-----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, N16g8ydiFluEDDi2yvX8JWEowJj8unpcyvMQjnrP1OPqMWii2F91YjqfJbhkUcd8 1jhejNTQV4njSwiKXQMv/A== 0001047469-98-039182.txt : 19981105 0001047469-98-039182.hdr.sgml : 19981105 ACCESSION NUMBER: 0001047469-98-039182 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981104 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-30D SEC ACT: SEC FILE NUMBER: 811-06279 FILM NUMBER: 98737727 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 N-30D ANNUAL REPORT SEPTEMBER 30, 1998 THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK SMALL CAP FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND MEMBER OF - -------------------------------- 100% NO-LOAD MUTUAL FUND COUNCIL - -------------------------------- MANAGED BY HARRIS ASSOCIATES L.P. OAKMARK THE OAKMARK FAMILY OF FUNDS 1998 ANNUAL REPORT ........................................................................ LETTER FROM THE CHAIRMAN AND PRESIDENT...................... 1 THE OAKMARK FAMILY OF FUNDS SUMMARY......................... 2 THE OAKMARK FUND Letter from the Portfolio Manager......................... 4 Schedule of Investments................................... 7 THE OAKMARK SELECT FUND Letter from the Portfolio Manager......................... 10 Schedule of Investments................................... 12 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Manager......................... 14 Schedule of Investments................................... 16 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Manager......................... 19 Schedule of Investments................................... 21 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Manager......................... 24 International Diversification Chart....................... 26 Schedule of Investments................................... 27 THE OAKMARK INT'L SMALL CAP FUND Letter from the Portfolio Manager......................... 32 International Diversification Chart....................... 34 Schedule of Investments................................... 35 FINANCIAL STATEMENTS Statement of Assets and Liabilities....................... 38 Statement of Operations................................... 40 Statement of Changes in Net Assets........................ 42 Notes to Financial Statements............................. 48 TRUSTEES AND OFFICERS....................................... 61
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 617-328-5000. WEB SITE AND 24-HOUR NET ASSET VALUE HOTLINE Access our web site at www.oakmark.com to obtain the current net asset value of a fund, or call 1-800-GROWOAK (1-800-476-9625). LETTER FROM THE CHAIRMAN AND PRESIDENT... ........................................................................ FELLOW SHAREHOLDERS: WE ARE PLEASED TO PRESENT THE ANNUAL REPORT FOR THE OAKMARK FAMILY OF FUNDS. THE PAST YEAR HAS BEEN A DIFFICULT PERIOD AND WE DRAW SMALL COMFORT FROM THE FACT THAT PREVIOUS LETTERS HAVE ENCOURAGED ALL SHAREHOLDERS TO BE REALISTIC IN THEIR RETURN EXPECTATIONS AND ASSET MIX. MORE IMPORTANTLY, AS SHAREHOLDERS AND INVESTMENT MANAGERS, WE ARE CONFIDENT THAT THE CURRENT MARKET VOLATILITY WILL NOT PROVE TO BE A LONG-TERM DETERRENT TO MEETING OUR INVESTMENT GOALS. OUR CONFIDENCE IS BASED ON SEVERAL FACTORS. HARRIS ASSOCIATES, INVESTMENT ADVISER TO THE OAKMARK FAMILY OF FUNDS, WAS FOUNDED IN 1976. THE INVESTMENT PROFESSIONALS OF OUR FIRM HAVE IMPLEMENTED THE SAME RISK-AVERSE VALUE APPROACH FROM THE INCEPTION OF THE FIRM. IN OTHER DIFFICULT PERIODS, OUR REACTION HAS BEEN STRAIGHTFORWARD AND SUCCESSFUL. OUR PEOPLE, PROCESS AND PHILOSOPHY REMAIN CONSTANT AND PORTFOLIO CHANGES ARE MADE CAREFULLY AND NOT EMOTIONALLY. OUR LONG-TERM RESULTS AND EXPERIENCE REINFORCE OUR BELIEF THAT THIS IS THE APPROPRIATE COURSE OF ACTION TO MEET OUR FINANCIAL GOALS. THE BROAD MARKET WEAKNESS OF THE LAST SEVERAL MONTHS HAS PRESENTED SIGNIFICANT INVESTMENT OPPORTUNITIES TO EACH OF OUR FUNDS. OUR OPTIMISM IS STRENGTHENED BY THE QUALITY AND UPSIDE POTENTIAL OF THE SECURITIES THAT WE HOLD AND HAVE ADDED TO OUR FUNDS. IT IS ENCOURAGING THAT OUR INTERNAL BUY LIST IS LONGER THAN IT HAS BEEN IN SEVERAL YEARS. THE ATTRACTIVENESS OF THE STOCKS IN OUR UNIVERSE IS FURTHER CONFIRMED BY OUR DECISION TO RE-OPEN OUR SMALL CAP FUND TO NEW INVESTORS. THE FINAL SOURCE OF OUR CONFIDENCE IS A RESULT OF THE ATMOSPHERE AT OUR FIRM. IN OUR INTERNAL MEETINGS, WE NOTE AN EDGINESS THAT REFLECTS OUR COMPETITIVE SPIRIT. COMPLACENCY IS THE BIGGEST THREAT TO INVESTMENT SUCCESS--IT IS NOT TOLERATED AT OUR FIRM. WE ARE WELL POSITIONED TO BENEFIT FROM THE INEVITABLE REBOUND IN STOCK PRICES AND WE APPRECIATE YOUR CONTINUED CONFIDENCE IN OUR EFFORTS. AS THE MILLENNIUM APPROACHES, WE HAVE RECEIVED A NUMBER OF QUESTIONS ABOUT OUR READINESS. OUR INTERNAL Y2K COMMITTEE HAS BEEN ACTIVE FOR AN EXTENDED PERIOD. WE ARE ON SCHEDULE IN DETERMINING THAT OUR INTERNAL SYSTEMS AND OUTSIDE VENDORS ARE Y2K COMPLIANT. AT THIS TIME, WE EXPECT NO BUSINESS DISRUPTIONS TO OCCUR WHEN WE ENTER THE NEXT CENTURY. IN ADDITION, WE ARE WELL PREPARED FOR THE EURO CONVERSION IN THE INTERNATIONAL MARKETS. THOUGH LESS PUBLICIZED, THIS CURRENCY CHANGE ALSO REQUIRES SUBSTANTIAL INTERNAL PLANNING AND VENDOR CONTACT. WE SIMILARLY EXPECT THAT CONVERSION TO A COMMON CURRENCY IN EUROPE WILL NOT CAUSE OPERATIONAL PROBLEMS FOR OUR INTERNATIONAL FUNDS. WE LOOK FORWARD TO BETTER TIMES AHEAD. [SIGNATURE] VICTOR MORGENSTERN CHAIRMAN [SIGNATURE] ROBERT M. LEVY PRESIDENT [LOGO] 1 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION ........................................................................
THE OAKMARK THE OAKMARK PERFORMANCE FOR PERIOD ENDED FUND SELECT SEPTEMBER 30, 1998 FUND -------------------- -------------------- 3 MONTHS -13.8% -17.2% .............................................................................. 6 MONTHS -16.2% -15.7% .............................................................................. 1 YEAR -4.1% 3.6% .............................................................................. AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 15.0% N/A .............................................................................. 5 YEAR 16.7% N/A .............................................................................. SINCE INCEPTION 25.2% 31.7% VALUE OF $10,000 $49,899 $16,936 FROM INCEPTION DATE (8/5/91) (11/1/96) - ------------------------------------------------------------------------------ TOP FIVE HOLDINGS Philip Morris Cablevision Systems AS OF SEPTEMBER 30, 1998 Companies, Corporation, Cl COMPANY AND % OF TOTAL NET Inc. 9.2% A 13.8% ASSETS Nike, Inc., Cl USG B 6.1% Corporation 9.7% Mattel, Inc 5.4% U.S. Industries, Banc One Inc. 9.2% Corporation 5.4% PartnerRe Lockheed Martin Ltd. 8.2% Corporation 5.3% Gucci Group 8.2% - ------------------------------------------------------------------------------ TOP FIVE INDUSTRIES Other Consumer Broadcasting & AS OF SEPTEMBER 30, 1998 Goods & Cable TV 13.8% INDUSTRIES AND % OF TOTAL NET Services 20.1% Building Materials ASSETS Food & & Beverage 15.2% Banks & Construction 9.7% Thrifts 14.0% Diversified Aerospace & Defense 9.1% Conglomerates 9.2% Apparel 6.1% Insurance 8.2% Retail 8.2%
