-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQIvRao7hRvvBIPdiWVrom3JXUq5bpHjGLSoiCB54cEm071J5gI9PsBNPEV62KiU n+1G/RFIppyEeqTAfgrdCw== 0000912057-02-041339.txt : 20021107 0000912057-02-041339.hdr.sgml : 20021107 20021107160336 ACCESSION NUMBER: 0000912057-02-041339 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021107 EFFECTIVENESS DATE: 20021107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRIS ASSOCIATES INVESTMENT TRUST CENTRAL INDEX KEY: 0000872323 STATE OF INCORPORATION: MA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06279 FILM NUMBER: 02812686 BUSINESS ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO N LASALLE ST STE 500 CITY: CHICAGO STATE: IL ZIP: 60602-3790 BUSINESS PHONE: 8004769625 MAIL ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO NORTH LASALLE STREET STE 500 CITY: CHICAGO STATE: IL ZIP: 60602-3790 N-30D 1 a2092750zn-30d.txt N-30D THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK SMALL CAP FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND ANNUAL REPORT SEPTEMBER 30, 2002 ADVISED BY HARRIS ASSOCIATES L.P. [OAKMARK FAMILY OF FUNDS LOGO] THE OAKMARK FAMILY OF FUNDS 2002 ANNUAL 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 11 Schedule of Investments 12 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Managers 14 Schedule of Investments 16 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 20 Schedule of Investments 22 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 28 Global Diversification Chart 30 Schedule of Investments 31 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 35 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 37 International Diversification Chart 38 Schedule of Investments 39 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 44 International Diversification Chart 45 Schedule of Investments 46 FINANCIAL STATEMENTS Statements of Assets and Liabilities 50 Statements of Operations 52 Statements of Changes in Net Assets 54 Notes to Financial Statements 61 TRUSTEES AND OFFICERS 79 OAKMARK PHILOSOPHY AND PROCESS 82 THE OAKMARK GLOSSARY 83 FOR MORE INFORMATION Access our web site at www.oakmark.com to obtain a prospectus, an application or periodic reports, or call 1-800-OAKMARK (1-800-625-6275) or (617) 449-6274. Turn to the end of this report to read about Oakmark's Philosophy and Process and look up financial terms in the Oakmark Glossary. LETTER FROM THE PRESIDENT DEAR FELLOW SHAREHOLDERS, This past quarter was extremely difficult for all equity investors. The Dow(1), S&P 500(2), and NASDAQ(3) all posted double-digit losses for the second consecutive quarter. While the Funds' relative performance has held up in the face of significant declines this year, our absolute returns are not in line with our long-term goal of positive rates of return. THE MARKET The market continued to be very volatile over the past few months, and investors faced a range of complex issues. On the plus side, hope grew that the economy and stock prices may be improving, while negative factors included high profile company-specific problems, uncertain profit forecasts, and the threat of war with Iraq. Without overlooking these issues, we attribute the market's weakness primarily to an emotional exodus from equities as a whole and NOT to an unacceptably large number of new fundamental problems. Like many, we continue to find values in today's market and believe that this downward stock price pressure is symptomatic more of the END of a bear market, rather than the BEGINNING. With very low interest rates and expectations of improving economic conditions in 2003 and 2004, we maintain that equities will provide attractive long-term returns versus other asset classes. Over time, economic growth drives corporate earnings, which in turn power the long-term performance of the stock market. CORPORATE GOVERNANCE One of our three key investment tenets is to invest with company managements whose interests are aligned with us, as shareholders. Adhering to this principle allowed us to avoid a number of recent well-publicized company-specific problems. It is important, however, that the concerns surrounding executive compensation, stock options, and excessive retirement packages be addressed. We have and will continue to invest in companies that strike the appropriate balance between providing strong incentives for management and overall corporate profitability and integrity. Stock options should be expensed so that they are more accurately reflected as a "cost" of compensation. In addition, compensation packages should be rational, and retirement benefits should reward excellent long-term leadership, but at sensible levels. Periods of excess often uncover problems--and then lead to solutions that benefit all long-term investors. We believe that the market will also be self-correcting with management compensation. [PHOTO] EVALUATE YOUR EQUITY ALLOCATION As we saw in late 1999 and early 2000 -- and as we see today--investors are often most optimistic when the market climbs to new highs and are most pessimistic when it tumbles significantly. Bear markets can trigger exaggerated, emotional behavior--causing equities to become significantly undervalued--as much as stocks in bull markets become overvalued. We continue to direct our efforts to what we've always done: invest in quality companies that we believe are undervalued and have significant long-term potential and focus on the rigors of our investment process rather than respond to the market emotionally. While exiting equities may seem tempting today, you should consider remaining invested--or increasing your equity position to return to levels before this correction--if you have a long investment horizon. Even if the benefits of equity investing are difficult to appreciate now, we remain confident in the long-term positioning of our Funds and encourage you to stick with your financial plan. An important part of achieving above-average long-term investment results is investing against the emotional tide, not with it. We look forward to better times ahead. /s/ Robert M. Levy ROBERT M. LEVY PRESIDENT AND CEO P.S. In our continuing efforts to provide top quality service to investors, you may now open new Oakmark accounts on our web site, www.oakmark.com. We hope that this makes investing in our funds even easier for you. October 4, 2002 1 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION
THE OAKMARK THE OAKMARK THE OAKMARK PERFORMANCE FOR FUND SELECT SMALL CAP PERIOD ENDED FUND FUND SEPTEMBER 30, 2002(4) (OAKMX) (OAKLX) (OAKSX) - --------------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* -16.60% -15.58% -22.01% 6 MONTHS* -23.57% -22.41% -27.36% 1 YEAR -11.77% -13.85% -3.23% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR -0.59% 10.49% 1.75% 5 YEAR 0.35% 12.70% -3.02% 10 YEAR 12.15% N/A N/A SINCE INCEPTION 16.10% 20.21% 8.37% VALUE OF $10,000 FROM INCEPTION DATE $52,927 $29,720 $17,445 (8/5/91) (11/1/96) (11/1/95) TOP FIVE Washington Washington Hanger Orthopedic Group HOLDINGS AS OF Mutual, Inc. 3.7% Mutual, Inc. 17.8% Group, Inc. 4.3% SEPTEMBER 30, 2002(5) H&R Block, Inc. 3.1% H&R Block, Inc. 8.6% Tupperware AOL Time Warner Inc. 2.4% Yum! Brands, Inc. 5.4% Corporation 4.0% COMPANY AND % OF TOTAL General Mills, Inc. 2.4% Moody's Corporation 5.1% eFunds Corporation 3.5% NET ASSETS Fortune Brands, Inc. 2.4% The Dun & Bradstreet Checkpoint Corporation 4.7% Systems, Inc. 3.5% Ralcorp Corporation 3.5% TOP FIVE Retail 14.3% Banks & Thrifts 17.8% Medical Products 7.4% INDUSTRIES AS OF Pharmaceuticals 10.6% Retail 16.5% Computer Software 6.7% SEPTEMBER 30, 2002 Other Consumer Other Consumer Food & Beverage 6.3% Goods & Services 7.8% Goods & Services 13.1% Banks & Thrifts 5.9% INDUSTRIES AND % OF TOTAL Food & Beverage 6.4% Information Services 9.8% Other Consumer NET ASSETS Cable Systems & Computer Services 5.3% Goods & Services 5.1% Satellite TV 6.2%
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * NOT ANNUALIZED 2
THE OAKMARK THE OAKMARK PERFORMANCE FOR EQUITY AND GLOBAL PERIOD ENDED INCOME FUND FUND SEPTEMBER 30, 2002(4) (OAKBX) (OAKGX) - ------------------------------------------------------------------------------------------- 3 MONTHS* -8.57% -17.70% 6 MONTHS* -11.49% -23.13% 1 YEAR -0.47% 6.84% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 10.50% 8.81% 5 YEAR 9.80% N/A 10 YEAR N/A N/A SINCE INCEPTION 13.24% 5.46%(6) VALUE OF $10,000 FROM INCEPTION DATE $23,640 $11,828 (11/1/95) (8/4/99) TOP FIVE Burlington eFunds Corporation 6.5% HOLDINGS AS OF Resources Inc. 3.3% Vivendi Universal SA 6.3% SEPTEMBER 30, 2002(5) SAFECO Corporation 3.0% Synopsys, Inc. 4.8% Guidant Corporation 2.5% Hunter Douglas N.V. 4.3% COMPANY AND % OF TOTAL Synopsys, Inc. 2.4% Liberty Media NET ASSETS Ceridian Corporation 2.4% Corporation, Class A 4.1% TOP FIVE U.S. Government Information Services 9.9% INDUSTRIES AS OF Notes 37.9% Banks and Thrifts 7.6% SEPTEMBER 30, 2002 Oil & Natural Gas 6.3% Computer Software 7.2% Medical Products 5.2% Broadcasting & INDUSTRIES AND % OF TOTAL Retail 4.6% Programming 6.6% NET ASSETS Pharmaceuticals 4.5% Diversified Conglomerates 6.3% THE OAKMARK THE OAKMARK PERFORMANCE FOR INTERNATIONAL INTERNATIONAL PERIOD ENDED FUND SMALL CAP FUND SEPTEMBER 30, 2002(4) (OAKIX) (OAKEX) - -------------------------------------------------------------------------------------- 3 MONTHS* -22.93% -22.25% 6 MONTHS* -24.64% -20.30% 1 YEAR -1.53% 4.68% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR -0.75% -1.75% 5 YEAR 0.07% 2.93% 10 YEAR 8.85% N/A SINCE INCEPTION 8.85% 5.66% VALUE OF $10,000 FROM INCEPTION DATE $23,365 $14,641 (9/30/92) (11/1/95) TOP FIVE GlaxoSmithKline plc 4.5% Kobenhavns HOLDINGS AS OF Vivendi Universal SA 3.5% Lufthavne A/S 4.6% SEPTEMBER 30, 2002(5) Wolters Kluwer NV 3.1% Carpetright plc 4.4% Hunter Douglas N.V. 3.0% Gurit-Heberlein AG 4.0% COMPANY AND % OF TOTAL Givaudan 3.0% Neopost SA 3.8% NET ASSETS Grupo Aeroportuario del Sureste S.A. de C.V. 3.5% TOP FIVE Pharmaceuticals 9.6% Retail 10.4% INDUSTRIES AS OF Food & Beverage 8.4% Airport Maintenance 8.1% SEPTEMBER 30, 2002 Banks & Thrifts 7.5% Food & Beverage 6.4% Publishing 6.7% Banks & Thrifts 5.9% INDUSTRIES AND % OF TOTAL Other Financial 5.6% Machinery & NET ASSETS Industrial Processing 5.4%
3 THE OAKMARK AND OAKMARK SELECT FUNDS At Oakmark, WE LOOK FOR STOCKS WITH PRICES LESS THAN 60% OF INTRINSIC VALUE, with intrinsic value that is likely to grow and with management that acts in the interest of outside shareholders. The combination of these factors creates our biggest competitive advantage--the ability to be more patient than most investors. [PHOTO] Last quarter was brutal! As measured by the 17% decline in the S&P 500(2), the market lost more last quarter than in any quarter in the past fifteen years--and this quarter followed a couple of very tough years. The NEW YORK TIMES publishes daily a list of the twenty most widely held stocks and shows their recent performance. That list shows an average loss of 38% over the last year and 58% since the March 2000 peak. Back at the peak, research reports were arguing that stocks would go higher, primarily because they had gone up so much already, which sounded backwards to us. This week I read a report on one of our holdings that used the same rear-view mirror logic: "We have lowered our price objective based on the recent weakness in the stock." Effectively, the shell-shocked analyst is saying that his model projects a price that makes the stock look too attractive, so he is going to ignore the model. Media reports are not any better as story after story points out that over the past five years, the average equity investor has lost money, and then goes on to question why anyone would own stocks today. Those articles are like the weather forecast made by Bill Murray's character, Phil Connors, in GROUNDHOG DAY: "It's gonna be cold... it's gonna be gray... and it's gonna last for the rest of your life!" As we watch the market go down, seemingly every day, it's hard to keep the perspective that business values are much more stable than are stock prices. Just as business value growth did not match the 250% gain the S&P 500 achieved from 1995 to March of 2000, business values have not subsequently declined 45% as the S&P 500 has. The observation that business values are relatively stable (but generally grow over time) leads to our conclusion that the more extreme stock price moves become, the more likely they are to reverse. As the bull market of the 90's neared its end, investor surveys showed expectations of long-term annual percentage gains in the teens. We all knew that was not achievable. Now, after the market has fallen sharply, return expectations have also fallen, with many investors now uncomfortable projecting future returns greater than zero. Historical returns and future returns necessarily have an inverse relationship. The more stock prices fall, the greater the opportunity is for above-average returns. John Burr Williams was one of the first to represent mathematically the value of a stock as the present worth of all its future dividends. In his 1938 classic THE THEORY OF INVESTMENT VALUE he states: "If a man buys a security below its investment value he need never lose, even if its price should fall at once, because he can still hold for income and get a return above normal on his cost price; but if he buys it above its investment value, his only hope of avoiding a loss is to sell to someone else who must in turn take the loss in the form of insufficient income." "If marginal opinion, not intrinsic value, determines market price, as claimed in this book, and if changes in opinion, but nothing else, cause changes in price, then those who trade in the market for a living will find herein a philosophy of their work." That approach defines value investing--estimating the intrinsic value of businesses and only purchasing them when negative opinions cause prices to reach discounts to value. Value investing is what we do across The Oakmark Family of Funds. The basic premise of value investing is that the return achieved while owning a stock can be broken down into two components: the change in business value during the holding period, and the change in the stock price relative to its business value. We attempt to identify stocks selling below 60% of business value, anticipating that the narrowing of the price-to-value gap will be a significant positive contributor to our return. All value investors share this basic approach of buying at a discount to value, but how value is estimated differs widely. Benjamin Graham was one of the early developers of the value investing style. In his book with David Dodd, SECURITY ANALYSIS, he states that "asset values are virtually ignored in the stock market." He considered the best investment opportunities to be "those cases in which the market price ... is less than the net current assets." [SIDENOTE] HIGHLIGHTS - - Business values are much more stable than are stock prices. - - We estimate the highest price a buyer could pay to own a business and still earn an adequate return, and then we buy at 60% of that number. - - Owning stocks that sell below our intrinsic value estimate provides a margin of safety. 4 Following Graham's work, a generation of value investors focused on the balance sheet and accounting book value as the primary indicator of intrinsic value. One of Graham's students, Warren Buffett, is generally viewed as today's most successful value investor. Buffett broadened the value investing perspective. In his 1996 Berkshire Hathaway annual report he wrote: "My own thinking has changed drastically from thirty five years ago when I was taught to favor tangible assets and to shun businesses whose value depended largely upon economic goodwill. Ultimately, business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring goodwill and that utilize a minimum of tangible assets." With this approach, value investors moved from a balance sheet focus to an income statement focus. The intangible assets Buffett looks for don't get included on the balance sheet but represent competitive advantage that allows companies to sustainably earn high returns on equity. Using that thought process, the P/E(7) ratio became the favorite metric of most value investors for estimating business values. At The Oakmark Family we are not believers in a "one size fits all" approach to estimating business values. For some companies, a book value(8) or asset value based approach provides a good estimate of value. Natural resource companies, such as Burlington Resources, are a good example--a large number of transactions suggest that there is a fairly consistent price paid per MCF of natural gas. On the other hand, an asset-based approach would be nearly useless for valuing the consistently growing tax preparation business of H&R Block. For H&R Block, a price-to-earnings ratio is much more useful than a price-to-book(9) ratio for estimating value. And for a company in many different businesses, like AOL Time Warner, we value each business unit using the measure we find most appropriate, sum up all the values, then deduct net debt to reach an estimate of the equity value. What we do on an industry-by-industry and company-by-company basis is to look at acquisitions to gauge the most appropriate summary statistic for estimating business value. For any given business, book value, earnings, cashflow, sales, subscribers, or barrels of oil might give the best indication of value. For a different business, a different measure may be most useful. When we develop the rules-of-thumb that explain previous acquisition prices, we apply them to the stocks we are analyzing. For each stock we try to figure out the highest price a buyer could pay to own the entire business and still earn an adequate return on their investment. Then we wait for the stock to sell below 60% of that value. When prices of the stocks we already own exceed 90% of our value estimates, we sell them. Benjamin Graham summed up his investing approach with the phrase "margin-of-safety." Owning stocks that sell below intrinsic value provides a margin-of-safety that "is available for absorbing the effect of miscalculating or worse than average luck." Buying below intrinsic value not only lowers the risk, it increases the expected return. When we succeed at buying at 60% and selling at 90% of value, we achieve a return on our investment of not just the growth in business value, but an additional 50%. Our long-term track record shows that despite many mistakes, we have achieved above average returns with below average risk. We believe the primary reason behind this result is our disciplined approach to purchasing only undervalued stocks. /s/ William C. Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com October 3, 2002 5 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO] The Oakmark Fund declined 17% last quarter, which took our fiscal year results into negative territory by 12%. The loss in the quarter was only fractionally better than the 17% loss suffered by the S&P 500, but the fiscal year results compare favorably to the S&P 500 loss of 20%. The pain of this decline has caused many investors to give up on stocks. The stock market is down nearly 50% from its peak. Stocks now appear significantly undervalued using the Fed model (which compares P/E(7) ratios to long-term government bond yields); the dividend yield on the S&P 500 exceeds the yield on Treasury bills for the first time since 1963; and money-market fund assets compared to the market value of stocks is at the highest level ever recorded. Those data points are much more typical of market bottoms than tops. Many stocks have now fallen to our buy targets, and we continue to add new holdings that have the business fundamentals of growth companies, but the valuation levels of value stocks. All of our new holdings are discussed on our website (www.oakmark.com). The new holding discussed below is not singled out because of higher confidence in it, but rather because it is an exception to our belief that most large technology companies continue to be fully valued. SUN MICROSYSTEMS (SUNW--$2.59) Two years ago, Sun reached a high of $65, which we thought was silly because that was over 125 times earnings, nearly 30 times book value(8) and 13 times sales. As a leading supplier of servers and workstations, the last two years have been extremely disappointing for Sun's business. However, Sun continues to have a $12 billion sales base, and their Solaris operating system is unmatched for high-end servers. Today, Sun sells at a slight premium to tangible book value and has net cash of more than half its stock price. Net of its cash, Sun sells at about one-third of sales and less than three times its annual R&D spending. Sun probably won't return to a $65 price during our lifetime, but that is irrelevant to the investment decision today. At $2.59, we believe Sun is now selling at less than 60% of business value and, from this level, is likely to achieve above-average returns. 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 October 3, 2002 THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (9/30/02) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(2) [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 9/30/02 $52,927 $26,454
AVERAGE ANNUAL TOTAL RETURNS(4)
(AS OF 9/30/02) TOTAL RETURN 1-YEAR 5-YEAR 10-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/5/91) - --------------------------------------------------------------------------- OAKMARK FUND -16.60% -11.77% 0.35% 12.15% 16.10% S&P 500 -17.28% -20.49% -1.63% 8.99% 9.11% Dow Jones Average(1) -17.33% -12.48% 0.81% 11.11% 11.03% Lipper Large Cap -18.65% -19.61% -1.77% 8.49% 8.70% Value Index(10)
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized 6 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2002
