-----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, R2XNLpPnOz26cZuY1LeTBsOTd+B8c6HeX8fLJDGuILzKAIEYYHzanKXs4KQejUOf dKFepy171ygDSVsACc+BjA== 0000950131-96-004409.txt : 19960910 0000950131-96-004409.hdr.sgml : 19960910 ACCESSION NUMBER: 0000950131-96-004409 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960731 FILED AS OF DATE: 19960906 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRIS ASSOCIATES INVESTMENT TRUST CENTRAL INDEX KEY: 0000872323 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-06279 FILM NUMBER: 96626941 BUSINESS ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO NORTH LASALLE STREET SUITE 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-30B-2 1 OAKMARK FUNDS THIRD QUARTER REPORT THE OAKMARK FUND THE OAKMARK FAMILY of FUNDS THE THIRD QUARTER OAKMARK REPORT SMALL CAP --------------- FUND July 31, 1996 --------------- THE OAKMARK BALANCED FUND [LOGO] THE No-Load Funds Managed by OAKMARK HARRIS ASSOCIATES L.P. INTERNATIONAL FUND THE OAKMARK INT'L EMERGING VALUE FUND [LOGO] The Oakmark Family of Funds 1996 THIRD QUARTER REPORT TABLE OF CONTENTS
Letter from the President.............. 1 The Oakmark Funds Summary.............. 2 The Oakmark Fund Performance Chart................... 4 Letter from the Portfolio Manager... 4 Schedule of Investments............. 8 The Oakmark Small Cap Fund Performance Information............. 11 Letter from the Portfolio Manager... 11 Schedule of Investments............. 14 The Oakmark Balanced Fund Performance Information............. 16 Letter from the Portfolio Manager... 16 Schedule of Investments............. 19 The Oakmark International Fund Performance Chart................... 21 Letter from the Portfolio Managers.. 21 Schedule of Investments............. 25 The Oakmark Int'l Emerging Value Fund Performance Information............. 31 Letter from the Portfolio Managers.. 31 Schedule of Investments............. 34 Trustees and Officers.................. 39
FOR MORE INFORMATION: Please call 1-800-OAKMARK (1-800-625-6275). 24-HOUR NET ASSET VALUE HOTLINE: To obtain the current net asset value per share of a Fund, please call 1-800-GROWOAK (1-800-476-9625). Letter From the President . . . Fellow Shareholders: The third quarter ended July 31, 1996 was one of the most challenging investment environments we have seen in some time. The Oakmark Balanced Fund had a small positive return (.3%) in the quarter, but due in large part to the worldwide market declines in July, each of the other Oakmark Funds has declined in value (from -2.7 to -3.4). While we expect volatility (and indeed expect to profit from it) and the possibility of short-term negative results, it is our focus on long term results that will distinguish our record. In this regard we note the celebration of the fifth anniversary of the Oakmark Fund - August 5, 1991-1996. We are very proud of our 29.51% average annual total return during this five year period. In response to those investors who have asked for a more concentrated, non- diversified fund, we anticipate launching a new fund soon after our October 31, 1996 fiscal year-end. This fund will be managed by Bill Nygren, our Director of Research, and will focus on Harris Associates' top 8 to 10 investment ideas or themes. Call us at (1-800-OAKMARK) to receive a prospectus as soon as it is available. We're listening . . . Oakmark shareholders want to receive less paper and less mail. Therefore, effective November 1, confirmations of shares purchased by reinvestment of dividends or via an automatic plan will only be confirmed to you quarterly through Investor Statements. Thank you for your business and support. Sincerely, /s/ Victor A. Morgenstern VICTOR A. MORGENSTERN President THE OAKMARK FUNDS FAMILY SUMMARY INFORMATION* PERFORMANCE FOR PERIOD ENDED JULY 31, 1996 OAKMARK SMALL CAP ------- --------- 3 Months -3.4% -2.9% 6 Months -1.5% 16.2% Performance for: 1 Year 15.1% N/A 3 Years 17.3%** N/A Since Inception 28.9%** 18.3% Value of $10,000 $35,559 $11,830 from inception date 08/05/91 11/01/95 TOP FIVE HOLDINGS AS OF JULY 31, 1996 Company and % of Total Net Philip Morris Co. 7.6% SPX Corp. 6.3% Assets Mellon Bank Corp. 5.2% Premark International, Inc. 6.0% First USA Inc. 4.7% US Industries Inc. 5.7% Dun & Bradstreet 4.6% Catellus Dev Corp. 3.7% US West Media Group 4.6% Peoples Bank of Bridgeport CT 3.6% TOP FIVE INDUSTRIES AS OF JULY 31, 1996 Industries and Food & Beverage 19.5% Other Industrial Goods % of Total Net Broadcasting & & Services 15.9% Assets Publishing 16.8% Machinery & Other Consumer Metal Processing 15.6% Goods & Services 10.6% Banks 13.8% Other Financial 8.4% Broadcasting & Publishing 8.5% Insurance 6.0% Other Consumer Goods & Services 6.5% *The Oakmark Fund's average annual total return for the twelve months ended June 30, 1996 and the period August 5, 1991 (inception) through June 30, 1996 was 24.3% and 31.0%, respectively. The Oakmark Small Cap Fund's total return for November 1, 1995 (inception) through June 30, 1996 was 24.7%. The Oakmark Balanced Fund's total return for November 1, 1995 (inception) through June 30, 1996 was 10.4%. **Annualized. 2
BALANCED INTERNATIONAL INT'L EMERGING VALUE -------- ------------- -------------------- .3% -2.9% -2.7% 3.6% 8.5% 4.8% N/A 13.7% N/A N/A 11.8%** N/A 6.6% 15.9%** 10.4% $10,660 $17,634 $11,040 11/01/95 09/30/92 11/01/95
US Industries Inc. 3.8% AB Volvo 4.7% Solution 6 Holdings Philip Morris Co. 3.5% Cordiant PLC 4.5% Limited 4.8% US West Media Group 3.3% National Australia PT Polysindo Eka Arctco, Inc. 3.3% Bank 4.2% Perkasa 4.1% Associates First Usiminas 3.7% Yip's Hang Cheung Cap Corp. 3.3% Telefonos de Mexico, (Holdings) Limited 3.6% S.A. 3.5% Parbury Limited 3.4% Cordiant PLC 3.4% Government & Banks 12.8% Other Industrial Goods Agency Securities 27.2% Telecommunications 10.1% & Services 13.1% Other Consumer Goods Food 9.4% Computer Systems 9.8% & Services 16.5% Steel 8.3% Mining & Building Broadcasting Transportation 6.3% Materials 8.2% and Publishing 9.3% Production Equipment 7.7% Banks and Other Components 6.7% Financial 9.3% Food and Beverage 6.4%
The Oakmark International Fund's average annual total return for the twelve months ended June 30, 1996 and the period September 30, 1992 (inception) through June 30, 1996 was 24.6% and 17.6%, respectively. The Oakmark International Emerging Value Fund's total return for November 1, 1995 (inception) through June 30, 1996 was 15.7%. The Funds' past performances are no guarantee of future results. Share prices and investment returns will vary, so you may have a gain or loss when you sell shares. 3 Oakmark Fund THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (7/31/96) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
Oakmark Fund S&P 500 8/91 10,000 10,000 10/91 12,100 10,201 13,910 10,719 14,660 10,946 15,910 11,279 10/92 17,110 11,216 19,913 11,857 20,136 11,957 22,052 12,276 [GRAPH APPEARS HERE] 10/93 24,504 12,892 25,648 13,372 24,855 12,593 25,321 12,896 10/94 26,653 13,401 26,480 13,444 28,869 14,803 30,883 16,263 10/95 32,397 16,931 36,091 17,213 36,823 19,239 7/96 35,559 18,933
7/31/96 NAV $30.11 AVERAGE ANNUAL TOTAL RETURN* THROUGH 7/31/96 --------------------------------------- TOTAL RETURN TOTAL RETURN FROM FROM FUND INCEPTION LAST 3 MOS. LAST 6 MOS. 7/31/95 8/5/91 ------------ ------------ ------- ---------------------------- THE OAKMARK FUND -3.4% -1.5% 15.1% 28.9% Standard & Poor's 500 Stock Index* -1.6% 1.7% 16.5% 13.6% Dow Jones Industrial Average* -0.1% 3.6% 20.2% 16.0% Value Line Composite Index* -6.6% -0.7% 2.8% 6.6%
*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. The Dow Jones Average includes only 30 big companies. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results. THE OAKMARK FUND REPORT FROM ROBERT J. SANBORN, PORTFOLIO MANAGER FUND UPDATE The past three months were the most volatile in your Fund's history. Undecided about whether the economy is growing too fast or too slow, investors' chief obsession at the current time is the release of macroeconomic data. We largely ignore this data and observe with bemusement as market commentators greet the latest jobs data (which get revised a month or so later) as if they and they alone hold the answers to market direction, the upcoming election, and whether the planet is warming or cooling. 4 Oakmark Fund For the first prolonged period in your Fund's existence, however, we are struggling relative to the Standard & Poor's 500. While our holdings are generally reporting satisfactory to better-than-expected business results, in total the market is not rewarding us right now for these results. Frank Layden, ex-coach of the NBA's aptly-named Utah Jazz, had a player who was performing poorly. He asked him, "Son, is it ignorance or apathy?" The player responded, "Coach, I don't know and I don't care." Similarly, we ask ourselves if there is anything deficient in either our philosophy or our effort. The answer is no. There are going to be occasions when our holdings will be out of market favor. They are inevitable, and we will waste no time trying to anticipate market psychology. Rather, we will continue to spend our time trying to better understand the businesses of which we are part owners. If the businesses prosper, so will--sooner or later--their stocks. I am writing this letter on your Fund's fifth birthday. What an experience managing your Fund has been! On behalf of everyone at Harris Associates, I want to thank all of you for your support. HERE COME THE Q! The Q ratio is coming, the Q ratio is coming! Like most fields, the investment profession endures vigorous yet arcane debates, and I sometimes share them with you in these letters. Some prominent market seers are claiming that the stock market is over-valued because of something called the Q ratio. This number compares the market value of stocks with the current replacement value of underlying assets. The seers estimate the Q ratio stands at 1.9, implying that the market is grossly over-valued. In a perfect world, the ratio would always be 1.0. If a manufacturing plant were the market's sole asset, and it could be built today for $X, then the value of the market would also be $X. Alas, the world is not perfect and there is a teensy-weensy problem with the Q ratio: the data have a very tenuous connection with economic reality. Take the case of one of our ten largest holdings, Anheuser-Busch Companies (BUD). In round numbers at year-end 1995, BUD had $0.3B in net current assets (cash, inventories, receivables less payables); $2.3B in investments (largely foreign brewers); and $6.8B in depreciated plant and equipment. Thus, the replacement value of BUD is $9.4B. Since the market value of BUD's equity, plus its debt, is $21.6B, BUD's Q ratio of 2.3 implies that the stock is grossly overvalued. 