2 THE OAKMARK FAMILY OF FUNDS ......................................................................
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK SMALL CAP EQUITY AND INTERNATIONAL INTERNATIONAL FUND INCOME FUND FUND SMALL CAP FUND -------------------- -------------------- -------------------- -------------------- 3 Months -26.8% -6.9% -19.4% -17.0% .............................................................................................................................. 6 Months -31.1% -6.4% -29.0% -28.2% .............................................................................................................................. 1 Year -26.4% 2.6% -29.9% -35.2% .............................................................................................................................. Average Annual Total Return for: 3 Year N/A N/A 1.7% N/A .............................................................................................................................. 5 Year N/A N/A 4.0% N/A .............................................................................................................................. Since inception 14.9% 15.4% 8.5% -6.5% Value of $10,000 $14,976 $15,191 $16,322 $8,211 from inception date (11/1/95) (11/1/95) (9/30/92) (11/1/95) - ------------------------------------------------------------------------------------------------------------------------------ TOP FIVE HOLDINGS People's Bank of Imation Tomkins plc 5.6% Enix AS OF SEPTEMBER 30, 1998 Bridgeport, Corp. 4.0% Cordiant Corporation 5.4% COMPANY AND % OF TOTAL NET CT 7.9% Chrysler Communications Cordiant ASSETS U.S. Industries, Corporation 3.5% Group plc 5.3% Communications Inc. 7.8% Quilmes Industrial Group plc 5.0% Cablevision Systems Tele-Communications, SA 5.1% Lambert Fenchurch Corporation, Cl Liberty Media, Fernz Corporation Group plc 4.8% A 4.8% Class A 3.4% Limited 4.5% Haw Par Corporation First Brands Amli Residential Rolls-Royce Ltd. 4.6% Corporation 4.4% Properties plc 4.2% Elevadores Atlas, Ralcorp Holdings, Trust 3.3% SA 4.6% Inc. 4.0% The Dun & Bradstreet Corporation 3.3% - ------------------------------------------------------------------------------------------------------------------------------ TOP FIVE INDUSTRIES Other Consumer U.S. Government Other Industrial Other Industrial AS OF SEPTEMBER 30, 1998 Goods & Bonds 25.7% Goods & Goods & INDUSTRIES AND % OF TOTAL NET Services 13.0% Banks & Services 13.7% Services 11.6% ASSETS Banks & Thrifts 9.8% Food & Retail 11.3% Thrifts 11.5% Automotive 6.5% Beverage 10.1% Other Food & Other Consumer Marketing Financial 11.0% Beverage 11.2% Goods & Services 9.5% Food & Other Industrial Services 6.4% Banks 8.2% Beverage 9.6% Goods & Commercial Real Other Consumer Computer Services 10.3% Estate 6.2% Goods & Software 7.5% Automotive 7.9% Services 6.8%
THE OAKMARK FAMILY OF FUNDS 3 THE OAKMARK FUND REPORT FROM ROBERT J. SANBORN, PORTFOLIO MANAGER ........................................................................ [PHOTO] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (9/30/98) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
The Oakmark Fund S & P 500 8/91 $10,000 $10,000 10/91 $12,100 $10,202 1/92 $13,910 $10,707 4/92 $14,660 $10,947 7/92 $15,910 $11,279 10/92 $17,110 $11,217 1/93 $19,913 $11,836 4/93 $20,136 $11,957 7/93 $22,052 $12,260 10/93 $24,504 $12,896 1/94 $25,648 $13,357 4/94 $24,855 $12,590 7/94 $25,321 $12,890 10/94 $26,653 $13,384 1/95 $26,480 $13,433 4/95 $28,846 $14,781 7/95 $30,883 $16,248 10/95 $32,397 $16,916 1/96 $36,091 $18,608 4/96 $36,823 $19,242 7/96 $35,559 $18,934 10/96 $38,252 $20,988 1/97 $43,112 $23,510 4/97 $44,197 $24,073 7/97 $51,606 $28,797 9/97 $52,009 $28,668 12/97 $54,132 $29,494 3/98 $59,517 $33,663 6/98 $57,909 $34,775 9/98 $49,899 $31,316
AVERAGE ANNUAL TOTAL RETURN* THROUGH 9/30/98 TOTAL RETURN FROM FUND INCEPTION 9/30/98 NAV $33.54 LAST 3 MOS. 8/5/91 - --------------------------------------------------------------------------------- THE OAKMARK FUND -13.8% 25.2% Standard & Poor's 500 Stock Index w/inc** -10.0% 17.3% Dow Jones Industrial Average w/ inc** -12.0% 17.1% Value Line Composite Index** -19.6% 6.7%
*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 Industrial 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. WHAT A SUMMER AND WHAT A YEAR...! ...and am I glad it's over! Summer was beautiful in Chicago-- great weather, another Bulls championship, Sammy Sosa and the Cubs. It was also the summer we learned the definitions of a lot of neat words--"salacious," "parse," and "is," among others. Yet, it was (and remains!) a very rocky period for the global economy and financial markets. The emerging market contagion, Monicagate, and the hedge fund debacle all combined to make equity markets very volatile. In the past month-and-a-half, the Standard & Poor's 500 had 17 trading sessions where it was up or down more than 1 percent! The height of what Shakespeare termed in TWELFTH NIGHT "this very midsummer madness" occurred on the morning of Friday, September 11. The Dow opened down big, but in the course of about ten minutes reversed, appreciating more than 3 percent. The proximate cause of this stunning reversal? President Clinton's tearful confession that he had "sinned." The market took this confession as sincere--as opposed to his prior confessions--and, I guess, interpreted these ostensibly real tears as increasing the chance that he will remain in office for the rest of his term. What are value investors like ourselves to do in this sort of wacky environment in which stock prices are decoupled from intrinsic value? Well, in light of the new forces driving the stock market, we have decided to abandon our one-stock-at-a-time, value-based philosophy. Instead, we have hired a linguist to interpret the nuances of the pronouncements of President Clinton and Alan Greenspan, we have installed cable tuned to CNBC in every investment professional's office, and have implemented a new investment philosophy we term "Buy what's going up." We are very optimistic that these moves will get us back in synch with the current market. Just kidding. Repeat: just kidding. REPEAT: JUST KIDDING. 4 THE OAKMARK FUND ........................................................................ This has been a frustrating year and quarter for us (and for virtually all value investors, be they large cap, small cap, international--whatever). For the year, we lagged behind the S&P 500 by thirteen percent and, for the quarter, four percent. Last quarter, I discussed what I consider to be the reasons for this, and things have not changed. Frankly, many professional investors tend to be either paralyzed by the market weakness or, even worse, abandon their stated philosophies in pursuit of "performance." Many mutual fund managers encounter pressure from their shareholders and bosses to "do something"; generally, this means buying the hot stocks and selling the cold ones. What are we doing? Well, both in our business affairs and our investment execution, we always do the same thing no matter what the environment. We continue to adhere to our philosophy and tune out all the noise. In fact, I am more confident about our Fund's prospects than I have been in a long time. Apparently, the managements of most of our holdings agree, as share repurchase activity among our holdings is at a very high level. As I have said before, we do not regard share buybacks as a panacea, but when stocks are trading significantly below value, they are a very efficient way to increase long-term value per share. In the market declines of 1987 and 1990, these were early indicators of under-valuation in many stocks. I believe it will also be the case this time. As I write this, we are seeing very attractive buying opportunities and, in fact, putting our cash reserves to work. As many of our competitors adopt shorter and shorter investment time-frames, we find less competition from others with our long-term time-frame. While the volatility and uncertainty we are witnessing is not pleasant, it does present us with opportunities that should pay off over time. In future quarters, I hope to discuss individual investments at length. In closing, and mining the same vein that characterized this summer's most famous speech, I take complete responsibility for the performance of the Fund, this has gone on too long and hurt too many innocent people. If I have ever misled anyone--even my wife--that returns would be straight up to the moon, I offer my regret. God bless you and God bless The Oakmark Fund! HEDGE FUND 101 What do you get in an investment firm where partners are ex-Vice Chairman of the Fed, two Nobel Prize winners in economics, and one of the all-time legendary traders? Answer: a decline in your portfolio of over 90 percent this year. Long-Term Capital Management was once a successful hedge fund that has been--alas!--in the news a lot recently. A hedge fund is an investment vehicle whose investors are institutions and very wealthy individuals. Due to this clientele, hedge funds are exempt from most of the onerous regulations that other financial institutions--such as banks and mutual funds--must follow. While hedge funds follow a large variety of strategies, most use borrowed money to enhance returns. The ironically named Long-Term Capital Management was formed by an ex-Solomon Brothers trader who figured prominently in the book LIAR'S POKER. Its specialty was in the fixed-income area. Generally, using computer models, its strategy was to buy and short a wide variety of debt securities that its computers identified as mispriced. During this past summer, Long-Term's portfolio consisted of about $100 billion of securities, and the fund itself had partner equity of around $3.5 billion. This leverage ratio of almost 30:1 made the fund a high-octane one but also made it very vulnerable if its model failed. Thus, after financing costs, if Long-Term was able to eke out a one percent gain from its portfolio, the leverage would allow the partners to realize a return of 30%. Long-Term Capital attracted some very savvy investors, including the heads of many of Wall Street's most prominent firms. The terms were pretty tough: investors paid a management fee plus a percentage of profits, were given only a sketchy annual peek at the portfolio, and had to commit capital for three years. With the outsized gains that were generated, why worry? Well, just like the seemingly infallible HAL in 2001: A SPACE ODYSSEY, Long-Term's computers made a boo-boo. Its models undoubtedly were sophisticated, but depended upon order in the markets in which it invested. (This was the same assumption that blew up portfolio insurance, which was partly responsible for the Crash of 1987). Well, this summer saw volatile, disorderly markets. Long- Term's bets were off, and the leverage magnified them. Long-Term has surrendered virtual control to a passel of THE OAKMARK FUND 5 ........................................................................ financial institutions who had lent it all that money. Personally, I think the long-term effects of Long-Term's demise are negligible. Its clients can afford the loss and should have known about the risk. Perhaps lenders to hedge funds will now exercise more discretion. However, the long-term effect on the economy and the stock market is nil. Individual investors can learn two important lessons from Long-Term. The first is a skepticism towards focusing soley on the historical returns of an investment vehicle. Just looking at the returns Long-Term was generating in its first few years of existence enticed a lot of people who should have known better. A responsible investor should know how one's money is being invested, the philosophy behind it, the leverage and any derivatives used, etc. The second is the ironclad relation between risk and return. Prior to this year, Long-Term had racked up great returns with an apparently low-risk system. We now know the risk was far greater than had been assumed by its investors. [SIGNATURE] ROBERT J. SANBORN Portfolio Manager rsanborn@oakmark.com October 5, 1998 6 THE OAKMARK FUND THE OAKMARK FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 ........................................................................
SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--88.5% FOOD & BEVERAGE--15.2% Philip Morris Companies Inc. 13,810,700 $ 636,155,369 H.J. Heinz Company 4,007,250 204,870,656 Gallaher Group Plc (b) 3,835,500 112,667,812 Nabisco Holdings Corporation, Class A 2,572,100 92,434,844 The Quaker Oats Company 118,000 6,962,000 -------------- 1,053,090,681 APPAREL--6.1% Nike, Inc., Class B 11,457,100 $ 421,764,494 RETAIL--0.3% American Stores Company 648,400 $ 20,870,375 OTHER CONSUMER GOODS & SERVICES--20.1% Mattel, Inc. 13,439,400 $ 376,303,200 The Black & Decker Corporation (c) 8,267,000 344,113,875 H&R Block, Inc. (c) 7,665,800 317,172,475 Polaroid Corporation (c) 4,552,400 111,818,325 Brunswick Corporation (c) 7,280,800 94,195,350 Fortune Brands, Inc. 2,746,800 81,373,950 Juno Lighting, Inc. (c) 1,085,000 24,276,875 First Brands Corporation 1,070,400 23,348,100 GC Companies, Inc. (a)(c) 397,000 15,334,125 -------------- 1,387,936,275 BANKS & THRIFTS--14.0% Banc One Corporation 8,800,548 $ 375,123,359 Washington Mutual, Inc. 10,100,000 340,875,000 Mellon Bank Corporation 4,540,500 250,011,281 -------------- 966,009,640 INSURANCE--1.3% Old Republic International Corporation 4,122,930 $ 92,765,925 PUBLISHING--4.8% Knight-Ridder, Inc. (c) 6,929,400 $ 308,358,300 R. H. Donnelley Corporation (c) 2,098,260 25,965,967 -------------- 334,324,267 INFORMATION SERVICES--5.6% The Dun & Bradstreet Corporation (c) 10,491,300 $ 283,265,100 ACNielsen Corporation (c) 4,764,000 105,999,000 -------------- 389,264,100 COMPUTER SERVICES--2.2% Electronic Data Systems Corporation 4,588,000 $ 152,264,250
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FUND 7 THE OAKMARK FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
SHARES HELD/ PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--88.5% (CONT.) MEDICAL CENTERS--3.9% Columbia/HCA Healthcare Corporation 13,601,000 $ 272,870,063 MEDICAL PRODUCTS--0.9% Sybron International Corporation (a) 3,135,600 $ 59,968,350 AUTOMOTIVE--0.5% SPX Corporation (a)(c) 875,200 $ 36,156,700 AEROSPACE & DEFENSE--9.1% Lockheed Martin Corporation 3,625,000 $ 365,445,312 The Boeing Company 7,599,400 260,754,413 -------------- 626,199,725 MACHINERY & INDUSTRIAL PROCESSING--2.5% Eaton Corporation 2,721,100 $ 170,578,956 FORESTRY PRODUCTS--0.1% Fort James Corporation 237,200 $ 7,783,125 MINING--1.2% DeBeers Centenary AG (b) 6,546,000 $ 82,234,125 OTHER INDUSTRIAL GOODS & SERVICES--0.7% Bandag Incorporated, Class A 1,104,100 $ 34,227,100 The Geon Company 971,600 17,245,900 -------------- 51,473,000 TOTAL COMMON STOCKS (COST: $5,810,888,085) 6,125,554,051 SHORT TERM INVESTMENTS--11.0% GOVERNMENT AND AGENCY SECURITIES--1.4% U.S. GOVERNMENT BILLS--1.4% United States Treasury Bills, 4.29%-5.15% due 10/15/1998-1/14/1999 $100,000,000 $ 99,199,666 -------------- TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $99,146,486) 99,199,666
8 THE OAKMARK FUND THE OAKMARK FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--11.0% (CONT.) COMMERCIAL PAPER--7.4% American Express Credit Corp., 5.27%-5.55% due 10/1/1998-10/14/1998 $180,000,000 $ 180,000,000 Ford Motor Credit Corp., 5.40%-5.55% due 10/1/1998-10/9/1998 160,000,000 160,000,000 General Electric Capital Corporation, 5.45%-5.70% due 10/1/1998-10/5/1998 170,000,000 170,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $510,000,000) 510,000,000 REPURCHASE AGREEMENTS--2.2% State Street Repurchase Agreement, 5.30% due 10/1/1998 $153,865,000 $ 153,865,000 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $153,865,000) 153,865,000 TOTAL SHORT TERM INVESTMENTS (COST: $763,011,486) 763,064,666 Total Investments (Cost $6,573,899,571)--99.5% (d) $6,888,618,717 Other Assets In Excess Of Other Liabilities--0.5% 35,339,165 -------------- TOTAL NET ASSETS--100% $6,923,957,882 -------------- --------------
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (d) At September 30, 1998, net unrealized appreciation of $314,719,146, for federal income tax purposes consisted of gross unrealized appreciation of $1,142,918,937 and gross unrealized depreciation of $828,199,791. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FUND 9 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN, PORTFOLIO MANAGER ........................................................................ [PHOTO] - -------------------------------------------------------------------- THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/98) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE OAKMARK SELECT FUND S & P 500 10/96 $10,000 $10,000 1/97 $12,500 $11,202 4/97 $12,250 $11,470 7/97 $15,290 $13,721 9/97 $16,340 $13,659 12/97 $17,704 $14,053 3/98 $20,078 $16,021 6/98 $20,462 $16,551 9/98 $16,936 $14,904
AVERAGE ANNUAL TOTAL RETURN* THROUGH 9/30/98 TOTAL RETURN FROM FUND INCEPTION 9/30/98 NAV $16.76 LAST 3 MOS. 11/1/96 - ------------------------------------------------------------------------------ THE OAKMARK SELECT FUND -17.2% 31.7% Standard & Poor's 500 Stock Index w/inc** -10.0% 23.2% Standard & Poor's MidCap 400 Index w/ inc** -14.5% 14.7% Value Line Composite Index** -19.6% 3.8%
*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 S&P 400 consists of 400 domestic stocks chosen for market size, liquidity, and industry group representation. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results. For fiscal 1998, The Oakmark Select Fund increased in value by 3.6%. That performance looks especially good versus the 6.3% decline in the S&P MidCap 400. In fact, your fund outperformed 98% of the other funds classified by Morningstar as midcap value funds. Continued strong performance by our cable TV holdings, especially our largest holding Cablevision Systems, was the main contributor to these results. Unlike the full year, the fourth quarter was disappointing as the fund's decline exceeded the drop in the Index. Although the fund declined less from the July 20 peak than did the MidCap Index, (16.0% vs. 18.2%), we weren't able to overcome the loss that occurred in the first week of the quarter when US Industries reported disappointing results. Our equity weighting at the end of the quarter, 88.3%, was slightly below the 90% level that I've indicated would normally be our minimum. This situation was created by an unusual combination of events on the last two days of the quarter including new money coming into the fund, a sharp down market and a tactical decision to defer purchasing a new position. You should view the current cash position as extremely unusual and very temporary (it will likely be back to normal by the time you receive this!). We have no ability to predict the market level, and because of that, we don't use cash as a market timing tool. Declines in individual stock prices this quarter seemed to have little correlation with underlying business value. Because of that, your fund had more turnover than usual as we opportunistically took steps to improve the portfolio. As always, we look for transactions that maximize the portfolio's undervaluation and our confidence in that undervaluation. In addition, we strive to make portfolio changes as tax-efficiently as possible. I think the portfolio today is unusually attractive relative to other stock market opportunities. The S&P 500 at September 30 sold at about 23 times estimated 1999 earnings. Excluding our two cable TV holdings (which aren't valued on a P/E basis), The Oakmark Select Fund had a weighted average P/E on 1999 estimates of 11.5 times. Look at the quality 10 THE OAKMARK SELECT FUND ........................................................................ companies we own and I believe you will agree that a 50% discount to the market P/E is excessive. This inexpensive valuation should allow us to continue toward our goal of exceptional long-term performance. HOW BIG IS TOO BIG? By far the most frequently asked question in your e-mails is: "When should The Oakmark Select Fund close?" The topic of optimal fund size has received a great deal of attention this year thanks largely to the excellent work John Bogle, Jr. of Numeric Investors did explaining why his funds closed. Unfortunately, it seems his conclusion--close the funds--has received much more press than has his well-articulated rationale. I'd like to look at that rationale and see how it applies to The Oakmark Select Fund. Intuitively, we all know that there are limits to how much money can be effectively managed with any investment strategy that attempts to perform better than the overall market. As assets under management grow, the number of investments goes up, each position size increases and the cost to enter and exit each position also goes up. What Mr. Bogle did was to measure the reduction in his return caused by price movements his own trading created. By quantifying those costs, Mr. Bogle found that his investment approach maximized expected excess return with just $350 million under management. What can we learn from his analysis? Most important, because trading costs are the key issue, capacity is constrained by trading volume, not assets under management. Since different investment styles require different levels of trading, they have different capacity. Mr. Bogle identifies three variables that determine a fund's trading cost: the average holding period, the amount of a company being purchased and, lastly, the role stock price momentum plays in the stock selection process. His style, short holding periods for small cap companies that show positive price momentum, has very limited capacity. At the other extreme, a contrarian approach of buying and holding very large companies would have nearly limitless capacity. How does The Oakmark Select Fund compare? Mr. Bogle's average holding is an $800 million market cap company that he holds for four months. Our average market cap today is about $4 billion and our turnover implies a three-year holding period. Per dollar in the fund, he trades nine times as often as we do and is buying companies that are about 20% as large as ours. By multiplication, our Fund could handle 45 times more assets. Further, costs per trade are much higher for strategies that wait for positive price action before a stock is purchased. While our approach is indifferent to stock price momentum, generally our buy targets are hit when a stock is unloved, and our sell targets hit when the stock is quite popular. Because our trades often go against the trend, our market impact is typically much less significant. Capacity for The Oakmark Select Fund, as measured purely by trading costs, would be a very large number. In fact, we have imposed a much tighter constraint. We have said that the fund will generally hold twenty or fewer positions and we want the ability to make meaningful investments in midcap companies when we feel they are attractively priced. The midcap universe today is commonly defined to have an average market cap of about $3 billion (that definition was created when stock prices were much lower, and I think it should now be well above $3 billion). To invest 5% of the fund's assets without owning more than 5% of an average midcap company, our assets could not be greater than the size of that average company. What benefits do current shareholders receive from allowing assets to increase? The most significant benefit is increased tax-efficiency. Because of our long-term holding periods, our gains are normally not only deferred, but also taxed at lower long-term rates. A growing fund gets additional tax benefits. First, some realized gains are avoided because position sizes can be reduced by simply allowing new money to dilute these positions. In a closed fund, it would require a sale, which would generate a taxable gain. Second, both realized and unrealized taxable gains are shared with the new investors even though they didn't benefit from them. The flip side of the argument, that it may be unwise to buy into a fund with a large unrealized gain, is that existing investors have their per-share taxable gains reduced. So, if The Oakmark Select Fund becomes larger than an average midcap stock, we don't develop a large unrealized gain, and we haven't addressed closing, send me e-mails reminding me of this letter. Until then, we welcome new investors because we believe we all benefit from their joining us. Thank you for your continued support. [SIGNATURE] WILLIAM C. NYGREN Portfolio Manager bnygren@oakmark.com October 1, 1998 THE OAKMARK SELECT FUND 11 THE OAKMARK SELECT FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 ........................................................................
SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--88.3% RETAIL--8.2% Gucci Group (b) 2,787,900 $ 100,712,887 OTHER CONSUMER GOODS & SERVICES--5.8% Host Marriott Corporation (a) 3,260,900 $ 41,372,669 Ralston Purina Group 1,016,400 29,729,700 -------------- 71,102,369 BANKS & THRIFTS--8.0% Washington Mutual, Inc. 1,725,000 $ 58,218,750 People's Bank of Bridgeport, Connecticut 1,642,600 40,243,700 -------------- 98,462,450 INSURANCE--8.2% PartnerRe Ltd. (c) 2,522,600 $ 101,061,662 BROADCASTING & CABLE TV--13.8% Cablevision Systems Corporation, Class A (a) 3,930,200 $ 169,735,512 TV PROGRAMMING--4.4% Tele-Communications, Liberty Media, Class A (a) 1,453,550 $ 53,327,116 INFORMATION SERVICES--4.0% The Dun & Bradstreet Corporation 1,818,600 $ 49,102,200 COMPUTER SERVICES--7.2% First Data Corporation 1,900,000 $ 44,650,000 Electronic Data Systems Corporation 1,310,900 43,505,494 -------------- 88,155,494 MEDICAL PRODUCTS--6.0% Amgen, Inc. (a) 975,000 $ 73,673,438 BUILDING MATERIALS & CONSTRUCTION--9.7% USG Corporation (d) 2,740,800 $ 118,539,600 OTHER INDUSTRIAL GOODS & SERVICES--3.8% Premark International, Inc. 1,678,800 $ 47,111,325 DIVERSIFIED CONGLOMERATES--9.2% U.S. Industries, Inc. (d) 7,514,000 $ 113,179,625 TOTAL COMMON STOCKS (COST: $1,075,412,040) 1,084,163,678
12 THE OAKMARK SELECT FUND THE OAKMARK SELECT FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--12.0% GOVERNMENT AND AGENCY SECURITIES--3.2% U.S. GOVERNMENT BILLS--3.2% United States Treasury Bills, 4.29%-5.07% due 10/8/1998-1/14/1999 $40,000,000 $ 39,709,859 -------------- TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $39,688,587) 39,709,859 COMMERCIAL PAPER--6.1% American Express Credit Corp., 5.27%-5.55% due 10/1/1998-10/9/1998 $25,000,000 $ 25,000,000 Ford Motor Credit Corp., 5.30%-5.53% due 10/1/1998-10/7/1998 20,000,000 20,000,000 General Electric Capital Corporation, 5.70% due 10/1/1998 30,000,000 30,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $75,000,000) 75,000,000 REPURCHASE AGREEMENTS--2.7% State Street Repurchase Agreement, 5.30% due 10/1/1998 $32,399,000 $ 32,399,000 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $32,399,000) 32,399,000 TOTAL SHORT TERM INVESTMENTS (COST: $147,087,587) 147,108,859 Total Investments (Cost $1,222,499,627)--100.3% (e) $1,231,272,537 Other Liabilities In Excess Of Other Assets--(0.3)% (3,378,151) -------------- TOTAL NET ASSETS--100% $1,227,894,386 -------------- --------------
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents foreign domiciled corporation. (d) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (e) At September 30, 1998, net unrealized appreciation of $8,772,910, for federal income tax purposes consisted of gross unrealized appreciation of $155,507,575 and gross unrealized depreciation of $146,734,665. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK SELECT FUND 13 THE OAKMARK SMALL CAP FUND REPORT FROM STEVEN J. REID, PORTFOLIO MANAGER ........................................................................ [PHOTO] - -------------------------------------------------------------------- THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/98) AS COMPARED TO THE RUSSELL 2000 INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE OAKMARK SMALL CAP FUND RUSSELL 2000 10/95 $10,000 $10,000 1/96 $10,180 $10,684 4/96 $12,180 $11,841 7/96 $11,830 $10,772 10/96 $13,190 $11,661 1/97 $15,180 $12,708 4/97 $15,170 $11,848 7/97 $18,730 $14,369 9/97 $20,340 $15,774 12/97 $20,290 $15,245 3/98 $21,732 $16,779 6/98 $20,467 $15,997 9/98 $14,976 $12,774
AVERAGE ANNUAL TOTAL RETURN* THROUGH 9/30/98 TOTAL RETURN FROM FUND INCEPTION 9/30/98 NAV $12.63 LAST 3 MOS. 11/1/95 - ------------------------------------------------------------------------------ THE OAKMARK SMALL CAP FUND -26.8% 14.9% Lipper Small Cap Fund Index** -21.4% 5.0% Russell 2000 w/ inc** -20.2% 8.8% S&P Small Cap 600 w/inc** -20.9% 10.9%
*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 or funds whose composition is different from the Fund. The Lipper Small Cap 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 small market capitalization. Past performance is no guarantee of future results. Fortunately, The Oakmark Small Cap Fund's fiscal year ended on September 30, 1998. Results for the fourth quarter and the fiscal year were very disappointing. The shares of small cap companies have not performed well this year and continue to trail the broad market. Unfortunately, The Oakmark Small Cap Fund's results lagged the relevant small cap indices. "It was the worst of times, it was the best of times." SJR, PM. Small cap stocks have been through a very difficult period. It is not uncommon to see a company's shares trading at prices that are down 30% or more from their annual highs. Nor, is it uncommon to see a company's shares trading at prices that represent their annual lows. The indices that measure the performance of the shares of small cap stocks have underperformed the broad market indices for years. The question I am frequently asked is: "When will small caps start to do well again?" I honestly don't know the answer. I don't think we will really know the answer until we can clearly see it in the rear view mirror three to six months after it has happened. Robert McGough of the Wall Street Journal wrote in a recent article: "Predictions of the revival of small-company stocks have been coming about as regularly as Elvis sightings--and so far have had about as much substance too." Leaving predictions to the gurus and pundits, our focus should be on where we are now. I believe we are in the midst of the mutated Dickens quote from above. While there is no doubt that there are some very unsettling events occurring across the globe, we need to look beyond the headlines. As investors, we need to be forward looking. The underperformance of the shares of small cap companies is an opportunity. Historically, small cap stocks have traded at price earnings (P/E) ratios that are greater than those of large cap stocks. Very rarely do small cap stocks trade at a P/E ratio equal to or less than large cap stocks. Right now is one of 14 THE OAKMARK SMALL CAP FUND ........................................................................ those rare occasions where small cap stocks are cheaper than large cap stocks. In fact, we are able to buy small cap stocks that are trading at P/E multiples that are less than ten times earnings, which is less than half the small or large cap P/E multiple. Our experience has been that remaining patient and consistent with our investment philosophy will be rewarded. REDEMPTIONS, DISTRIBUTIONS, AND RE-OPENING One year ago, the total assets of The Oakmark Small Cap Fund were over $1.5 billion. At the end of this past fiscal year total assets are over $600 million. Although it feels like we lost about $900 million, we did not. In fact, net redemptions, the amount shareholders take out of the Fund less the amount they put into the Fund, amounted to over $600 million of the change in assets. What is the effect of redemptions on the Fund? There are several that stand out. First, redemptions require the Fund to sell portfolio securities in order to make payments to shareholders who have elected to redeem their shares of the Fund. Essentially, the Fund was selling solely to create liquidity for redemptions, not because these investments had met our investment targets. The second effect, although not quantifiable, is the effect forced selling of our investments has on the share prices of these companies. There are several unavoidable events in life--they include death, taxes, and mutual fund distributions. The Internal Revenue Service requires that mutual funds annually distribute to shareholders any income and realized capital gains. Since the Fund's inception, there has been relatively low turnover and hence very little realized gain distributed to shareholders. Unfortunately, another significant effect of net redemptions after the portfolio has appreciated is that they force the Fund to realize a significant amount of gains. Those gains, which were all long-term, were distributed to shareholders in early August. We anticipate that any additional distribution will be minimal. It is also worth noting that the Fund currently is carrying a fairly significant unrealized loss in the portfolio. Hence, going forward we should be in a fairly benign tax position. Investors' disinterest in small cap stocks has reduced the level of competition for both the sourcing and purchasing of new investments for the Fund. During the quarter we added five new companies to the portfolio. These companies are all close to their annual lows and between thirty and seventy percent below their annual highs. In order to take advantage of the opportunities we were seeing in the marketplace, the Fund "re-opened" to new investors at the beginning of September. This has helped stem the level of redemptions, mitigating the adverse effects noted above. We believe that new shareholders, as well as existing shareholders, own the Fund for the right reasons...meaning that they want exposure to small cap value stocks and are intrigued by the long-term opportunities available to us. In the future, should the level of inflows be too large or our opportunities to prudently invest the money not be available, we will take the appropriate action. Once again, I would like to thank everyone involved, especially our shareholders, for your support of The Oakmark Small Cap Fund. [SIGNATURE] STEVEN J. REID Portfolio Manager sreid@oakmark.com October 6, 1998 THE OAKMARK SMALL CAP FUND 15 THE OAKMARK SMALL CAP FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 ........................................................................
SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--91.9% FOOD & BEVERAGE--11.2% Ralcorp Holdings, Inc. (a)(b) 1,750,000 $ 24,500,000 Triarc Companies, Inc. (a)(b) 1,250,000 19,453,125 Vlasic Foods International Inc. (a) 500,000 9,343,750 International Multifoods Corporation 500,000 8,218,750 M & F Worldwide Corp. (a) 750,000 7,453,125 -------------- 68,968,750 RETAIL--3.7% Department 56, Inc. (a) 520,000 $ 14,040,000 Ugly Duckling Corporation (a)(b) 1,676,200 8,695,288 -------------- 22,735,288 OTHER CONSUMER GOODS & SERVICES--13.0% First Brands Corporation 1,250,000 $ 27,265,625 Scotsman Industries, Inc. (b) 983,000 22,240,375 Libbey, Inc. 420,500 12,404,750 Barry (R.G.) Corporation (a)(b) 849,100 11,781,262 P.H. Glatfelter Company 500,000 6,531,250 -------------- 80,223,262 BANKS & THRIFTS--11.5% People's Bank of Bridgeport, Connecticut 2,000,000 $ 49,000,000 BankAtlantic Bancorp, Inc., Class A 1,000,001 7,187,507 Northwest Bancorp Inc. 550,000 5,637,500 Niagara Bancorp Inc. (a) 400,000 3,925,000 PennFed Financial Services, Inc. 260,000 3,445,000 Finger Lakes Financial Corp. (b) 188,000 2,068,000 -------------- 71,263,007 INSURANCE--2.3% Financial Security Assurance Holdings Ltd. 292,600 $ 14,264,250 OTHER FINANCIAL--5.5% ARM Financial Group, Inc., Class A 1,000,000 $ 17,750,000 Duff & Phelps Credit Rating Co. (b) 350,000 16,121,875 -------------- 33,871,875 BROADCASTING & CABLE TV--6.8% Cablevision Systems Corporation, Class A (a) 689,800 $ 29,790,737 Ascent Entertainment Group, Inc. (a)(b) 1,500,000 12,000,000 -------------- 41,790,737 TELECOMMUNICATIONS--0.9% ROHN Industries, Inc. (b) 3,000,000 $ 5,812,500 COMPUTER SERVICES--1.5% Symantec Corporation (a) 725,000 $ 9,560,938
16 THE OAKMARK SMALL CAP FUND THE OAKMARK SMALL CAP FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