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% FOOD & BEVERAGE--6.4% General Mills, Inc. 1,755,000 $ 77,957,100 Kraft Foods Inc. 1,895,000 69,091,700 H.J. Heinz Company 1,910,000 63,736,700 ------------------- 210,785,500 HOUSEHOLD PRODUCTS--2.4% The Clorox Company 1,390,200 $ 55,858,236 Newell Rubbermaid, Inc. 775,000 23,924,250 ------------------- 79,782,486 OTHER CONSUMER GOODS & SERVICES--7.8% H&R Block, Inc. 2,453,300 $ 103,063,133 Fortune Brands, Inc. 1,645,600 77,820,424 Mattel, Inc. 3,216,300 57,925,563 Cendant Corporation (a) 1,895,100 20,391,276 ------------------- 259,200,396 BROADCASTING & PROGRAMMING--2.5% Liberty Media Corporation, Class A (a) 8,201,400 $ 58,886,052 The Walt Disney Company 1,500,000 22,710,000 ------------------- 81,596,052 BUILDING MATERIALS & CONSTRUCTION--1.9% Masco Corporation 3,133,000 $ 61,250,150 CABLE SYSTEMS & SATELLITE TV--6.2% AOL Time Warner Inc. (a) 6,766,600 $ 79,169,219 General Motors Corporation, Class H (Hughes Electronics Corporation) (a) 5,100,000 46,665,000 EchoStar Communications Corporation (a) 2,475,000 42,817,500 Comcast Corporation (a) 1,800,000 37,548,000 ------------------- 206,199,719 HARDWARE--2.1% The Black & Decker Corporation 1,622,200 $ 68,018,846 MARKETING SERVICES--1.5% The Interpublic Group of Companies, Inc. 3,165,000 $ 50,165,250 PUBLISHING--3.5% Gannett Co., Inc. 884,500 $ 63,843,210 Knight-Ridder, Inc. 916,000 51,671,560 ------------------- 115,514,770 RECREATION & ENTERTAINMENT--1.1% Carnival Corporation 1,500,000 $ 37,650,000
7
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% (CONT.) RETAIL--14.3% Yum! Brands, Inc (a) 2,439,000 $ 67,584,690 J.C. Penney Company, Inc. 3,902,900 62,134,168 The Kroger Co. (a) 4,390,000 61,899,000 McDonald's Corporation 3,300,000 58,278,000 Safeway Inc. (a) 2,527,000 56,352,100 The Home Depot, Inc. 2,100,000 54,810,000 CVS Corporation 1,605,000 40,686,750 The Gap, Inc. 3,599,000 39,049,150 Toys `R' Us, Inc. (a) 3,125,000 31,812,500 ------------------- 472,606,358 BANK & THRIFTS--5.8% Washington Mutual, Inc. 3,937,300 $ 123,906,831 U.S. Bancorp 3,700,000 68,746,000 ------------------- 192,652,831 INSURANCE--1.8% MGIC Investment Corporation 1,437,900 $ 58,709,457 OTHER FINANCIAL--2.1% Fannie Mae 1,170,000 $ 69,661,800 MEDICAL PRODUCTS--2.4% Guidant Corporation (a) 2,396,100 $ 77,417,991 PHARMACEUTICALS--10.6% Bristol-Myers Squibb Company 3,250,000 $ 77,350,000 Abbott Laboratories 1,850,000 74,740,000 Merck & Co., Inc. 1,600,000 73,136,000 Schering-Plough Corporation 3,225,000 68,757,000 Chiron Corporation (a) 1,622,000 56,672,680 ------------------- 350,655,680 TELECOMMUNICATIONS--1.2% Sprint Corporation 4,421,000 $ 40,319,520 TELECOMMUNICATIONS EQUIPMENT--0.9% Motorola, Inc. 2,975,000 $ 30,285,500 COMPUTER SERVICES--4.3% First Data Corporation 2,400,000 $ 67,080,000 SunGard Data Systems, Inc. (a) 2,801,600 54,491,120 Electronic Data Systems Corporation 1,501,000 20,983,980 ------------------- 142,555,100
8
SHARES HELD/ NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--93.5% (CONT.) COMPUTER SYSTEMS--0.9% Sun Microsystems, Inc. (a) 12,000,000 $ 31,080,000 OFFICE EQUIPMENT--1.1% Xerox Corporation (a) 7,427,400 $ 36,765,630 AEROSPACE & DEFENSE--2.3% Honeywell International, Inc. 1,950,000 $ 42,237,000 The Boeing Company 1,000,000 34,130,000 ------------------- 76,367,000 OTHER INDUSTRIAL GOODS & SERVICES--1.1% Illinois Tool Works Inc. 604,200 $ 35,242,986 WASTE DISPOSAL--1.8% Waste Management, Inc. 2,574,300 $ 60,032,676 OIL & NATURAL GAS--4.2% ConocoPhillips 1,635,335 $ 75,617,890 Burlington Resources Inc. 1,671,100 64,103,396 ------------------- 139,721,286 ELECTRIC UTILITIES--3.3% TXU Corp. 1,565,000 $ 65,276,150 Duke Energy Corporation 2,220,000 43,401,000 ------------------- 108,677,150 TOTAL COMMON STOCKS (COST: $3,433,430,323) 3,092,914,134 SHORT TERM INVESTMENTS--6.4% U.S. GOVERNMENT BILLS--4.8% United States Treasury Bills, 1.58% - 1.665% due 10/3/2002 - 11/29/2002 $160,000,000 $ 159,873,818 TOTAL U.S. GOVERNMENT BILLS (COST: $159,870,861) 159,873,818
9
NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--6.4% (CONT.) REPURCHASE AGREEMENTS--1.6% IBT Repurchase Agreement, 1.75% due 10/1/2002, repurchase price $50,002,431 collateralized by U.S. Government Agency Securities $50,000,000 $ 50,000,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $1,886,022 collateralized by a U.S. Government Agency Security 1,885,964 1,885,964 -------------- TOTAL REPURCHASE AGREEMENT (COST: $51,885,964) 51,885,964 TOTAL SHORT TERM INVESTMENTS (COST: $211,756,825) 211,759,782 Total Investments (Cost $3,645,187,148)--99.9% $3,304,673,916 Other Assets In Excess Of Other Liabilities--0.1% 4,007,917 -------------- TOTAL NET ASSETS--100% $3,308,681,833 ==============
(a) Non-income producing security. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 10 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO] The Oakmark Select Fund declined by 16% during the quarter and by 14% for the fiscal year. For a little over two years, despite the bear market, we were able to prosper by owning undervalued stocks that were not a part of the bull market's excesses. In fact, the Fund achieved an all-time high NAV(13) in May of this year. Since May, however, the market decline has become very broad-based--all capitalization sizes and all investment styles have been hit by roughly the same amount. We both have personal assets invested in the Fund, so we share the pain that all our investors have experienced these last four months. Although we cannot predict when the bottom will be reached, we strongly believe that prices have declined to levels that make it highly likely that today's long-term investors will earn higher returns in stocks than in other investments. In the nearly six years since we started The Oakmark Select Fund, we have owned sixty different stocks, and in three of those we have lost over half of our investment. The most recent, Electronic Data Systems (EDS), shocked the market last month by drastically lowering earnings expectations. No explanation of that miss made sense: either management had not been candid about their prospects or, perhaps worse, didn't have the information flow to know how weak their business was, or despite their large book of long-term contracts, their profitability was more dependent on last-minute, add-on sales than realized. We didn't like any of those answers and began selling our EDS position, despite the stock having fallen from $36 to $22. When the stock fell below $20, we stopped selling. We felt that EDS was suffering artificial pressure from managers who didn't want EDS on their quarter-end statements and from hedge funds that were trying to encourage panic selling. Unfortunately, we had sold less than a quarter of our holdings. Our belief was, and still is, that for a company likely to earn between $2 and $3 per share next year, the price should be higher than the low teens. We still have just over 1% of our assets in EDS and will be looking for a better opportunity to sell that position. As unpleasant as these mistakes are, they are included in our long-term performance record, which continues to be excellent both in relative and absolute terms. Thank you for your support. /s/ William C. Nygren /s/ Henry R. Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com berghoef@oakmark.com October 3, 2002 THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/02) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(2) [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 9/30/02 $29,720 $12,590
AVERAGE ANNUAL TOTAL RETURNS(4)
(AS OF 9/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (11/1/96) - ---------------------------------------------------------------------------- OAKMARK SELECT FUND -15.58% -13.85% 12.70% 20.21% S&P 500 -17.28% -20.49% -1.63% 3.97% S&P MidCap 400(11) -16.55% -4.70% 5.38% 10.47% Lipper Mid Cap -17.46% -8.22% 0.38% 5.22% Value Index(12)
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized 11 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2002
NAME SHARES HELD MARKET VALUE - --------------------------------------------------------------------------------------------------- COMMON STOCKS--92.2% OTHER CONSUMER GOODS & SERVICES--13.1% H&R Block, Inc. 7,738,800 $ 325,106,988 Mattel, Inc. 9,554,000 172,067,540 ------------------- 497,174,528 CABLE SYSTEMS & SATELLITE TV--4.0% AOL Time Warner Inc. (a) 13,000,000 $ 152,100,000 INFORMATION SERVICES--9.8% Moody's Corporation 3,984,000 $ 193,224,000 The Dun & Bradstreet Corporation (a)(b) 5,321,300 178,848,893 ------------------- 372,072,893 PUBLISHING--3.9% Knight-Ridder, Inc. 2,606,500 $ 147,032,665 RETAIL--16.5% Yum! Brands, Inc (a) 7,422,000 $ 205,663,620 The Kroger Co. (a) 10,362,500 146,111,250 Office Depot, Inc. (a) 11,434,900 141,106,666 Toys `R' Us, Inc. (a)(b) 12,698,500 129,270,730 ------------------- 622,152,266 BANK & THRIFTS--17.8% Washington Mutual, Inc. 21,351,400 $ 671,928,558 INVESTMENT MANAGEMENT--2.9% Stilwell Financial Inc 9,030,400 $ 108,996,928 HEALTH CARE SERVICES--4.1% IMS Health Incorporated 10,392,000 $ 155,568,240 PHARMACEUTICALS--4.4% Chiron Corporation (a) 4,811,400 $ 168,110,316 TELECOMMUNICATIONS--3.3% Sprint Corporation 13,727,500 $ 125,194,800 COMPUTER SERVICES--5.3% First Data Corporation 5,430,400 $ 151,779,680 Electronic Data Systems Corporation 3,451,500 48,251,970 ------------------- 200,031,650 OFFICE EQUIPMENT--2.8% Xerox Corporation (a) 21,547,700 $ 106,661,115
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SHARES HELD/ NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.2% (CONT.) OIL & NATURAL GAS--4.3% Burlington Resources Inc. 4,201,800 $ 161,181,048 TOTAL COMMON STOCKS (COST: $3,372,614,639) 3,488,205,007 SHORT TERM INVESTMENTS--7.4% U.S. GOVERNMENT BILLS--4.1% United States Treasury Bills, 1.58% - 1.975% due 10/3/2002 - 12/12/2002 $155,000,000 $ 154,792,889 TOTAL U.S. GOVERNMENT BILLS (COST: $154,782,375) 154,792,889 REPURCHASE AGREEMENTS--3.3% IBT Repurchase Agreement, 1.75% due 10/1/2002, repurchase price $121,005,882 collateralized by U.S. Government Agency Securities $121,000,000 $ 121,000,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $2,118,317 collateralized by a U.S. Government Agency Security 2,118,252 2,118,252 ------------------- TOTAL REPURCHASE AGREEMENT (COST: $123,118,252) 123,118,252 TOTAL SHORT TERM INVESTMENTS (COST: $277,900,627) 277,911,141 Total Investments (Cost $3,650,515,266)--99.6% $ 3,766,116,148 Other Assets In Excess Of Other Liabilities--0.4% 15,936,183 ------------------- TOTAL NET ASSETS--100% $ 3,782,052,331 ===================
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 13 THE OAKMARK SMALL CAP FUND REPORT FROM JAMES P. BENSON AND CLYDE S. MCGREGOR, PORTFOLIO MANAGERS [PHOTO] The third calendar quarter of 2002 was the worst quarter for U. S. stocks since the fourth quarter of 1987. It is notable that the fourth quarter of 1987 included the October "Black Monday" stock market crash when the market lost over 20% in one day. Thankfully, the just concluded quarter lacked a major one-day catastrophe, but the cumulative pounding of stock prices over the weeks took a severe toll. We wish we could say we avoided this sharp downdraft, but we cannot. For the just concluded quarter, stocks slumped in value as the S&P 500 Index(2) fell by over 17% and the Russell 2000 Small Cap Index declined by more than 21%. Year-to-date the Russell 2000 is down by over 25%. Your Fund experienced a loss roughly in-line with the Russell 2000 of 22% during the last three months, bringing the year-to-date return to a loss of 18%. While we can report that our results thus far in 2002 are about 7% better vis-a-vis the Russell 2000, our absolute returns have been disappointing. THE RECENT PAST Uncertainty concerning economic activity, terrorism, a possible war and corporate governance has, we believe, had a negative impact on stocks over the past six months. Successful investing, however, has always revolved around seeing opportunities and accessing risks well ahead of the crowd. Examining past periods when equity prices declined sharply provides investors a few key guideposts for the future. In most cases in the post World War II economy, a sharp drop in equity prices was followed in fairly short order by a significant rebound in prices as the economic picture brightened and investor psychology improved. There are only two examples over this time period when stocks entered an extended period of sluggish performance, the mid-1970's to the early 1980's and the past two and one-half years. The 1973-1982 period was characterized by high inflation, a lack of productivity, high interest rates and stock prices that moved generally sideways for almost a decade. Almost none of these characteristics are present in today's economy, thus we do not believe this historical example is applicable to today's stock market. The other extended period of poor equity performance has been over the past two and one-half years. During this period, the NASDAQ Composite Index(3) has declined by over 75% from its peak led by price declines in telecom and technology companies. Most other broad-based indices are also down over this period, although by lesser amounts, as excesses in valuations got squeezed out of stock prices. Despite the strong headwind created by generally declining stock prices since March 2000, your Fund has achieved a total return of approximately 15% from its mid-March 2000 level. THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/02) AS COMPARED TO THE RUSSELL 2000 INDEX(14) [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 9/30/02 $17,445 $13,412
AVERAGE ANNUAL TOTAL RETURNS(4)
(AS OF 9/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (11/1/95) - ---------------------------------------------------------------------------- OAKMARK SMALL CAP FUND -22.01% -3.23% -3.02% 8.37% Russell 2000 -21.40% -9.30% -3.19% 4.33% S&P Small Cap 600(15) -18.61% -1.79% 0.82% 8.25% Lipper Small Cap -18.83% -0.33% 1.36% 8.49% Value Index(16)
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized 14 LOOKING FORWARD The ability to exceed the returns posted by the overall stock market over an extended period of time is usually based on sound analytical work in estimating the value of any asset and comparing that asset's expected investment return to other investment choices. While no investment process that we are aware of generates a perfect track record, we work diligently to uncover stocks that are undervalued relative to their private market value. One key measure of comparing stock prices to other classes of investments is a company's earnings yield. Many investors are familiar with price-to-earnings ratios and the earnings yield of a company is simply the inverse of the P/E(7) ratio. We think the earnings-to-price yield is an especially interesting valuation measure in a low inflation and low interest rate environment. The earnings yield measure is conceptually easier to think about in the context of owning an entire company. If an investor purchases a company for $100 million and that company generates $12 million in after-tax profits, the investor paid 8.3 times earnings (the P/E) and is enjoying a 12% yield on his/her $100 million investment. This 12% yield looks very attractive in an environment where fixed-income investment alternatives like 10-year Treasury Notes yield less than 4%. Since shares of stock simply represent a percentage ownership in a company, the earnings yield calculation can easily be applied to publicly traded stocks. In addition to looking at earnings, our analysts focus on the ability of the companies we invest in to generate free cash flow which we believe provides us with incremental insight as to what a stock is worth. In retrospect, in early 2000 the 10-year Treasury Note yielded over 6% while many stocks had earnings yields of less than 3%. Today, many of the stocks in your Fund trade at less than ten times estimated earnings and thus have an expected earnings yield of over 10%. We believe the return expectations for stocks are now very positive based upon the positive earnings yield differential between many stocks and fixed-income Treasury securities. Therefore, we remain optimistic on the long-term future of small cap equities. PORTFOLIO UPDATE During the past quarter we deleted two stocks from your Fund's portfolio while we added no new names. The two companies we sold were Covance Inc. and Silverstream Software. Covance had been a strong performer for the Fund for a couple of years and we elected to liquidate this position principally due to its valuation relative to many other stocks in the portfolio. Covance was one of our lowest earnings yield stocks and we wanted to redeploy the capital invested in Covance into other stocks that we believe represent better values. The other stock we exited during the quarter was Silverstream Software. This company was purchased in an all cash transaction that closed during the third quarter of 2002. Within the portfolio we actively trimmed some positions while adding to others to better position the Fund for the future. We were able to take advantage of the overall decline in equity prices to add to our positions in Insituform Technologies, Surebeam Corp. and Tupperware Corp. Insituform, a leading provider of sewer replacement services to local governments, appears to be well positioned to benefit from a replacement/upgrade cycle in municipal sewer systems. We believe Surebeam, with its patented food irradiation process, is just beginning to see large numbers of customers embrace its solutions to prevent food borne illnesses such as e. coli and salmonella. Lastly, we added to Tupperware based upon its strong consumer brand name, expanding distribution channels, attractive valuation and high dividend yield. 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 October 1, 2002 [SIDENOTE] HIGHLIGHTS - - Earnings-to-price yield is an especially interesting valuation measure--and way to compare stock prices to other investments--in a low inflation, low interest-rate environment. - - Many of our stocks trade at less than ten times estimated earnings and have an expected earnings yield of over 10%. - - We believe return expectations are now very positive based on the positive earnings yield differential between stocks and treasuries. 15 THE OAKMARK SMALL CAP FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2002
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--96.7% FOOD & BEVERAGE--6.3% Ralcorp Holdings, Inc. (a) 579,000 $ 12,315,330 Del Monte Foods Company (a) 1,230,000 10,049,100 ---------------- 22,364,430 HOUSEHOLD PRODUCTS--3.9% Tupperware Corporation 850,000 $ 14,127,000 OTHER CONSUMER GOODS & SERVICES--5.1% Department 56, Inc. (a)(b) 760,000 $ 7,942,000 Callaway Golf Company 500,000 5,200,000 Central Parking Corporation 250,000 5,035,000 ---------------- 18,177,000 SECURITY SYSTEMS--3.4% Checkpoint Systems, Inc. (a) 1,000,000 $ 12,350,000 APPAREL--3.2% Oakley, Inc. (a) 750,000 $ 7,537,500 R.G. Barry Corporation (a)(b) 900,000 3,744,000 ---------------- 11,281,500 AUTOMOBILE RENTALS--1.5% Dollar Thrifty Automotive Group, Inc. (a) 325,000 $ 5,216,250 BUILDING MATERIALS & CONSTRUCTION--3.0% Insituform Technologies, Inc., Class A (a) 750,000 $ 10,762,500 EDUCATIONAL SERVICES--2.7% ITT Educational Services, Inc. (a) 509,500 $ 9,563,315 HOTELS & MOTELS--1.9% Prime Hospitality Corp. (a) 810,000 $ 6,642,000 INFORMATION SERVICES--3.5% eFunds Corporation (a) 1,327,600 $ 12,454,216 MARKETING SERVICES--0.2% Grey Global Group Inc. 1,000 $ 590,000 RETAIL--3.9% ShopKo Stores, Inc. (a) 740,000 $ 9,664,400 Pathmark Stores Inc (a) 471,500 4,314,225 ---------------- 13,978,625
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NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--96.7% (CONT.) BANK & THRIFTS--5.9% BankAtlantic Bancorp, Inc., Class A 1,000,000 $ 8,980,000 People's Bank of Bridgeport, Connecticut 360,000 8,074,800 PennFed Financial Services, Inc. 150,000 4,123,500 ---------------- 21,178,300 INSURANCE--3.0% The PMI Group, Inc. 400,000 $ 10,884,000 OTHER FINANCIAL--1.9% NCO Group, Inc. (a) 600,000 $ 6,882,000 REAL ESTATE--4.7% Catellus Development Corporation (a) 650,000 $ 11,992,500 Trammell Crow Company (a) 495,000 4,880,700 ---------------- 16,873,200 MEDICAL PRODUCTS--7.4% Hanger Orthopedic Group, Inc. (a) 960,000 $ 15,264,000 CONMED Corporation (a) 350,000 7,052,500 Sybron Dental Specialties, Inc. (a) 300,000 4,197,000 ---------------- 26,513,500 PHARMACEUTICALS--3.4% Pharmaceutical Resources Inc (a) 424,300 $ 11,871,914 Elan Corporation plc (a)(c) 115,000 221,950 ---------------- 12,093,864 COMPUTER SERVICES--3.3% CIBER, Inc. (a) 1,805,000 $ 10,487,050 Interland, Inc. (a) 600,000 1,230,000 ---------------- 11,717,050 COMPUTER SOFTWARE--6.7% Sybase Inc (a) 1,000,000 $ 11,620,000 MSC.Software Corp. (a) 1,100,000 9,372,000 Mentor Graphics Corporation (a) 587,000 2,864,560 ---------------- 23,856,560 COMPUTER SYSTEMS--1.6% Optimal Robotics Corp., Class A (a)(b)(d) 763,500 $ 5,833,140 DATA STORAGE--2.0% Imation Corp. (a) 250,000 $ 7,082,500
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NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--96.7% (CONT.) OFFICE EQUIPMENT--3.7% InFocus Corporation (a) 1,000,000 $ 7,620,000 MCSi, Inc. (a) 1,125,000 5,568,750 ---------------- 13,188,750 INSTRUMENTS--2.3% IDEXX Laboratories, Inc. (a) 255,000 $ 7,891,740 Measurement Specialties, Inc. (a)(e) 550,000 412,500 ---------------- 8,304,240 MACHINERY & INDUSTRIAL PROCESSING--2.1% SureBeam Corporation, Class A (a) 3,100,000 $ 5,580,000 Columbus McKinnon Corporation (a) 365,000 1,919,900 ---------------- 7,499,900 OTHER INDUSTRIAL GOODS & SERVICES--0.7% Integrated Electrical Services, Inc. (a) 650,000 $ 2,431,000 TRANSPORTATION SERVICES--1.6% Teekay Shipping Corporation (d) 203,400 $ 5,796,900 CHEMICALS--2.8% Sensient Technologies Corporation 292,800 $ 6,186,864 H.B. Fuller Company 140,000 3,724,000 ---------------- 9,910,864 OIL & NATURAL GAS--5.0% St. Mary Land & Exploration Company 350,000 $ 8,365,000 Cabot Oil & Gas Corporation 250,000 5,375,000 Berry Petroleum Company 250,000 4,247,500 ---------------- 17,987,500 TOTAL COMMON STOCKS (COST: $404,024,443) 345,540,104