5 Oakmark Fund However, while your cool $9.4B could replicate all of BUD's tangible assets, it could not replicate the distribution system, trademarks, and goodwill that BUD possesses. Most companies, especially many of your Fund's largest holdings, are worth far more as going concerns than as liquidations. What is relevant is not the replacement value of a company's assets, but the earnings a set of assets can generate. And, what is foolhardy is basing investment decisions on fallacious philosophies and faulty data. GOOD NEWS REDUX It turns out you can have it both ways-or at least the US can. For years, politicians have lamented the US's low rate of capital investment compared to Germany and Japan. If we would only invest more, goes the dirge, we'd produce more and workers would earn more. It turns out that-I am shocked, shocked!-they missed a crucial point. The McKinsey Global Institute has concluded that the US generates 50 percent more output per unit of capital input than either Germany or Japan. This is very important-Germany spends 40 percent more on capital investment per worker, yet its workers are still less productive than Americans. McKinsey estimates that the return on capital in the US averaged 9 percent between 1974 and 1993, compared to 7 percent in Germany and Japan. While the causes for this gap are complex, McKinsey argues that efficient American capital markets compel managements to invest in the highest-return projects. Also, the intensity of competition and low entrepreneurial barriers in the US compare favorably to the regulations in Germany and Japan that coddle existing firms at the expense of new firms. Yet another example of the invisible hand of the market producing the best outcome! THE OAKMARK BOOK CLUB Some of you have suggested that I revive The Oakmark Book Club, a list of the investment/financial/business books that I have read, and which might be of interest to you. Here goes: Warren Buffett: The Making of an American Capitalist, by Roger Lowenstein (Random House, 1995). My number one recommendation, this is a great biography of the best investor of the century, and a man who has led a nonpareil and fascinating business career; 6 Oakmark Fund Built to Last: Successful Habits of Visionary Companies, by James Collins and Jerry Porras (Harper Collins, 1994). The authors compare eighteen companies with their rivals, and attempt to analyze why one company prevailed over the other; Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris, by Richard Kluger (Knopf, 1996). An exhaustive and balanced history of the cigarette industry and Philip Morris; Inside Fidelity, by Diana B. Henriquez (Scribner, 1995). This is a history of the US mutual fund industry and its (by far) largest player. I especially enjoyed the scene in which Fidelity's CEO (whose multi-billionaire family controls the company) bumps into five of his fund managers in a Hong Kong hotel in 1995. Alas, he fails to recognize any of them, who at that time collectively managed over $50 billion; The Late Shift: Letterman, Leno, & the Network Battle for the Night, by Bill Carter (Hyperion, 1994). A very readable account of Johnny Carson's retirement and managing the fragile egos of those who put us to bed every night; Aging and Old Age, by Richard Posner (The University of Chicago Press, 1995). Judge Posner, a pioneer in integrating free-market economics and the law, paints a thorough portrait of the largest-growing segment of our society. With entitlement reform inevitable, this should be required reading for every US Congressman; Hit and Run: How Peter Guber and Jon Peters Took Sony for a Ride in Hollywood, by Nancy Griffin and Kim Masters (Simon and Schuster, 1996). The moral of this hilarious book is: don't ever, ever invest in a movie studio. Enjoy! ROBERT J. SANBORN Portfolio Manager harjs@aol.com August 5, 1996 7 Oakmark Fund THE OAKMARK FUND SCHEDULE OF INVESTMENTS-JULY 31, 1996 (UNAUDITED)
Shares Held Market Value - ------------------------------------------------------------------------------ COMMON STOCKS-92.6% FOOD & BEVERAGE-19.5% 2,670,400 Philip Morris Companies Inc. $279,390,600 1,769,100 Anheuser-Busch Companies Inc. 132,240,225 3,497,250 H.J. Heinz Company 115,846,406 2,422,100 Nabisco Holdings Corp. 81,745,875 685,000 CPC International 45,809,375 1,571,900 Interstate Bakeries 41,655,350 274,600 Ralston Purina Group 17,231,150 200,000 International Dairy Queen, Inc., Class A (a) 4,000,000 ------------ 717,918,981 APPAREL-0.1% 388,500 K-Swiss Inc., Class A 3,836,438 RETAIL-4.0% 2,102,000 Federated Department Stores, Inc. (a) 63,585,500 954,600 The Kroger Company 36,036,150 1,000,000 Carson Pirie Scott & Co. (a) 22,250,000 780,300 Zale Corporation (a) 13,557,712 560,000 Cole National Corporation (a) 9,380,000 53,800 Rex Stores Corporation (a) 692,675 ------------ 145,502,037 OTHER CONSUMER GOODS & SERVICES-10.6% 3,810,400 The Black & Decker Corporation 140,032,200 2,032,800 American Brands, Inc. 92,492,400 1,000,000 Polaroid Corporation 42,250,000 940,400 First Brands Corporation 22,452,050 583,800 GC Companies, Inc. (a) 21,527,625 957,500 Whitman Corporation 21,424,062 885,000 JUNO Lighting Inc. 13,275,000 957,500 Arctco, Inc. 10,173,437 601,500 Justin Industries, Inc. 6,691,688 281,500 Rollins, Inc. 5,911,500 257,600 Paragon Trade Brands, Inc. (a) 5,538,400 395,000 Mikasa, Inc. (a) 3,653,750 207,000 Armor All Products Corporation 3,247,313 ------------ 388,669,425 BANKS-5.3% 3,606,550 Mellon Bank Corporation 190,245,512 340,000 River Bank America (a) 2,890,000 ------------ 193,135,512 INSURANCE-6.0% 3,296,200 Torchmark Corporation 140,500,525 2,108,620 Old Republic International 44,281,020 684,700 American Financial Group, Inc. 20,198,650 501,300 Acordia, Inc. 15,414,975 ------------ 220,395,170
8 Oakmark Fund THE OAKMARK FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED) Shares Held Market Value ________________________________________________________________________________
OTHER FINANCIAL--8.4% 3,548,000 First USA, Inc. $173,408,500 2,194,900 AMBAC Inc. 104,806,475 204,400 Fund American Enterprises Holdings, Inc. 16,939,650 474,500 Federal National Mortgage Association 15,065,375 ------------ 310,220,000 BROADCASTING & PUBLISHING--16.8% 2,927,800 Dun + Bradstreet Corporation 168,348,500 9,687,300 U.S. West Media Group 167,105,925 2,174,400 Knight-Ridder, Inc. 142,423,200 6,829,179 Tele-Communications, Inc., Class A (a) 97,315,801 1,928,494 TCI Communications, Inc. (a) 42,426,868 ------------ 617,620,294 PHARMACEUTICAL--3.0% 1,950,000 American Home Products Corporation 110,662,500 MANAGED CARE SERVICES-1.7% 2,000,000 Foundation Health Corporation (a) 49,000,000 420,000 Physicians Health Services, Inc. (a) 7,350,000 500,000 Laboratory Corporation of America Holdings 3,437,500 270,000 Right CHOICE Managed Care, Inc. (a) 3,105,000 ------------ 62,892,500 MEDICAL PRODUCTS--0.9% 1,297,800 Sybron Corporation (a) 32,445,000 70,900 Spacelabs Medical, Inc. (a) 1,444,588 ------------ 33,889,588 AEROSPACE & DEFENSE--5.2% 1,371,110 Lockheed Martin Corporation 113,630,741 1,220,000 McDonnell Douglas Corporation 54,595,000 779,600 Logicon, Inc. 21,731,350 ------------ 189,957,091 BUILDING MATERIALS & CONSTRUCTION--0.4% 590,000 USG Corporation (a) 15,782,500 OTHER INDUSTRIAL GOODS & SERVICES--4.8% 2,839,100 James River Corporation 71,687,275 1,014,300 Bandag Incorporated, Class A 45,897,075 880,400 SPX Corporation 21,899,950 872,000 The Geon Company 21,037,000 170,000 UCAR International Inc. (a) 5,928,750 182,600 Amtrol, Inc. 4,428,050 186,200 Premark International, Inc. 3,351,600 26,300 Bandag Incorporated 1,209,800 ------------ 175,439,500
9 Oakmark Fund THE OAKMARK FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held Market Value - ------------------------------------------------------------------------------ COMMERCIAL REAL ESTATE--1.0% 2,291,700 Host Marriott Corporation (a) 30,078,563 585,700 Catellus Development Corporation (a) 5,124,875 -------------- 35,203,438 RECREATION & ENTERTAINMENT--0.0% 70,000 Brunswick Corporation 1,330,000 FOREIGN SECURITIES--4.9% 3,135,000 DeBeers Consolidated Mines Limited ADR (b) 95,225,625 3,276,500 YPF Sociedad Anonima (b) 68,806,500 547,700 EVC International NV 15,945,025 -------------- 179,977,150 TOTAL COMMON STOCKS (COST: $2,809,897,840) 3,402,432,124 SHORT-TERM INVESTMENTS--7.4% COMMERCIAL PAPER--4.8% 25,000,000 American Express Credit Corporation, 5.27% due 8/5/1996 25,000,000 50,000,000 Ford Motor Credit Corp., 5.35% due 8/1/1996 50,000,000 50,000,000 Ford Motor Credit Corp., 5.60% due 8/1/1996 50,000,000 50,000,000 Ford Motor Credit Corp., 5.38% due 8/9/1996 50,000,000 -------------- TOTAL COMMERCIAL PAPER (Cost: $175,000,000) 175,000,000 REPURCHASE AGREEMENTS--2.6% 96,424,000 State Street Repurchase Agreement 5.55% due 8/1/1996 96,424,000 TOTAL SHORT-TERM INVESTMENTS (COST: $271,424,000) 274,000,000 Total investments (Cost $3,081,321,840)--100% 3,673,856,124 Other assets, less other liabilities--0% 3,653 -------------- TOTAL NET ASSETS--100% $3,673,859,777 ==============
- ----------- Notes: (a) Non-income producing security. (b) Represents an American Depository Receipt. For the Fund's fiscal year ended October 31, 1995, the portfolio turnover was 18% and the Fund's expense ratio was 1.17%. 10 Small Cap THE OAKMARK SMALL CAP FUND RESULTS FROM NOVEMBER 1, 1995 (INCEPTION) THRU JULY 31, 1996: 7/31/96 NAV $11.83
CALENDAR SINCE YTD THRU INCEPTION 7/31/96* 11/1/95* -------- --------- THE OAKMARK SMALL CAP FUND...... 14.5% 18.3% Lipper Small Co. Growth......... 3.1% 7.8% Russell 2000.................... .0% 6.7% S&P 600......................... 3.0% 8.6%