SHARES HELD/ PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--91.9% (CONT.) AUTOMOTIVE--7.9% SPX Corporation (a) 500,000 $ 20,656,250 Stoneridge, Inc. (a) 1,000,000 16,187,500 Standard Motor Products, Inc. 500,000 12,187,500 -------------- 49,031,250 TRANSPORTATION SERVICES--2.7% Teekay Shipping Corporation (c) 900,000 $ 16,368,750 MACHINERY & INDUSTRIAL PROCESSING--1.9% Northwest Pipe Company (a)(b) 500,000 $ 9,250,000 The Carbide/Graphite Group, Inc. (a) 240,000 2,670,000 -------------- 11,920,000 FORESTRY PRODUCTS--0.8% Schweitzer-Mauduit International, Inc. 216,500 $ 4,708,875 OTHER INDUSTRIAL GOODS & SERVICES--10.3% Ferro Corporation 900,000 $ 17,887,500 Columbus McKinnon Corporation (b) 900,000 17,325,000 MagneTek, Inc. (a) 1,500,000 16,406,250 H.B. Fuller Company 200,000 7,575,000 Binks Sames Corporation (b) 275,000 4,675,000 -------------- 63,868,750 COMMERCIAL REAL ESTATE--4.1% Catellus Development Corporation (a) 1,500,000 $ 19,500,000 Prime Hospitality Corp. 800,000 5,600,000 -------------- 25,100,000 DIVERSIFIED CONGLOMERATES--7.8% U.S. Industries, Inc. 3,200,000 $ 48,200,000 TOTAL COMMON STOCKS (COST: $633,782,649) 567,688,232 SHORT TERM INVESTMENTS--7.8% COMMERCIAL PAPER--5.6% American Express Credit Corp., 5.27%-5.55% due 10/1/1998-10/6/1998 $15,000,000 $ 15,000,000 Ford Motor Credit Corp., 5.40% due 10/2/1998 5,000,000 5,000,000 General Electric Capital Corporation, 5.70% due 10/1/1998 15,000,000 15,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $35,000,000) 35,000,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK SMALL CAP FUND 17 THE OAKMARK SMALL CAP FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- REPURCHASE AGREEMENTS--2.2% State Street Repurchase Agreement, 5.30% due 10/1/1998 $13,543,000 $ 13,543,000 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $13,543,000) 13,543,000 TOTAL SHORT TERM INVESTMENTS (COST: $48,543,000) 48,543,000 Total Investments (Cost $682,325,649)--99.7% (d) $ 616,231,232 Other Assets In Excess Of Other Liabilities--0.3% 1,763,530 -------------- TOTAL NET ASSETS--100% $ 617,994,762 -------------- --------------
(a) Non-income producing security. (b) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (c) Represents foreign domiciled corporation. (d) At September 30, 1998, net unrealized depreciation of $66,094,417, for federal income tax purposes consisted of gross unrealized appreciation of $47,329,047 and gross unrealized depreciation of $113,423,464. 18 THE OAKMARK SMALL CAP FUND SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. MCGREGOR, PORTFOLIO MANAGER ........................................................................ [PHOTO] - -------------------------------------------------------------------- THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/98) AS COMPARED TO THE LIPPER BALANCED FUND INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE OAKMARK LIPPER BALANCED EQUITY & INCOME FUND FUND INDEX 10/95 $10,000 $10,000 1/96 $10,290 $10,662 4/96 $10,630 $10,778 7/96 $10,660 $10,665 10/96 $11,290 $11,449 1/97 $12,255 $12,197 4/97 $12,429 $12,244 7/97 $14,289 $13,909 9/97 $14,810 $14,005 12/97 $14,941 $14,243 3/98 $16,233 $15,370 6/98 $16,320 $15,599 9/98 $15,191 $14,701
AVERAGE ANNUAL TOTAL RETURN* THROUGH 9/30/98 TOTAL RETURN FROM FUND INCEPTION 9/30/98 NAV $13.99 LAST 3 MOS. 11/1/95 - ------------------------------------------------------------------------------ THE OAKMARK EQUITY & INCOME FUND -6.9% 15.4% Lipper Balanced Fund Index** -5.8% 14.1% Lehman Govt./ Corp. Bond** 5.0% 8.6% S&P 500 w/ inc** -10.0% 23.5%
*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 or funds 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 indices. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. Past performance is no guarantee of future results. THE SUMMER OF OUR DISCONTENT Last quarter saw the end of two wonderful streaks: Cal Ripken Jr.'s record for consecutive baseball games and the Equity and Income Fund's heretofore unblemished record of positive return quarters. Time and volatile markets made it inevitable that these streaks would end, but both are regrettable developments. Investor confidence seemed to evaporate worldwide during the summer, and the resulting "flight to liquidity" proved quite painful for some of our mid-cap equity holdings. The portfolio's fixed income position did its part to buffer volatility, however, earning a positive total return of 4.6%. It is important to remember that the market prices on businesses are far more volatile than the intrinsic values of those businesses. None of the Fund's holdings announced a loss, fraud, or dividend cut during the quarter. Some bought back their shares, others announced new repurchase authorizations, and most saw high levels of share purchases by their own management and directors. In all cases management has been and is now working hard to increase the value per share of their business. In keeping with these deflationary times, the stock market has declared a clearance sale on most issues. At The Oakmark Family of Funds, we own pieces of businesses that the stock market has allowed us to purchase for less than their intrinsic value. We believe that the opportunities which the summer's selloff has created will prove to be the foundation of future investment returns. THE STRENGTH OF THE (FIXED INCOME) STRATEGY While the stock market's difficulties have gotten most of the press recently, times have also been very tough in the corporate bond market. Risk premiums for corporate bonds have widened dramatically over the last six months, in part because of the well-publicized problems of a major hedge fund. THE OAKMARK EQUITY AND INCOME FUND 19 ........................................................................ Since the Fund's inception, my strategy in fixed income investing has been to maintain a "quality barbell" of at least 25% in US Treasury notes augmented with high yield investments developed as byproducts of our equity work. I have avoided investment grade corporate debt because the spreads versus Treasury notes were inadequate for all but the most perfect environment. Now that the world is seen as a risky place again, spreads have expanded to more typical levels. How has the strategy worked out in this period of transition from "all news is good news" to "all news is bad news?" Splendidly. Returns on the Fund's fixed income position were positive in every month of fiscal 1998. This outcome resulted in part because I let the percentage allocation for high yield issues diminish during the year. The one area of increased commitment has been preferred stocks, specifically trust preferreds (discussed in my August 1997 report). I am pleased to report that all of the Trust preferreds achieved a positive return in fiscal 1998 despite unfavorable market conditions. In closing this section, I will note that should current trends continue, I might have the opportunity to add investment grade issues to the portfolio. I am not opposed to higher graded bonds; I am opposed to overpaying for them. MIGHTY OAKS AWARDS With the close of the fiscal year it is time to issue the Mighty Oaks Awards. The awards recognize the stock and fixed income investments which achieve the highest rates of return. Though 1998 proved to be a difficult year, several issues did make large contributions to the Fund. While two-time award winner Bill Nygren (of Oakmark Select) made a strong showing in the equity category with Liberty Media (up 84%), he lost out to analyst Jim Benson who scored a 110% return from Lexmark International. Clients often ask us why our portfolios do not have representation in the technology sector. The answer to this question derives from our investment philosophy. Before we invest in a company's stock, we ask whether we would be willing to own the entire company at the current price if we could never sell shares again. Put differently, could we live off the cash flows that the business produces if we paid today's price for the entire company? Leading edge technology companies pose a great problem for our philosophy because of the risk of obsolescence. We are, happy, however, to own companies that turn technological innovation to their advantage. Lexmark International is such a company. Originally the division of IBM which made Selectric typewriters, Lexmark is now the second largest manufacturer of printers. The business economics fit the razor/razor blade model. Lexmark's profits from printers are small, but the company achieves high margins on associated supplies (e.g. ink cartridges). Jim recommended Lexmark for the Fund in May 1997, when the stock had dipped on earnings and product worries. Part of what we do as value investors is to position our portfolios to benefit from unexpected good fortune, and Lexmark exemplifies this effort. Shortly after we purchased the stock, the company introduced new products that were well received. And, the company's free cash flow proved to be strong enough to support a significant share repurchase. Congratulations to Jim for this wonderful recommendation. This year's fixed income winner is Harris Associates' fixed income analyst, Chris Pilat. Chris advised that I extend the duration of the fixed income portfolio but keep overall quality high. The Fund's 7-year Treasury notes returned 18% for the twelve months, 4% more than the Fund's highest-returning high yield issue. Thanks, Chris, for pushing me out further on the yield curve. THANKS As the Fund nears its third anniversary, I would be remiss not to thank long term shareholders for their support. The consistency and interest of the Fund's shareholders has been most helpful. Please feel free to e-mail me with your comments, questions or ideas for quarterly reports. [SIGNATURE] CLYDE S. MCGREGOR Portfolio Manager mcgregor@oakmark.com October 9, 1998 20 THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK EQUITY AND INCOME FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 ........................................................................
SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--57.4% OFFICE EQUIPMENT--3.1% Lexmark International Group, Inc., Class A (a) 26,000 $ 1,802,125 OTHER CONSUMER GOODS & SERVICES--6.4% Juno Lighting, Inc. 76,300 $ 1,707,213 H&R Block, Inc. 33,000 1,365,375 National Presto Industries, Inc. 17,000 637,500 -------------- 3,710,088 BANKS & THRIFTS--4.7% Washington Mutual, Inc. 50,000 $ 1,687,500 Banc One Corporation 23,674 1,009,104 -------------- 2,696,604 INSURANCE--4.2% PartnerRe Ltd. (b) 32,500 $ 1,302,031 Old Republic International Corporation 49,500 1,113,750 -------------- 2,415,781 TV PROGRAMMING--3.4% Tele-Communications, Liberty Media, Class A (a) 52,800 $ 1,937,100 PUBLISHING--1.5% Lee Enterprises, Inc. 33,900 $ 879,281 INFORMATION SERVICES--3.3% The Dun & Bradstreet Corporation 70,000 $ 1,890,000 COMPUTER SERVICES--5.8% First Data Corporation 80,000 $ 1,880,000 Electronic Data Systems Corporation 45,000 1,493,438 -------------- 3,373,438 DATA STORAGE--4.0% Imation Corp. (a) 125,000 $ 2,312,500 MEDICAL PRODUCTS--3.1% Sybron International Corporation (a) 93,000 $ 1,778,625 AUTOMOTIVE--6.5% Chrysler Corporation 42,000 $ 2,010,750 Lear Corporation (a) 40,000 1,750,000 -------------- 3,760,750 OTHER INDUSTRIAL GOODS & SERVICES--2.7% Premark International, Inc. 56,500 $ 1,585,531
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK EQUITY AND INCOME FUND 21 THE OAKMARK EQUITY AND INCOME FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