18
NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--3.3% REPURCHASE AGREEMENTS--3.3% IBT Repurchase Agreement, 1.75% due 10/1/2002, repurchase price $10,000,486 collateralized by U.S. Government Agency Securities $10,000,000 $ 10,000,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $1,896,864 collateralized by a U.S. Government Agency Security 1,896,806 1,896,806 ---------------- TOTAL REPURCHASE AGREEMENT (COST: $11,896,806) 11,896,806 TOTAL SHORT TERM INVESTMENTS (COST: $11,896,806) 11,896,806 Total Investments (Cost $415,921,249)--100.0% $ 357,436,910 Other Liabilities In Excess Of Other Assets--0.0% (42,821) ---------------- TOTAL NET ASSETS--100% $ 357,394,089 ================
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (c) Represents an American Depository Receipt. (d) Represents a foreign domiciled corporation. (e) Security valued at a fair value as determined by the Pricing Committee appointed by the Board of Trustees. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. MCGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/02) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(17)
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 09/30/02 $23,640 $14,986
AVERAGE ANNUAL TOTAL RETURNS(4) (AS OF 9/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (11/1/95) - -------------------------------------------------------------------------------- OAKMARK EQUITY AND -8.57% -0.47% 9.80% 13.24% INCOME FUND S&P 500(2) -17.28% -20.49% -1.63% 6.66% Lehman Govt./ 5.70% 9.21% 7.92% 7.53% Corp. Bond(18) Lipper Balanced -9.87% -9.83% 1.34% 6.02% Fund Index The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized QUARTER AND ANNUAL REVIEW What is it about summer, anyway? In the entire 27-quarter history of The Oakmark Equity and Income Fund only six quarters have suffered negative results. Four of those six were summer quarters. The recently completed quarter saw the Fund's price decrease by 9%, which contrasts with a loss of 10% for the Lipper Balanced Fund Index. For the fiscal 9/30 year the comparative results are stronger though still negative: -1% for the Fund, -10% for the Lipper. The Lipper Balanced Fund Index may be our standard of comparison, but it is not our benchmark. Our true focus is on how much money the Fund has earned for its shareholders. Others may be in the business of besting an index. We are in the business of earning positive returns for our clients. Period. We know that our clients can live off positive returns that may be uninteresting when times are good. We also know that they cannot live off negative returns even when those returns are relatively superior. ISSUES DU JOUR Hopefully the summer quarter's pains will produce some positive, if unintended, consequences. For example, we fervently hope that the word "visibility" has been expunged from the lexicon of Wall Street analysts. We regularly come across analyst reports expressing wariness towards a particular company because of insufficient visibility concerning future earnings. If the last two years have not discredited the idea that future corporate outcomes may be precisely forecasted, we do not know what will. This explains why our focus on valuation is so important. While any valuation of a business implicitly assumes that there will, in fact, be a future, our valuation methodologies attempt to minimize the importance of positive future developments. We often speak of "obtaining the future for free." Catellus Development, the real estate company, is a good example of this way of seeing. When we purchased Catellus, we knew that management was in the process of obtaining permits to develop Mission Bay, the first significant new real estate project in the city of San Francisco in over fifty years. We were able to pay a price for the company that did not reflect any positive impact from Mission Bay. We would also like to reframe the debate over incentive stock options by moving the focus from accounting to aligning. At Harris Associates we have always articulated a belief that corporate management teams should have their interests aligned with their shareholders. In the 1980's we saw options programs as one means to that end. Some of the excesses that we observed in the 1990's changed our minds. 20 In the last few years management teams have come to regard their options program as an extension of their annual compensation. "Evergreen" options programs are a particularly troublesome illustration of this tendency. When options vest in this system, management exercises the options and sells the new shares immediately. The company's board of directors then "reloads" management with new options so that the incentive element is reestablished. Today the weakened condition of the stock market and the renewed focus on corporate governance combine to make it possible to return options to their proper role. In our opinion, cash should be the dominant form of compensation. For the purpose of aligning interests, boards should require management to own meaningful equity in their company. Options may be a means to that end if they have long-term vesting and long term holding periods. This would have the effect of reducing management's attention to short term outcomes and focusing efforts on productive deployment of capital. We do not expect to see changes of this sort anytime soon, but we will be studying options programs ever more carefully. Management teams of companies in which we invest have been given control over capital that you, our shareholders, have worked hard to accumulate. It is their responsibility to treat this capital with respect. PROFITLESS PROSPERITY By now it is generally accepted that many sectors of the US economy experienced growth in the late 1990's that was both far above trend and unsustainable. Unfortunately, boom/bust cycles are a recurring feature in our economy. The basic pattern is that new technology promotes optimism, draws inordinate capital investment to the favored sector, and finally collapses that sector under the weight of excessive competition. For example, in early 1983 extreme optimism enabled more than 60 manufacturers of computer storage devices to go public. The flood of capital into this industry quickly resulted in destructive competition and the rapid evaporation of business values. A similar cycle ensued in the early 1990's for manufacturers of personal computers. More recently, the puncturing of the late 1990's bubble had obvious first level effects such as the disappearance of the "dotcoms." Next to suffer was the telecommunications industry. It is now clear, however, that the boom's impact was much more widespread than first thought. Industries as diverse as retailing and electric utilities now labor under excess capacity conditions. An example more relevant to The Equity and Income Fund has been the effect on portfolio holding GATX. Improved computer systems have helped the railroad industry reduce the time it takes to move a carload across the country. This greater efficiency in the management of the rail fleet means that GATX, a leasing company, has more railroad equipment than it can profitably employ at present. This pattern has spread throughout much of the economy: excess supply leads to lower pricing and then decreased return on investment. Imagine one year ago we had known that the government would be reporting solid economic growth for 2002 together with low inflation and very low interest rates. With that knowledge we would probably have forecast that the stock market would be enjoying a strong year. But as it has turned out, this apparent prosperity has been without profit and replete with corporate distress. Our tactical response to this environment has been to orient The Equity and Income Fund portfolio to issues with the strongest balance sheets. In particular, we have searched for undervalued issues with no debt and substantial cash positions. In deflationary times, debt is economically disadvantageous. Because we do not know whether the future will bring inflation or deflation, we have built a portfolio that has the potential to succeed in either environment. In closing, we once again thank you, our shareholders, for entrusting us with the management of your capital. /s/ CLYDE S. MCGREGOR, CFA /s/ EDWARD A. STUDZINSKI, CFA CLYDE S. MCGREGOR, CFA EDWARD A. STUDZINSKI, CFA Portfolio Manager Portfolio Manager mcgregor@oakmark.com estudzinski@oakmark.com October 1, 2002 [SIDENOTE] HIGHLIGHTS - - Our valuation methodologies attempt to minimize the importance of future developments--we are looking to "obtain the future for free". - - The apparent prosperity of 2002--an environment with low inflation and low interest rates--has been without profit. Our response is to orient the fund to issues with strong balance sheets. - - A weakened stock market and renewed focus on corporate governance make it possible to return stock options to their proper role. 21 SCHEDULE OF INVESTMENTS -- SEPTEMBER 30, 2002
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--53.2% COMMON STOCKS--52.5% FOOD & BEVERAGE--0.5% UST Inc. 400,000 $ 11,284,000 BROADCASTING & PUBLISHING--0.7% Gemstar-TV Guide International Inc. (b) 7,000,000 $ 17,640,000 CABLE SYSTEMS & SATELLITE TV--0.8% General Motors Corporation, Class H (Hughes Electronics Corporation) (a) 2,000,000 $ 18,300,000 INFORMATION SERVICES--2.4% Ceridian Corporation (a) 3,900,000 $ 55,575,000 MARKETING SERVICES--0.5% The Interpublic Group of Companies, Inc. 800,000 $ 12,680,000 PRINTING--0.2% Valassis Communications, Inc. (a) 150,000 $ 5,260,500 RECREATION & ENTERTAINMENT--1.0% International Game Technology (a) 345,000 $ 23,853,300 RETAIL--4.1% J.C. Penney Company, Inc. 2,200,000 $ 35,024,000 Albertson's, Inc. 1,200,000 28,992,000 BJ's Wholesale Club, Inc. (a) 1,100,000 20,911,000 Office Depot, Inc. (a) 980,000 12,093,200 ------------------- 97,020,200 INSURANCE--3.6% SAFECO Corporation 2,200,000 $ 69,916,000 PartnerRe, Ltd. (c) 200,000 9,636,000 RenaissanceRe Holdings Ltd. 174,700 6,601,913 ------------------- 86,153,913 OTHER FINANCIAL--0.5% GATX Corporation 600,000 $ 11,880,000 REAL ESTATE--2.0% Catellus Development Corporation (a) 1,881,500 $ 34,713,675 Hospitality Properties Trust 200,000 6,624,000 Legacy Hotels Real Estate Investment Trust (c) 1,125,000 5,909,851 ------------------- 47,247,526
22
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--53.2% (CONT.) HEALTH CARE SERVICES--2.0% IMS Health Incorporated 2,300,000 $ 34,431,000 Caremark Rx, Inc. (a) 750,000 12,750,000 ------------------- 47,181,000 MANAGED CARE SERVICES--2.3% First Health Group Corp. (a) 2,000,000 $ 54,240,000 MEDICAL PRODUCTS--4.9% Guidant Corporation (a) 1,855,000 $ 59,935,050 Apogent Technologies Inc. (a) 1,750,000 32,655,000 Techne Corporation (a) 525,000 17,214,750 Edwards Lifesciences Corporation (a) 275,000 7,037,250 ------------------- 116,842,050 PHARMACEUTICALS--4.3% Watson Pharmaceuticals, Inc. (a) 2,100,000 $ 51,471,000 Bristol-Myers Squibb Company 2,000,000 47,600,000 Chiron Corporation (a) 41,800 1,460,492 ------------------- 100,531,492 TELECOMMUNICATIONS--0.1% CenturyTel, Inc. 159,800 $ 3,584,314 COMPUTER SOFTWARE--3.6% Synopsys, Inc. (a) 1,485,000 $ 56,652,750 Novell, Inc. (a) 8,000,000 16,800,000 Mentor Graphics Corporation (a) 2,300,000 11,224,000 ------------------- 84,676,750 COMPUTER SYSTEMS--1.1% The Reynolds and Reynolds Company, Class A 1,164,000 $ 26,120,160 AEROSPACE & DEFENSE--3.5% Rockwell Collins, Inc. 1,863,800 $ 40,891,772 Honeywell International, Inc. 1,875,000 40,612,500 ------------------- 81,504,272 AGRICULTURAL EQUIPMENT--0.1% Alamo Group Inc. 141,900 $ 1,753,884 INSTRUMENTS--1.9% Varian Inc. (a) 1,599,400 $ 44,159,434 MACHINERY & INDUSTRIAL PROCESSING--2.5% Rockwell Automation International Corporation 1,964,500 $ 31,962,415 Cooper Industries, Ltd. 880,700 26,729,245 ------------------- 58,691,660
23
SHARES HELD/ NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--53.2% (CONT.) TRANSPORTATION SERVICES--0.1% Nordic American Tanker Shipping Limited (c) 154,900 $ 1,645,038 AGRICULTURAL OPERATIONS--1.8% Monsanto Company 2,800,000 $ 42,812,000 FORESTRY PRODUCTS--1.7% Plum Creek Timber Company, Inc. 1,809,644 $ 40,916,051 OIL & NATURAL GAS--6.3% Burlington Resources Inc. 2,000,000 $ 76,720,000 XTO Energy, Inc. 1,528,000 31,492,080 St. Mary Land & Exploration Company 1,030,000 24,617,000 Cabot Oil & Gas Corporation 750,000 16,125,000 ------------------- 148,954,080 TOTAL COMMON STOCKS (COST: $1,385,836,462) 1,240,506,624 CONVERTIBLE BONDS--0.7% CABLE SYSTEMS & SATELLITE TV--0.5% EchoStar Communications Corporation, 4.875% due 1/1/2007 $ 15,000,000 $ 11,343,750 PHARMACEUTICALS--0.2% Sepracor Inc., 7.00% due 12/15/2005 $ 7,285,000 $ 4,498,487 TOTAL CONVERTIBLE BONDS (COST: $17,579,387) 15,842,237 TOTAL EQUITY AND EQUIVALENTS (COST: $1,403,415,849) 1,256,348,861 FIXED INCOME--40.2% PREFERRED STOCKS--0.1% BANK & THRIFTS --0.1% BBC Capital Trust I, Preferred, 9.50% 48,000 $ 1,200,480 Pennfed Capital Trust, Preferred, 8.90% 27,500 694,375 Fidelity Capital Trust I, Preferred, 8.375% 43,500 437,175 ------------------- 2,332,030 TELECOMMUNICATIONS--0.0% MediaOne Finance Trust III, Preferred, 9.04% 20,000 $ 470,000 TOTAL PREFERRED STOCKS (COST: $2,715,763) 2,802,030
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NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- FIXED INCOME--40.2% (CONT.) CORPORATE BONDS--1.8% BROADCASTING & PROGRAMMING--0.5% Liberty Media Corporation, 8.25% due 2/1/2030, Debenture $ 12,900,000 $ 12,740,453 BUILDING MATERIALS & CONSTRUCTION--0.0% Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note $ 750,000 $ 768,750 CABLE SYSTEMS & SATELLITE TV--0.1% CSC Holdings Inc., 7.875% due 12/15/2007 $ 3,000,000 $ 2,475,000 HOTELS & MOTELS--0.3% HMH Properties, 7.875% due 8/1/2005, Senior Note Series A $ 3,450,000 $ 3,329,250 Park Place Entertainment, 7.00% due 7/15/2004, Senior Notes 2,750,000 2,778,212 ------------------- 6,107,462 RETAIL--0.5% The Gap, Inc., 6.90% due 9/15/2007 $ 9,187,000 $ 8,084,560 Rite Aid Corporation, 7.625% due 4/15/2005, Senior Notes 4,900,000 3,626,000 Ugly Duckling Corporation, 12.00% due 10/23/2003, Subordinated Debenture 650,000 585,000 ------------------- 12,295,560 MEDICAL PRODUCTS--0.3% CONMED Corporation, 9.00% due 3/15/2008 $ 5,610,000 $ 5,666,100 MACHINERY & INDUSTRIAL PROCESSING--0.1% Columbus McKinnon Corporation New York, 8.50% due 4/1/2008 $ 3,000,000 $ 2,490,000 ELECTRIC UTILITIES--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 $ 500,000 $ 506,250 TOTAL CORPORATE BONDS (COST: $43,397,142) 43,049,575
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NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- GOVERNMENT AND AGENCY SECURITIES--38.3% U.S. GOVERNMENT NOTES--37.9% United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed $156,864,600 $ 170,859,903 United States Treasury Notes, 3.375% due 1/15/2012, Inflation Indexed 141,993,600 157,058,269 United States Treasury Notes, 5.75% due 11/15/2005 100,000,000 111,070,300 United States Treasury Notes, 4.75% due 11/15/2008 100,000,000 109,824,200 United States Treasury Notes, 3.50% due 11/15/2006 100,000,000 104,250,000 United States Treasury Notes, 3.00% due 11/30/2003 75,000,000 76,315,425 United States Treasury Notes, 7.875% due 11/15/2004 25,000,000 28,171,875 United States Treasury Notes, 5.00% due 8/15/2011 25,000,000 27,764,650 United States Treasury Notes, 5.25% due 5/15/2004 25,000,000 26,454,100 United States Treasury Notes, 2.875% due 6/30/2004 25,000,000 25,522,450 United States Treasury Notes, 3.00% due 2/29/2004 25,000,000 25,500,000 United States Treasury Notes, 3.00% due 1/31/2004 25,000,000 25,475,575 United States Treasury Notes, 7.25% due 8/15/2004 5,000,000 5,514,060 ------------------- 893,780,807 U.S. GOVERNMENT AGENCIES--0.4% Fannie Mae, 3.875% due 9/7/2004 $ 5,000,000 $ 5,045,315 Federal Home Loan Bank, 5.10% due 12/26/2006 2,035,000 2,108,769 Fannie Mae, Principal Only, Zero Coupon, due 10/3/2011 1,065,000 1,066,354 Federal Home Loan Bank, 3.875% due 12/15/2004 1,000,000 1,038,045 ------------------- 9,258,483 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $861,911,517) 903,039,290 TOTAL FIXED INCOME (COST: $908,024,422) 948,890,895 SHORT TERM INVESTMENTS--5.7% U.S. GOVERNMENT BILLS--3.2% United States Treasury Bills, 1.55% - 1.62% $ 75,000,000 $ 74,944,321 due 10/10/2002 - 10/31/2002 TOTAL U.S. GOVERNMENT BILLS (COST: $74,944,321) 74,944,321
26
PAR VALUE/ NAME SHARES SUBJECT TO CALL MARKET VALUE SHORT TERM INVESTMENTS--5.7% (CONT.) REPURCHASE AGREEMENTS--2.5% IBT Repurchase Agreement, 1.75% due 10/1/2002, repurchase price $58,002,819 collateralized by U.S. Government Agency Securities $ 58,000,000 $ 58,000,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $1,636,138 collateralized by a U.S. Government Agency Security 1,636,088 1,636,088 ------------------- TOTAL REPURCHASE AGREEMENT (COST: $59,636,088) 59,636,088 TOTAL SHORT TERM INVESTMENTS (COST: $134,580,409) 134,580,409 Total Investments (Cost $2,446,020,680)--99.1% $ 2,339,820,165 CALL OPTIONS WRITTEN--0.0% BROADCASTING & PUBLISHING--0.0% Gemstar-TV Guide International Inc., November 7.50 Calls (1,019,000) $ (50,950) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(638,100))--0.0% (50,950) Other Assets In Excess Of Other Liabilities--0.9% $ 20,817,788 ------------------- TOTAL NET ASSETS--100% $ 2,360,587,003 ===================
(a) Non-income producing security. (b) A portion of this security has been segregated to cover written option contracts. See footnote number one in the Notes to Financial Statements regarding accounting for options. (c) Represents a foreign domiciled corporation. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 27 THE OAKMARK GLOBAL FUND REPORT FROM GREGORY L. JACKSON AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO] [PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (9/30/02) AS COMPARED TO THE MSCI WORLD INDEX(19) [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 9/30/02 $11,828 $6,204
AVERAGE ANNUAL TOTAL RETURNS(4)
(AS OF 9/30/02) TOTAL RETURN 1-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/4/99) - -------------------------------------------------------------------------------- OAKMARK GLOBAL FUND -17.70% 6.84% 5.46%(6) MSCI World -18.38% -19.18% -13.98% Lipper Global Fund Index(20) -17.53% -15.89% -9.80%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized FELLOW SHAREHOLDERS, The Oakmark Global Fund declined 18% for the three-month period ending September 30, 2002. This quarter's results are in-line with the 18% decline for the MSCI World Index and the 18% decline for the Lipper Global Fund Index. For the twelve-month period ending September 30, 2002, The Oakmark Global Fund increased 7%, which compares favorably versus the declines of 19% and 16% for the MSCI World Index and the Lipper Global Fund Index respectively. Our number one goal is to generate positive absolute returns, while hopefully outperforming the relative benchmarks in the process. We are happy to report that for the fiscal year ending September 30, 2002, The Oakmark Global Fund succeeded in achieving both objectives. VALUE PHILOSOPHY REMAINS UNCHANGED While investor sentiment continually shifts from optimism to pessimism or from a growth orientation to a value bent, our investing philosophy remains unchanged. Our value philosophy remains paramount to our past and future investment success. As a refresher, the three primary tenets of our value investment philosophy are: 1) To buy businesses that are trading for no more than 70% of our appraised value--offering a margin of safety between what we pay and what we calculate to be the company's underlying intrinsic value. 2) To buy companies that are growing per share value--buying statistically cheap businesses that don't grow has been a deathtrap for many value investors. 3) To invest with management teams that think and act like shareowners--when management's incentives are directly linked to increasing shareholder returns, both parties benefit. It makes no difference to us whether a company is categorized as being a "growth" or "value" business--we are agnostic when it comes to the types of businesses we own. What is important to us is that each company we buy adheres to our three primary investment tenets (our philosophy). The Oakmark Global Fund has two distinguishing characteristics that differentiate it from other funds of The Oakmark Family: 1) The Global Fund is not limited to investing in any one country or geographic region, but rather we are able to invest anywhere in the world that we find attractive ideas, and 2) we can invest in companies of all sizes--small, mid, or large capitalization companies. In prior reports we have highlighted the benefits of being able to invest globally (point #1) and would now like to discuss the benefits of investing in companies of all sizes (point #2). 28 While we never target a specific "size" company, our research process often times leads us to companies or industries that are out of favor or which have declined significantly in price. It is important to note that the companies in our portfolio are selected individually on a company by company basis. In other words, we employ a bottom-up investment approach. Often times we find that companies in the same industry or market capitalization range become attractive at similar time intervals. Therefore, our portfolio may at times appear to be weighted towards a particular size company or a particular industry. For example, in late 1999 and early 2000 Morningstar positioned The Oakmark Global Fund in the small-cap value category based upon their proprietary style boxes. During late 1999 and early 2000, we found that most investors focused on large-cap growth companies and seemed to ignore many of the small to mid-size companies such as ITT Educational Services, Nova Corporation, Sterling Commerce, Hite Brewery, Telemig Celular and Denny's Japan. It just so happens that the Russell 2000 Value Index (a small cap value index) was the number one performing Russell category, returning an aggregate 55.8%, from October 1, 1999 through March 31, 2002. Therefore, targeting the out of favor small and midsize capitalization companies during late 1999 and early 2000 positioned the Fund towards the number one performing category over that two and one-half year time frame. Today, Morningstar positions The Oakmark Global Fund in the large-cap growth category based upon their proprietary style boxes. Has our investment approach changed? Definitely not! Rather, the once high-flying large capitalization growth companies of 1999 and early 2000 have seen severe share price declines, which now make them attractive investments based upon our three primary investment tenets. Our holdings today include Vivendi Universal, LM Ericsson, Grupo Televisa, GlaxoSmithKline, Liberty Media, Abbott Labs, First Data Corporation and Interpublic Group. Generally speaking, value investors are usually not given the opportunity to own such high quality, fast-growing businesses as those listed above because of the higher valuation levels typically afforded these companies. However, the recent worldwide stock market decline has given us a chance to own what historically have been labeled "growth" businesses at very attractive prices. Given the valuation levels of the large capitalization companies currently held in the portfolio, we believe the Fund is well-positioned as the economy and stock markets recover in the future. Our investment philosophy, based upon our three primary tenets, will always be the driving force behind all our investment decisions. As you can see by the examples above, having the ability to own companies of any size and in any geography allows The Oakmark Global Fund the flexibility to move wherever the best ideas are found--we go wherever value leads us. Given the attractive prices and the quality level of the businesses currently held in the portfolio, we remain quite excited about the future prospects for The Oakmark Global Fund. Thank you for your continued confidence and support. /s/ Gregory L. Jackson /s/ Michael J. Welsh GREGORY L. JACKSON MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager gjackson@oakmark.com 102521.2142@compuserve.com [SIDENOTE] HIGHLIGHTS - - We are indifferent to whether a company is categorized as "growth" or "value"--as long as a business meets our three investment criteria. - - While we never target a specific "size" company, our process often leads us to out-of-favor companies or industries with significant price declines. - - Recent worldwide stock market declines have given us a chance to own former large-cap "growth" businesses at very attractive prices. 29 THE OAKMARK GLOBAL FUND GLOBAL DIVERSIFICATION--SEPTEMBER 30, 2002 [CHART]
% OF FUND NET ASSETS ---------- UNITED STATES 45.7% EUROPE 35.4% Great Britain 10.0% * France 6.3% * Italy 5.7% * Netherlands 4.3% * Germany 3.7% Sweden 3.1% Switzerland 2.3% PACIFIC RIM 8.5% Japan 4.9% Australia 2.0% Korea 1.6% LATIN AMERICA 4.7% Mexico 4.7% OTHER 1.9% Israel 1.9%
*Euro currency countries comprise 20.0% of the Fund. 30 THE OAKMARK GLOBAL FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2002
NAME DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--96.2% FOOD & BEVERAGE--1.6% Lotte Chilsung Beverage Co., Ltd. (Korea) Soft Drinks, Juices & Sports Drinks Manufacturer 4,800 $ 2,826,532 HOUSEHOLD PRODUCTS--3.7% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 118,000 $ 6,584,329 AUTOMOBILES--1.7% Ducati Motor Holding S.p.A. (Italy)(a) Motorcycle Manufacturer 1,933,500 $ 3,055,239 BROADCASTING & PROGRAMMING--6.6% Liberty Media Corporation, Class A (United States) (a) Broadcast Services & Programming 1,000,000 $ 7,180,000 Grupo Televisa S.A. (Mexico) (a)(b) Television Production & Broadcasting 173,700 4,427,613 ----------- 11,607,613 BROADCASTING & PUBLISHING--1.4% Gemstar-TV Guide International Inc. (United States) (a) Electronic Program Guide Services 1,000,000 $ 2,520,000 EDUCATIONAL SERVICES--1.7% ITT Educational Services, Inc. (United States) (a) Postsecondary Degree Programs 161,600 $ 3,033,232 HOME FURNISHINGS--4.3% Hunter Douglas N.V. (Netherlands) Window Coverings Manufacturer 285,600 $ 7,615,581 HUMAN RESOURCES--4.0% Michael Page International plc (Great Britain) Recruitment Consultancy Services 3,740,000 $ 6,985,884 INFORMATION SERVICES--9.9% eFunds Corporation (United States) (a) Electronic Debit Payment Services 1,225,000 $11,491,725 Ceridian Corporation (United States) (a) Data Management Services 425,000 6,056,250 ----------- 17,547,975
31
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--96.2% (CONT.) MARKETING SERVICES--3.8% The Interpublic Group of Companies, Inc. (United States) Advertising & Marketing Services 344,000 $ 5,452,400 Cordiant Communications Group plc (Great Britain) (a) Advertising & Media Services 2,097,000 1,267,249 ----------- 6,719,649 RETAIL--3.1% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 897,700 $ 2,978,870 Somerfield plc (Great Britain) (a) Food Retailer 1,403,000 2,361,880 ----------- 5,340,750 BANK & THRIFTS--7.6% U.S. Bancorp (United States) Commercial Bank 275,000 $ 5,109,500 Washington Mutual, Inc. (United States) Thrift 135,000 4,248,450 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 351,100 4,004,920 ----------- 13,362,870 OTHER FINANCIAL--2.5% Daiwa Securities Group Inc. (Japan) Stock Broker 807,000 $ 4,451,866 MANAGED CARE SERVICES--3.7% First Health Group Corp. (United States) (a) Health Benefits Company 240,000 $ 6,508,800 MEDICAL PRODUCTS--6.2% Cytyc Corporation (United States) (a) Diagnostic Equipment 400,000 $ 4,288,000 Ansell Limited (Australia) (a) Protective Rubber & Plastics Products 934,000 3,499,418 Guidant Corporation (United States) (a) Medical Instruments 100,000 3,231,000 ----------- 11,018,418 PHARMACEUTICALS--6.2% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 362,400 $ 6,911,420 Abbott Laboratories (United States) Pharmaceuticals 100,000 4,040,000 ----------- 10,951,420
32
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--96.2% (CONT.) TELECOMMUNICATIONS EQUIPMENT--3.1% Telefonaktiebolaget LM Ericsson, Class B (Sweden) (a) Mobile & Wired Telecommunications Products 14,923,000 $ 5,419,470 COMPUTER SERVICES--5.2% First Data Corporation (United States) Data Processing & Management 175,000 $ 4,891,250 Meitec Corporation (Japan) Software Engineering Services 181,900 4,263,223 ----------- 9,154,473 COMPUTER SOFTWARE--7.2% Synopsys, Inc. (United States) (a) Electronic Design Automation 220,000 $ 8,393,000 Novell, Inc. (United States) (a) Network & Internet Integration Software 2,000,000 4,200,000 ----------- 12,593,000 AIRPORT MAINTENANCE--2.2% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b) Airport Operator 355,000 $ 3,905,000 DIVERSIFIED CONGLOMERATES--6.3% Vivendi Universal SA (France) Multimedia 983,400 $11,023,186 INSTRUMENTS--1.9% Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 225,000 $ 3,318,750 CHEMICALS--2.3% Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 8,970 $ 4,010,161 TOTAL COMMON STOCKS (COST: $202,352,125) 169,554,198
33
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--3.0% REPURCHASE AGREEMENTS--3.0% IBT Repurchase Agreement, 1.75% Due 10/1/2002, repurchase price $4,000,194 collateralized by a U.S. Government Agency Security $4,000,000 $ 4,000,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $1,187,300 collateralized by U.S. Government Agency Securities 1,187,263 1,187,263 ------------ TOTAL REPURCHASE AGREEMENT (COST: $5,187,263) 5,187,263 TOTAL SHORT TERM INVESTMENTS (COST: $5,187,263) 5,187,263 Total Investments (Cost $207,539,388)--99.2% $174,741,461 Other Assets In Excess Of Other Liabilities--0.8% 1,472,340 ------------ Total Net Assets--100% $176,213,801 ============
(a) Non-income producing security. (b) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 34 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS FELLOW SHAREHOLDERS, We are disappointed to report that both The Oakmark International and International Small Cap Fund had negative quarters, down 23% and 22% respectively. Global equity markets have witnessed vast price destruction as demonstrated by EAFE21 (-20%), MSCI ex USA Small22 (-16%), the Lipper International Funds Index23 (-20%) and the Lipper International Small Cap Average24 (-19%) which were also down. As a result, many foreign markets are now trading at 5+ year lows and we are seeing valuations in developed markets that we have rarely seen before. Yes, there has been widespread destruction of price, yet we do not see a correspondingly large fall in business value. To us, this spells opportunity. ANATOMY OF A BEAR MARKET The current weakness we are seeing (especially in Europe) has roots that date back to 1996 when equity markets around the world began an aggressive move upward which did not end until the Spring of 2000. The last two years in particular saw share prices move exponentially upward, much of the strength fueled by technology, media and telecommunications ("TMT") companies. After 2 years of price declines in foreign equities, we are now seeing pre-hype prices. We believe this to be a very good thing. The bear market started off by hammering away at inconceivably priced "fluff" stocks, later moving on to real businesses that were over-priced, and now, marking what we think could be an end to the bear market, has moved to reasonably priced, high-quality businesses. Simply put, no stock has been spared. SIGNS OF LIGHT AT THE TUNNEL'S END The fact that stable, well-financed, well-run foreign stocks are trading at dirt cheap prices reminds us of the Singapore stock market getting crushed at the end of the Pacific Rim crisis in 1998. Though share prices throughout Asia were hard hit in `97 through mid `98, Singapore, known for high-quality companies and seen as the safe haven of Asia, didn't feel the heat until the summer of 1998. This event marked the bottom of Asian share prices in August/September of that year. Today we worry about war, corporate scandal and slowing economies. Yes, there is always something to worry about. In the past it was inflation, unemployment, the cold war, European unification, the Euro, Y2K (remember Y2K?), Russia, Mexico, U.S. Banks, hedge funds, etc., etc., etc. The point is, we will always have some negative macro influences. They should not be ignored, but do need to be put into perspective. Today, European share prices are at 5-6 year lows. Many of the higher-quality companies have sustainable dividend yields greater than 4% and price-to-cashflow ratios of under 10x's. Outside the US, most corporate tax rates have been chopped to the degree that the U.S. has higher corporate tax rates than most of Europe and Asia. Interest rates are at extremely low levels. The tech/telecom revolution and legitimate restructuring continue to boost productivity. The developing world is rapidly becoming developed, especially when you look at East Asia and parts of Latin America. Especially noteworthy are events in China, now a member of the World Trade Organization, which is currently seeing such an influx of Foreign Direct Investment that it has even surpassed the levels of FDI in the USA. China is the world's most populous place: an economically healthy China may help propel world GDP growth for a long, long time. So, because of these and other reasons, we are extremely optimistic about future investment opportunities. We will continue to work hard to continue to ensure the best of these opportunities find their way into our international funds. HOUSEKEEPING At the end of September, we will have completed the 10th year of managing The Oakmark International Fund. After 10 years, it has returned 9% per annum, ranking it number 4/84 funds by Lipper25. We are proud of our 5-Star rating for this period in Morningstar's26 Foreign Stock category measured against the performance of 92 funds in that category. We would especially like to thank all of our [PHOTO] [PHOTO] [SIDENOTE] HIGHLIGHTS - - After two years of price declines in foreign equities, we are now seeing pre-hype prices that are attractive. - - Today, European prices are at five-to-six year lows; many higher-quality companies have sustainable dividend yields greater than 4%, and price-to-cash flow ratios of under 10x's - - Developing world is rapidly becoming developed, especially China, now a member of the WTO, and seeing an influx of foreign direct investment. 35 shareholders for your confidence and trust, and others that have been instrumental to our success over the past 10 years. Also, we are delighted to welcome two new members, Jeff Weiss and Natalie Barber to The Oakmark International analytical team. We hope this demonstrates our commitment to our shareholders to constantly improve the strength and depth of our research effort. /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 36 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (9/30/02) COMPARED TO THE MSCI WORLD EX U.S. INDEX(27) [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 9/30/02 $23,365 $13,603
AVERAGE ANNUAL TOTAL RETURNS(4)
(AS OF 9/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (9/30/92) - --------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND -22.93% -1.53% 0.07% 8.85% MSCI World ex. U.S. -19.62% -15.31% -5.47% 3.12% MSCI EAFE(21) -19.73% -15.53% -5.65% 2.95% Lipper International -19.61% -12.37% -4.43% 4.75% Fund Index(23)
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Fund was down 23% for the quarter, under-performing the MSCI World ex-US and the Lipper International Fund indices, each of which declined 20%. Despite this quarter's performance, over the past 12 months the Fund is barely down (2%) relative to large declines in the aforementioned indices (down 15% and 12%, respectively). It was an extremely rough quarter throughout the world. The major markets of Europe were especially hard hit: Germany -36%, France -27%, the Netherlands - -31%, Sweden -29%. The DAX, the German version of the Dow Jones Industrials Index, has now fallen back to 1996 levels, down nearly 70% from its all-time high. From our point of view, share price declines during the quarter had less to do with underlying business performance than with widespread investor fear. PORTFOLIO UPDATE During the quarter we continued to increase our weighting in European companies, which now represent over 70 percent of the portfolio. We have continued to add to two of our worst performers for the quarter, L.M. Ericsson and Vivendi Universal. In addition to adding to our favorite names we initiated positions in four more: Publicis Groupe, the global advertising giant headquartered in France; Bayerische Motoren Werke (BMW), the German auto maker; jewelry retailer Signet Group, of the UK; and, SanPaolo IMI, a highly-profitable Italian financial institution. Each of these businesses trade at significant discounts to our estimate of intrinsic value. Under normal circumstances, these are companies we would not be able to afford because the market values them so highly. With their current share prices down significantly we can now be buyers at our prices. LOOKING FORWARD We remain optimistic based on the large number of attractive absolute return opportunities in the portfolio. 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 37 THE OAKMARK INTERNATIONAL FUND INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2002 [CHART]
% OF FUND NET ASSETS ---------- EUROPE 71.4% Great Britain 22.1% * France 14.6% * Netherlands 11.4% Sweden 6.7% * Italy 3.8% Switzerland 3.8% * Germany 3.6% * Finland 2.1% * Greece 2.1% * Ireland 1.2% PACIFIC RIM 18.2% Japan 8.7% Korea 4.6% Australia 2.5% Hong Kong 1.7% Singapore 0.7% LATIN AMERICA 4.0% Mexico 3.4% Brazil 0.5% Panama 0.1% OTHER 1.9% Israel 1.9%
*Euro currency countries comprise 38.8% of the Fund. 38 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2002
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% FOOD & BEVERAGE--8.4% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 3,150,200 $ 38,865,432 Pernod-Ricard SA (France) Manufactures Wines, Spirits, & Fruit Juices 363,300 32,650,352 Lotte Chilsung Beverage Co., Ltd. (Korea) Soft Drinks, Juices & Sports Drinks Manufacturer 49,700 29,266,378 Fomento Economico Mexicano S.A. de C.V. (Mexico) (b) Soft Drink & Beer Manufacturer 600,400 20,293,520 ------------ 121,075,682 HOUSEHOLD PRODUCTS--2.9% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 755,000 $ 42,128,547 APPAREL--0.2% Fila Holdings S.p.A. (Italy) (a)(b)(c) Athletic Footwear & Apparel 5,894,760 $ 3,006,328 AUTOMOBILES--0.7% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 313,100 $ 10,052,663 AUTOMOTIVE--3.1% Autoliv Inc (Sweden) (d) Automotive Safety Systems Manufacturer 1,248,000 $ 26,225,268 Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 664,500 18,650,915 ------------ 44,876,183 BROADCASTING & PROGRAMMING--3.3% Grupo Televisa S.A. (Mexico) (a)(b) Television Production & Broadcasting 1,003,100 $ 25,569,019 Tokyo Broadcasting System, Inc. (Japan) Television & Radio Broadcasting 1,511,000 22,017,198 ------------ 47,586,217 BUILDING MATERIALS & CONSTRUCTION--1.1% Kumkang Korea Chemical Co., Ltd. (Korea) Building Materials 162,140 $ 15,515,155
39
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% (CONT.) HOME FURNISHINGS--3.0% Hunter Douglas N.V. (Netherlands) Window Coverings Manufacturer 1,638,584 $43,693,170 HUMAN RESOURCES--2.8% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 21,562,900 $40,276,985 MARKETING SERVICES--5.3% Aegis Group plc (Great Britain) Media Services 31,735,500 $34,122,335 Publicis Groupe (France) Advertising & Media Services 1,461,700 27,572,281 Cordiant Communications Group plc (Great Britain) (a)(c) Advertising & Media Services 24,209,270 14,630,031 ----------- 76,324,647 PUBLISHING--6.7% Wolters Kluwer NV (Netherlands) Reference Material Publisher 2,430,200 $43,921,199 John Fairfax Holdings Limited (Australia) Newspaper Publisher 23,642,600 36,459,726 Independent News & Media PLC (Ireland) Newspaper Publisher 14,132,000 18,143,792 ----------- 98,524,717 RETAIL--4.0% Somerfield plc (Great Britain) (a) Food Retailer 15,128,500 $25,468,068 Giordano International Limited (Hong Kong) Pacific Rim Clothing Retailer & Manufacturer 63,102,300 24,676,515 Signet Group plc (Great Britain) Jewelry Retailer 6,245,100 7,891,110 ----------- 58,035,693 BANK & THRIFTS--7.5% Banco Popolare di Verona e Novara Scrl (Italy) Commercial Banking 2,742,200 $31,279,672 BNP Paribas SA (France) Commercial Banking 758,300 24,698,626 Sanpaolo IMI S.p.A. (Italy) Banking Services 3,732,800 20,976,261 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 1,426,968 9,552,991 Kookmin Bank (Korea) Commercial Banking 231,168 8,460,594 Svenska Handelsbanken AB (Sweden) Commercial Banking 508,000 6,322,902
40
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% (CONT.) BANK & THRIFTS--7.5% (CONT.) Uniao de Bancos Brasileiros S.A. (Brazil) (e) Commercial Banking 784,000 $ 5,566,400 Banco Latinoamericano de Exportaciones, S.A., Class E (Panama) (b) Latin American Trade Bank 515,400 $ 1,061,724 ------------ 107,919,170 OTHER FINANCIAL--5.6% Daiwa Securities Group Inc. (Japan) Stock Broker 7,285,000 $ 40,188,154 Euronext (Netherlands) Stock Exchange 2,125,200 40,087,988 ------------ 80,276,142 MEDICAL PRODUCTS--1.7% Gambro AB, Class A (Sweden) Manufacturer of Dialysis Products 6,144,000 $ 24,431,398 PHARMACEUTICALS--9.6% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 3,418,800 $ 65,200,781 Aventis S.A. (France) Pharmaceuticals 613,300 32,101,839 Takeda Chemical Industries, Ltd. (Japan) Pharmaceuticals & Food Supplements 739,000 29,786,890 Novartis AG (Switzerland) Pharmaceuticals 298,500 11,777,840 ------------ 138,867,350 TELECOMMUNICATIONS--3.1% Panafon Hellenic Telecom S.A. (Greece) Mobile Telecommunications 6,717,900 $ 29,722,999 SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 64,860 12,572,029 Telemig Celular Participacoes S.A. (Brazil) Mobile Telecommunications 1,806,000,000 1,949,866 ------------ 44,244,894 TELECOMMUNICATIONS EQUIPMENT--2.8% Telefonaktiebolaget LM Ericsson, Class B (Sweden) (a) Mobile & Wired Telecommunications Products 109,949,200 $ 39,929,394 COMPUTER SERVICES--2.3% Meitec Corporation (Japan) Software Engineering Services 1,402,000 $ 32,858,925
41
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% (CONT.) AEROSPACE--1.4% Rolls-Royce plc (Great Britain) Aviation & Marine Power 12,558,195 $ 19,711,971 AIRPORT MAINTENANCE--0.2% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b) Airport Operator 242,000 $ 2,662,000 DIVERSIFIED CONGLOMERATES--3.5% Vivendi Universal SA (France) Multimedia 4,551,100 $ 51,014,463 INSTRUMENTS--1.9% Orbotech, Ltd. (Israel) (a)(c) Optical Inspection Systems 1,841,200 $ 27,157,700 MACHINERY & INDUSTRIAL PROCESSING--2.1% Metso Corporation (Finland) Paper & Pulp Machinery 3,490,700 $ 30,337,255 OTHER INDUSTRIAL GOODS & SERVICES--4.2% Enodis plc (Great Britain) (c) Food Processing Equipment 33,585,320 $ 26,095,013 Chargeurs SA (France) (c) Wool, Textile Production & Trading 1,050,201 24,632,990 FKI plc (Great Britain) Industrial Manufacturing 8,299,300 10,519,299 -------------- 61,247,302 TRANSPORTATION SERVICES--2.5% Associated British Ports Holdings Plc (Great Britain) Port Operator 5,533,899 $ 35,744,061 CHEMICALS--5.6% Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 95,600 $ 42,739,281 Akzo Nobel N.V. (Netherlands) Chemical Producer 1,152,800 37,115,272 -------------- 79,854,553 TOTAL COMMON STOCKS (COST: $1,739,391,715) 1,377,352,565
42
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--5.5% U.S. GOVERNMENT BILLS--2.1% United States Treasury Bills, 1.615% - 1.67% due 10/3/2002 - 10/17/2002 $30,000,000 $ 29,987,835 TOTAL U.S. GOVERNMENT BILLS (COST: $29,987,835) 29,987,835 REPURCHASE AGREEMENTS--3.4% IBT Repurchase Agreement, 1.75% due 10/1/2002, repurchase price $47,002,285 collateralized by U.S. Government Agency Securities $47,000,000 $ 47,000,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $2,554,729 collateralized by a U.S. Government Agency Security 2,554,650 2,554,650 -------------- TOTAL REPURCHASE AGREEMENT (COST: $49,554,650) 49,554,650 TOTAL SHORT TERM INVESTMENTS (COST: $79,542,485) 79,542,485 Total Investments (Cost $1,818,934,200)--101.0% $1,456,895,050 Foreign Currencies (Cost $2,256,583)--0.2% $ 2,275,134 Other liabilities In Excess Of Other Assets--(1.2%) (16,906,490) -------------- TOTAL NET ASSETS--100% $1,442,263,694 ==============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (d) Represents a Swedish Depository Receipt. (e) Represents a Global Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 43 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO] [PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/02) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(26) [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 9/30/02 $14,641 $9,547
AVERAGE ANNUAL TOTAL RETURNS(4)
(AS OF 9/30/02) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (11/1/95) - ----------------------------------------------------------------------------- OAKMARK INTERNATIONAL -22.25% 4.68% 2.93% 5.66% SMALL CAP FUND MSCI World ex. U.S. -19.62% -15.31% -5.47% -0.67% Lipper International -18.67% -6.06% 0.69% 6.09% Small Cap Average(24)
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Small Cap Fund was down 22% for the quarter, under-performing the MSCI World ex-US Index and the Lipper International Small Cap Average, which declined 20%, and 19%, respectively. Over the past twelve months your Fund has returned a positive 5%, relative to declines of 15% in the MSCI World ex-US index and 6% in the Lipper International Small Cap Average. Until this quarter, overseas small caps had held up extremely well throughout big price declines in the major markets. This quarter proved that no equity market area in the world would remain unscathed by this bear market. PORTFOLIO UPDATE Throughout the quarter we eliminated a number of positions to better concentrate the Fund in our best ideas. We sold a number of winners that achieved their sell targets, especially in Asia, including Dairy Farm (Hong Kong), Jusco Stores (HK), Jardine Strategic Holdings (Singapore) and Haw Par Brothers (Singapore). Most of the investments we made during the dark days of Asia in 1997-98 have continued to pay off handsomely. We also sold some losers where the underlying fundamentals were poorer than we had expected, including United Services Group and House of Fraser. The proceeds from these sales were re-deployed primarily into existing positions trading at more significant discounts to intrinsic value. We also initiated a new position in Australia-based credit services company Baycorp Advantage. LOOKING FORWARD We are optimistic regarding long-term equity market performance, and believe investing during this current period of extreme pessimism will be rewarding. 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 44 THE OAKMARK INTERNATIONAL SMALL CAP FUND INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2002 [CHART]
% OF FUND NET ASSETS ---------- EUROPE 69.5% Switzerland 16.9% * Italy 13.2% Great Britain 12.5% Denmark 7.6% * France 7.2% * Germany 2.6% Sweden 2.6% * Netherlands 2.4% * Spain 2.1% * Belgium 1.2% * Finland 1.2% PACIFIC RIM 20.5% Australia 5.1% Japan 4.7% New Zealand 4.3% Philippines 2.0% Hong Kong 1.9% Singapore 0.9% Korea 0.8% Thailand 0.8% LATIN AMERICA 5.5% Mexico 4.8% Panama 0.7%
* Euro currency countries comprise 29.9% of the Fund. 45 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2002
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% FOOD & BEVERAGE--6.4% Campari Group (Italy) (a) Soft Drinks, Wines, & Spirits Producer 235,200 $ 7,642,128 Grupo Continental, S.A. (Mexico) Soft Drink Manufacturer 2,760,000 4,596,845 Baron De Ley, S.A. (Spain) (a) Wines & Spirits Manufacturer 150,985 3,917,193 Hite Brewery Co., Ltd. (Korea) Brewer 57,700 2,784,248 Alaska Milk Corporation (Philippines) (b) Milk Producer 49,394,000 1,997,430 Mikuni Coca-Cola Bottling Co., Ltd. (Japan) Soft Drink Manufacturer 310,000 1,822,107 ----------- 22,759,951 OTHER CONSUMER GOODS & SERVICES--0.5% Royal Doulton plc (Great Britain) (a)(b) Tableware & Giftware 22,373,000 $ 1,755,889 APPAREL--0.3% Kingmaker Footwear Holdings Limited (Hong Kong) Athletic Footwear Manufacturer 4,395,000 $ 1,127,010 AUTOMOBILES--2.3% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 5,177,200 $ 8,180,804 BROADCASTING & PROGRAMMING--1.4% ABS-CBN Broadcasting Corporation (Philippines) (a) Television & Broadcasting Operator 11,920,000 $ 5,002,194 BROADCASTING & PUBLISHING--1.8% Tamedia AG (Switzerland) (a) TV Broadcasting & Publishing 146,880 $ 6,466,978 BUILDING MATERIALS & CONSTRUCTION--3.2% Fletcher Building Limited (New Zealand) Building Materials Manufacturer 8,129,200 $11,420,319 HOME FURNISHINGS--3.3% Natuzzi S.p.A. (Italy) (c) Home Furnishings 1,078,300 $11,775,036
46
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% (CONT.) HOTELS & MOTELS--1.8% Jarvis Hotels plc (Great Britain) Hotel Operator 3,845,700 $ 6,338,223 HUMAN RESOURCES--1.2% Solvus S.A. (Belgium) Temporary Staffing Services 623,254 $ 4,308,680 INFORMATION SERVICES--2.0% Baycorp Advantage Limited (Australia) Credit Reference Services 4,213,500 $ 7,275,619 MARKETING SERVICES--2.3% Asatsu-DK, Inc. (Japan) Advertising Services Provider 445,100 $ 8,349,165 PUBLISHING--3.6% Edipresse S.A. (Switzerland) Newspaper & Magazine Publisher 18,274 $ 5,019,377 Recoletos Grupo de Comunicacion, S.A. (Spain) Publisher 880,000 3,563,261 Matichon Public Company Limited, Foreign Shares (Thailand) (b) Newspaper Publisher 2,039,500 2,733,156 VLT AB, Class B (Sweden) Newspaper Publisher 178,450 1,480,737 ----------- 12,796,531 RETAIL--10.4% Carpetright plc (Great Britain) Carpet Retailer 1,589,200 $15,715,273 D.F.S. Furniture Company plc (Great Britain) Furniture Retailer & Manufacturer 1,972,100 11,933,179 Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 2,904,600 9,638,439 ----------- 37,286,891 BANK & THRIFTS--5.9% Jyske Bank A/S (Denmark) (a) Commercial Banking 441,900 $10,898,925 Vontobel Holding AG (Switzerland) Commercial Banking 662,536 8,078,065 Banco Latinoamericano de Exportaciones, S.A., Class E (Panama) (b)(c) Multinational Bank 1,153,100 2,375,386 ----------- 21,352,376 FINANCIAL SERVICES--4.6% Van der Moolen Holding N.V. (Netherlands) International Trading Firm 528,400 $ 8,740,951
47
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% (CONT.) FINANCIAL SERVICES--4.6% (CONT.) Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 41,100 $ 7,934,363 ----------- 16,675,314 OTHER FINANCIAL--3.5% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 2,480,000 $ 6,738,743 JCG Holdings Limited (Hong Kong) Consumer Finance 12,851,000 5,684,533 ----------- 12,423,276 MEDICAL PRODUCTS--3.1% Ansell Limited (Australia) (a) Protective Rubber & Plastics Products 2,949,425 $11,050,611 COMPUTER SERVICES--2.5% Morse Plc (Great Britain) Business & Technology Solutions 4,369,800 $ 9,088,250 COMPUTER SYSTEMS--1.5% Lectra (France) (a) Manufacturing Process Systems 1,668,500 $ 5,536,644 OFFICE EQUIPMENT--3.8% Neopost SA (France) (a) Mailroom Equipment Supplier 401,200 $13,511,277 AIRPORT MAINTENANCE--8.1% Kobenhavns Lufthavne A/S (Copenhagen Airports A/S) (Denmark) Airport Management & Operations 274,895 $16,447,319 Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (c) Airport Operator 1,129,000 12,419,000 ----------- 28,866,319 DIVERSIFIED CONGLOMERATES--2.0% Pargesa Holding AG (Switzerland) Diversified Operations 4,784 $ 7,129,174 INSTRUMENTS--1.2% Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 206,800 $ 4,268,526 MACHINERY & INDUSTRIAL PROCESSING--5.4% Pfeiffer Vacuum Technology AG (Germany) (b) Vacuum Pump Manufacturer 545,100 $ 9,178,710 Alfa Laval (Sweden) (a) Filtration & Separation Equipment 959,700 7,963,371 Carbone Lorraine SA (France) Electrical Systems Manufacturer 92,964 2,065,753 ----------- 19,207,834
48
SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.5% (CONT.) OTHER INDUSTRIAL GOODS & SERVICES--4.3% Schindler Holding AG (Switzerland) Elevator & Escalator Manufacturer 67,800 $ 11,940,662 GFI Industries SA (France) Industrial Fastener Manufacturer 241,813 3,510,573 ------------ 15,451,235 PRODUCTION EQUIPMENT--3.1% Interpump Group S.p.A. (Italy) Pump & Piston Manufacturer 2,588,800 $ 10,150,095 NSC Groupe (France) Textile Equipment Manufacturer 12,316 1,155,512 ------------ 11,305,607 TRANSPORTATION SERVICES--2.0% Mainfreight Limited (New Zealand) (b) Logistics Services 7,765,726 $ 4,013,599 DelGro Corporation Limited (Singapore) Bus, Taxi, & Car Leasing 3,502,700 3,093,718 ------------ 7,107,317 CHEMICALS--4.0% Gurit-Heberlein AG (Switzerland) Chemical Producer 32,734 $ 14,190,720 TOTAL COMMON STOCKS (COST: $432,335,590) 342,007,770 SHORT TERM INVESTMENTS--3.6% REPURCHASE AGREEMENTS--3.6% IBT Repurchase Agreement, 1.75% due 10/1/2002, repurchase price $10,500,510 collateralized by a U.S. Government Agency Security $10,500,000 $ 10,500,000 IBT Repurchase Agreement, 1.11% due 10/1/2002, repurchase price $2,163,944 collateralized by a U.S. Government Agency Security 2,163,878 2,163,878 ------------ TOTAL REPURCHASE AGREEMENT (COST: $12,663,878) 12,663,878 TOTAL SHORT TERM INVESTMENTS (COST: $12,663,878) 12,663,878 Total Investments (Cost $444,999,468)--99.1% $354,671,648 Foreign Currencies (Cost $756,494)--0.2% $ 762,021 Other Assets In Excess Of Other Liabilities--0.7% 2,572,499 ------------ TOTAL NET ASSETS--100% $358,006,168 ============
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (c) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 49 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF ASSETS AND LIABILITIES--SEPTEMBER 30, 2002
THE OAKMARK THE OAKMARK THE OAKMARK SELECT SMALL CAP FUND FUND FUND - --------------------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $3,304,673,916 $3,457,996,525 $339,917,770 Investments in affiliated securities, at value (b) 0 308,119,623 17,519,140 Cash 0 12,552 374 Foreign currency, at value (c) 0 0 0 Receivable for: Securities sold 2,091,437 19,387,520 291,727 Fund shares sold 6,671,135 3,459,905 564,785 Dividends and interest 5,210,296 3,927,925 201,295 Tax reclaim 0 0 0 -------------- -------------- ------------ Total receivables 13,972,868 26,775,350 1,057,807 Other Assets 5,663 1,986 494 -------------- -------------- ------------ Total assets $3,318,652,447 $3,792,906,036 $358,495,585 LIABILITIES AND NET ASSETS Options written, at value (d) $ 0 $ 0 $ 0 Foreign currency, at value (c) 0 0 0 Payable for: Securities purchased 117,600 689,030 0 Fund shares redeemed 8,337,246 8,651,604 750,211 Due to transfer agent 221,381 142,745 40,356 Trustees fees 467,207 323,179 155,954 Other 827,180 1,047,147 154,975 -------------- -------------- ------------ Total liabilities 9,970,614 10,853,705 1,101,496 -------------- -------------- ------------ Net assets applicable to fund shares outstanding $3,308,681,833 $3,782,052,331 $357,394,089 ============== ============== ============ ANALYSIS OF NET ASSETS Paid in capital $3,831,067,422 $3,739,480,524 $416,525,955 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (195,307,126) (76,625,527) (497,018) Net unrealized appreciation (depreciation) of investments (340,513,232) 115,600,882 (58,484,339) Net unrealized appreciation (depreciation)--other 0 0 0 Accumulated undistributed net investment income (loss) 13,434,769 3,596,452 (150,509) -------------- -------------- ------------ Net assets applicable to Fund shares outstanding $3,308,681,833 $3,782,052,331 $357,394,089 ============== ============== ============ PRICE OF SHARES Net asset value per share: Class I $ 28.08 $ 21.67 $ 14.10 ============== ============== ============ Class I--Net assets 3,300,948,792 3,717,632,174 356,858,991 Class I--Shares outstanding (Unlimited shares authorized) 117,549,041 171,568,297 25,302,542 Net asset value per share: Class II $ 28.04 $ 21.56 $ 14.09 ============== ============== ============ Class II--Net assets 7,733,041 64,420,157 535,098 Class II--Shares outstanding (Unlimited shares authorized) 275,825 2,987,328 37,974 (a) Identified cost of investments in unaffiliated securities $3,645,187,148 $3,348,274,428 $383,383,526 (b) Identified cost of investments in affiliated securities 0 302,240,838 32,537,723 (c) Identified cost of foreign currency 0 0 0 (d) Premiums received on options written 0 0 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 50
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INTERNATIONAL INTERNATIONAL INCOME FUND FUND FUND SMALL CAP FUND - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Investments in unaffiliated securities, at value (a) $2,339,820,165 $174,741,461 $1,321,096,003 $332,617,478 Investments in affiliated securities, at value (b) 0 0 135,799,047 22,054,170 Cash 4,800 1,078 2,005 832 Foreign currency, at value (c) 0 0 2,275,134 762,021 Receivable for: Securities sold 19,784,672 2,031,764 8,204,243 4,046,830 Fund shares sold 14,669,900 433,791 9,298,317 314,503 Dividends and interest 12,571,292 254,357 4,823,089 39,002 Tax reclaim 13,125 0 1,086,895 295,964 -------------- ------------ -------------- ------------ Total receivables 47,038,989 2,719,912 23,412,544 4,696,299 Other Assets 205 10,691 732 88 -------------- ------------ -------------- ------------ Total assets $2,386,864,159 $177,473,142 $1,482,585,465 $360,130,888 LIABILITIES AND NET ASSETS Options written, at value (d) $ 50,950 $ 0 $ 0 $ 0 Foreign currency, at value (c) 0 447,726 0 0 Payable for: Securities purchased 18,798,772 0 36,536,159 609,257 Fund shares redeemed 6,485,636 546,829 2,779,240 1,082,406 Due to transfer agent 80,824 22,865 73,718 20,905 Trustees fees 133,381 107,802 198,794 124,396 Other 727,593 134,119 733,860 287,756 -------------- ------------ -------------- ------------ Total liabilities 26,277,156 1,259,341 40,321,771 2,124,720 -------------- ------------ -------------- ------------ Net assets applicable to fund shares outstanding $2,360,587,003 $176,213,801 $1,442,263,694 $358,006,168 ============== ============ ============== ============ ANALYSIS OF NET ASSETS Paid in capital $2,521,771,393 $210,400,457 $1,805,715,911 $436,575,200 Accumulated undistributed net realized gain (loss) of investments, forward contracts and foreign currency exchange transactions (81,534,657) (1,261,095) (16,938,571) 8,805,460 Net unrealized appreciation (depreciation) of investments (105,613,365) (32,812,022) (361,765,517) (90,334,969) Net unrealized appreciation (depreciation)--other (601) 18,294 (166,407) 23,896 Accumulated undistributed net investment income (loss) 25,964,233 (131,833) 15,418,278 2,936,581 -------------- ------------ -------------- ------------ Net assets applicable to Fund shares outstanding $2,360,587,003 $176,213,801 $1,442,263,694 $358,006,168 ============== ============ ============== ============ PRICE OF SHARES Net asset value per share: Class I $ 17.18 $ 11.30 $ 12.17 $ 10.17 ============== ============ ============== ============ Class I--Net assets 2,241,862,902 175,601,074 1,393,787,394 357,719,432 Class I--Shares outstanding (Unlimited shares authorized) 130,507,859 15,544,703 114,538,219 35,173,301 Net asset value per share: Class II $ 17.15 $ 11.24 $ 12.13 $ 10.14 ============== ============ ============== ============ Class II--Net assets 118,724,101 612,727 48,476,300 286,736 Class II--Shares outstanding (Unlimited shares authorized) 6,924,284 54,492 3,995,110 28,276 (a) Identified cost of investments in unaffiliated securities $2,446,020,680 $207,539,388 $1,539,684,625 $389,851,090 (b) Identified cost of investments in affiliated securities 0 0 279,249,575 55,148,378 (c) Identified cost of foreign currency 0 (444,039) 2,256,583 756,494 (d) Premiums received on options written 638,100 0 0 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF OPERATIONS--SEPTEMBER 30, 2002
THE OAKMARK THE OAKMARK THE OAKMARK SELECT SMALL CAP FUND FUND FUND - ----------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 50,671,538 $ 46,220,759 $ 1,845,226 Dividends from affiliated securities 0 0 0 Interest Income 6,099,174 7,268,233 727,044 Other Income 520,924 0 95,842 Foreign taxes withheld 0 0 0 ------------- ------------- ------------ Total investment income 57,291,636 53,488,992 2,668,112 EXPENSES: Investment advisory fee 34,848,853 40,838,462 4,121,533 Transfer and dividend disbursing agent fees 2,598,857 1,837,559 400,097 Other shareholder servicing fees 2,939,882 4,219,660 332,079 Service Fee--Class II 6,000 170,778 263 Reports to shareholders 1,746,488 1,238,788 270,048 Custody and accounting fees 433,423 527,332 74,622 Registration and blue sky expenses 57,237 139,966 66,288 Trustee fees 173,043 153,218 64,484 Legal fees 73,921 87,233 27,682 Audit fees 23,843 22,590 18,593 Other 325,365 242,519 42,475 ------------- ------------- ------------ Total expenses 43,226,912 49,478,105 5,418,164 Expense offset arrangements (11,599) (7,529) (1,102) ------------- ------------- ------------ Net expenses 43,215,313 49,470,576 5,417,062 NET INVESTMENT INCOME (LOSS): 14,076,323 4,018,416 (2,748,950) NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on unaffiliated securities (42,175,347) (30,963,843) 99,039 Net realized gain (loss) on affiliated securities 0 (4,535,664) (1,065,702) Net realized gain on options 9,979,097 6,335,456 1,292,518 Net realized loss on short sales (197,816) (510,036) 0 Net realized loss on foreign currency transactions 0 0 0 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (498,006,779) (635,685,201) (51,515,515) Net change in unrealized appreciation (depreciation)--other 0 0 0 Net realized and unrealized (loss) on investments and foreign currency transactions: (530,400,845) (665,359,288) (51,189,660) ------------- ------------- ------------ Net decrease in net assets resulting from operations $(516,324,522) $(661,340,872) $(53,938,610) ============= ============= ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 52
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INTERNATIONAL INTERNATIONAL INCOME FUND FUND FUND SMALL CAP FUND - ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 15,494,152 $ 2,020,348 $ 26,661,445 $ 9,093,523 Dividends from affiliated securities 0 0 7,733,163 760,375 Interest Income 29,202,243 174,049 1,080,852 342,349 Other Income 963 2,897 31,522 32,574 Foreign taxes withheld (62,100) (90,947) (3,066,633) (1,079,330) ------------- ------------ ------------- ------------ Total investment income 44,635,258 2,106,347 32,440,349 9,149,491 EXPENSES: Investment advisory fee 12,099,581 1,333,497 12,048,977 3,860,436 Transfer and dividend disbursing agent fees 704,717 188,437 753,702 178,248 Other shareholder servicing fees 1,945,936 128,955 1,027,483 339,434 Service Fee--Class II 136,109 1,348 64,867 525 Reports to shareholders 561,536 137,992 533,719 133,178 Custody and accounting fees 232,947 136,665 1,274,568 422,731 Registration and blue sky expenses 309,540 85,882 144,392 73,317 Trustee fees 75,585 54,012 77,128 53,714 Legal fees 42,499 22,774 37,180 25,599 Audit fees 18,593 23,843 22,844 25,992 Other 72,407 11,986 76,172 19,967 ------------- ------------ ------------- ------------ Total expenses 16,199,450 2,125,391 16,061,032 5,133,141 Expense offset arrangements (3,761) (497) (1,248) (216) ------------- ------------ ------------- ------------ Net expenses 16,195,689 2,124,894 16,059,784 5,132,925 NET INVESTMENT INCOME (LOSS): 28,439,569 (18,547) 16,380,565 4,016,566 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on unaffiliated securities (85,663,134) (2,849,841) 6,020,949 11,352,308 Net realized gain (loss) on affiliated securities 0 0 (8,131,968) 731,075 Net realized gain on options 3,680,523 1,588,746 0 0 Net realized loss on short sales 0 0 0 0 Net realized loss on foreign currency transactions (2,938) (37,184) (744,096) (31,834) Net change in unrealized appreciation (depreciation) of investments and foreign currencies (107,419,745) (30,244,164) (199,327,235) (70,664,400) Net change in unrealized appreciation (depreciation)--other (601) 18,109 (155,750) 21,128 Net realized and unrealized (loss) on investments and foreign currency transactions: (189,405,895) (31,524,334) (202,338,100) (58,591,723) ------------- ------------ ------------- ------------ Net decrease in net assets resulting from operations $(160,966,326) $(31,542,881) $(185,957,535) $(54,575,157) ============= ============ ============= ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF CHANGES IN NET ASSETS--September 30, 2002
THE OAKMARK FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 14,076,323 $ 19,416,042 Net realized gain (loss) on investments (32,394,066) 195,984,944 Net change in unrealized appreciation (depreciation) of investments (498,006,779) 126,130,060 -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (516,324,522) 341,531,046 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (19,630,178) (28,565,025) Net investment income--Class II (447) 0 -------------- -------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (19,630,625) (28,565,025) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,648,934,264 1,499,450,622 Proceeds from shares sold--Class II 10,646,454 122,635 Reinvestment of distributions--Class I 19,105,784 27,842,716 Reinvestment of distributions--Class II 347 0 Payments for shares redeemed, net of fees--Class I (942,439,538) (769,874,783) Payments for shares redeemed, net of fees--Class II (838,834) (7,515) -------------- -------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 735,408,477 757,533,675 -------------- -------------- TOTAL INCREASE IN NET ASSETS 199,453,330 1,070,499,696 NET ASSETS: Beginning of period 3,109,228,503 2,038,728,807 -------------- -------------- End of period $3,308,681,833 $3,109,228,503 ============== ============== Undistributed net investment income $ 13,434,769 $ 18,989,069 ============== ============== FUND SHARE TRANSACTIONSCLASS I: Shares sold 48,113,112 44,681,731 Shares issued in reinvestment of dividends 562,595 994,363 Less shares redeemed (28,259,864) (24,202,141) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 20,415,843 21,473,953 ============== ============== FUND SHARE TRANSACTIONSCLASS II: Shares sold 298,334 3,601 Shares issued in reinvestment of dividends 10 0 Less shares redeemed (25,887) (233) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 272,457 3,368 ============== ==============
54
THE OAKMARK SELECT FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 4,018,416 $ 8,224,650 Net realized loss on investments (29,674,087) (46,951,440) Net change in unrealized appreciation (depreciation) of investments (635,685,201) 564,071,103 -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (661,340,872) 525,344,313 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (8,379,997) (7,393,194) Net investment income--Class II 0 (21,608) Net realized gain--Class I 0 (117,459,365) -------------- -------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (8,379,997) (124,874,167) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,260,687,129 2,438,122,791 Proceeds from shares sold--Class II 74,250,948 33,209,296 Reinvestment of distributions--Class I 7,956,922 121,465,993 Payments for shares redeemed, net of fees--Class I (1,056,777,332) (569,095,434) Payments for shares redeemed, net of fees--Class II (31,085,298) (6,168,435) -------------- -------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 255,032,369 2,017,534,211 -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS (414,688,500) 2,418,004,357 NET ASSETS: Beginning of period 4,196,740,831 1,778,736,474 -------------- -------------- End of period $3,782,052,331 $4,196,740,831 ============== ============== Undistributed net investment income $ 3,596,452 $ 7,958,033 ============== ============== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 47,211,312 99,937,364 Shares issued in reinvestment of dividends 299,856 5,902,071 Less shares redeemed (41,080,996) (23,316,445) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 6,430,172 82,522,990 ============== ============== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 2,801,878 1,337,637 Shares issued in reinvestment of dividends 0 5,804 Less shares redeemed (1,223,864) (250,564) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 1,578,014 1,092,877 ============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55
THE OAKMARK SMALL CAP FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment loss $ (2,748,950) $ (710,637) Net realized gain on investments 325,855 1,334,090 Net change in unrealized appreciation (depreciation) of investments (51,515,515) (10,475,705) -------------- -------------- NET DECREASE IN NET ASSETS FROM OPERATIONS (53,938,610) (9,852,252) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized gain--Class I 0 (8,165,109) -------------- -------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS 0 (8,165,109) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 326,865,529 133,704,823 Proceeds from shares sold--Class II 777,070 0 Reinvestment of distributions--Class I 0 8,045,937 Payments for shares redeemed, net of fees--Class I (180,818,640) (107,824,806) Payments for shares redeemed, net of fees--Class II (103,465) 0 -------------- -------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 146,720,494 33,925,954 -------------- -------------- TOTAL INCREASE IN NET ASSETS 92,781,884 15,908,593 NET ASSETS: Beginning of period 264,612,205 248,703,612 -------------- -------------- End of period $ 357,394,089 $ 264,612,205 ============== ============== Undistributed net investment income (loss) $ (150,509) $ 0 ============== ============== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 17,912,470 8,459,269 Shares issued in reinvestment of dividends 0 585,160 Less shares redeemed (10,773,500) (7,348,265) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 7,138,970 1,696,164 ============== ============== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 44,265 0 Shares issued in reinvestment of dividends 0 0 Less shares redeemed (6,291) 0 -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 37,974 0 ============== ==============
56
THE OAKMARK EQUITY AND INCOME FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 28,439,569 $ 5,055,874 Net realized gain (loss) on investments (81,982,611) 1,909,621 Net realized loss on foreign currency transactions (2,938) (518) Net change in unrealized appreciation (depreciation) of investments (107,419,745) (5,101,055) Net change in unrealized appreciation (depreciation)--other (601) 0 -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (160,966,326) 1,863,922 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (6,931,173) (897,529) Net investment income--Class II (90,128) (7,433) Net realized gain--Class I (1,870,660) (3,733,470) Net realized gain--Class II (33,869) 0 -------------- ------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (8,925,830) (4,638,432) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 2,457,322,254 682,515,057 Proceeds from shares sold--Class II 146,887,453 2,887,484 Reinvestment of distributions--Class I 8,525,720 4,457,698 Reinvestment of distributions--Class II 85,801 0 Payments for shares redeemed, net of fees--Class I (683,906,125) (118,553,466) Payments for shares redeemed, net of fees--Class II (21,792,340) (111,704) -------------- ------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 1,907,122,763 571,195,069 -------------- ------------- TOTAL INCREASE IN NET ASSETS 1,737,230,607 568,420,559 NET ASSETS: Beginning of period 623,356,396 54,935,837 -------------- ------------- End of period $2,360,587,003 $ 623,356,396 ============== ============= Undistributed net investment income $ 25,964,233 $ 5,004,490 ============== ============= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 132,277,123 38,856,265 Shares issued in reinvestment of dividends 477,891 290,529 Less shares redeemed (37,783,411) (6,913,372) -------------- ------------- NET INCREASE IN SHARES OUTSTANDING 94,971,603 32,233,422 ============== ============= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 7,935,953 167,044 Shares issued in reinvestment of dividends 4,809 2,544 Less shares redeemed (1,205,519) (7,320) -------------- ------------- NET INCREASE IN SHARES OUTSTANDING 6,735,243 162,268 ============== =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57
THE OAKMARK GLOBAL FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment loss $ (18,547) $ (55) Net realized gain (loss) on investments (1,261,095) 1,479,943 Net realized gain (loss) on foreign currency transactions (37,184) 71,444 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (30,244,164) (4,901,265) Net change in unrealized appreciation (depreciation) of forward currency exchange contracts 0 (76,462) Net change in unrealized appreciation (depreciation)--other 18,109 1,700 -------------- ------------- NET DECREASE IN NET ASSETS FROM OPERATIONS (31,542,881) (3,424,695) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (11,774) (435,138) Net investment income--Class II (61) 0 Net realized gain--Class I (1,361,493) (129,934) Net realized gain--Class II (7,099) 0 -------------- ------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,380,427) (565,072) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 228,014,650 42,948,303 Proceeds from shares sold--Class II 754,996 0 Reinvestment of distributions--Class I 1,321,517 560,498 Payments for shares redeemed, net of fees--Class I (69,082,440) (18,542,262) Payments for shares redeemed, net of fees--Class II (75,625) 0 -------------- ------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 160,933,098 24,966,539 -------------- ------------- TOTAL INCREASE IN NET ASSETS 128,009,790 20,976,772 NET ASSETS: Beginning of period 48,204,011 27,227,239 -------------- ------------- End of period $ 176,213,801 $ 48,204,011 ============== ============= Undistributed net investment loss $ (131,833) $ (159,043) ============== ============= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 16,329,528 3,516,235 Shares issued in reinvestment of dividends 108,677 52,629 Less shares redeemed (5,343,294) (1,614,181) -------------- ------------- NET INCREASE IN SHARES OUTSTANDING 11,094,911 1,954,683 ============== ============= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 61,020 0 Less shares redeemed (6,528) 0 -------------- ------------- NET INCREASE IN SHARES OUTSTANDING 54,492 0 ============== =============
58
THE OAKMARK INTERNATIONAL FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 16,380,565 $ 11,508,911 Net realized loss on investments (2,111,019) (13,334,222) Net realized gain (loss) on foreign currency transactions (744,096) 2,323,657 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (199,327,235) (118,037,625) Net change in unrealized appreciation (depreciation) of forward currency exchange contracts 0 (2,048,003) Net change in unrealized appreciation (depreciation)--other (155,750) 169,583 -------------- -------------- NET DECREASE IN NET ASSETS FROM OPERATIONS (185,957,535) (119,417,699) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (10,170,790) (24,851,611) Net investment income--Class II (76,332) (3,245) Net realized gain--Class I 0 (24,703,666) -------------- -------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (10,247,122) (49,558,522) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,172,930,611 282,295,504 Proceeds from shares sold--Class II 71,056,423 2,588,328 Reinvestment of distributions--Class I 9,816,822 47,893,421 Reinvestment of distributions--Class II 1,669 0 Payments for shares redeemed, net of fees--Class I (339,595,271) (205,510,100) Payments for shares redeemed, net of fees--Class II (16,218,827) (327,974) -------------- -------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 897,991,427 126,939,179 -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS 701,786,770 (42,037,042) NET ASSETS: Beginning of period 740,476,924 782,513,966 -------------- -------------- End of period $1,442,263,694 $ 740,476,924 ============== ============== Undistributed net investment income $ 15,418,278 $ 9,923,928 ============== ============== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 78,310,031 18,753,874 Shares issued in reinvestment of dividends 726,633 3,302,548 Less shares redeemed (23,511,785) (13,850,522) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 55,524,879 8,205,900 ============== ============== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 4,928,274 172,064 Shares issued in reinvestment of dividends 124 446 Less shares redeemed (1,088,826) (23,339) -------------- -------------- NET INCREASE IN SHARES OUTSTANDING 3,839,572 149,171 ============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59
THE OAKMARK INTERNATIONAL SMALL CAP FUND - ---------------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 - ---------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 4,016,566 $ 1,844,218 Net realized gain on investments 12,083,383 1,136,757 Net realized gain (loss) on foreign currency transactions (31,834) 591,541 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (70,664,400) (12,360,111) Net change in unrealized appreciation (depreciation) of forward currency exchange contracts 0 (289,441) Net change in unrealized appreciation (depreciation)--other 21,128 28,453 ------------ ------------ NET DECREASE IN NET ASSETS FROM OPERATIONS (54,575,157) (9,048,583) DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (2,120,585) (2,566,080) Net investment income--Class II (921) 0 Net realized gain--Class I (1,891,258) (3,663,064) Net realized gain--Class II (1,136) 0 ------------ ------------ TOTAL DISTRIBUTIONS TO SHAREHOLDERS (4,013,900) (6,229,144) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 428,499,905 72,931,617 Proceeds from shares sold--Class II 333,324 39,964 Reinvestment of distributions--Class I 3,875,545 6,071,794 Payments for shares redeemed, net of fees--Class I (134,986,731) (35,203,678) Payments for shares redeemed, net of fees--Class II (34,570) 0 ------------ ------------ NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 297,687,473 43,839,697 ------------ ------------ TOTAL INCREASE IN NET ASSETS 239,098,416 28,561,970 NET ASSETS: Beginning of period 118,907,752 90,345,782 ------------ ------------ End of period $358,006,168 $118,907,752 ============ ============ Undistributed net investment income $ 2,936,581 $ 1,922,975 ============ ============ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 34,412,757 6,676,464 Shares issued in reinvestment of dividends 375,172 588,352 Less shares redeemed (11,505,764) (3,225,816) ------------ ------------ NET INCREASE IN SHARES OUTSTANDING 23,282,165 4,039,000 ============ ============ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 27,354 3,688 Less shares redeemed (2,766) 0 ------------ ------------ NET INCREASE IN SHARES OUTSTANDING 24,588 3,688 ============ ============
60 THE OAKMARK FAMILY OF FUNDS NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies of The Oakmark Fund ("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Small Cap Fund ("Small Cap"), The Oakmark Equity and Income Fund ("Equity and Income"), The Oakmark Global Fund ("Global"), The Oakmark International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap"), collectively referred to as "the Funds", each a series of Harris Associates Investment Trust (a Massachusetts business trust). These policies are in conformity with accounting principles generally accepted in the United States ("GAAP"). The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. CLASS DISCLOSURE -- Each Fund offers two classes of shares: Class I Shares and Class II Shares. Class I Shares are offered to the general public. Class II Shares are offered to certain retirement plans such as 401(k) and profit sharing plans. Class II Shares pay a service fee at the annual rate of .25% of average net assets of Class II Shares of the Funds. This service fee is paid to an administrator for performing the services associated with the administration of such retirement plans. Expenses of the Funds that are not directly attributable to a specific class of shares are prorated among the classes based on the relative net assets of each class. Expenses directly attributable to a class of shares are recorded to the specific class. SECURITY VALUATION -- Investments are stated at value. Securities traded on securities exchanges, securities traded on the NASDAQ National Market, and over-the-counter securities are valued at the last sales price on the day of valuation, or if there are no reported sales that day, at the most recent bid quotation. Debt obligations and money market instruments maturing in more than 60 days from the date of purchase shall be valued at the latest bid quotation. Debt obligations and money market instruments maturing in less than 61 days from the date of purchase are valued on an amortized cost basis, which approximates market value. Options are valued at the last reported sale price on the day of valuation, or if there are no reported sales that day, at the mean of the most recent bid and ask quotations. Securities for which quotations are not readily available, or securities which may have been affected by a significant event after the price was determined, are valued at a fair value as determined by the Pricing Committee appointed by the Board of Trustees. FOREIGN CURRENCY TRANSLATIONS -- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the mean of the bid and offer prices of such currencies at the time of valuation. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations for securities sold are included with the net realized gain or loss from securities. Net realized gains on foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded and the U.S. dollar equivalent of the amounts actually received or paid, and the realized gains or losses resulting from the portfolio and transaction hedges. At September 30, 2002, the Equity and Income, Global, International and Int'l Small Cap Funds had foreign currency transactions. Net unrealized appreciation (depreciation) - other includes the following components:
EQUITY AND INT'L INCOME GLOBAL INTERNATIONAL SMALL CAP - -------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on dividends and dividend reclaims receivable $(601) $ 4,181 $ 110,055 $18,659 Unrealized appreciation (depreciation) on open securities purchases and sales 0 14,113 (276,462) 5,237 ----- ------- --------- ------- Net Unrealized appreciation (depreciation) - Other $(601) $18,294 $(166,407) $23,896 ===== ======= ========= =======
SECURITY TRANSACTIONS AND INVESTMENT INCOME -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on an accrual basis. Bond discount is accreted and premium is amortized over the expected life of each applicable security. 61 FORWARD FOREIGN CURRENCY CONTRACTS -- The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions. The contractual amounts of forward foreign exchange contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values. At September 30, 2002, the Funds had no forward foreign currency contracts outstanding. DISTRIBUTIONS TO SHAREHOLDERS -- Income dividends and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. To the extent these tax and book differences are permanent in nature, such amounts are reclassified among paid in capital, undistributed net investment income and accumulated undistributed net realized gain (loss). These differences are primarily related to foreign currency transactions, deferral of losses on wash sales, and character of capital loss carryforwards. The Funds also utilize tax basis earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. BANK LOANS -- The Funds have an unsecured line of credit with Investors Bank & Trust. It is a committed line of $250 million. Borrowings under this arrangement bear interest at .45% above the Federal Funds Effective Rate. For the year ended September 30, 2002, there were no outstanding borrowings. ACCOUNTING FOR OPTIONS -- When a Fund writes an option, the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options that expire are recorded by the Fund on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund has realized a gain or a loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Fund. In writing an option, the Fund bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Fund could result in the Fund selling or buying a security or currency at a price different from the current market value. During the year ended September 30, 2002, Oakmark, Select, Small Cap, Equity and Income, and Global wrote option contracts. At September 30, 2002, Equity and Income had outstanding option contracts. Portfolio securities valued at $2,567,880 were being held in escrow by the custodian as cover for options written by Equity and Income. 2. TRANSACTIONS WITH AFFILIATES Each Fund has an investment advisory agreement with Harris Associates L.P. ("Adviser"). For management services and facilities furnished, the Funds pay the Adviser monthly fees. Each fee is calculated on the total net assets as determined at the end of each preceding calendar month. Annual fee rates are as follows:
FUND ADVISORY FEES FUND ADVISORY FEES - ---------------------------------------------------------------------------------------------------------------- Oakmark Fund 1.00% up to $2 billion; Equity and Income Fund 0.75% 0.90% on the next $1 billion; 0.80% on the next $2 billion; and 0.75% over $5 billion Select Fund 1.00% up to $1 billion; Global Fund 1.00% 0.95% on the next $500 million; 0.90% on the next $500 million; International Fund 1.00% up to $2 billion; 0.85% on the next $500 million; 0.95% on the next 0.80% on the next $2.5 billion; and $1 billion; and 0.75% over $5 billion 0.85% over $3 billion Small Cap Fund 1.00% International Small 1.25% up to $500 Cap Fund million; and 1.10% over $500 million
62 The Adviser has voluntarily agreed to reimburse the Funds to the extent that annual expenses are greater than 1.0% for Class I shares of the Equity and Income Fund, and greater than 1.5% for Class I shares of all other domestic funds; are greater than 1.75% for Class I shares of the Global Fund, and greater than 2.0% for Class I shares of all other international funds; are greater than 1.25% for Class II shares of the Equity and Income Fund, and greater than 1.75% for Class II shares of all other domestic funds; are greater than 2.0% for Class II shares of the Global Fund, and greater than 2.25% for Class II shares of all other international funds. During the year ended September 30, 2002, the Funds incurred brokerage commissions, including commissions paid to affiliates of the Adviser, as follows:
FUND TOTAL COMMISSIONS COMMISSIONS PAID TO AFFILIATES --------------------------------------------------------------------------- Oakmark $6,780,742 $1,944,252 Select 7,103,318 1,010,280 Small Cap 653,247 68,113 Equity and Income 4,727,959 787,956 Global 896,230 194,583 International 3,824,992 0 Int'l Small Cap 1,711,855 0
CDC IXIS Asset Management Services Co., an affiliate of the adviser, provides transfer agent services to the Funds. During the year ended September 30, 2002, the Funds incurred the following transfer agent expenses:
FUND TRANSFER AGENT FEES --------------------------------------------------------------------------- Oakmark $2,598,857 Select 1,837,559 Small Cap 400,097 Equity and Income 704,717 Global 188,437 International 753,702 Int'l Small Cap 178,248
The Funds' independent Trustees may participate in a Deferred Compensation Plan which may be terminated at any time. The obligations of the Plan are paid solely out of the assets of the Funds. 3. FEDERAL INCOME TAXES It is the policy of each Fund to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required.
COST OF INVESTMENTS NET UNREALIZED FOR FEDERAL INCOME GROSS UNREALIZED GROSS UNREALIZED APPRECIATION FUND TAX PURPOSES APPRECIATION (DEPRECIATION) (DEPRECIATION) ----------------------------------------------------------------------------------------------------- Oakmark $3,652,370,429 $247,594,858 $(595,291,371) $(347,696,513) Select 3,653,927,245 692,943,112 (580,754,209) 112,188,903 Small Cap 415,921,249 50,149,302 (108,633,643) (58,484,339) Equity and Income 2,446,194,767 92,373,384 (198,160,836) (105,787,452) Global 207,674,350 8,586,205 (41,519,093) (32,932,888) International 1,820,971,241 107,877,031 (471,953,223) (364,076,192) Int'l Small Cap 445,238,103 12,236,363 (102,802,819) (90,566,456)
63 As of September 30, 2002, the net capital loss carryovers noted below are available to offset future realized capital gains and thereby reduce future taxable gains distributions.
NET CAPITAL LOSS YEARS OF FUND CARRYOVER EXPIRATION --------------------------------------------------------------------------- Oakmark $165,547,384 2008-2010 Select 49,038,583 2009-2010 Equity and Income 3,347,886 2010 Global 463,447 2010 International 14,901,531 2010
For the year ended September 30, 2002, the Funds have elected to defer to October 1, 2002 Post October capital losses of:
FUND AMOUNT --------------------------------------------------------------------------- Oakmark $22,576,461 Select 24,174,966 Small Cap 497,018 Equity and Income 78,012,684 Global 662,686
For the year ended September 30, 2002, Global has elected to defer to October 1, 2002 Post October currency losses of $28,715. At September 30, 2002, the components of distributable earnings (excluding unrealized (depreciation) disclosed below) on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG- TOTAL DISTRIBUTABLE FUND ORDINARY INCOME TERM GAIN EARNINGS ---------------------------------------------------------------------------------------- Oakmark $13,888,257 $ 0 $13,888,257 Select 3,909,462 0 3,909,462 Equity and Income 25,952,231 0 25,952,231 International 15,610,363 0 15,610,363 Int'l Small Cap 3,056,360 9,044,095 12,100,455
Pursuant to Section 852 of the Internal Revenue Code, Int'l Small Cap designates $11,433,302 as capital gain dividends for the year ended September 30, 2002. For corporate shareholders, a portion of the ordinary dividends paid during the Funds' year ended September 30, 2002 qualified for the dividends received deduction, as follows:
FUND --------------------------------------------------------------------------- Oakmark 100.00% Select 100.00% Equity and Income 48.23% Global 49.97%
International and Int'l Small Cap paid qualifying foreign taxes of $2,971,519 and $1,023,528 and earned $34,394,608 and $9,853,898 foreign source income during the year ended September 30, 2002, respectively. Pursuant to Section 853 of the Internal revenue Code, International and Int'l Small Cap designated $0.02507 and $0.02908 per share as foreign taxes paid and $0.29017 and $0.27993 per share as income earned from foreign sources for the year ended September 30, 2002, respectively. During the year ended September 30, 2002, the tax character of distributions paid was as follows:
DISTRIBUTIONS PAID DISTRIBUTIONS PAID FROM ORDINARY FROM LONG-TERM FUND INCOME CAPITAL GAIN --------------------------------------------------------------------------- Oakmark $19,630,625 $ 0 Select 8,379,997 0 Equity and Income 7,028,935 1,896,895 Global 11,596 1,361,554 International 10,247,122 0 Int'l Small Cap 4,821,309 2,389,207
64 4. INVESTMENT TRANSACTIONS Transactions in investment securities (excluding short term securities) were as follows (in thousands):
EQUITY & INT'L OAKMARK SELECT SMALL CAP INCOME GLOBAL INTERNATIONAL SMALL CAP ------------------------------------------------------------------------------------------------------------------------------- Purchases at cost $2,294,297 $1,691,592 $231,562 $2,583,815 $269,893 $1,156,420 $413,133 Proceeds from sales 1,471,091 1,364,181 81,723 1,007,679 110,669 278,168 123,782
Purchases at cost and proceeds from sales of long-term U.S. Government securities during the year ended September 30, 2002 were $386,583 and $107,684, respectively for Equity and Income. Transactions in options written during the year ended September 30, 2002 were as follows:
OAKMARK SELECT SMALL CAP ------------------------------------------------------------------------------- NUMBER OF PREMIUMS NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED CONTRACTS RECEIVED -------------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2001 0 $ 0 0 $ 0 0 $ 0 Options written 172,645 16,125,038 104,615 10,534,128 9,325 1,683,351 Options terminated in closing purchase transactions (97,910) (9,243,078) (67,380) (6,668,372) (5,800) (1,167,798) Options expired (50,745) (5,804,083) (25,389) (3,500,703) (3,325) (413,956) Options exercised (23,990) (1,077,877) (11,846) (365,053) (200) (101,597) ------- ---------- ------- ----------- ------ ---------- Options outstanding at September 30, 2002 0 $ 0 0 $ 0 0 $ 0 EQUITY & INCOME GLOBAL --------------------------------------------------- NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED -------------------------------------------------------------------------------------------------------------------------- Options outstanding at September 30, 2001 0 $ 0 450 $ 141,020 Options written 49,964 5,314,503 26,135 3,011,740 Options terminated in closing purchase transactions (30,549) (3,674,211) (24,925) (2,852,310) Options expired (9,194) (999,677) (1,610) (291,350) Options exercised (31) (2,515) (50) (9,100) ------- ----------- ------- ---------- Options outstanding at September 30, 2002 10,190 $ 638,100 0 $ 0
5. TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS Affiliated issuers, as defined under the Investment Company Act of 1940, are those in which the Fund's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. A summary of the Fund's transactions in the securities of these issuers during the year ended September 30, 2002, is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SELECT FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2002 -------------------------------------------------------------------------------------------- Dun & Bradstreet Corporation $109,946,411 $ 3,432,695 $0 $178,848,893 Toys 'R' Us, Inc. 210,755,208 10,492,421 0 129,270,730 ------------ ----------- -- ------------ TOTALS $320,701,619 $13,925,116 $0 $308,119,623
65 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SMALL CAP FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2002 ------------------------------------------------------------------------------------------------------------------------------- Department 56, Inc. $10,772,852 $510,789 $0 $ 7,942,000 Optimal Robotics Corp., Class A 6,384,338 200,906 0 5,833,140 R.G. Barry Corporation 10,857,418 31,219 0 3,744,000 ----------- -------- -- ----------- TOTALS $28,014,608 $742,914 $0 $17,519,140 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL FUND MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2002 ------------------------------------------------------------------------------------------------------------------------------- Chargeurs SA $ 19,034,755 $ 0 $1,216,916 $ 24,632,990 Cordiant Communications Group plc 50,280,582 8,718,722 0 14,630,031 Enodis plc 53,457,790 8,846,818 5,650,112 26,095,013 Fila Holding S.p.A 83,867,401 205,149 0 3,006,328 Michael Page International plc 17,905,974 0 866,135 40,276,985 Orbotech, Ltd. 17,949,095 0 0 27,157,700 ------------ ----------- ---------- ------------ TOTALS $242,495,597 $17,770,689 $7,733,163 $135,799,047 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INT'L SMALL CAP FUND MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES (COST) PROCEEDS INCOME 2002 ------------------------------------------------------------------------------------------------------------------------------- Alaska Milk Corporation $ 3,024,829 $ 0 $216,616 $ 1,997,430 Banco Latinoamericano 10,642,049 86,525 0 2,375,386 Mainfreight Limited 6,734,113 0 141,073 4,013,599 Matichon Public Company Limited, Foreign Shares 3,448,354 0 163,123 2,733,15 Pfeiffer Vacuum Technology AG 10,695,295 0 239,563 9,178,710 Royal Daulton plc 8,302,272 0 0 1,755,889 ----------- ------- -------- ----------- TOTALS $42,846,912 $86,525 $760,375 $22,054,170
66 [OAKMARK FAMILY OF FUNDS LOGO] (This page has been intentionally left blank.) 67 THE OAKMARK FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 32.01 $ 26.95 $ 34.37 $ 33.54 $ 41.21 Income From Investment Operations: Net Investment Income 0.12 0.07 0.49 0.36 0.47 Net Gains or Losses on Securities (both realized and unrealized) (3.85) 5.38 (2.91) 2.51 (1.73) --------- -------- --------- --------- --------- Total From Investment Operations: (3.73) 5.45 (2.42) 2.87 (1.26) Less Distributions: Dividends (from net investment income) (0.20) (0.39) (0.26) (0.44) (0.40) Distributions (from capital gains) 0.00 0.00 (4.74) (1.60) (6.01) --------- -------- --------- --------- --------- Total Distributions (0.20) (0.39) (5.00) (2.04) (6.41) --------- -------- --------- --------- --------- Net Asset Value, End of Period $ 28.08 $ 32.01 $ 26.95 $ 34.37 $ 33.54 ========= ======== ========= ========= ========= Total Return (11.77)% 20.42% (7.55)% 7.98% (4.06)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $3,300.9 $3,109.1 $2,038.7 $4,772.8 $6,924.0 Ratio of Expenses to Average Net Assets 1.17% 1.15% 1.21% 1.11% 1.08% Ratio of Net Investment Income to Average Net Assets 0.38% 0.73% 1.42% 1.02% 1.22% Portfolio Turnover Rate 44% 57% 50% 13% 43%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 5, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 2002 2001 (a) - --------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 31.97 $32.09 Net Investment Income 0.16 0.05 Net Gains or Losses on Securities (both realized and unrealized) (3.92) (0.17) ------- ------ Total From Investment Operations: (3.76) (0.12) Less Distributions: Dividends (from net investment income) (0.17) 0.00 Distributions (from capital gains) 0.00 0.00 ------- ------ Total Distributions (0.17) 0.00 ------- ------ Net Asset Value, End of Period $ 28.04 $31.97 ======= ====== Total Return (11.85)% (0.37)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 7.7 $ 0.1 Ratio of Expenses to Average Net Assets 1.44% 1.32%* Ratio of Net Investment Income to Average Net Assets 0.35% 0.46%* Portfolio Turnover Rate 44% 57%
* Data has been annualized. (a) The date which Class II shares were first sold to the public was April 5, 2001. 68 THE OAKMARK SELECT FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 25.20 $ 21.45 $ 20.92 $ 16.76 $ 16.34 Income From Investment Operations: Net Investment Income 0.02 0.03 0.13 0.19 0.03 Net Gains or Losses on Securities (both realized and unrealized) (3.50) 5.17 4.32 4.73 0.56 --------- --------- --------- --------- --------- Total From Investment Operations: (3.48) 5.20 4.45 4.92 0.59 Less Distributions: Dividends (from net investment income) (0.05) (0.09) (0.20) (0.05) 0.00 Distributions (from capital gains) 0.00 (1.36) (3.72) (0.71) (0.17) --------- --------- --------- --------- --------- Total Distributions (0.05) (1.45) (3.92) (0.76) (0.17) --------- --------- --------- --------- --------- Net Asset Value, End of Period $ 21.67 $ 25.20 $ 21.45 $ 20.92 $ 16.76 ========= ========= ========= ========= ========= Total Return (13.85)% 25.75% 24.53% 30.07% 3.64% Ratios/Supplemental Data: Net Assets, End of Period ($million) $3,717.6 $4,161.4 $1,772.0 $1,638.9 $1,227.9 Ratio of Expenses to Average Net Assets 1.07% 1.08% 1.17% 1.16% 1.22% Ratio of Net Investment Income to Average Net Assets 0.09% 0.26% 0.76% 0.98% 0.17% Portfolio Turnover Rate 32% 21% 69% 67% 56%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
DECEMBER 31, 1999 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 (a) - -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 25.10 $21.40 $18.42 Net Investment Income (Loss) (0.04) 0.00 0.10 Net Gains or Losses on Securities (both realized and unrealized) (3.50) 5.10 2.88 ------- ------ ------ Total From Investment Operations: (3.54) 5.10 2.98 Less Distributions: Dividends (from net investment income) 0.00 (0.06) 0.00 Distributions (from capital gains) 0.00 (1.34) 0.00 ------- ------ ------ Total Distributions 0.00 (1.40) 0.00 ------- ------ ------ Net Asset Value, End of Period $ 21.56 $25.10 $21.40 ======= ====== ====== Total Return (14.10)% 25.28% 16.18% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 64.4 $35.4 $ 6.8 Ratio of Expenses to Average Net Assets 1.36% 1.40% 1.41%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.19)% (0.08)% 0.59%* Portfolio Turnover Rate 32% 21% 69%
* Data has been annualized. (a) The date which Class II shares were first sold to the public was December 31, 1999. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 69 THE OAKMARK SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 14.57 $ 15.10 $ 13.88 $ 12.63 $ 20.34 Income From Investment Operations: Net Investment Income (Loss) (0.11) 0.00 0.00 0.14 (0.12) Net Gains or Losses on Securities (both realized and unrealized) (0.36) (0.02) 1.22 1.20 (4.73) ------- ------- ------- ------- ------- Total From Investment Operations: (0.47) (0.02) 1.22 1.34 (4.85) Less Distributions: Dividends (from net investment income) 0.00 0.00 0.00 0.00 0.00 Distributions (from capital gains) 0.00 (0.51) 0.00 (0.09) (2.86) ------- ------- ------- ------- ------- Total Distributions 0.00 (0.51) 0.00 (0.09) (2.86) ------- ------- ------- ------- ------- Net Asset Value, End of Period $ 14.10 $ 14.57 $ 15.10 $ 13.88 $ 12.63 ======= ======= ======= ======= ======= Total Return (3.23)% 0.07% 8.79% 10.56% (26.37)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $356.9 $264.6 $248.7 $437.1 $618.0 Ratio of Expenses to Average Net Assets 1.33% 1.27% 1.50%(a) 1.48% 1.45% Ratio of Net Investment Income (Loss) to Average Net Assets (0.67)% (0.28)% (0.41)%(a) (0.44)% (0.40)% Portfolio Turnover Rate 22% 47% 28% 68% 34%
(a) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Advisers, ratios would have been as follows:
SEPTEMBER 30, 2000 - -------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.59% Ratio of Net Income (Loss) to Average Net Assets (0.50)%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 10, 2002 THROUGH SEPTEMBER 30, 2002 (b) - ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 19.71 Net Investment Income (Loss) (0.20)(c) Net Gains or Losses on Securities (both realized and unrealized) (5.42) ------- Total From Investment Operations: (5.62) ------- Net Asset Value, End of Period $ 14.09 ======= Total Return (28.51)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.5 Ratio of Expenses to Average Net Assets 1.48%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.85)%* Portfolio Turnover Rate 22%
* Data has been annualized. (b) The date which Class II shares were first sold to the public was April 10, 2002. (c) Computed using average shares outstanding throughout the period. 70 THE OAKMARK EQUITY AND INCOME FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 17.45 $ 16.50 $ 15.68 $ 13.99 $ 14.49 Income From Investment Operations: Net Investment Income 0.33(a) 0.08 0.35 0.39 0.29 Net Gains or Losses on Securities (both realized and unrealized) (0.40) 2.11 2.28 1.72 0.04 --------- ------- ------- ------- ------- Total From Investment Operations: (0.07) 2.19 2.63 2.11 0.33 Less Distributions: Dividends (from net investment income) (0.16) (0.24) (0.45) (0.21) (0.24) Distributions (from capital gains) (0.04) (1.00) (1.36) (0.21) (0.59) --------- ------- ------- ------- ------- Total Distributions (0.20) (1.24) (1.81) (0.42) (0.83) --------- ------- ------- ------- ------- Net Asset Value, End of Period $ 17.18 $ 17.45 $ 16.50 $ 15.68 $ 13.99 ========= ======= ======= ======= ======= Total Return (0.47)% 14.40% 18.51% 15.32% 2.57% Ratios/Supplemental Data: Net Assets, End of Period ($million) $2,241.9 $620.1 $ 54.5 $ 60.3 $ 57.7 Ratio of Expenses to Average Net Assets 0.96% 0.98% 1.24% 1.18% 1.31% Ratio of Net Investment Income to Average Net Assets 1.71% 2.07% 3.04% 2.65% 2.39% Portfolio Turnover Rate 73% 124% 87% 81% 46%
(a) Computed using average shares outstanding throughout the period. FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JULY 13, 2000 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 (b) - --------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 17.40 $16.49 $15.51 Net Investment Income 0.30(c) 0.07 0.30 Net Gains or Losses on Securities (both realized and unrealized) (0.40) 2.08 0.68 ------- ------ ------ Total From Investment Operations: (0.10) 2.15 0.98 Less Distributions: Dividends (from net investment income) (0.11) (0.24) 0.00 Distributions (from capital gains) (0.04) (1.00) 0.00 ------- ------ ------ Total Distributions (0.15) (1.24) 0.00 ------- ------ ------ Net Asset Value, End of Period $ 17.15 $17.40 $16.49 ======= ====== ====== Total Return (0.60)% 14.07% 6.32% Ratios/Supplemental Data: Net Assets, End of Period ($million) $118.7 $ 3.3 $ 0.4 Ratio of Expenses to Average Net Assets 1.20% 1.23% 1.32%* Ratio of Net Investment Income to Average Net Assets 1.50% 1.95% 2.59%* Portfolio Turnover Rate 73% 124% 87%
* Data has been annualized. (b) The date which Class II shares were first sold to the public was July 13, 2000. (c) Computed using average shares outstanding throughout the period. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 71 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
AUGUST 4, 1999 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 (a) - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 10.83 $ 10.91 $ 9.18 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.00(b)(c) 0.03 0.11 0.01 Net Gains or Losses on Securities (both realized and unrealized) 0.76(d) 0.12 1.63 (0.83) ------- ------- ------- ------- Total From Investment Operations: 0.76 0.15 1.74 (0.82) Less Distributions: Dividends (from net investment income) (0.00) (0.17) (0.01) 0.00 Distributions (from capital gains) (0.29) (0.06) 0.00 0.00 ------- ------- ------- ------- Total Distributions (0.29) (0.23) (0.01) 0.00 ------- ------- ------- ------- Net Asset Value, End of Period $ 11.30 $ 10.83 $ 10.91 $ 9.18 ======= ======= ======= ======= Total Return 6.84% 1.37% 18.97% (8.20)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $175.6 $ 48.2 $ 27.2 $ 24.0 Ratio of Expenses to Average Net Assets 1.55% 1.75%(e) 1.75%(e) 1.75%*(e) Ratio of Net Investment Income (Loss) to Average Net Assets (0.01)% 0.00(e) 0.54%(e) 0.98%*(e) Portfolio Turnover Rate 86% 114% 147% 7%
* Data has been annualized. (a) The date which Fund shares were first offered for sale to the public was August 4, 1999. (b) Amount rounds to less than $(0.01) per share. (c) Computed using average shares outstanding throughout the period. (d) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating market values of the Fund. (e) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Advisers, ratios would have been as follows:
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 1999 - --------------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.80% 1.96% 2.22%* Ratio of Net Income (Loss) to Average Net Assets (0.05)% 0.34% 0.51%*
72 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
OCTOBER 10, 2001 THROUGH SEPTEMBER 30, 2002 (a) - -------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $11.25 Net Investment Income (Loss) (0.03) Net Gains or Losses on Securities (both realized and unrealized) 0.31(b) ------ Total From Investment Operations: 0.28 Less Distributions: Dividends (from net investment income) (0.00) Distributions (from capital gains) (0.29) ------ Total Distributions (0.29) ------ Net Asset Value, End of Period $11.24 ====== Total Return 2.31% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.6 Ratio of Expenses to Average Net Assets 1.86%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.26)%* Portfolio Turnover Rate 86%