*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The Lipper Small Company Growth Fund Index is comprised of 30 small cap funds. The Russell 2000 Index measures the performance of smaller companies, and represents approximately 10% of the total value of publicly traded companies in the U.S. The S&P 600 Index measures the performance of selected U.S. stocks with a small market capitalization. Past performance is no guarantee of future results. The Oakmark Small Cap Fund REPORT FROM STEVEN J. REID, PORTFOLIO MANAGER THE GOOD, THE BAD, AND THE UGLY THE GOOD: For the nine months ended July 31, 1996, The Oakmark Small Cap Fund gained 18.3%. THE BAD: Unfortunately, the Fund declined 2.9% for the three months ended July 31,1996. THE UGLY: The small cap investment universe suffered a substantial decline during the most recent quarter. Your Fund's holdings performed significantly better, which was our expectation as value investors. What happened in the small cap investment universe? July was a particularly difficult month. Technology stock investors were greeted with several pieces of disappointing news regarding the outlook for their companies. This triggered lemming-like selling of many of these stocks. Unfortunately, this had a spillover effect on all stocks, as several market naysayers predicted gloom and doom for the overall market. Small cap growth stocks were particularly hard hit. I would like to share two thoughts with you regarding the recent activity in the stock market. First, we don't follow the herd (too many droppings). We think independently and frequently act contrary to the rest of Wall Street. For instance, your Fund has yet to find value in the technology sector. Though we did not participate in the run-up of these stocks, we did not participate in their sell-off either. We continue to be 11 Small Cap invested in the stocks of companies we find to be fundamentally undervalued. Second, the market's activity and volatility in July was a mixed blessing. In 1787, Thomas Paine said, "Panics, in some cases, have their uses; they produce as much good as hurt." While the stock prices of the Fund's holdings declined, the underlying value of these companies did not. Although I never have been a fan of losing, I whole-heartedly embrace the concept of paying less and getting more. So when the market provides these temporary "Blue Light Specials," we will try to take advantage of these opportunities. TRUE OR FALSE??? Excluding the government, Catellus Development (CDX-$9) is the largest landowner in the State of California. True (of course they were virtually gifted all that land from the government). Catellus Development was once the real estate arm of the Santa Fe Railroad. The company was created through federal land grants over 100 years ago when the railroads were feverishly building a national transportation system. In 1990, Catellus was spun-out from the Santa Fe Railroad with some fanfare. However, the company very quickly became an orphan due to a weak California economy and excess capacity in commercial real estate. Catellus, indeed, went through a difficult period in the early Nineties. Rental and occupancy rates declined, development activity slowed and land values depreciated. Coupled with a significant amount of debt and a decline in value of the company's assets, the price of Catellus' shares fell from a peak $15 to nearly $5 last year; it is worth noting that in 1989, prior to being publicly traded, a minority interest in Catellus was sold in a private transaction that implied a value of over $35 per share. The company remained relatively obscure for several years, but in 1994, Nelson Rising was named President & CEO to restructure the company's languishing operations. He was later joined by Steve Wallace, Vice President & CFO. Both men have extensive real estate experience and are diligently reshaping the company. Catellus is one of your Fund's larger holdings for several reasons. First, we believe the shares are undervalued compared to our assessment of the value of the underlying real estate. Because of its railroad history, the company has a unique portfolio of properties that are ideally suited for industrial and commercial uses due to their proximity to transportation and distribution systems. Second, we have a 12 Small Cap high degree of confidence in management's ability and take comfort in knowing that their incentives are directly aligned with ours as shareholders. Third, this stock is an orphan on Wall Street. It is unknown and underfollowed. Fourth, Catellus is a unique proxy on both the economies of California and the Pacific Rim. We are pleased with the progress the company is making and wish Nelson, Steve, and all the employees at Catellus Development good fortune. WEATHER In the last quarterly letter, I complained about the weather and predicted that I would likely do so again. Well, this quarter, I can't complain. Last year's oppressive heat in Chicago has been noticeably absent, for which we can all be thankful. Once again, I would like to thank everyone involved, especially our shareholders, for your support of The Oakmark Small Cap Fund. STEVEN J. REID Portfolio Manager sreid@oakmark.com August 5, 1996 13 SMALL CAP THE SMALL CAP FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) Shares Held Market Value - ------------------------------------------------------------------------------
COMMON STOCKS--94.4% FOOD & BEVERAGE--5.3% 250,000 GoodMark Foods, Inc. $ 3,500,000 100,000 Eskimo Pie Corporation 1,575,000 64,000 Smucker (JM) Class B 1,136,000 ----------- 6,211,000 RETAIL--6.2% 200,000 Rex Stores Corporation (a) 2,575,000 150,900 Cole National Corporation (a) 2,527,575 100,000 Carson Pirie Scott & Co. (a) 2,225,000 ----------- 7,327,575 OTHER CONSUMER GOODS & SERVICES--6.5% 160,000 First Brands Corporation 3,820,000 207,400 Justin Industries, Inc. 2,307,325 140,000 Triarc Companies, Inc. 1,470,000 ----------- 7,597,325 BANKS--13.8% 200,000 Peoples Bank of Bridgeport Connecticut 4,200,000 150,000 Texas Regional Bancshares, Inc. 3,993,750 106,000 Harbor Federal Savings Bank 2,570,500 185,000 Northwest Savings Bank 2,081,250 140,000 Pocahontas Federal Savings & Loan Association 1,995,000 86,500 Savings Bank of Finger Lakes 1,411,031 ----------- 16,251,531 INSURANCE--5.3% 140,000 Renaissance Re Holdings Limited 4,112,500 100,000 Chartwell Re Corporation 2,150,000 ----------- 6,262,500 OTHER FINANCIAL--5.1% 200,000 Duff & Phelps Credit Rating Company 3,850,000 54,100 First USA Paymentech Inc. 2,211,338 ----------- 6,061,338 BROADCASTING & PUBLISHING--8.5% 300,000 Granite Broadcasting Corporation 3,675,000 100,000 Central Newspapers, Class A 3,387,500 125,000 Lee Enterprises, Incorporated 2,484,375 40,000 Jones Intercable, Inc. (a) 490,000 ----------- 10,036,875 MANAGED CARE SERVICES--2.8% 355,000 Healthcare Services Group, Inc. 3,328,125 MACHINERY & METAL PROCESSING--15.6% 200,000 Northwest Pipe Company 3,575,000 205,000 The Carbide/Graphite Group 3,280,000 350,000 Sudbury, Inc. 2,975,000
14 SMALL CAP THE SMALL CAP FUND SCHEDULE OF INVESTMENTS-JULY 31, 1996 (UNAUDITED) (CONTINUED) Shares Held/Principal Value Market Value - ------------------------------------------------------------------------------ 105,000 Mathews International Corporation 2,913,750 125,000 Kysor Industrial Corporation 2,906,250 105,000 Gardner Denver Machinery, Inc. 2,703,750 ------------ 18,353,750 OTHER INDUSTRIAL GOODS & SERVICES-15.9% 300,000 SPX Corporation 7,462,500 390,000 Premark International, Inc. 7,020,000 300,000 Magnet Tek, Inc. 2,812,500 60,200 Amtrol, Inc. 1,459,850 ------------ 18,754,850 COMMERCIAL REAL ESTATE-3.7% 500,000 Catellus Development Corporation (a) 4,375,000 DIVERSIFIED CONGLOMERATES-5.7% 300,000 US Industries, Inc. 6,750,000 TOTAL COMMON STOCKS (COST: $106,879,798) 111,309,869 CORPORATE BONDS-1.3% RECREATION & ENTERTAINMENT-1.3% 3,000,000 Harrah's Jazz Bonds, 14.25% due 11/15/2001 1,575,000 ------------- TOTAL CORPORATE BONDS (COST: $1,177,787) 1,575,000 SHORT TERM INVESTMENTS-4.3% REPURCHASE AGREEMENTS-4.3% 5,067,000 State Street Repurchase Agreement, 5.55% due 8/01/96 5,067,000 Total investments (Cost $113,124,585)-100% $117,951,869 Other assets, less other liabilities-0% 42,391 ------------ TOTAL NET ASSETS-100% $117,994,260 ============ - ---------- NOTES: (a) Non-income producing security. 15 THE OAKMARK BALANCED FUND RESULTS FROM NOVEMBER 1, 1995 (INCEPTION) THRU JULY 31, 1996: 7/31/96 NAV $10.66
CALENDAR YTD THRU SINCE INCEPTION 7/31/96* 11/1/95* -------- -------------- THE OAKMARK BALANCED FUND.................. 4.1% 6.6% Lipper Balanced Fund Index................. 1.8% 6.6% Lehman Govt/Corp Bond...................... -1.7% 1.4% S&P 500.................................... 5.3% 11.9%
*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The Lipper Balanced Fund Index Composite is comprised of 30 balanced funds. The Lehman Govt./Corp. Bond Index includes the Lehman Government and Lehman Corporate indexes. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. Past performance is no guarantee of future results. THE OAKMARK BALANCED FUND REPORT FROM CLYDE S. MCGREGOR, PORTFOLIO MANAGER THE RETURN OF RISK Will Rogers once commented that when it came to investing he was less concerned with the return ON his money than with the return OF his money. During the latest fiscal quarter many stock market investors empathized with his sentiment. Whether the July downturn qualifies as a "correction," others will determine. Correction or not, however, a lot of money was lost. From their highs to their July lows, indices of large capitalization stocks declined more than 10% and the NASDAQ Composite Index of over-the-counter stocks lost 20%. This was the first meaningful decline since 1994. When the stock market suffers a significant loss, it is important to remember that the underlying enterprise values of businesses themselves are far less volatile. I once knew a man who had sold his business and began to invest in stocks for the first time. He was quickly stunned by the volatility of prices in the stock market. As he put it, "When I owned my company, I knew that day in and day out we were growing our value. It never occurred to me that had my company been public, the price would have bounced around so much from day to day." Of course, as value investors, we at Harris Associates consider market volatility our friend. In order for us to have opportunities to exploit, security prices must frequently get out of alignment with underlying business value. We do not own stocks based on hope. We are owners of businesses which the stock market has allowed us the opportunity to purchase for less than fair value. And, like my 16 acquaintance above, we know that most days the businesses in which we have invested are growing their intrinsic business value. This knowledge gives us the confidence to ride out market downturns. WHAT'S HAPPENING AT THE HOLDINGS During July's turbulence in the markets the corporate bond segment of the portfolio held up well. The Oakmark Balanced Fund will usually hold between 35% and 45% of its assets in fixed income securities. We invest at least one quarter of the portfolio in US Treasury notes in order to provide safety, liquidity, and income. The remainder of the fixed income investments are bonds and preferred stocks which we estimate to have total return prospects that are competitive with the stock market but with lower volatility and fundamental risk. Basically, as fixed income investors we manage credit risk (the risk of default) and duration (sensitivity to interest rate changes). We use our value- based research process to discover corporate issues which the market underrates. We control our portfolio duration with the Treasury note holdings. As mentioned above, we are pleased with the results that the corporate bond investments have produced in 1996. Interest rates have risen this year, causing bond indices to show a loss for the period. Our corporate fixed income holdings, however, show positive results. Because other funds in The Oakmark Family do not typically invest in this sector, I will devote the remainder of this report to describing our fixed income approach. OUR FIXED INCOME APPROACH We subject all of the corporate bonds and preferred stocks in The Oakmark Balanced Fund to the same rigorous research process that we use to analyze equities. In fact, new fixed income ideas are often a direct outgrowth of our equity search process. Sometimes we look at a company's common stock and decide that its debt instruments offer more value. In other cases we find both the common stock and the fixed income offerings of a company to be undervalued. In that circumstance, we will buy the debt for our income-oriented portfolios and the common stock for those portfolios which do not desire current income. EVEREN CAPITAL PREFERRED is a good illustration of what we are trying to find. Late last year, our research director Bill Nygren learned that Everen Securities, the newly spun off brokerage arm of Kemper Financial, had issued payment-in-kind preferred shares as part of their 17 initial capitalization. Everen management quickly restructured the company selling off assets which were not central to its operations. The preferred soon began to pay cash dividends, and the company recently announced that it would call the issue at a hefty premium. While we regret that this issue's time in The Balanced Fund was short, we are pleased that its return to the Fund exceeded 20%. One factor in which we place great importance in evaluating investments is the inside (management and directors) ownership. Significant purchasing activity by insiders is usually indicative of undervaluation. Most investors, however, only consider inside ownership in terms of common stocks. The Everen securities demonstrate that this factor can inform fixed income investors as well. When Bill did his work on this issue, he noted that insiders owned a substantial percentage of the shares and that insiders continued to make open market purchases. We believe that the corporate fixed income market offers plentiful opportunities to purchase mispriced securities. Our job at The Oakmark Balanced Fund is to determine which issues have the most desirable risk/reward characteristics. I will have more to say about our fixed income holdings in future reports. As always, please feel free to write or E-mail me with your questions or comments. CLYDE S. MCGREGOR Portfolio Manager hacsm@aol.com August 2, 1996 18 THE OAKMARK BALANCED FUND SCHEDULE OF INVESTMENTS -- JULY 31, 1996 (UNAUDITED)
Shares Held Market Value - ------------------------------------------------------------------------------ EQUITY AND EQUIVALENTS -- 55.6% RETAIL-2.7% 8,500 The Kroger Company $ 320,875 OTHER CONSUMER GOODS & SERVICES-15.2% 36,200 Arctco, Inc. 384,625 13,400 Promus Hotel Corporation 365,150 9,900 The Black & Decker Corporation 363,825 6,500 Armstrong World Industries, Inc. 360,750 20,800 JUNO Lighting Inc. 312,000 ------------ 1,786,350 FOOD & BEVERAGE-6.4% 3,900 Philip Morris Companies Inc. 408,037 10,150 H.J. Heinz Company 336,219 ------------ 744,256 BANKS & OTHER FINANCIAL-9.3% 10,000 Associates First Capital Corporation, Class A 383,750 7,300 First USA, Inc. 356,788 6,700 Mellon Bank Corporation 353,425 ------------ 710,213 BROADCASTING & PUBLISHING-9.3% 22,500 US West Media Group 388,125 18,100 Lee Enterprises, Incorporated 359,737 6,000 Dun + Bradstreet Corporation 345,000 ------------ 1,092,862 AEROSPACE & DEFENSE-3.0% 8,000 McDonnell Douglas Corporation 358,000 OTHER INDUSTRIAL GOODS & SERVICES-3.1% 20,000 Premark International, Inc. 360,000 COMMERCIAL REAL ESTATE-2.8% 6,200 Catellus Development Corporation, Preferred Convertible Series A, 3.75% 323,175 DIVERSIFIED CONGLOMERATES-3.8% 20,000 U.S. Industries, Inc. 450,000 TOTAL EQUITY AND EQUIVALENTS (COST: $6,346,743) 6,529,481
19 THE OAKMARK BALANCED FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held/Principal Value Market Value - ------------------------------------------------------------------------------ FIXED INCOME-40.1% CORPORATE BONDS-10.9% RETAIL-0.9% 100,000 The Vons Companies Inc., 9.625% due 4/1/2002 105,250 OTHER CONSUMER GOODS & SERVICES-1.3% 150,000 Samsonite Corporation, 11.125% due 7/15/2005 153,750 FINANCIAL SERVICES-2.4% 250,000 Everen Capital Corporation, 13.50% due 9/15/2007 280,000 AEROSPACE & AUTOMOTIVE-1.3% 150,000 Coltec Industries, Inc., 9.75% due 4/1/2000 153,937 BUILDING MATERIALS & CONSTRUCTION-1.3% 150,000 USG Corporation, Senior Notes Series B, 9.25% due 9/15/2001 153,978 UTILITIES-1.3% 150,000 Midland Funding Corporation, 11.75% due 7/23/2005 157,125 OTHER INDUSTRIAL GOODS & SERVICES-1.5% 150,000 UCAR Global Enterprises Inc., Senior Subordinated Note, 12.00% due 1/15/2005 170,250 RECREATION & ENTERTAINMENT-0.9% 190,000 Harrah's Jazz Bonds, 14.25% due 11/15/2001 99,750 ----------- TOTAL CORPORATE BONDS (COST: $1,350,396) 1,274,000 PREFERRED STOCKS-2.0% BROADCASTING & CABLE TV-2.0% 3,900 Tele-Communications, Inc., Pfd Jr. Class B, 6% 232,050 ----------- TOTAL PREFERRED STOCKS (COST: $257,263) 232,050 GOVERNMENT AND AGENCY SECURITIES-27.2% 1,000,000 United States Treasury Notes, 6.00% due 10/15/1999 989,020 750,000 United States Treasury Notes, 5.625% due 11/30/2000 724,200 600,000 United States Treasury Notes, 6.125% due 5/31/1997 601,260 600,000 United States Treasury Notes, 5.25% due 7/31/1998 589,320 300,000 Federal Home Loan Bank, Consolidated Bond, 6.405% due 4/10/2001 295,128 ----------- TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $3,254,045) 3,198,928 SHORT TERM INVESTMENTS-4.0% REPURCHASE AGREEMENTS-4.0% 474,000 State Street Repurchase Agreement, 5.55% due 08/01/1996 474,000 TOTAL INVESTMENTS (COST $11,682,447)-99.7% $11,708,459 Other Assets, Less Other Liabilities-0.3% 31,267 ----------- TOTAL NET ASSETS-100% $11,739,726 ===========
20 INTERNATIONAL THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (7/31/96) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX [GRAPH APPEARS HERE] Oakmark Morgan Stanley International World ex U.S. Fund Index 9/92 10,000 10,000 10/92 9,800 9,505 10,833 9,621 12,105 11,764 12,607 12,233 10/93 14,454 12,981 16,487 13,786 15,382 13,664 15,194 13,899 10/94 15,121 14,265 13,698 13,124 14,399 14,437 15,506 14,911 10/95 14,659 14,248 16,248 15,312 18,162 16,144 7/96 17,634 15,471 7/31/96 NAV $14.37
AVERAGE ANNUAL TOTAL RETURN THROUGH 7/31/96 ------------------------ TOTAL RETURN TOTAL RETURN FROM FROM INCEPTION LAST 3 MOS. LAST 6 MOS. 7/31/95 9/30/92 ------------ ------------ ------- -------------- OAKMARK INTERNATIONAL -2.9% 8.5% 13.7% 15.9% Morgan Stanley World ex U.S.* -4.2% 1.0% 3.8% 12.1% Morgan Stanley EAFE* -4.2% 1.0% 3.5% 12.1% Lipper Analytical International Fund Average* -2.8% 2.4% 6.7% 12.5%
*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Morgan Stanley EAFE Free Index refers to Europe, Asia and the Far East and includes 18 country sub-indexes. The Lipper International Fund Average includes 106 mutual funds that invest in securities whose primary markets are outside the United States. Past performance is no guarantee of future results. INTERNATIONAL THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS Dear Fellow Shareholders: Our fiscal 3rd quarter return was a negative 2.9%. More importantly, however, your Fund, on a year to date basis, is up more than 16%. This compares favorably with our international fund peer group, represented by the Lipper average of international funds, which was up slightly less than 5%. The quarter was highlighted by a sharp global equity market correction in July when your Fund lost around 4%. We are certain that despite this correction, opportunities in international equity markets are abundant. We remain extremely 21 optimistic about this Fund's long-term prospects. Valuations remain compelling in most overseas markets, interest rates are down, corporate activity is up in Europe and Asia, and the emerging markets continue to grow. WHY THE CONVERGENCE? Frequently, experts list portfolio diversification as one of the main reasons to invest internationally. They claim it is one of the few "free lunches" in investing-a portfolio that includes international stocks should generate a higher expected return with lower volatility. But it seems whenever the U.S. market is hit with a bout of downward volatility, overseas markets move downward in sympathy. This is true IN THE SHORT-TERM, due to the global nature of the world's capital markets as well as to the herd mentality of some "investors" and traders. When traders see something major happening in the world's largest market, there is a tendency to panic and behave defensively everywhere. BECAUSE WE ARE LONG-TERM INVESTORS, SHORT-TERM VOLATILITY DOES NOT CONCERN US. We are only concerned with what is happening to the fundamental economic value of the companies in which we are invested. As a result of this discipline, we use these moments of market volatility to increase our holdings in companies whose share prices have declined due to market conditions, but whose long-term economic value remains relatively unchanged. INVESTING VS. TRADING A few years ago, we wrote about the difference between being an investor and being a trader. Given the recent bout of market volatility, here are some of those points again. Traders react instantly to any piece of information (whether it be fact or rumor, material or insignificant) on the state of the economy or a particular company. If a trading trend is established, other traders will quickly follow suit under "the trend is your friend" principle. In contrast, an investor ascertains whether this news is white noise, or whether it truly does have an impact on the business fundamentals of a company. Depending on the accuracy or materiality of any single piece of data, investors can take advantage of the poor discipline and short-term vision of many traders by buying the shares of high quality, but temporarily out-of-favor companies. Traders are concerned with how a company did in a week or a quarter. Investors are concerned about how it did over a 3, 5 or 10 year period. Traders will try to "time" getting in and out of markets, while investors buy and hold companies or dollar cost average. Traders ask 22 us how we will do this year. Investors ask us to define our investment philosophy or whether we have been able to find good value. You can see from the above why a down month or quarter or even year in the world equity markets is of less concern to us than sticking to our guns in volatile times. We fully believe it is in our shareholders' best interests to adopt the same approach. Trading is closer to gambling than to investing-you can make good money doing it, but the odds aren't good. If gambling is the intention, there are far more exciting venues than the world equity markets; for instance, one can bet on the Packers to win the Super Bowl in 1997! TRAVELERS LOG: JAPAN AND KOREA Over the past four years many shareholders have asked us, "Do you still not like Japan?". This is not the question we ask ourselves, but rather "Can we find any companies in Japan that meet our investment criteria?". Finding these companies has been a near Sisyphean task. It is not that we "still don't like Japan." We've spent hundreds of hours and met with well over one hundred companies in the last four years trying to find appropriate Japanese investments. And things have gotten better in those four years. Managements are more willing to talk with investors, financial disclosure has improved, companies have started to unwind cross-shareholdings, and, most unbelievably, a handful of pioneering firms have started to buy back their own stock. There is so much to admire about the abilities of Japanese companies: the constant striving for improvement, the ability to deliver high quality, good value consumer products, the efficiency of production, and the loyalty and work ethic of employees. However, none of these factors necessarily translate into attractive equity investments. The meager long-run returns on capital for most of corporate Japan are ample evidence of this. Foreigners have been the only buyers of the Japanese market over the past two years. Most are hoping for a wave of domestic buying in the market driven by all-time low interest rates. This scenario is all the more plausible given that Japanese individuals have been net sellers in the market ever since "the bubble" burst in 1990, and given that Tokyo is the only major market in the world that is still significantly off its all-time high. The scenario excludes one important variable-the price an investor is paying relative to the value of what is received. Our one investment in Japan, KYOCERA, not only represents excellent value but is clearly run 23 for the benefit of shareholders. We will continue to seek out companies of this quality trading at sensible prices. Korean companies in general have many of the same blemishes as their Japanese role models, including low investment returns, cross-shareholdings, empire building mentalities (di-worse-ification), and low regard for minority shareholders. The biggest difference is price. Korea is unquestionably the cheapest stock market in Asia. Investors are amply compensated for the less- than-ideal conditions by paying a substantial discount to the economic value of the company. We have taken advantage of the recent raising of the foreign investment limitation by investing more money in high-quality Korean firms. We believe that as the country continues to deregulate and decentralize ahead of its entry into the Organization of Economic Cooperation and Development (OECD), that it will be a market of great potential. Our portfolio weightings in Japan and Korea illustrate how unimportant indices are to our investment decisions. As of the end of the third quarter, our weighting in Korea (2.7% of assets) was roughly the same as our weighting in Japan (2.5%), even though Japan represents 40% of Morgan Stanley's widely followed international benchmark EAFE (Europe, Australia, and the Far East). Korea is not even in the EAFE index. In The Oakmark International Fund, geographic portfolio allocation will always be a fall-out of stock selection. We will have the most money in the countries where we can find the most value. We realize that having so little invested in the largest overseas market in the world certainly distinguishes us from our peer group (especially in good times and bad). But you can be sure we will never invest in a company just because its home country has a big weighting in an international market index. DAVID HERRO MICHAEL WELSH Portfolio Managers 72242.772@Compuserve.com oakix@aol.com August 8, 1996 24 International THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS COUNTRY DIVERSIFICATION--JULY 31, 1986 (UNAUDITED) % of Fund Country Net Assets - ------------------------------------------------------------------------------ ARGENTINA 5.6% Alparagatas Sociedad Anonima Industrial Y Comercial CIADEA S.A. YPF Sociedad Anonima AUSTRALIA 6.2% National Australia Bank Limited Pioneer International BRAZIL 3.8% Iochpe-Maxion SA Usiminas CANADA 0.9% Call Net Enterprises Inc. FINLAND 1.6% Kone Corporation FRANCE 3.0% Chargeurs International Sa Groupe Legris Industries Pathe Strafor Facom GREAT BRITAIN 13.8% British Aerospace Public Limited Company Cordiant PLC Guinness PLC Reckitt & Colman PLC Rolls-Royce Public Limited Company The Central European Growth Fund PLC HONG KONG 6.6% Chen Hsong Holdings Limited Giordano Holdings Limited Hong Kong Aircraft Engineering Company Limited Lamex Holdings Limited Varitronix International Holdings Limited Yue Yuen Industrial (Holdings) Limited INDONESIA 2.6% Asia Pulp & Paper Company Ltd ISRAEL 3.7% Bezeq Scitex Corporation Limited ITALY 1.0% Parmalat Finanziaria S.p.A. Parmalat Finanziaria S.p.A. Rights JAPAN 2.5% Kyocera Corporation KOREA 2.7% BYC Company Daehan Flour Mills Co., Ltd. Keumkang Lotte Chilsung Beverage Lotte Confectionery Pacific Corporation MALAYSIA 1.5% Leong Hup Holdings Berhad Technology Resources Industries Berhad MEXICO 4.7% Grupo Financiero Bancomer, S.A. De C.V. (GFB)-B Grupo Financiero Bancomer, S.A. De C.V.- L Telefonos de Mexico, S.A. de C.V. NETHERLANDS 7.0% EVC International NV Hollandsche Beton Groep nv Macintosh Royal Pakhoed N.V. NEW ZEALAND 2.8% Lion Nathan Limited NORWAY 2.3% Kvaerner PORTUGAL 3.3% Banco Espirito Santo E Comercial de Lisboa, S.A. SPAIN 5.0% Banco Popular Espanol Telefonica Union Electrica Fenosa S.A. SWEDEN 13.0% AB Volvo Avesta Sheffield Fastighets AB Nackebro Mo och Domsjo AB Svenska Handelsbanken Svenskt Stal AB Series A Svenskt Stal AB Series B SWITZERLAND 2.2% Saurer Ltd. TAIWAN 0.3% Tung-Ho Steel Enterprise Corp. 25 International THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)
Shares Held Description Market Value - ------------------------------------------------------------------------------ COMMON STOCKS--96.8% CONSUMER NON-DURABLES--3.0% 91,828,000 Yue Yuen Industrial Athletic Footwear (Holdings) Limited Manufacturing (Hong Kong) $ 26,123,595 88,233 Chargeurs International Wool Production Holding Sa (France) Company 3,505,725 24,000 BYC Company (Korea) Textile Manufacturer 3,247,632 35,820 Pacific Corporation Cosmetics and Household (Korea) Goods Manufacturer 660,967 ------------ 33,537,919 FOOD & BEVERAGE--9.4% 4,945,000 Guinness PLC Distiller & Brewer (Great Britain) 35,535,698 12,113,200 Lion Nathan Limited New Zealand Brewer (New Zealand) 31,907,615 8,700,000 Parmalat Finanziaria Dairy Products S.p.A. (Italy) 10,989,185 4,939,000 Leong Hup Holdings Major Poultry Operation in Berhad (Malaysia) Malaysia and KFC Operator 9,538,417 56,000 Lotte Confectionery Confectionary Manufacturer (Korea) 9,334,481 44,770 Lotte Chilsung Manufacturer of Soft Drinks, Beverage (Korea) Juices, & Sport Drinks 5,948,038 31,770 Daehan Flour Mills Food Processing Co., Ltd. (Korea) 2,813,925 8,700,000 Parmalat Finanziaria Dairy Products S.p.A., Rights (Italy) 377,753 ------------ 106,445,112 HOUSEHOLD PRODUCTS--1.8% 1,950,853 Reckitt & Colman PLC Household Cleaners and (Great Britain) Air Fresheners 19,936,389 RETAIL-2.8% 12,403,000 Giordano Holdings East Asian Clothing Retailer Limited (Hong Kong) & Manufacturer 10,986,325 17,430,294 Alparagatas Sociedad Textiles and Footwear Anonima Industrial Y Comercial (Argentina) 10,806,782 451,300 Macintosh (Netherlands) Non-Food Specialty Retailer 10,243,161 ------------ 32,036,268 TELECOMMUNICATIONS--10.1% 1,295,100 Telefonos de Mexico, Telephone Company in Mexico S.A. de C.V. (Mexico) (b) 39,662,438 2,050,500 Telefonica (Spain) Spanish Telecommunications 35,763,111 9,330,000 Bezeq (Israel) Telephone Company 21,377,246
26 International THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held Description Market Value - ------------------------------------------------------------------------------ 908,500 Call Net Enterprises Inc., Telecommunications Common (Canada) $ 10,374,927 2,350,000 Technology Resources Telecommunications Industries Berhad (Malaysia) 7,203,101 ------------ 114,380,823 TRANSPORTATION--6.3% 2,434,600 AB Volvo (Sweden) Automobiles and Trucks 52,650,747 3,197,497 CIADEA S.A. Assembler and Distributor (Argentina) (a) of Automobiles 18,065,860 ------------ 70,716,607 OIL & NATURAL GAS--3.0% 1,631,200 YPF Sociedad Anonima Oil Exploration, (Argentina) (b) Production and Marketing 34,255,200 ELECTRIC--0.2% 366,968 Union Electrica Fenosa Spanish Electric S.A. (Spain) Utility 2,226,971 BANKS--2.8% 5,275,000 National Australia Bank Largest Australian Limited (Australia) Bank 47,898,909 2,275,480 Banco Espirito Santo Portuguese Bank E Comercial de Lisboa, S.A.(Portugal) 37,779,687 1,268,850 Svenska Handelsbanken Large Swedish Bank Series A (Sweden) 26,288,859 108,093 Banco Popular Espanol Large Spanish Bank (Spain) 18,680,509 26,635,000 Grupo Financiero Large Mexican Bancomer, S.A. Financial Group De C.V. (GFB)-B (Mexico) (a) 11,555,238 6,129,630 Grupo Financiero Large Mexican Bancomer, S.A. Financial Group De C.V.- L (Mexico) (a) 2,020,713 ------------ 144,223,915 INVESTMENT COMPANIES--0.4% 4,200,000 The Central European Diversified, Growth Fund PLC Closed-End Fund (Great Britain) Investing in Central Europe 3,985,068 BROADCASTING & PUBLISHING--1.9% 88,233 Pathe (France) Television & Film 21,087,332 COMPUTER SYSTEMS--1.9% 1,361,500 Scitex Corporation Color Pre-Press Limited (Israel) (b) Systems 20,933,063
27 International The Oakmark International Fund Schedule of investments-July 31, 1996 (Unaudited) (continued)
Shares Held Description Market Value - ------------------------------------------------------------------------------ MARKETING SERVICES-4.5% 30,408,656 Cordiant PLC Global Advertising Agency (Great Britain) (a) $ 51,083,137 AEROSPACE-5.7% 7,848,737 Rolls-Royce Public Jet Engines Limited Company (Great Britain) 26,614,165 7,504,400 Hong Kong Aircraft Commercial Aircraft Overhaul Engineering Company and Maintenance Limited (Hong Kong) 19,116,894 1,299,666 British Aerospace Public Defense Products and Limited Company Civil Aviation (Great Britain) 18,780,366 ------------ 64,511,425 CHEMICALS-4.7% 989,165 EVC International NV Western European PVC (Netherlands) Manufacturer 28,797,262 943,383 Royal Pakhoed N.V. Petroleum Products, (Netherlands) Chemical Handling 24,552,396 ------------ 53,349,658 COMPONENTS-3.7% 419,000 Kyocera Corporation Electric Components (Japan) 28,690,834 7,177,000 Varitronix International Liquid Crystal Displays Holdings Limited (Hong Kong) 13,085,707 972,000 Chen Hsong Holdings Plastic Injection Moulding Limited (Hong Kong) Machines 515,330 ------------ 42,291,871 MACHINERY & METAL PROCESSING-2.4% 66,000 Saurer Ltd (Switzerland) Textile Machinery 24,530,193 17,323 Strafor Facom (France) Metal Processing, Office Equipment, Mining Tools 1,230,942 7,880,000 Iochpe-Maxion SA Agricultural Machinery & (Brazil) Automotive Parts 911,208 ------------ 26,672,343 FORESTRY PRODUCTS-4.2% 2,785,600 Asia Pulp & Paper Paper & Packaging Company Ltd Products in Asia (Indonesia) (a) (b) 29,945,200 694,500 Mo och Domsjo AB Paper, Pulp & Timber (Sweden) 17,697,546 ------------ 47,642,746
28 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED) Shares Held/Principal Value Description Market Value
MINING AND BUILDING MATERIALS--2.7% 8,180,923 Pioneer International Concrete Products, (Australia) Aggregates $ 22,399,619 126,980 Keumkang (Korea) Building Materials 8,357,030 -------------- 30,756,649 OTHER INDUSTRIAL GOODS & SERVICES--2.7% 161,870 Kone Corporation Elevators (Finland) 18,036,057 195,097 Groupe Legris Industries Europe's Leading Crane (France) Manufacturer 7,810,284 14,040,000 Lamex Holdings Limited Hong Kong's Largest (Hong Kong) Office Furniture Supplier 5,128,858 -------------- 30,975,199 SHIP BUILDING--2.3% 723,110 Kvaerner (Norway) Shipbuilding and Engineering 25,831,440 STEEL--8.3% 39,563,700 Usiminas (Brazil) Steel Production 42,230,476 3,575,000 Avesta Sheffield Stainless Steel (Sweden) 33,520,356 1,090,000 Svenskt Stal AB, Steel Series A (Sweden) 14,011,554 374,000 Tung-Ho Steel Enterprise Taiwanese Manufacturer of Corp. (Taiwan) (a) Steel Bars and H-Beams 3,605,996 65,200 Svenskt Stal AB, Steel Series B (Sweden) 838,122 -------------- 94,206,504 DIVERSIFIED CONGLOMERATES--0.5% 378,200 Koors Industries Israeli Holding Company Limited (United States) 6,003,925 REAL ESTATE CONSTRUCTION--1.5% 88,732 Hollandsche Beton Construction Groep nv (Netherlands) 15,837,712 121,885 Fastighets AB Nackebro Real Estate (Sweden) 1,566,787 -------------- 17,404,499 TOTAL COMMON STOCKS (COST: $1,064,663,708) 1,094,494,063 SHORT TERM INVESTMENTS--2.7% REPURCHASE AGREEMENTS--0.0% 459,000 State Street Repurchase Agreement, 5.55% due 8/1/1996 459,000
29 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED) Shares Held/Principal Value Description Market Value
COMMERCIAL PAPER--2.7% 20,000,000 Ford Motor Credit Corp., 5.60% due 8/1/1996 $ 20,000,000 10,000,000 Ford Motor Credit Corp., 5.38% due 8/9/1996 10,000,000 -------------- 30,000,000 TOTAL SHORT TERM INVESTMENTS (COST: $30,459,000) $ 30,459,000 Total Investments (Cost $1,095,122,708)--99.5% $1,124,953,063 Foreign currencies (Cost $5,271,053)--0.5% $ 5,722,881 Other assets, less other liabilities--0% (c) 551,909 -------------- TOTAL NET ASSETS-100% $1,131,227,853 ==============
____________ Notes: (a) Non-income producing security. (b) Represents an American Depositary Receipt. (c) Includes portfolio and transaction hedges. For the Fund's fiscal year ending October 31, 1995 the portfolio turnover was 27% and the Fund's expense ratio was 1.40%. 30 THE OAKMARK INTERNATIONAL EMERGING VALUE FUND RESULTS FROM NOVEMBER 1, 1995 (INCEPTION) THRU JULY 31, 1996: 7/31/96 NAV $11.04
CALENDAR YTD SINCE INCEPTION THRU 7/31/96* 11/1/95* ------------- -------------- THE OAKMARK INT'L EMERGING VALUE FUND........... 14.6% 10.4% Morgan Stanley World ex U.S..................... 1.6% 8.6% Lipper Analytical International Fund Average.... 4.8% 9.0% Lipper Emerging Market Fund Index............... 7.3% 8.2%
*Total return includes change in share prices and in each case included reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Lipper International Fund Average includes 106 mutual funds that invest in securities whose primary markets are outside the United States. The Lipper Emerging Market Fund Index is comprised of 10 emerging market funds. Past performance is no guarantee of future results. THE OAKMARK INTERNATIONAL EMERGING VALUE FUND REPORT FROM DAVID G. HERRO AND ADAM D. SCHOR, PORTFOLIO MANAGERS Dear Fellow Shareholders: Your Fund declined by 2.7% during the quarter ended July 31, 1996, which included July's global equity market correction. The Oakmark International Emerging Value Fund outperformed its peer group during this quarter and is up more than 14.5% since the beginning of the calendar year. We continue to be enthusiastic about this Fund's prospects because of the attractiveness of the Fund's universe: companies located in emerging markets or small companies located outside the USA. MARKETS AND SOAP OPERAS As we leave the third quarter, the national election draws near and terrorism remains foremost in our minds, yet the U.S. stock market remains strong. The U.S. economy and investment community, generally, are mature and can weather these events. Successful companies will continue to be successful. There are no sea changes in the United States, just gentle shifts in the tide. Global markets eventually will behave like this. They don't all yet, but some are changing. At the end of the quarter, Argentina's finance minister, Domingo Cavallo, resigned after an argument with President Carlos Menem. Two years ago, just the threat of Cavallo's departure sent the market down sharply. Today the market is holding up. Immediately after Cavallo's resignation we spoke to Alan Clutterbuck, a director of Alpargatas, an Argentine footwear company we added to the Fund this quarter. Alan 31 was initially concerned that the resignation would affect consumer confidence and hurt sales. But early signs are positive. There has been no rush to trade-in Argentine pesos for U.S. dollars as there was after the last Mexican crisis and subsequent public rift between Menem and Cavallo. As Alan tells us, "After I heard the news I went to a television. Two years ago, it would have been a breaking story. This time, I still saw soap operas on television. There was no reason to break in." We don't know his television tastes generally, but we know Alan was glad to see soaps on this time. "We are a more mature country now," he says. "We are taking this with a great deal of maturity. That's good." Politicians talk, come and go, but they do not change our daily lives. It's not the national ecomony that's important but our own private economies. The employment statistics an individual most cares about are his own, not the country's. There are two important employment rates: 0% and 100%, with a sample size of one. Businesses, like individuals, forge ahead. They don't live through statistics. They don't exist because of government or politicians; indeed, most thrive despite these entities. Businesses exist because they sell goods and services that are in demand and can be priced to cover their costs. A successful business worries more about the next product or next sale than about the next president or economic data release. And successful investors do the same. SIMPLE VIEW In emerging markets, it should be just as simple but it's not. Not all markets and investors show the restraint that Argentina is now showing. When an election nears or terrorists strike, investors get nervous. They get concerned that other investors will get concerned, so they sell before the rest of the pack sells. It's like a puppy chasing his tail, spinning out of control. This tail-spinning, however, ignores a fundamental principle--investment rewards ultimately reflect the successes of the businesses in which one invests. 32 This basic principle underlies some important questions we consider when investing: 1. WHO CONTROLS THE COMPANY? We often become linked to major shareholders who are managers and majority owners of their businesses. Their competency, honesty and integrity determine whether we will invest with them. When we buy into a company, we expect to be with it for many years, so we must choose our partners carefully. 2. CAN IT COMPETE ON ITS OWN? We look for globally competitive companies not reliant on protective tariffs or regulations. We know that eventually barriers break down and competitors rush in. If a company is not globally competitive, it is unwise to get involved with it. 3. IS IT FINANCIALLY STABLE? Given the volatility small and emerging market companies face, we look for companies with the financial strength to weather storms. Good management will navigate through these storms, but the financial boat can't be too leaky. We are certain that we can generate excess returns by buying undervalued companies that meet these three criteria. There may be volatility. Ultimately, however, the performance of these companies will make the investment worthwhile. DAVID HERRO ADAM SCHOR 72242.722@compuserve.com oakix@aol.com Portfolio Managers August 8, 1996 33 THE OAKMARK INTERNATIONAL EMERGING VALUE FUND SCHEDULE OF INVESTMENTS COUNTRY DIVERSIFICATION -- JULY 31, 1996 (UNAUDITED)
% of Fund Country Net Assets - -------------------------------------------------------------------------------- ARGENTINA 6.1% Alparagatas Sociedad Anonima Industrial Y Comercial CIADEA S.A. YPF Sociedad Anonima AUSTRALIA 12.5% CE Heath International Holdings Limited Parbury Limited Solution 6 Holdings Limited Wattyl AUSTRIA 0.4% Bau Holdings BRAZIL 1.2% Banco Nacional S.A. Cemig Iochpe-Maxion SA CANADA 1.8% Moffat Communications Limited FRANCE 4.1% Groupe Fives-Lille The NSC Group GERMANY 1.8% WMF GREAT BRITAIN 6.3% Cordiant PLC Vardon PLC HONG KONG 5.2% TechTronic Industries Company Limited Yip's Hang Cheung (Holdings) Limited HUNGARY 1.7% Egis Gygogyszergyar Soproni Sorgy AR RT INDIA 0.8% Zee Telefilms INDONESIA 5.9% Asia Pulp & Paper Company Ltd PT Polysindo EKA Perkasa IRELAND 7.5% Anglo Irish Bank Corporation plc Barlo Group PLC Fyffes ISRAEL 4.7% Nice Systems Tower Semiconductor Limited ITALY 1.7% Danieli & Company JAPAN 1.8% Fukuda Denshi Co., Ltd. KOREA 6.4% Asia Cement Manufacturing Co. Chosun Brewery Daehan Flour Mills Co., Ltd. Woong Jin Publishing Co., Ltd. MEXICO 5.7% Grupo Herdez, SA de CV Telefonos de Mexico, S.A. de C.V. NETHERLANDS 5.4% EVC International NV N. V. Koninklijke Sphinx Gustavsberg NEW ZEALAND 5.1% Sanford Limited Steel & Tube Holdings Ltd. SINGAPORE 4.3% Aztech Pentex Schweizer Circuits Limited SPAIN 2.4% Grupo Uralita SWEDEN 2.7% BT Industries AB SWITZERLAND 0.9% SwissLog Holding AG
34 THE OAKMARK INTERNATIONAL EMERGING VALUE FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)
Shares Held Description Market Value - ------------------------------------------------------------------------------ COMMON STOCKS--96.4% CONSUMER NON-DURABLES--4.0% 2,652,000 PT Polysindo EKA Integrated Textile Perkasa (Indonesia) Manufacturer $ 1,381,544 FOOD & BEVERAGE--6.1% 2,934,000 Grupo Herdez, SA de Manufacturer and CV (Mexico) Distributor of Bottled and Canned Food 1,044,610 14,410 Chosun Brewery (Korea) Korean Brewer 450,257 4,500 Daehan Flour Mills Food Processing Co., Ltd. (Korea) 398,573 13,155 Soproni Sorgy AR RT Hungarian Brewer (Hungary) 203,275 ----------- 2,096,715 HOUSEHOLD PRODUCTS--4.2% 47,550 N.V. Koninklijke Bathroom Products Sphinx Gustavsberg (Netherlands) 820,224 3,000 WMF (Germany) Tableware and Kitchenware 613,368 ----------- 1,433,592 RETAIL--3.0% 1,625,000 Alparagatas Sociedad Textiles and Footwear Anonima Industrial Y Comercial (Argentina) 1,007,500 TELECOMMUNICATIONS--2.7% 29,950 Telefonos de Mexico, Telephone Company S.A. de C.V. in Mexico (Mexico) (b) 917,219 TRANSPORTATION--1.3% 77,250 CIADEA S.A. Assembler and Distributor (Argentina) (a) of Automobiles 436,463 PHARMACEUTICAL--1.1% 7,600 Egis Gygogyszergyar Hungarian Pharmaceutical (Hungary) Company 376,822 OTHER CONSUMER GOODS & SERVICES--5.4% 585,000 Vardon PLC Bingo Clubs (Great Britain) 982,734 528,133 Fyffes (Ireland) Distributor of Fresh Fruit, Flowers and Produce in Europe 871,394 ----------- 1,854,128
35 The Oakmark International Emerging Value Fund Schedule of Investments--July 31, 1996 (Unaudited) (continued)
Shares Held Description Market Value - ------------------------------------------------------------------------------ OIL & NATURAL GAS--1.9% 30,500 YPF Sociedad Anonima Oil Exploration, Production (Argentina) (b) and Marketing $ 640,500 ELECTRIC--1.0% 12,500,000 Cemig (Brazil) Electric Utility 343,447 BANKS--2.2% 750,000 Anglo Irish Bank Irish Bank Corporation pic (Ireland) 752,184 8,800,000 Banco Nacional Brazilian Bank S.A. (Brazil) (c) 0 ---------- 752,184 OTHER FINANCIAL--2.0% 391,844 CE Health International Insurance and Reinsurance Holdings Limited Broker (Australia) 687,977 BROADCASTING & PUBLISHING--4.0% 46,700 Moffat Communications Owner and Operator of Limited (Canada) Television Stations and Cable Systems 625,022 8,045 Woong Jin Publishing Publisher Co., Ltd. (Korea) 473,061 85,900 Zee Telefilms, B Shares Broadcasting and TV (India) 275,025 ---------- 1,373,108 COMPUTER SYSTEMS--9.8% 1,382,500 Solution 6 Holdings Design Computer Systems/ Limited (Australia) Consultants 1,625,338 55,000 Nice Systems (Israel) Voice Logging Systems 1,072,500 2,005,000 Aztech (Singapore) Design and Produce Multimedia Computing Products 638,490 ---------- 3,336,328 MARKETING SERVICES--3.4% 685,000 Cordiant PLC Global Advertising Agency (Great Britain) (a) 1,150,723 CHEMICALS--3.0% 34,600 EVC International NV Western European PVC (Netherlands) Manufacturer 1,007,299 COMPONENTS--6.7% 1,605,000 Barlo Group PLC Manufacturer of Radiators (Ireland) and Industrial Plastics 934,649
36 THE OAKMARK INTERNATIONAL EMERGING VALUE FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)(CONTINUED)
Shares Held Description Market Value - -------------------------------------------------------------------------------- 627,000 Pentex Schweizer Manufacturer and Marketer Circuits Limited of Printed Circuit Boards $ 834,166 (Singapore) 55,900 Tower Semiconductor Semi Conductors 517,075 Limited (Israel) ------------- 2,285,890 MACHINERY & METAL PROCESSING--3.3% 150,500 Steel & Tube Holdings Produces and Distributes Steel Ltd. (New Zealand) 757,585 3,125 Groupe Fives-Lille Builder of Heavy Machinery (France) 285,735 576,000 Iochpe-Maxion SA Agricultural Machinery & (Brazil) Automotive Parts 66,606 ------------- 1,109,926 FORESTRY PRODUCTS--1.9% 59,000 Asia Pulp & Paper Paper & Packaging Company Ltd Products in Asia (Indonesia)(a)(b) 634,250 MINING AND BUILDING MATERIALS--8.2% 3,268,622 Parbury Limited Manufactures Building Products (Australia) 1,162,940 22,550 Asia Cement Large Cement Manufacturer Manufacturing Co. 846,076 (Korea) 97,100 Grupo Uralita (Spain) Manufacturers of Building Products and Chemicals 804,237 ------------- 2,813,253 OTHER INDUSTRIAL GOODS & SERVICES--13.1% 10,090,000 Yip's Hang Cheung Paint Company (Holdings) Limited (Hong Kong) 1,226,462 586,400 Sanford Limited Owns and Manges Fisheries (New Zealand) 970,460 212,926 Wattyl (Australia) Paint Company 798,740 25,000 Fukuda Denshi Co., Medical Products Manufacturer Ltd. (Japan) and Distributor 620,580 3,850,000 TechTronic Industries Manufactures Electric Hand Company Limited Tools (Hong Kong) 552,610 1,045 SwissLog Holding Logistics Services AG (Switzerland) 301,115 ------------- 4,469,967
37 THE OAKMARK INTERNATIONAL EMERGING VALUE FUND SCHEDULE OF INVESTMENTS -- JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held/Principal Value Description Market Value - ------------------------------------------------------------------------------ PRODUCTION EQUIPMENT--7.7% 8,560 The NSC Group Manufacturer of (France) Textile Equipment $ 1,127,420 65,000 BT Industries AB Fork Lifts & Transportation Equipment 933,852 175,300 Danieli & Company Steel Mini-Mills (Italy) Equipment 565,097 ------------ 2,626,369 REAL ESTATE CONSTRUCTION--0.4% 2,600 Bau Holdings (Austria) Construction 151,827 TOTAL COMMON STOCKS (COST: $33,007,745) 32,887,031 SHORT-TERM INVESTMENTS--4.7% REPURCHASE AGREEMENTS--4.7% 1,605,000 State Street Repurchase Agreement, 5.55% due 8/1/1996 1,605,000 Total Investments (Cost $34,612,745)--101.1% $ 34,492,031 Foreign currencies (Cost $279,518)--0.8% $ 281,487 Other liabilities, less other assets--(1.9%) (d) (649,110) ------------ TOTAL NET ASSETS--100% $ 34,124,408 ============
___________ Notes: (a) Non-income producing security. (b) Represents an American Depositary Receipt. (c) On November 10, 1995, the Comissao de Valores Mobiliarios suspended trading in Banco Nacional. The Central Bank of Brazil is in the process of appraising the assets and liabilities of Banco Nacional to determine the value, if any, of its equity. To date, this matter has not been resolved. The shares held by the Fund are valued at zero as determined by the pricing committee of the Board of Trustees. (d) Includes transaction hedges. 38 THE OAKMARK FUNDS' THIRD QUARTER REPORT JULY 31, 1996 Trustees and Officers Trustees Michael J. Friduss Allan J. Reich Thomas H. Hayden Marv Rotter Christine M. Maki Burton W. Ruder Victor A. Morgenstern Peter S. Voss Gary Wilner, M.D. Officers Victor A. Morgenstern-President Robert J. Sanborn-Executive Vice President David G. Herro-Vice President Clyde S. McGregor-Vice President Steven J. Reid-Vice President Adam Schor-Assistant Vice President Michael J. Welsh-Assistant Vice President Donald Terao-Treasurer Anita M. Nagler-Secretary Ann W. Regan-Vice President-Shareholder Operations and Assistant Secretary Kristi L. Rowsell-Assistant Treasurer Other Information Transfer Agent State Street Bank and Trust Company Attention: The Oakmark Family of Funds P.O. Box 8510 Boston, Massachusetts 02266-8510 Investment Adviser Harris Associates L.P. Legal Counsel Bell, Boyd & Lloyd Chicago, Illinois Independent Public Accountants Arthur Andersen LLP Chicago, Illinois Address of Fund and Adviser Two North LaSalle Street, Suite 500 Chicago, Illinois 60602 1-800-OAKMARK (1-800-625-6275) 24-HOUR NAV HOTLINE 1-800-GROWOAK(1-800-476-9625) This report, including the unaudited 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. [LOGO] HARRIS ASSOCIATES L.P. 2 North LaSalle Street Chicago, IL 60602 1-800-OAKMARK [LOGO OF THE OAKMARK FUND] THIRD QUARTER REPORT -------------- July 31, 1996 -------------- member of ================== NO LOAD 100% MUTUAL FUND COUNCIL ================== No-Load Funds Managed by HARRIS ASSOCIATES L.P. [LOGO] The Oakmark Family of Funds 1996 THIRD QUARTER REPORT TABLE OF CONTENTS
The Oakmark Fund Performance Chart................... 1 Letter from the Portfolio Manager... 1 Schedule of Investments............. 5 Trustees and Officers.................. 9 Other Important Information............ 9
FOR MORE INFORMATION: Please call 1-800-OAKMARK (1-800-625-6275). 24-HOUR NET ASSET VALUE HOTLINE: To obtain the current net asset value per share of a Fund, please call 1-800-GROWOAK (1-800-476-9625). Oakmark Fund THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (7/31/96) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
Oakmark Fund S&P 500 8/91 10,000 10,000 10/91 12,100 10,201 13,910 10,719 14,660 10,946 15,910 11,279 10/92 17,110 11,216 19,913 11,857 20,136 11,957 22,052 12,276 [GRAPH APPEARS HERE] 10/93 24,504 12,892 25,648 13,372 24,855 12,593 25,321 12,896 10/94 26,653 13,401 26,480 13,444 28,869 14,803 30,883 16,263 10/95 32,397 16,931 36,091 17,213 36,823 19,239 7/96 35,559 18,933
7/31/96 NAV $30.11 AVERAGE ANNUAL TOTAL RETURN* THROUGH 7/31/96 --------------------------------------- TOTAL RETURN TOTAL RETURN FROM FROM FUND INCEPTION LAST 3 MOS. LAST 6 MOS. 7/31/95 8/5/91 ------------ ------------ ------- ---------------------------- THE OAKMARK FUND -3.4% -1.5% 15.1% 28.9% Standard & Poor's 500 Stock Index* -1.6% 1.7% 16.5% 13.6% Dow Jones Industrial Average* -0.1% 3.6% 20.2% 16.0% Value Line Composite Index* -6.6% -0.7% 2.8% 6.6%
*Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. The Dow Jones Average includes only 30 big companies. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results. THE OAKMARK FUND REPORT FROM ROBERT J. SANBORN, PORTFOLIO MANAGER FUND UPDATE The past three months were the most volatile in your Fund's history. Undecided about whether the economy is growing too fast or too slow, investors' chief obsession at the current time is the release of macroeconomic data. We largely ignore this data and observe with bemusement as market commentators greet the latest jobs data (which get revised a month or so later) as if they and they alone hold the answers to market direction, the upcoming election, and whether the planet is warming or cooling. 1 For the first prolonged period in your Fund's existence, however, we are struggling relative to the Standard & Poor's 500. While our holdings are generally reporting satisfactory to better-than-expected business results, in total the market is not rewarding us right now for these results. Frank Layden, ex-coach of the NBA's aptly-named Utah Jazz, had a player who was performing poorly. He asked him, "Son, is it ignorance or apathy?" The player responded, "Coach, I don't know and I don't care." Similarly, we ask ourselves if there is anything deficient in either our philosophy or our effort. The answer is no. There are going to be occasions when our holdings will be out of market favor. They are inevitable, and we will waste no time trying to anticipate market psychology. Rather, we will continue to spend our time trying to better understand the businesses of which we are part owners. If the businesses prosper, so will--sooner or later--their stocks. I am writing this letter on your Fund's fifth birthday. What an experience managing your Fund has been! On behalf of everyone at Harris Associates, I want to thank all of you for your support. HERE COME THE Q! The Q ratio is coming, the Q ratio is coming! Like most fields, the investment profession endures vigorous yet arcane debates, and I sometimes share them with you in these letters. Some prominent market seers are claiming that the stock market is over-valued because of something called the Q ratio. This number compares the market value of stocks with the current replacement value of underlying assets. The seers estimate the Q ratio stands at 1.9, implying that the market is grossly over-valued. In a perfect world, the ratio would always be 1.0. If a manufacturing plant were the market's sole asset, and it could be built today for $X, then the value of the market would also be $X. Alas, the world is not perfect and there is a teensy-weensy problem with the Q ratio: the data have a very tenuous connection with economic reality. Take the case of one of our ten largest holdings, Anheuser-Busch Companies (BUD). In round numbers at year-end 1995, BUD had $0.3B in net current assets (cash, inventories, receivables less payables); $2.3B in investments (largely foreign brewers); and $6.8B in depreciated plant and equipment. Thus, the replacement value of BUD is $9.4B. Since the market value of BUD's equity, plus its debt, is $21.6B, BUD's Q ratio of 2.3 implies that the stock is grossly overvalued. 2 However, while your cool $9.4B could replicate all of BUD's tangible assets, it could not replicate the distribution system, trademarks, and goodwill that BUD possesses. Most companies, especially many of your Fund's largest holdings, are worth far more as going concerns than as liquidations. What is relevant is not the replacement value of a company's assets, but the earnings a set of assets can generate. And, what is foolhardy is basing investment decisions on fallacious philosophies and faulty data. GOOD NEWS REDUX It turns out you can have it both ways-or at least the US can. For years, politicians have lamented the US's low rate of capital investment compared to Germany and Japan. If we would only invest more, goes the dirge, we'd produce more and workers would earn more. It turns out that-I am shocked, shocked!-they missed a crucial point. The McKinsey Global Institute has concluded that the US generates 50 percent more output per unit of capital input than either Germany or Japan. This is very important-Germany spends 40 percent more on capital investment per worker, yet its workers are still less productive than Americans. McKinsey estimates that the return on capital in the US averaged 9 percent between 1974 and 1993, compared to 7 percent in Germany and Japan. While the causes for this gap are complex, McKinsey argues that efficient American capital markets compel managements to invest in the highest-return projects. Also, the intensity of competition and low entrepreneurial barriers in the US compare favorably to the regulations in Germany and Japan that coddle existing firms at the expense of new firms. Yet another example of the invisible hand of the market producing the best outcome! THE OAKMARK BOOK CLUB Some of you have suggested that I revive The Oakmark Book Club, a list of the investment/financial/business books that I have read, and which might be of interest to you. Here goes: Warren Buffett: The Making of an American Capitalist, by Roger Lowenstein (Random House, 1995). My number one recommendation, this is a great biography of the best investor of the century, and a man who has led a nonpareil and fascinating business career; 3 Built to Last: Successful Habits of Visionary Companies, by James Collins and Jerry Porras (Harper Collins, 1994). The authors compare eighteen companies with their rivals, and attempt to analyze why one company prevailed over the other; Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris, by Richard Kluger (Knopf, 1996). An exhaustive and balanced history of the cigarette industry and Philip Morris; Inside Fidelity, by Diana B. Henriquez (Scribner, 1995). This is a history of the US mutual fund industry and its (by far) largest player. I especially enjoyed the scene in which Fidelity's CEO (whose multi-billionaire family controls the company) bumps into five of his fund managers in a Hong Kong hotel in 1995. Alas, he fails to recognize any of them, who at that time collectively managed over $50 billion; The Late Shift: Letterman, Leno, & the Network Battle for the Night, by Bill Carter (Hyperion, 1994). A very readable account of Johnny Carson's retirement and managing the fragile egos of those who put us to bed every night; Aging and Old Age, by Richard Posner (The University of Chicago Press, 1995). Judge Posner, a pioneer in integrating free-market economics and the law, paints a thorough portrait of the largest-growing segment of our society. With entitlement reform inevitable, this should be required reading for every US Congressman; Hit and Run: How Peter Guber and Jon Peters Took Sony for a Ride in Hollywood, by Nancy Griffin and Kim Masters (Simon and Schuster, 1996). The moral of this hilarious book is: don't ever, ever invest in a movie studio. Enjoy! ROBERT J. SANBORN Portfolio Manager harjs@aol.com August 5, 1996 4 THE OAKMARK FUND SCHEDULE OF INVESTMENTS-JULY 31, 1996 (UNAUDITED)
Shares Held Market Value - ------------------------------------------------------------------------------ COMMON STOCKS-92.6% FOOD & BEVERAGE-19.5% 2,670,400 Philip Morris Companies Inc. $279,390,600 1,769,100 Anheuser-Busch Companies Inc. 132,240,225 3,497,250 H.J. Heinz Company 115,846,406 2,422,100 Nabisco Holdings Corp. 81,745,875 685,000 CPC International 45,809,375 1,571,900 Interstate Bakeries 41,655,350 274,600 Ralston Purina Group 17,231,150 200,000 International Dairy Queen, Inc., Class A (a) 4,000,000 ------------ 717,918,981 APPAREL-0.1% 388,500 K-Swiss Inc., Class A 3,836,438 RETAIL-4.0% 2,102,000 Federated Department Stores, Inc. (a) 63,585,500 954,600 The Kroger Company 36,036,150 1,000,000 Carson Pirie Scott & Co. (a) 22,250,000 780,300 Zale Corporation (a) 13,557,712 560,000 Cole National Corporation (a) 9,380,000 53,800 Rex Stores Corporation (a) 692,675 ------------ 145,502,037 OTHER CONSUMER GOODS & SERVICES-10.6% 3,810,400 The Black & Decker Corporation 140,032,200 2,032,800 American Brands, Inc. 92,492,400 1,000,000 Polaroid Corporation 42,250,000 940,400 First Brands Corporation 22,452,050 583,800 GC Companies, Inc. (a) 21,527,625 957,500 Whitman Corporation 21,424,062 885,000 JUNO Lighting Inc. 13,275,000 957,500 Arctco, Inc. 10,173,437 601,500 Justin Industries, Inc. 6,691,688 281,500 Rollins, Inc. 5,911,500 257,600 Paragon Trade Brands, Inc. (a) 5,538,400 395,000 Mikasa, Inc. (a) 3,653,750 207,000 Armor All Products Corporation 3,247,313 ------------ 388,669,425 BANKS-5.3% 3,606,550 Mellon Bank Corporation 190,245,512 340,000 River Bank America (a) 2,890,000 ------------ 193,135,512 INSURANCE-6.0% 3,296,200 Torchmark Corporation 140,500,525 2,108,620 Old Republic International 44,281,020 684,700 American Financial Group, Inc. 20,198,650 501,300 Acordia, Inc. 15,414,975 ------------ 220,395,170
5 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED) Shares Held Market Value - --------------------------------------------------------------------------------
OTHER FINANCIAL--8.4% 3,548,000 First USA, Inc. $173,408,500 2,194,900 AMBAC Inc. 104,806,475 204,400 Fund American Enterprises Holdings, Inc. 16,939,650 474,500 Federal National Mortgage Association 15,065,375 ------------ 310,220,000 BROADCASTING & PUBLISHING--16.8% 2,927,800 Dun + Bradstreet Corporation 168,348,500 9,687,300 U.S. West Media Group 167,105,925 2,174,400 Knight-Ridder, Inc. 142,423,200 6,829,179 Tele-Communications, Inc., Class A (a) 97,315,801 1,928,494 TCI Communications, Inc. (a) 42,426,868 ------------ 617,620,294 PHARMACEUTICAL--3.0% 1,950,000 American Home Products Corporation 110,662,500 MANAGED CARE SERVICES-1.7% 2,000,000 Foundation Health Corporation (a) 49,000,000 420,000 Physicians Health Services, Inc. (a) 7,350,000 500,000 Laboratory Corporation of America Holdings 3,437,500 270,000 Right CHOICE Managed Care, Inc. (a) 3,105,000 ------------ 62,892,500 MEDICAL PRODUCTS--0.9% 1,297,800 Sybron Corporation (a) 32,445,000 70,900 Spacelabs Medical, Inc. (a) 1,444,588 ------------ 33,889,588 AEROSPACE & DEFENSE--5.2% 1,371,110 Lockheed Martin Corporation 113,630,741 1,220,000 McDonnell Douglas Corporation 54,595,000 779,600 Logicon, Inc. 21,731,350 ------------ 189,957,091 BUILDING MATERIALS & CONSTRUCTION--0.4% 590,000 USG Corporation (a) 15,782,500 OTHER INDUSTRIAL GOODS & SERVICES--4.8% 2,839,100 James River Corporation 71,687,275 1,014,300 Bandag Incorporated, Class A 45,897,075 880,400 SPX Corporation 21,899,950 872,000 The Geon Company 21,037,000 170,000 UCAR International Inc. (a) 5,928,750 182,600 Amtrol, Inc. 4,428,050 186,200 Premark International, Inc. 3,351,600 26,300 Bandag Incorporated 1,209,800 ------------ 175,439,500
6 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held Market Value - ------------------------------------------------------------------------------ COMMERCIAL REAL ESTATE--1.0% 2,291,700 Host Marriott Corporation (a) 30,078,563 585,700 Catellus Development Corporation (a) 5,124,875 -------------- 35,203,438 RECREATION & ENTERTAINMENT--0.0% 70,000 Brunswick Corporation 1,330,000 FOREIGN SECURITIES--4.9% 3,135,000 DeBeers Consolidated Mines Limited ADR (b) 95,225,625 3,276,500 YPF Sociedad Anonima (b) 68,806,500 547,700 EVC International NV 15,945,025 -------------- 179,977,150 TOTAL COMMON STOCKS (COST: $2,809,897,840) 3,402,432,124 SHORT-TERM INVESTMENTS--7.4% COMMERCIAL PAPER--4.8% 25,000,000 American Express Credit Corporation, 5.27% due 8/5/1996 25,000,000 50,000,000 Ford Motor Credit Corp., 5.35% due 8/1/1996 50,000,000 50,000,000 Ford Motor Credit Corp., 5.60% due 8/1/1996 50,000,000 50,000,000 Ford Motor Credit Corp., 5.38% due 8/9/1996 50,000,000 -------------- TOTAL COMMERCIAL PAPER (Cost: $175,000,000) 175,000,000 REPURCHASE AGREEMENTS--2.6% 96,424,000 State Street Repurchase Agreement 5.55% due 8/1/1996 96,424,000 TOTAL SHORT-TERM INVESTMENTS (COST: $271,424,000) 274,000,000 Total investments (Cost $3,081,321,840)--100% 3,673,856,124 Other assets, less other liabilities--0% 3,653 -------------- TOTAL NET ASSETS--100% $3,673,859,777 ==============
- ----------- Notes: (a) Non-income producing security. (b) Represents an American Depository Receipt. For the Fund's fiscal year ended October 31, 1995, the portfolio turnover was 18% and the Fund's expense ratio was 1.17%. 7 (THIS PAGE INTENTIONALLY LEFT BLANK) 8 THE OAKMARK FUNDS' THIRD QUARTER REPORT JULY 31, 1996 Trustees and Officers Trustees Michael J. Friduss Allan J. Reich Thomas H. Hayden Marv Rotter Christine M. Maki Burton W. Ruder Victor A. Morgenstern Peter S. Voss Gary Wilner, M.D. Officers Victor A. Morgenstern-President Robert J. Sanborn-Executive Vice President David G. Herro-Vice President Clyde S. McGregor-Vice President Steven J. Reid-Vice President Adam Schor-Assistant Vice President Michael J. Welsh-Assistant Vice President Donald Terao-Treasurer Anita M. Nagler-Secretary Ann W. Regan-Vice President-Shareholder Operations and Assistant Secretary Kristi L. Rowsell-Assistant Treasurer Other Information Transfer Agent State Street Bank and Trust Company Attention: The Oakmark Family of Funds P.O. Box 8510 Boston, Massachusetts 02266-8510 Investment Adviser Harris Associates L.P. Legal Counsel Bell, Boyd & Lloyd Chicago, Illinois Independent Public Accountants Arthur Andersen LLP Chicago, Illinois Address of Fund and Adviser Two North LaSalle Street, Suite 500 Chicago, Illinois 60602 1-800-OAKMARK (1-800-625-6275) 24-HOUR NAV HOTLINE 1-800-GROWOAK(1-800-476-9625) This report, including the unaudited 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. [LOGO THE OAKMARK FUND] HARRIS ASSOCIATES L.P. 2 North LaSalle Street Chicago, IL 60602 1-800-OAKMARK -----END PRIVACY-ENHANCED MESSAGE-----