SHARES HELD/ PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- COMMON STOCKS--57.4% (CONT.) COMMERCIAL REAL ESTATE--6.2% Amli Residential Properties Trust 90,000 $ 1,918,125 Catellus Development Corporation (a) 127,728 1,660,464 -------------- 3,578,589 DIVERSIFIED CONGLOMERATES--2.5% U.S. Industries, Inc. 94,000 $ 1,415,875 TOTAL COMMON STOCKS (COST: $30,820,268) 33,136,287 FIXED INCOME--33.7% PREFERRED STOCK--5.1% BANKS & THRIFTS--5.1% BBC Capital Trust I, Preferred, 9.50% 28,000 $ 714,000 Pennfed Capital Trust, Preferred, 8.90% 27,500 687,500 PennFirst Capital Trust 1, Preferred, 8.625% 70,000 673,750 RBI Capital Trust I, Preferred, 9.10% 42,500 430,312 Fidelity Capital Trust I, Preferred, 8.375% 43,500 424,125 -------------- 2,929,687 TOTAL PREFERRED STOCK (COST: $2,970,738) 2,929,687 CORPORATE BONDS--2.4% AEROSPACE & AUTOMOTIVE--0.3% Coltec Industries, Inc., 9.75% due 4/1/2000 $150,000 $ 157,687 Coltec Industries, Inc., 9.75% due 11/1/1999 25,000 26,188 -------------- 183,875 BUILDING MATERIALS & CONSTRUCTION--0.3% USG Corporation, 9.25% due 9/15/2001, Senior Notes Series B 150,000 $ 160,313 UTILITIES--0.3% Midland Funding Corporation, 11.75% due 7/23/2005 150,000 $ 173,438 OTHER INDUSTRIAL GOODS & SERVICES--1.5% Scotsman Industries, Inc., 8.625% due 12/15/2007, Senior Subordinated Note 565,000 $ 560,762 UCAR Global Enterprises Inc., 12.00% due 1/15/2005, Senior Subordinated Note 300,000 304,500 -------------- 865,262 TOTAL CORPORATE BONDS (COST: $1,395,124) 1,382,888
22 THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK EQUITY AND INCOME FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------- FIXED INCOME--33.7% (CONT.) GOVERNMENT AND AGENCY SECURITIES--26.2% U.S. GOVERNMENT BONDS--25.7% United States Treasury Notes, 7.875% due 11/15/2004 $6,000,000 $ 7,107,720 United States Treasury Notes, 7.50% due 5/15/2002 6,000,000 6,616,140 United States Treasury Notes, 6.25% due 2/15/2007 1,000,000 1,122,490 -------------- 14,846,350 U.S. GOVERNMENT AGENCIES--0.5% Federal Home Loan Bank, 6.405% due 4/10/2001, Consolidated Bond 300,000 $ 311,895 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $14,288,633) 15,158,245 TOTAL FIXED INCOME (COST: $18,654,495) 19,470,820 SHORT TERM INVESTMENTS--8.5% COMMERCIAL PAPER--6.1% American Express Credit Corp., 5.27% due 10/5/1998 $500,000 $ 500,000 Ford Motor Credit Corp., 5.55% due 10/1/1998 1,500,000 1,500,000 General Electric Capital Corporation, 5.70% due 10/1/1998 1,500,000 1,500,000 -------------- TOTAL COMMERCIAL PAPER (COST: $3,500,000) 3,500,000 REPURCHASE AGREEMENTS--2.4% State Street Repurchase Agreement, 5.30% due 10/1/1998 $1,390,000 $ 1,390,000 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $1,390,000) 1,390,000 TOTAL SHORT TERM INVESTMENTS (COST: $4,890,000) 4,890,000 Total Investments (Cost $54,364,763)--99.6% (c) $ 57,497,107 Other Assets In Excess Of Other Liabilities--0.4% 248,748 -------------- TOTAL NET ASSETS--100% $ 57,745,855 -------------- --------------
(a) Non-income producing security. (b) Represents foreign domiciled corporation. (c) At September 30, 1998, net unrealized appreciation of $3,132,344, for federal income tax purposes consisted of gross unrealized appreciation of $5,429,008 and gross unrealized depreciation of $2,296,664. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK EQUITY AND INCOME FUND 23 THE OAKMARK INTERNATIONAL 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 FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (9/30/98) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE OAKMARK M.S. WORLD EX INTERNATIONAL FUND U.S. INDEX 9/92 $10,000 $10,000 10/92 $9,800 $9,505 1/93 $10,833 $9,621 4/93 $12,105 $11,764 7/93 $12,608 $12,233 10/93 $14,454 $12,981 1/94 $16,488 $13,786 4/94 $15,382 $13,664 7/94 $15,195 $13,899 10/94 $15,122 $14,265 1/95 $13,698 $13,124 4/95 $14,399 $14,437 7/95 $15,507 $14,911 10/95 $14,659 $14,248 1/96 $16,248 $15,312 4/96 $18,162 $16,144 7/96 $17,635 $15,471 10/96 $18,310 $15,843 1/97 $19,909 $15,761 4/97 $21,149 $16,114 7/97 $22,960 $18,426 9/97 $23,283 $18,027 12/97 $20,097 $16,637 3/98 $22,994 $19,083 6/98 $20,253 $19,233 9/98 $16,322 $16,404
AVERAGE ANNUAL TOTAL RETURN* THROUGH 9/30/98 TOTAL RETURN FROM FUND INCEPTION 9/30/98 NAV $10.42 LAST 3 MOS. 9/30/92 - ------------------------------------------------------------------------------ THE OAKMARK INTERNATIONAL FUND -19.4% 8.5% Morgan Stanley World ex U.S. w/inc.** -14.7% 8.6% Morgan Stanley EAFE w/ inc** -14.2% 8.6% Lipper Analytical International Fund Index** -15.8% 10.3%
*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 or funds 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 Index includes 30 mutual funds that invest in securities whose primary markets are outside the United States. Past performance is no guarantee of future results. FELLOW SHAREHOLDERS, Disappointingly, your Fund dropped by 19.4% in the third quarter as turmoil in the world equity markets intensified. As you can see by the comparative indices, all were greatly negative with the MS EAFE falling by 14.2% and the Lipper International Fund Index dropping by 15.8%. Virtually no market in the world was unscathed with just two exceptions: Korea, up 11.8% and Thailand up 6.6%. DON'T LET THE PUNDITS SCARE YOU! As a result of the sharp drop in share price, the global market gurus are predicting that the gloom and doom will last forever and one should avoid exposure to the world equity markets, especially those in Latin America and Asia. To us, this is just another reason why one should be ADDING to ones positions at these levels. Consider some of their past statements: "THE USA HAS A SEVERE PROBLEM WITH STRUCTURALLY HIGH INFLATION." This was the mantra of the media economists in the early 1980's. Certainly if you would have believed that conventional wisdom, you would have avoided the bond market thereby missing one of the greatest rallies in history. "THE USA HAS A SEVERE PROBLEM WITH STRUCTURALLY HIGH UNEMPLOYMENT." This was conventional wisdom of the late 80's/early 90's. Remember Robert Reich? Of course, this statement appears nonsensical now that the United States has the lowest unemployment rate in the developed world. "WE NEED TO BE MORE LIKE JAPAN AND GERMANY." This consensus began to build in the late 1980's. Even presidential candidate Bill Clinton preached this static opinion along with the pundit choir in the election of 1992. Luckily, we did not become more like them 24 THE OAKMARK INTERNATIONAL FUND ........................................................................ because Japan's bubble burst and Germany is struggling with genuinely high structural unemployment. And, remember all of the late 80's fear-mongering over Japanese ownership of USA assets? Popular authors like Michael Crichton and closed-minded politicians believed that, from Rockefeller Center to Nebraska farmland to the Pebble Beach golf club, the entirety of the United States would be bought up by the invincible Japanese. If you believed this and invested in Japanese stocks in the late 80's-early 90's you would be broke! By the way, has anyone seen Lester Thurow lately? In 1992, you couldn't turn on a television set without seeing this most zealous promoter of the Japanese economic model. He has become remarkably scarce over the past few years. "US DOLLAR HAS LOST ITS RESERVE STATUS. IT IS MOST ASSUREDLY ON ITS WAY TOY50 AND DM1.00." Most tel-economists and media-friendly strategists proclaimed this as the dollar was crashing to new lows in 1995-1996. How wrong they were! The dollar today is at Y120 and DM1.60 and seems to be the world's only safe haven. Again, following the advice of conventional wisdom would have taken a considerable chunk of your net worth. "ONE SHOULD HAVE AT LEAST 10% OF YOUR PERSONAL NET WORTH IN EMERGING MARKETS. I AM MAXIMUM BULLISH ON CHINA AND ASIA." This was the attitude of the day at the end of 1993 when most emerging markets were up over 50%. Again, more of the same by our global experts who, as you can see, earn their wages by telling you what just happened, amplifying it and assuming the new amplified version will carry on into perpetuity. By the way, long-term shareholders of Oakmark International might remember that we had only 5% of the Fund's assets in Asia at the height of this mania, given the lack of investments that met our value criteria. AND, HERE ARE TODAY'S SAMPLES... "THE JAPANESE YEN IS IN TERMINAL DECLINE. EXPECT IT TO DECLINE TO Y200." Maybe...but maybe not. The important thing to note is that for the first time in years we are finding Japanese companies that fit our value criteria and have business formulas designed to succeed regardless of the direction of the Yen. "EMERGING MARKETS SHOULD BE AVOIDED...THEY ARE JUST TOO RISKY AND VOLATILE." Again, reporting rather than analysis. To us, this sounds like perfect bottom-speak and probably indicates that long-term investors should seriously consider increasing exposure to this asset class. "FOREIGN STOCKS SHOULD BE AVOIDED...THEY ARE JUST TOO RISKY AND VOLATILE COMPARED TO THE US MARKET." As mentioned above, all of these experts seem to be able to do is to "report" via the rear-view mirror, that is, to tell us what has already happened. Given what has happened in terms of price drops, one should be adding, not cutting international holdings. "ASIA IS DESTROYED, IT WILL BE YEARS BEFORE IT WILL RECOVER ECONOMICALLY." We don't think the pundits understand Asia at all. Yes, it's tough there and will continue to be for a while. However, the area has numerous fundamental strengths that will prove the pundits wrong: solid physical and intellectual infrastructure, low economy-wide debt levels with high rates of individual savings, extremely flexible regulatory structures, generally a strong work ethic and literacy rates, and an important intangible, a fierce "we can do it" attitude. Investors also must keep in mind that with the unprecedented declines in most of these markets, a great deal of economic instability has already been discounted in the prices they are paying for businesses. THE OAKMARK WAY... To us, "pundit speak" is nothing more than distracting, random noise. Instead, we focus on something that is concrete and analyzable: the value of a business. To the greatest extent possible, we try hard to take advantage of the volatility that exists in times like these by buying shares of companies that have become undervalued. We are certain that these conditions are not permanent and that when things appear most bleak, it is usually a good time to invest. However, we also realize this is the time when it is most difficult to remain steadfast as a shareholder. In this regard, it is important for you to hear how extremely excited we are about the composition of The Oakmark International Fund. It is full of quality businesses selling at uniquely low prices. We believe this will eventually move the Fund to a strong future performance. Until this time, we would like to again thank our fellow shareholders for their continued patience. [SIGNATURE] DAVID HERRO Portfolio Manager 72242.772@compuserve.com [SIGNATURE] MICHAEL WELSH Portfolio Manager 102521.2142@compuserve.com October 5, 1998 THE OAKMARK INTERNATIONAL FUND 25 THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 1998 ........................................................................ EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC % of Fund % of Fund Net Assets Net Assets Europe 43.8% Pacific Rim 34.1% Great Britain 26.0% Japan 9.6% France 9.4% Hong Kong 7.4% Finland 3.5% Singapore 7.0% Italy 2.9% New Zealand 4.5% Netherlands 2.0% Korea 3.3% Australia 2.2% Latin America 16.4% Malaysia 0.1% Brazil 8.5% Argentina 5.1% Panama 2.8%
26 THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 ........................................................................
DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS--94.3% CONSUMER NON-DURABLES--5.7% Fila Holding S.p.A. (Italy), Athletic Footwear Manufacturing (b)(e) 2,574,800 $ 21,885,800 Citizen Watch Co. (Japan) Watch Manufacturer and Retailer 3,166,000 21,438,086 -------------- 43,323,886 FOOD & BEVERAGE--10.1% Quilmes Industrial SA Brewer (Argentina), (b) 4,724,300 $ 38,680,206 Pernod Ricard (France) Manufactures Wines, Spirits, & Fruit 228,579 16,837,894 Juices Tate & Lyle PLC (Great Sugar Producer & Distributor Britain) 2,665,700 14,774,171 Lotte Chilsung Beverage Manufacturer of Soft Drinks, Juices, & Company (Korea) (e) Sport Drinks 123,000 3,095,452 Lotte Confectionery Company Confection Manufacturer (Korea) 65,270 2,933,219 -------------- 76,320,942 HOUSEHOLD PRODUCTS--1.6% Amway Japan Limited (Japan) Marketing of Household Products 1,630,300 $ 11,934,409 RETAIL--1.2% Giordano International East Asian Clothing Retailer & Limited (Hong Kong) (e) Manufacturer 69,304,000 $ 9,391,028 OTHER CONSUMER GOODS & SERVICES--6.8% Canon, Inc. (Japan) Office and Video Equipment 1,007,000 $ 20,419,383 Sankyo Company, Ltd. (Japan) Pachinko Machine Manufacturer 1,234,800 16,722,520 Mandarin Oriental Hotel Management International Limited (Singapore) 30,539,000 14,353,330 -------------- 51,495,233
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL FUND 27 THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS--94.3% (CONT.) BANKS--8.2% Uniao de Bancos Brasileiros Major Brazilian Bank S.A. (Brazil), (c) 1,834,900 $ 24,771,150 Banco Latinoamericano de Multinational Bank Exportaciones, S.A., Class E (Panama), (b)(e) 1,316,500 21,146,282 United Overseas Bank Ltd., Commercial Banking Foreign Shares (Singapore) 5,443,000 15,864,668 -------------- 61,782,100 OTHER FINANCIAL--3.4% Sedgwick Group plc (Great Insurance Broker, Financial Services Britain) 7,510,000 $ 25,343,973 MARKETING SERVICES--9.5% Cordiant Communications Advertising Services Group plc (Great Britain) (e) 21,997,578 $ 40,015,927 Saatchi & Saatchi plc (Great Advertising Services Britain), (e) 17,757,578 31,699,125 -------------- 71,715,052 BROADCASTING & PUBLISHING--5.3% Singapore Press Holdings Newspaper Publisher Ltd. (Singapore) 2,740,000 $ 22,725,119 Europe 1 Communication Television Production (France) 74,020 14,804,529 Woongjin Publishing Company Publisher (Korea) (e) 148,410 1,259,204 South China Morning Post Newspaper Publisher (Holdings) Ltd. (Hong Kong) 3,130,000 1,231,997 -------------- 40,020,849 TELECOMMUNICATIONS--2.8% Telesp Participacoes S.A. Telecommunications (Brazil), (a) 401,100,000 $ 6,293,357 Embratel Participacoes S.A. Telecommunications (Brazil), (a) 401,100,000 3,315,855 SK Telecom Co. Ltd. (Korea) Telecommunications 10,395 3,146,716 Tele Centro Sul Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 2,233,127 Tele Norte Leste Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 2,030,115
28 THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS--94.3% (CONT.) TELECOMMUNICATIONS--2.8% (CONT.) Telesp Celular Participacoes Telecommunications S.A. (Brazil), (a) 401,100,000 $ 1,691,763 Tele Sudeste Celular Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 676,705 Technology Resources Telecommunications Industries Berhad (Malaysia) 1,485,000 472,855 Tele Celular Sul Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 304,517 Tele Centro Oeste Celular Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 213,162 Telemig Celular Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 179,327 Tele Nordeste Celular Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 172,560 Tele Leste Celular Telecommunications Participacoes (Brazil), (a) 401,100,000 111,656 Tele Norte Celular Telecommunications Participacoes S.A. (Brazil), (a) 401,100,000 84,588 Telecomunicacoes Brasileiras Telecommunications S.A. (Brazil) 401,100,000 84,588 -------------- 21,010,891 AEROSPACE--6.0% Rolls-Royce plc (Great Jet Engines Britain) 9,228,552 $ 31,928,037 Hong Kong Aircraft Commercial Aircraft Overhaul & Engineering Company Ltd. Maintenance (Hong Kong) (e) 11,096,900 13,175,134 -------------- 45,103,171 AIRLINES--2.2% Qantas Airways Limited International Airline (Australia) 10,798,714 $ 16,828,789 OIL & NATURAL GAS--0.5% ISIS (France), (a) Oil Services 57,000 $ 3,867,995
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL FUND 29 THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS--94.3% (CONT.) CHEMICALS--6.7% Fernz Corporation Limited Agricultural & Industrial Chemical (New Zealand) (e) Producer 13,373,250 $ 33,797,841 European Vinyls Corporation PVC Manufacturer International N.V. (Netherlands) (e) 1,212,299 15,126,783 Nagase & Co., Ltd. (Japan) Chemical Wholesaler 569,000 2,032,663 -------------- 50,957,287 COMPONENTS--3.4% Varitronix International Liquid Crystal Displays Limited (Hong Kong) 13,421,000 $ 26,066,752 MACHINERY & METAL PROCESSING--2.2% Outokumpu Oyj (Finland) Metal Producer 1,235,000 $ 10,250,172 The Rauma Group (Finland) Pulp Machinery 544,300 6,155,423 -------------- 16,405,595 MINING AND BUILDING MATERIALS--0.7% Keumkang Ltd. (Korea) (e) Building Materials 560,460 $ 4,956,792 Asia Cement Manufacturing Cement Producer Company Ltd. (Korea) 10,500 42,581 -------------- 4,999,373 OTHER INDUSTRIAL GOODS & SERVICES--13.7% Tomkins plc (Great Britain) Industrial Management Company 9,065,000 $ 42,496,931 Chargeurs SA (France) (e) Wool Production Holding Company 524,387 25,752,067 Kone Corporation, Class B Elevators (Finland) 103,870 10,418,665 Charter plc (Great Britain) Welding Products Manufacturer 1,884,100 10,250,102 Groupe Legris Industries SA European Crane Manufacturer (France) 217,815 9,720,341 Dongah Tire Industry Company Tire Manufacturer (Korea), (a)(e) 166,290 4,603,390 -------------- 103,241,496 STEEL--2.9% USIMINAS (Brazil), (e) Steel Production 7,401,370 $ 21,852,288 Pohang Iron & Steel Company Manufactures Steel Products Ltd. (Korea) 14,000 443,933 -------------- 22,296,221
30 THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
SHARES HELD/ DESCRIPTION PRINCIPAL VALUE MARKET VALUE - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS--94.3% (CONT.) DIVERSIFIED CONGLOMERATES--1.4% First Pacific Company Ltd. Diversified Operations (Hong Kong) 19,948,000 $ 5,856,610 Tae Young Corporation Heavy Construction (Korea) (e) 518,300 4,770,261 Lamex Holdings Ltd. (Hong Office Furniture Supplier Kong) (e) 14,040,000 322,517 -------------- 10,949,388 TOTAL COMMON STOCKS (COST: $1,061,918,399) 713,054,430
SHORT TERM INVESTMENTS--3.5% COMMERCIAL PAPER--2.0% General Electric Capital Corporation, 5.70% due 10/1/1998 $15,000,000 $ 15,000,000 -------------- TOTAL COMMERCIAL PAPER (COST: $15,000,000) 15,000,000 REPURCHASE AGREEMENTS--1.5% State Street Repurchase Agreement, 5.30% due 10/1/1998 $11,121,000 $ 11,121,000 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $11,121,000) 11,121,000 TOTAL SHORT TERM INVESTMENTS (COST: $26,121,000) 26,121,000 Total Investments (Cost $1,088,039,399)--97.8% (f) $ 739,175,430 Foreign Currencies (Proceeds $1,367,998)--0.2% 1,367,813 Other Assets In Excess Of Other Liabilities--2.0% (d) 15,561,065 -------------- TOTAL NET ASSETS--100% $ 756,104,308 -------------- --------------
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a Global Depository Receipt. (d) Includes portfolio and transaction hedges. (e) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (f) At September 30, 1998, net unrealized depreciation of $348,863,969, for federal income tax purposes consisted of gross unrealized appreciation of $42,503,436 and gross unrealized depreciation of $391,367,405. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL FUND 31 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 (9/30/98) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE OAKMARK INTERNATIONAL M.S. WORLD EX SMALL CAP FUND U.S. INDEX 10/95 $10,000 $10,000 1/96 $10,530 $10,747 4/96 $11,340 $11,331 7/96 $11,040 $10,858 10/96 $11,410 $11,120 1/97 $12,142 $11,062 4/97 $12,152 $11,310 7/97 $13,253 $12,933 9/97 $12,672 $12,652 12/97 $9,642 $11,677 3/98 $11,429 $13,394 6/98 $9,892 $13,499 9/98 $8,211 $11,513
AVERAGE ANNUAL TOTAL RETURN* THROUGH 9/30/98 TOTAL RETURN FROM FUND INCEPTION 9/30/98 NAV $6.89 LAST 3 MOS. 11/1/95 - ---------------------------------------------------------------------------- THE OAKMARK INTERNATIONAL SMALL CAP FUND -17.0% -6.5% Morgan Stanley World ex U.S. w/inc.** -14.7% 5.0% Lipper Analytical International Small Cap Fund Average** -17.0% 5.8% Micropal International Small Co. Fund Index** -16.8% 5.6%
*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 indexes or funds whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Lipper International Small Cap Fund Average includes 59 mutual funds that invest in securities whose primary markets are outside the United States. The Micropal Int'l Small Co. Fund Index sector average is an unweighted index comprised of all funds within the international small company fund sector. Past performance is no guarantee of future results. FELLOW SHAREHOLDERS, The Oakmark International Small Cap Fund declined by 17% in the past quarter. This compares with a drop of 17% of the Lipper International Small Cap Fund Index and a 14% drop of EAFE. Market conditions for global equities and especially international equities with exposure in emerging markets continue to be volatile. Besides the obvious places like the emerging markets, there have been certain pockets of severe price contraction in apparently economically healthy countries. AS AN EXAMPLE... Your fund currently has over 20% of its assets invested in the United Kingdom. Though conditions there are stable (See Traveler's Log below), that country's small cap index has dropped by close to 25% in the last three months. Furthermore, over the last year that index is down by over 15%. What gives? Last year, in order to head off the possibility of rising inflation, The Bank of England began raising interest rates. This caused sterling to strengthen which ultimately hit small and medium cap stocks and especially weakened stocks in the export sector. Our fund was not exempted from the mark-down...some of our larger positions were hit hard, hurting the performance of your Fund. One example of this was in the price of retailer CARPETRIGHT. When we began purchasing the stock, it had plummeted off its highs because of a slowing in the torrid pace of home remodeling in the UK; market punishment of a leading competitor for significant accounting problems also hurt sentiment for the industry. The company has little debt, 32 THE OAKMARK INTERNATIONAL SMALL CAP FUND ........................................................................ has a shareholder-oriented management that owns a lot of stock, and is one of the most efficient retailers in the UK. Unfortunately, the price continues to drop, and has fallen roughly 40% from our first purchases. Today Carpetright is yielding 14% on a stable dividend, and trades at 7.5 times core earnings. All through the price fall, those who know the company the best, management and the board of directors, have been buying stock. Furthermore, the company itself has also bought back shares. While the recent price drop has been another painful example of sell first, ask questions later, we feel extremely comfortable being investors in this business at this price. We have also taken advantage of price weakness to increase our holding. TRAVELER'S LOG...THE UNITED KINGDOM Recently, we spent a week visiting companies in the United Kingdom. Though it is an area of Europe with some of the strongest economic fundamentals, the most market-oriented government, and some of the best managements, the equity market has greatly underperformed those of the continent. Many of the companies we met with have experienced falls in their share prices of over 50% in the last year and are currently trading at five-year lows. Most of these managements were baffled by the share price declines, saying that while business conditions have slowed, they have experienced no collapse nor do they expect one. Clearly, there is a pervasive fright in the UK and in foreign markets that is taking prices down to unrealistic levels. Besides Carpetright, consider ROYAL DOULTON. This company makes tableware and gifts and is one of the global leaders in those two sectors. Formerly, the company was a poorly managed, neglected stepchild of a diversified conglomerate that didn't seem to bother focusing on the business's fundamentals. Recently, the newly independent company which was spun out of its parent, has installed new, more aggressive management that is much more focused on enhancing the profitability of the brand. Since the spin-off, the stock has dropped by over 50%, giving us the opportunity to buy it at a very attractive price. In Royal Doulton we are getting a good global brand and new, incentivized management focused on enhancing profitability. Equally important, Royal Doulton is trading at a price of about four times our estimate of "normal" earnings. The new chairman also thinks the stock is cheap, as he recently purchased a big block of stock for himself on the open market. THINGS WILL GET BETTER! Though share prices have been weak, and this fund has been slumping since the Asia crisis started last year, we continue to be confident about the future. It is true that as shareholders we have all suffered over the last year. However, we strongly assert that current prices of this FUND'S UNDERLYING INVESTMENTS DO NOT COME CLOSE TO REFLECTING THEIR TRUE FUNDAMENTAL VALUE. Over time, value and price have always converged and we have no reason to believe it will not happen again this time. We feel so certain of this that, as co-portfolio managers of this fund, we represent the largest ownership block and we continue to invest in the Fund. Fundamentals will assert themselves and while we wait, we thank you for your patience. [SIGNATURE] DAVID HERRO Portfolio Manager 72242.772@compuserve.com [SIGNATURE] MICHAEL WELSH Portfolio Manager 102521.2142@compuserve.com October 5, 1998 THE OAKMARK INTERNATIONAL SMALL CAP FUND 33 THE OAKMARK INTERNATIONAL SMALL CAP FUND - -------------------------------------------------------------- INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 1998 ........................................................................ EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC % of Fund % of Fund Net Assets Net Assets Pacific Rim 58.9% Europe 30.7% Japan 19.0% Great Britain 21.5% New Zealand 7.9% France 4.3% Hong Kong 7.0% Germany 2.9% Australia 6.9% Netherlands 2.0% Korea 6.7% Singapore 4.6% Other 0.8% Thailand 3.5% Canada 0.8% Phillipines 3.3% Latin America 5.3% Brazil 5.3%
34 THE OAKMARK INTERNATIONAL SMALL CAP FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 ........................................................................
DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% CONSUMER NON-DURABLES--3.9% Royal Doulton plc (Great Britain) Tableware and Giftware 990,000 $ 1,540,035 Designer Textiles (NZ) Limited Knit Fabrics (New Zealand) (c) 2,960,000 459,213 Dickson Concepts International Jewlery Wholesaler and Retailer Limited (Hong Kong) 20,000 15,615 -------------- 2,014,863 FOOD & BEVERAGE--9.6% Matthew Clark plc (Great Britain) Spirits & Drinks 1,054,000 $ 2,150,285 Alaska Milk Corporation Milk Producer (Philippines), (a) 39,327,000 1,707,915 Hite Brewery Company (Korea) Brewer 165,010 761,722 Souza Cruz S/A (Brazil) Tobacco Products 55,000 347,969 -------------- 4,967,891 RETAIL--11.3% Carpetright plc (Great Britain) Carpet Retailer 650,000 $ 2,375,889 Daimon (Japan) (c) Liquor Retailer & Distributor 657,700 1,516,602 Paris Miki Inc. (Japan) Optical Supplies Retailer 85,100 1,140,024 Giordano International Limited East Asian Clothing Retailer & (Hong Kong) Manufacturer 3,112,000 421,691 Jusco Stores Co., Limited (Hong Department Stores Kong) 4,244,000 410,773 -------------- 5,864,979 OTHER CONSUMER GOODS & SERVICES--6.5% Sanford Limited (New Zealand) Fisheries 1,275,240 $ 1,595,485 CeWe Color Holding AG (Germany) Photo Equipment & Supplies 9,400 1,519,806 CDL Hotels International Limited Hotel Operator (Hong Kong) 1,072,000 246,252 -------------- 3,361,543 BANKS--0.3% Shinhan Bank (Korea) Commercial Bank 47,764 $ 110,931 Kookmin Bank (Korea) Commercial Bank 11,351 27,587 -------------- 138,518 OTHER FINANCIAL--11.0% Lambert Fenchurch Group plc Insurance Broker (Great Britain) 1,411,000 $ 2,470,805 JCG Holdings Ltd. (Hong Kong) Investment Holding Company 9,461,000 1,709,348 Ichiyoshi Securities (Japan) Stock Broker 1,575,000 1,498,847 -------------- 5,679,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL SMALL CAP FUND 35 THE OAKMARK INTERNATIONAL SMALL CAP FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% (CONT.) COMPUTER SOFTWARE--7.5% Enix Corporation (Japan) Entertainment Software 129,100 $ 2,778,478 Koei (Japan) Computer Software 196,000 1,120,574 -------------- 3,899,052 COMPUTER SYSTEMS--3.9% Solution 6 Holdings Limited Systems Design & Consulting (Australia), (a)(c) 4,150,893 $ 1,992,286 MARKETING SERVICES--5.0% Cordiant Communications Group plc Advertising Services (Great Britain) 1,428,500 $ 2,598,593 BROADCASTING & PUBLISHING--5.2% Matichon Public Company Limited, Newspaper Publisher Foreign Shares (Thailand) (c) 2,038,900 $ 1,801,468 Woongjin Publishing Company Publisher (Korea) 107,076 908,501 Matichon Public Company Limited Newspaper Publisher (Thailand) 600 505 -------------- 2,710,474 TELECOMMUNICATIONS--0.5% SK Telecom Co. Ltd. (Korea) Telecommunications 803 $ 243,080 CHEMICALS--2.0% European Vinyls Corporation PVC Manufacturer International N.V. (Netherlands) 83,100 $ 1,036,902 MACHINERY & METAL PROCESSING--1.5% Denyo Co., Ltd. (Japan) Welding Machines & Power Generators 184,000 $ 793,353 MINING AND BUILDING MATERIALS--3.1% Parbury Limited (Australia) (c) Building Products 11,119,712 $ 1,581,357 OTHER INDUSTRIAL GOODS & SERVICES--11.6% Elevadores Atlas, SA (Brazil) Elevators 229,200 $ 2,378,135 Dongah Tire Industry Company Tire Manufacturer (Korea), (a) 43,900 1,215,280 Nishio Rent All Company (Japan) Construction Equipment Rental 163,900 995,842 Yip's Hang Cheung Ltd. (Hong Paint & Solvents Kong) (c) 24,724,000 845,532
36 THE OAKMARK INTERNATIONAL SMALL CAP FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND - -------------------------------------------------------------- SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT. ........................................................................
SHARES HELD/ DESCRIPTION PRINCIPAL VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% (CONT.) OTHER INDUSTRIAL GOODS & SERVICES--11.6% (CONT.) Groupe Legris Industries SA European Crane Manufacturer (France) 12,800 $ 571,220 -------------- 6,006,009 PRODUCTION EQUIPMENT--3.9% NSC Groupe (France) Manufacturer of Textile Equipment 11,532 $ 1,637,191 Skyjack Inc. (Canada), (a) Producer of Elevating Platforms & Lifts 32,200 406,339 -------------- 2,043,530 STEEL--4.3% Steel & Tube Holdings Ltd. (New Produces and Distributes Steel Zealand) 2,995,400 $ 2,023,714 Pohang Iron & Steel Company Ltd. Manufactures Steel Products (Korea) 6,580 208,649 -------------- 2,232,363 DIVERSIFIED CONGLOMERATES--4.6% Haw Par Corporation Ltd. Healthcare and Leisure Products (Singapore) 3,113,000 $ 2,397,452 TOTAL COMMON STOCKS (COST: $78,457,722) 49,561,245
SHORT TERM INVESTMENTS--1.9% REPURCHASE AGREEMENTS--1.9% State Street Repurchase Agreement, 5.30% due 10/1/1998 $967,000 $ 967,000 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $967,000) 967,000 TOTAL SHORT TERM INVESTMENTS (COST: $967,000) 967,000 Total Investments (Cost $79,424,722)--97.6% (d) $ 50,528,245 Foreign Currencies (Proceeds $31,439)--0.1% 31,436 Other Assets In Excess Of Other Liabilities--2.3% (b) 1,210,894 -------------- TOTAL NET ASSETS--100% $ 51,770,575 -------------- --------------
(a) Non-income producing security. (b) Includes portfolio and transaction hedges. (c) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. (d) At September 30, 1998, net unrealized depreciation of $28,896,477, for federal income tax purposes consisted of gross unrealized appreciation of $437,043 and gross unrealized depreciation of $29,333,520. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL SMALL CAP FUND 37 THE OAKMARK FAMILY OF FUNDS STATEMENT OF ASSETS AND LIABILITIES--SEPTEMBER 30, 1998 ........................................................................
THE OAKMARK THE OAKMARK FUND SELECT FUND ------------------------- ------------------------- - --------------------------------------------------------------------------------- ASSETS Investments, at market value $ 6,888,618,717 $ 1,231,272,537 (cost: $6,573,899,571) (cost: $1,222,499,627) Cash 47,767 652 Foreign currency, at value 0 0 Collateral for securities loaned, at value 0 159,033,480 Receivable for: Forward foreign currency contracts 0 0 Securities sold 23,602,941 467,123 Fund shares sold 9,105,820 2,884,796 Dividends and interest 17,548,208 750,119 ------------------------- ------------------------- Total receivables 50,256,969 4,102,038 Other assets 37,203 8,444 ------------------------- ------------------------- Total assets $ 6,938,960,656 $ 1,394,417,151 ------------------------- ------------------------- ------------------------- ------------------------- ................................................................................. LIABILITIES AND NET ASSETS Payable for: Collateral for securities loaned, at value $ 0 $ 159,033,480 Securities purchased 0 4,837,276 Fund shares redeemed 7,227,480 1,045,502 Due to adviser 5,290,462 957,981 Forward foreign currency contracts 0 0 Other 2,484,832 648,526 ------------------------- ------------------------- Total liabilities 15,002,774 166,522,765 ------------------------- ------------------------- