLT AB, Class B (Sweden) Newspaper Publisher 182,250 1,810,096 ------------- 18,888,235 RETAIL--8.8% Carpetright plc Carpet Retailer (Great Britain) 2,137,700 $ 19,395,683 D.F.S. Furniture Company Furniture Retailer & Manufacturer plc (Great Britain) 1,972,100 12,374,856 Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 851,500 5,363,005 House of Fraser Plc Department Store (Great Britain) 2,279,000 2,458,737 Dairy Farm International Supermarket Chain Holdings Limited (Hong Kong) (a) 2,502,000 2,176,740 Jusco Stores (Hong Kong) Department Stores Co., Limited (Hong Kong) 4,102,000 2,169,396 Harvey Nichols plc High Fashion Clothing Retailer (Great Britain) 493,400 1,534,867 ------------- 45,473,284 48 NAME DESCRIPTION SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- BANK & THRIFTS--6.8% Jyske Bank A/S Commercial Banking (Denmark) (a) 500,900 $ 12,497,240 Vontobel Holding AG Commercial Banking (Switzerland) 474,536 11,453,001 Banco Latinoamericano Multinational Bank de Exportaciones, S.A., Class E (Panama) (b) 888,700 11,153,185 ------------- 35,103,426 FINANCIAL SERVICES--4.4% Julius Baer Holding Ltd., Asset Management Zurich (Switzerland) 47,000 $ 13,470,434 Van der Moolen Holding International Trading Firm N.V. (Netherlands) 451,500 9,523,449 ------------- 22,993,883 INSURANCE--0.5% IPC Holdings, Ltd. Reinsurance Provider (Bermuda) 87,700 $ 2,678,358 OTHER FINANCIAL--2.7% Ichiyoshi Securities Co., Stock Broker Ltd. (Japan) 1,957,000 $ 7,397,538 JCG Holdings Limited Consumer Finance (Hong Kong) 11,623,000 6,929,318 ------------- 14,326,856 MEDICAL PRODUCTS--3.6% Ansell Limited (Australia) Protective Rubber & Plastics Products 5,254,625 $ 18,576,812 COMPUTER SERVICES--1.8% Morse Plc (Great Britain) Business & Technology Solutions 3,451,300 $ 9,420,568 COMPUTER SOFTWARE--0.6% Enix Corporation (Japan) Entertainment Software 146,600 $ 2,819,701 COMPUTER SYSTEMS--0.9% Lectra (France) (a) Manufacturing Process Systems 1,191,500 $ 4,638,888 OFFICE EQUIPMENT--3.7% Neopost SA (France) (a) Mailroom Equipment Supplier 480,700 $ 19,094,219 AIRPORT MAINTENANCE--7.5% Kobenhavns Lufthavne Airport Management & Operations A/S (Copenhagen Airports A/S) (Denmark) 283,700 $ 21,836,979 49 NAME DESCRIPTION SHARES HELD MARKET VALUE -------------------------------------------------------------------------------------------------------------- AIRPORT MAINTENANCE--7.5% (CONT.) Grupo Aeroportuario del Airport Operator Sureste S.A. de C.V. (Mexico) (b) 1,334,200 $ 17,211,180 ------------- 39,048,159 DIVERSIFIED CONGLOMERATES--3.1% Pargesa Holding AG Diversified Operations (Switzerland) 4,784 $ 9,833,564 Tae Young Corp. (Korea) Heavy Construction 106,600 2,853,300 Haw Par Corporation Healthcare & Leisure Products Limited (Singapore) 903,000 2,269,962 Jardine Strategic Holdings Diversified Operations Limited (Bermuda) 340,700 994,844 ------------- 15,951,670 INSTRUMENTS--1.0% Vaisala Oyj, Class A Atmospheric Observation (Finland) Equipment 182,450 $ 4,990,334 MACHINERY & INDUSTRIAL PROCESSING--5.6% Pfeiffer Vacuum Vacuum Pump Manufacturer Technology AG (Germany) 451,400 $ 16,818,067 Alfa Laval (Sweden) (a) Filtration & Separation Equipment 959,700 9,583,770 Carbone Lorraine SA Electrical Systems Manufacturer (France) 72,700 2,264,354 ------------- 28,666,191 OTHER INDUSTRIAL GOODS & SERVICES--4.4% Schindler Holding AG Elevator & Escalator Manufacturer (Switzerland) 67,800 $ 12,272,727 GFI Industries SA (France) Industrial Fastener Manufacturer 309,913 7,685,518 Coats plc (Great Britain) Textile Manufacturer 2,872,000 2,430,630 ------------- 22,388,875 PRODUCTION EQUIPMENT--2.6% Interpump Group S.p.A. Pump & Piston Manufacturer (Italy) 2,707,300 $ 11,260,860 NSC Groupe (France) Textile Equipment Manufacturer 17,466 2,010,754 ------------- 13,271,614 TRANSPORTATION SERVICES--1.9% Mainfreight Limited Logistics Services (New Zealand) 7,059,751 $ 4,776,504 Bergesen d.y. ASA, Class A Tanker Operator Shares (Norway) 187,000 3,977,454 50 SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE ---------------------------------------------------------------------------------------------------------------------------- DelGro Corporation Limited (Singapore) Bus, Taxi, & Car Leasing 1,066,000 $ 1,237,254 ------------- 9,991,212 CHEMICALS--4.5% Gurit-Heberlein AG Chemical Producer (Switzerland) 30,424 $ 23,456,423 TOTAL COMMON STOCKS (COST: $471,004,239) 494,269,780 SHORT TERM INVESTMENTS--4.2% U.S. GOVERNMENT BILLS--2.0% United States Treasury Bills, 1.64% due 7/5/2002 $10,000,000 $ 9,997,267 TOTAL U.S. GOVERNMENT BILLS (COST: $9,997,267) 9,997,267 REPURCHASE AGREEMENTS--2.2% IBT Repurchase Agreement, 1.85% due 7/1/2002, repurchase price $11,501,773 collateralized by U.S. Government Agency Securities $11,500,000 $ 11,500,000 TOTAL REPURCHASE AGREEMENT (COST: $11,500,000) 11,500,000 TOTAL SHORT TERM INVESTMENTS (COST: $21,497,267) 21,497,267 Total Investments (Cost $492,501,506)--99.8% $ 515,767,047 Foreign Currencies (Proceeds $756,429)--0.2% $ 766,497 Other Assets In Excess Of Other Liabilities--0.0% 250,292 ------------- TOTAL NET ASSETS--100% $ 516,783,836 =============
(a) Non-income producing security. (b) Represents an American Depository Receipt. 51 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. The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. 2. The NASDAQ Composite Index is a market value weighted index of all common stocks listed on NASDAQ. 3. 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. 4. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. 5. During the period since inception (8/4/99-6/30/02), IPOs contributed an annualized 2.94% 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. 6. The Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. 7. The Lipper Large Cap Value Fund Index measures the performance of the thirty largest U.S. large-cap value funds tracked by Lipper. 8. 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. 9. The Lipper Mid Cap Value Fund Index measures the performance of the thirty largest U.S. mid-cap value funds tracked by Lipper. 52 10. EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding. 11. The Russell 2000 Index is an unmanaged, market-weighted index, with dividends reinvested, of 2,000 small companies, formed by taking the largest 3,000 small companies and eliminating the largest 1,000 of those companies. This index is unmanaged and investors cannot actually make investments in this index. 12. The S&P Small Cap 600 Index measures the performance of selected U.S. stocks with small market capitalizations. 13. The Lipper Small Cap Value Fund Index measures the performance of the thirty largest U.S. small-cap value funds tracked by Lipper. 14. The Lipper Balanced Fund Index measures the performance of the thirty largest U.S. balanced funds tracked by Lipper. 15. The Lehman Govt./Corp. Bond Index is an unmanaged index that includes the Lehman Government and Lehman Corporate indices. 16. The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. This index is unmanaged and investors cannot actually make investments in this index. 17. 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. 18. The Lipper Global Fund Index is an unmanaged index that includes 30 mutual funds that invest in securities throughout the world. 19. The Morgan Stanley World Ex U.S. Index is made up of 19 country sub-indexes, excluding the U.S. This index is unmanaged and investors cannot actually make investments in this index. 20. The Lipper International Fund Index reflects the net asset value weighted total return of the 30 largest international equity funds. 21. The Morgan Stanley Small Cap World Ex US Index includes stocks having market capitalizations between $200-$800 million across 23 developed markets. This index is unmanaged and investors cannot actually make an investment in this index. 22. The Lipper International Small Cap Average includes 100 mutual funds that invest in securities whose primary markets are outside of the U.S. 23. 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. 53 THE OAKMARK FAMILY OF FUNDS INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with man-agement teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: a unified effort aimed at identifying the best values in the marketplace. From the list of approved stocks, each fund manager constructs a relatively focused portfolio, built on a stock-by-stock basis from the bottom up. WHO SHOULD INVEST Any investor who is seeking a disciplined value manager for the purposes of growing and diversifying a portfolio should consider one of the Oakmark funds, keeping in mind that all equity investments should be considered long-term investments. As value investors, we recognize that patience is a virtue and believe that, over the long term, investors are rewarded for their patience. We generally hold the companies in which we invest for three to five years, a time horizon that we encourage our shareholders to consider as well. HOW TO USE VALUE FUNDS IN AN OVERALL PORTFOLIO Investment styles tend to move in cycles. One style may be in favor for a few years while the other is out of favor, and vice versa. Diversifying the stock portion of your portfolio to include value and momemtum/growth investment styles may help reduce overall volatility--and potentially provide more consistent returns over time. INVEST Managers select stocks from the approved list for their specific funds APPROVED LIST Securities available for investment QUANTITATIVE AND QUALITATIVE RESEARCH Rigorous analysis is performed to ensure that the stock meets our strict value standards CRITERIA SCREENS Managers and research team screen for stocks that are worth further consideration UNIVERSE OF THOUSANDS OF EQUITY SECURITIES All stocks available for investment BOTTOM-UP INVESTMENT PROCESS 54 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. 55 [WATERMARK OF OAKMARK FAMILY OF FUNDS] (This page has been intentionally left blank.) 56 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. 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 John R. Raitt--VICE PRESIDENT Janet L. 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 Deloitte & Touche 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) This report is submitted for the general information of the shareholders of the Funds. The report is not authorized for distribution to prospective investors in the Funds unless it is accompanied or preceded by a currently effective prospectus of the Funds. No sales charge to the shareholder or to the new investor is made in offering the shares of the Funds. P.O.BOX 8510 BOSTON, MA 02266-8510 [OAKMARK FAMILY OF FUNDS LOGO] 1-800-OAKMARK www.oakmark.com THE OAKMARK FUNDS ARE DISTRIBUTED BY HARRIS ASSOCIATES SECURITIES L.P., MEMBER NASD. DATE OF FIRST USE: JULY 2002.