* Data has been annualized. (a) The date which Class II shares were first offered for sale to the public was October 10, 2001. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating market values of the Fund. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 73 THE OAKMARK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 12.51 $ 15.40 $ 13.95 $ 10.42 $ 18.77 Income From Investment Operations: Net Investment Income (Loss) 0.14 0.20 1.02 (0.34) 0.41 Net Gains or Losses on Securities (both realized and unrealized) (0.31) (2.07) 0.92 4.89 (5.32) --------- -------- -------- -------- -------- Total From Investment Operations: (0.17) (1.87) 1.94 4.55 (4.91) Less Distributions: Dividends (from net investment income) (0.17) (0.51) (0.49) (0.24) (0.58) Distributions (from capital gains) 0.00 (0.51) 0.00 (0.78) (2.86) --------- -------- -------- -------- -------- Total Distributions (0.17) (1.02) (0.49) (1.02) (3.44) --------- -------- -------- -------- -------- Net Asset Value, End of Period $ 12.17 $ 12.51 $ 15.40 $ 13.95 $ 10.42 ========= ======== ======== ======== ======== Total Return (1.53)% (13.10)% 14.27% 46.41% (29.90)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $1,393.8 $ 738.5 $ 782.4 $ 811.1 $ 756.1 Ratio of Expenses to Average Net Assets 1.31% 1.30% 1.30% 1.29% 1.32% Ratio of Net Investment Income (Loss) to Average Net Assets 1.34% 1.40% 1.87% 1.94% 1.95% Portfolio Turnover Rate 24% 58% 64% 54% 43%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
NOVEMBER 4, 1999 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 (a) - ----------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 12.47 $ 15.37 $ 14.36 Net Investment Income 0.15 0.17 0.96 Net Gains or Losses on Securities (both realized and unrealized) (0.37) (2.10) 0.54 ------- ------- ------- Total From Investment Operations: (0.22) (1.93) 1.50 Less Distributions: Dividends (from net investment income) (0.12) (0.49) (0.49) Distributions (from capital gains) 0.00 (0.48) 0.00 ------- ------- ------- Total Distributions (0.12) (0.97) (0.49) ------- ------- ------- Net Asset Value, End of Period $ 12.13 $ 12.47 $ 15.37 ======= ======= ======= Total Return (1.76)% (13.44)% 10.79% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 48.5 $ 1.9 $ 0.1 Ratio of Expenses to Average Net Assets 1.58% 1.64% 1.50%* Ratio of Net Investment Income to Average Net Assets 1.33% 0.62% 1.98%* Portfolio Turnover Rate 24% 58% 64%
* Data has been annualized. (a) The date which Class II shares were first sold to the public was November 4, 1999. 74 THE OAKMARK INTERNATIONAL SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 10.00 $ 11.51 $ 12.64 $ 6.89 $ 12.20 Income From Investment Operations: Net Investment Income 0.11 0.13 0.23 0.24 0.18 Net Gains or Losses on Securities (both realized and unrealized) 0.36(a) (0.81) (0.66) 5.71 (4.09) ------- ------- ------- ------- ------- Total From Investment Operations: 0.47 (0.68) (0.43) 5.95 (3.91) Less Distributions: Dividends (from net investment income) (0.16) (0.34) (0.11) (0.20) (0.06) Distributions (from capital gains) (0.14) (0.49) (0.59) 0.00 (1.34) ------- ------- ------- ------- ------- Total Distributions (0.30) (0.83) (0.70) (0.20) (1.40) ------- ------- ------- ------- ------- Net Asset Value, End of Period $ 10.17 $ 10.00 $ 11.51 $ 12.64 $ 6.89 ======= ======= ======= ======= ======= Total Return 4.68% (6.18)% (3.44)% 88.02% (35.20)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $357.7 $118.9 $ 90.3 $155.4 $ 51.8 Ratio of Expenses to Average Net Assets 1.64% 1.74% 1.77% 1.79% 1.96% Ratio of Net Investment Income to Average Net Assets 1.28% 1.83% 1.99% 2.31% 2.17% Portfolio Turnover Rate 42% 49% 40% 126% 69%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JANUARY 8, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 2002 2001 (b) - ---------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 9.97 $10.73 Net Investment Income 0.13(c) 0.15 Net Gains or Losses on Securities (both realized and unrealized) 0.30(c)(d) (0.91) ------ ------ Total From Investment Operations: 0.43 (0.76) Less Distributions: Dividends (from net investment income) (0.12) 0.00 Distributions (from capital gains) (0.14) 0.00 ------ ------ Total Distributions (0.26) 0.00 ------ ------ Net Asset Value, End of Period $10.14 $ 9.97 ====== ====== Total Return 4.25% (7.08)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.3 $ 0.0 Ratio of Expenses to Average Net Assets 1.87% 1.97%* Ratio of Net Investment Income to Average Net Assets 1.06% 1.76%* Portfolio Turnover Rate 42% 49%
* Data has been annualized. (a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating market values of the Fund. (b) The date which Class II shares were first sold to the public was January 8, 2001. (c) Computed using average shares outstanding throughout the period. (d) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating market values of the Fund. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 75 THE OAKMARK FAMILY OF FUNDS INDEPENDENT AUDITORS' REPORT TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF HARRIS ASSOCIATES INVESTMENT TRUST: WE HAVE AUDITED THE ACCOMPANYING STATEMENTS OF ASSETS AND LIABILITIES, INCLUDING THE SCHEDULES OF INVESTMENTS, OF HARRIS ASSOCIATES INVESTMENT TRUST COMPRISING THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK SMALL CAP FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK GLOBAL FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND (COLLECTIVELY, THE "FUNDS") AS OF SEPTEMBER 30, 2002, AND THE RELATED STATEMENTS OF OPERATIONS, CHANGES IN NET ASSETS AND FINANCIAL HIGHLIGHTS FOR THE YEAR THEN ENDED. THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE THE RESPONSIBILITY OF THE FUNDS' MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS BASED ON OUR AUDITS. THE FUNDS' FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS FOR THE PERIODS ENDED PRIOR TO SEPTEMBER 30, 2002, WERE AUDITED BY OTHER AUDITORS WHO HAVE CEASED OPERATIONS. THOSE AUDITORS EXPRESSED AN UNQUALIFIED OPINION ON THOSE STATEMENTS AND FINANCIAL HIGHLIGHTS IN THEIR REPORT DATED OCTOBER 26, 2001. WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDITS TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. OUR PROCEDURES INCLUDED CONFIRMATION OF SECURITIES OWNED AS OF SEPTEMBER 30, 2002, BY CORRESPONDENCE WITH THE FUNDS' CUSTODIAN AND BROKERS. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION. IN OUR OPINION, THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF EACH OF THE FUNDS AS OF SEPTEMBER 30, 2002, THE RESULTS OF THEIR OPERATIONS, THE CHANGES IN THEIR NET ASSETS, AND THEIR FINANCIAL HIGHLIGHTS FOR THE YEAR THEN ENDED, IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. DELOITTE & TOUCHE LLP Chicago, Illinois October 25, 2002 76 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 Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. 2. The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index. 3. The NASDAQ Composite Index is a market value weighted index of all common stocks listed on NASDAQ. 4. 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. 5. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. 6. During the period since inception (8/4/99 - 9/30/02), IPOs contributed an annualized 2.71% 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. 7. The Price-Earnings Ratio ("P/E") is the most common measure of how expensive a stock is. 8. Book Value refers to 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. 9. The Price to Book Ratio is a stock's capitalization divided by its book value. 77 10. The Lipper Large Cap Value Fund Index measures the performance of the thirty largest U.S. large-cap value funds tracked by Lipper. 11. The S&P MidCap 400 is an unmanaged broad market-weighted index of 400 stocks that are in the next tier down from the S&P 500 and that are chosen for market size, liquidity, and industry group representation. 12. The Lipper Mid Cap Value Fund Index measures the performance of the thirty largest U.S. mid-cap value funds tracked by Lipper. 13. NAV stands for Net Asset Value. NAV is the dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities divided by the number of shares outstanding. 14. 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. 15. The S&P Small Cap 600 Index measures the performance of selected U.S. stocks with small market capitalizations. 16. The Lipper Small Cap Value Fund Index measures the performance of the thirty largest U.S. small-cap value funds tracked by Lipper. 17. The Lipper Balanced Fund Index measures the performance of the thirty largest U.S. balanced funds tracked by Lipper. 18. The Lehman Govt./Corp. Bond Index is an unmanaged index that includes the Lehman Government and Lehman Corporate indices. 19. 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. 20. The Lipper Global Fund Index is an unmanaged index that includes 30 mutual funds that invest in securities throughout the world. 21. 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. 22. 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. 23. The Lipper International Funds Index reflects the net asset value weighted total return of the 30 largest international equity funds. 24. The Lipper International Small Cap Average includes 100 mutual funds that invest in securities whose primary markets are outside of the U.S. 25. Lipper, Inc. is an independent monitor of mutual fund performance. The Oakmark International Fund ranked #35 out of 816, #27 out of 404 and #4 out of 84 funds in the International Funds category for one, five and ten years, respectively, as of 9/30/02. 26. For funds at least three-years old, Morningstar calculates ratings based on a Risk-Adjusted Return measure that accounts for variation in a fund's monthly performance (including the effects of redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars. Overall Ratings are derived from a weighted-average of the performance figures associated with three-, five- and ten-year (if applicable) Morningstar metrics. The Oakmark International Fund was rated against the following numbers of U.S.-domiciled Foreign Stock funds over the following time periods: 630 funds in the last three years, 449 funds in the last five years, and 92 funds in the last ten years. With respect to these Foreign Stock funds, The Oakmark International Fund received a Morningstar Rating of 5 stars, 4 stars and 5 stars for the three-, five- and ten-year periods, respectively. Past performance is no guarantee of future results. 27. 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. 78 THE OAKMARK FAMILY OF FUNDS TRUSTEES AND OFFICERS The board of trustees has overall responsibility for the conduct of the affairs of Harris Associates Investment Trust ("Trust"), and its seven series, The Oakmark Family of Funds. Each trustee serves until the next annual meeting of shareholders and until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. Each trustee must retire at the end of the calendar year in which the trustee attains the age of 72. The board of trustees may fill any vacancy on the board provided that after such appointment, at least two-thirds of the trustees have been elected by the shareholders. No person shall be appointed or elected to serve as a trustee after attaining the age of 65. The shareholders may remove a trustee by a vote of two-thirds of the outstanding shares of the Trust at any meeting of shareholders called for the purpose of removing such trustee. The board of trustees elects or appoints the officers of the Trust. The president, any vice president, treasurer and secretary serves until the election and qualification of his or her successor, or until he or she dies, resigns, or is removed or disqualified. Each other officer shall serve at the pleasure of the board of trustees. The board of trustees may remove any officer at any time, with or without cause, by the vote of a majority of the trustees then in office. The names and ages of the trustees and officers, the position each holds with the Trust, the date each was first elected to office, their principal business occupations during the last five years and other directorships held are shown below. NAME AND AGE AT SEPTEMBER 30, 2002, POSITIONS HELD WITH THE TRUST, DATE FIRST ELECTED OR APPOINTED TO OFFICE, PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS, OTHER DIRECTORSHIPS HELD TRUSTEE WHO IS AN "INTERESTED PERSON"* Peter S. Voss, 55, Trustee, 1995 President and Chief Executive Officer, CDC IXIS Asset Management North America, L.P., formerly known as Nvest Companies, L.P. and its predecessor firms (investment management); Director, Harris Associates, Inc. ("HAI"). Chairman of the Board, AEW Real Estate Income Fund (an closed-end investment company); Chairman of the Board and Chief Executive Officer, CDC Nvest Funds (an open-end investment company--14 portfolios). TRUSTEES WHO ARE NOT "INTERESTED PERSONS" Victor A. Morgenstern, 59, Trustee and Chairman of the Board of Trustees, 1991 Chairman of the Board and Chief Executive Officer, Resolute Advisors (private investment management firm); Principal, Valor Equity Partners, LLC (private equity fund); formerly, Chairman of the Board, HAI, 1996-2000 and President and Chief Executive Officer, prior thereto; Chairman, Harris Partners, L.L.C., 1995-2000, Director, Bio-Sante Pharmaceuticals, Inc. Michael J. Friduss, 60, Trustee, 1995 Principal, MJ Friduss & Associates, Inc. (telecommunications consultants). None. Thomas H. Hayden, 51, Trustee, 1995 Executive Vice President, Campbell Mithun (advertising and marketing communication agency). None. Christine M. Maki, 41, Trustee, 1996 Vice President--Tax, Hyatt Corporation (hotels and resorts). None. 79 Allan J. Reich, 54, Trustee, 1993 Vice Chairman of the law firm D'Ancona & Pflaum LLC. None. Marv R. Rotter, 56, Trustee, 1996 Senior Advisor to President and CEO of AXA Advisors, LLC (formerly named Rotter & Associates), since 1999, and General Manager, prior thereto (financial services firm). None. Burton W. Ruder, 58, Trustee, 1995 President, The Academy Financial Group (venture capital investment and transaction financing firm); Manager, Cedar Green Associates (real estate management firm). None. Gary N. Wilner, M.D., 62, Trustee, 1993 Senior Attending Physician, Evanston Hospital; Medical Director--CardioPulmonary Wellness Program, Evanston Hospital Corporation. None. OFFICERS OF THE TRUST James P. Benson, 45, Vice President and Portfolio Manager (The Oakmark Small Cap Fund), 2000 Portfolio Manager and Analyst, Harris Associates L.P. ("HALP"), since 1997. None. Henry R. Berghoef, 53, Vice President and Portfolio Manager (The Oakmark Select Fund), 2000 Associate Director of Research, Portfolio Manager and Analyst, HALP. None. Kevin G. Grant, 38, Vice President and Portfolio Manager (The Oakmark Fund), 2000 Portfolio Manager and Analyst, HALP. None. David G. Herro, 41, Vice President and Portfolio Manager (The Oakmark International Fund and The Oak- mark International Small Cap Fund), 1992 Portfolio Manager and Analyst, HALP. None. Gregory L. Jackson, 36, Vice President and Portfolio Manager (The Oakmark Global Fund), 2000 Portfolio Manager and Analyst, HALP, since July 1998; Portfolio Manager and Analyst, Yacktman Asset Management Inc., prior thereto. None. John J. Kane, 31, Assistant Treasurer, 1999 Manager--Mutual Fund and Institutional Services, HALP. None. Robert Levy, 52, President, 2001 Director, President and Chief Executive Officer, HAI, since 1997; Chief Executive Officer, Harris Associates Securities L.P. ("HASLP"), since 1995; Chairman of the Board and Chief Investment Officer, since 2001, Chief Executive Officer, since 1997 and President, since 1996, HALP. None. Clyde S. McGregor, 49, Vice President and Portfolio Manager (The Oakmark Small Cap Fund and The Oak- mark Equity and Income Fund), 1995 Portfolio Manager and Analyst, HALP. None. Anita M. Nagler, 46, Vice President, 2001 Managing Director of Alternative & International Investing Group, HAI since 2001; formerly, Chief Operating Officer and Vice President, HAI, General Counsel, HALP, Chief Operating Officer and General Counsel, HASLP, 2000-2001; Chief Legal Officer, HASLP, prior thereto. None. 80 William C. Nygren, 43, Vice President and Portfolio Manager (The Oakmark Fund and The Oakmark Select Fund), 1996 Portfolio Manager and Analyst, HALP; formerly, Director of Research, HALP, 1990-1998. None. John R. Raitt, 47, Vice President, 2002 Chief Operating Officer, HALP, since 2001; Director of Research, HALP since 1998; Associate Director of Research and Analyst, HALP, prior thereto. None. Janet L. Reali, 51, Vice President and Secretary, 2001 Vice President, General Counsel and Secretary, HALP, since 2001; formerly, Senior Executive Vice President, General Counsel and Secretary, Everen Capital Corp. and Everen Securities, Inc. 1995-1999 (broker/dealer). None. Ann W. Regan, 54, Vice President--Shareholder Operations and Assistant Secretary, 1996 Director of Mutual Fund Operations, HALP. None. Kristi L. Rowsell, 36, Treasurer, 2000 Director, Chief Financial Officer and Treasurer, HAI; Chief Financial Officer, HALP and HASLP, since 1999; Assistant Treasurer, HALP, prior thereto. None. Edward A. Studzinski, 53, Vice President and Portfolio Manager (The Oakmark Equity and Income Fund), 2000 Portfolio Manager and Analyst, HALP. None. Michael J. Welsh, 39, Vice President and Portfolio Manager (The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap Fund), 1997 Portfolio Manager and Analyst, HALP. None. * Mr. Voss is a trustee who is an "interested person" of the Funds as defined in the Investment Company Act of 1940, because he is a director of HAI, the general partner and manager of HALP, the investment adviser to the Funds. Mr. Voss is also the President and Chief Executive Officer of CDC IXIS Asset Management North America, L.P. the parent company of HALP. The business address of the officers and trustees is Two North LaSalle Street, #500, Chicago, Illinois 60602. The Statement of Additional Information (SAI) contains further information about the trustees and is available without charge upon your request by calling 1-800-625-6275. 81 THE OAKMARK FAMILY OF FUNDS INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with management teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: a unified effort aimed at identifying the best values in the marketplace. From the list of approved stocks, each fund manager constructs a relatively focused portfolio, built on a stock-by-stock basis from the bottom up. WHO SHOULD INVEST Any investor who is seeking a disciplined value manager for the purposes of growing and diversifying a portfolio should consider one of the Oakmark funds, keeping in mind that all equity investments should be considered long-term investments. As value investors, we recognize that patience is a virtue and believe that, over the long term, investors are rewarded for their patience. We generally hold the companies in which we invest for three to five years, a time horizon that we encourage our shareholders to consider as well. HOW TO USE VALUE FUNDS IN AN OVERALL PORTFOLIO Investment styles tend to move in cycles. One style may be in favor for a few years while the other is out of favor, and vice versa. Diversifying the stock portion of your portfolio to include value and momemtum/growth investment styles may help reduce overall volatility--and potentially provide more consistent returns over time. [GRAPHIC] 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 82 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. 83 [OAKMARK FAMILY OF FUNDS LOGO] (This page has been intentionally left blank.) 84 THE OAKMARK FAMILY OF FUNDS OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT CDC IXIS Asset Management Services, Inc. Attention: The Oakmark Family of Funds P.O. Box 8510 Boston, Massachusetts 02266-8510 LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT AUDITORS 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, including the audited financial statements contained herein, is submitted for the general information of the shareholders of the Funds.The report is not authorized for distribution to prospective investors in the Funds unless it is accompanied or preceded by a currently effective prospectus of the Funds. No sales charge to the shareholder or to the new investor is made in offering the shares of the Funds. P.O. BOX 8510 BOSTON, MA 02266-8510 [OAKMARK FAMILY OF FUNDS LOGO] 1-800-OAKMARK www.oakmark.com The Oakmark Funds are distributed by Harris Associates Securities L.P., member NASD. Date of first use: November 2002. -----END PRIVACY-ENHANCED MESSAGE-----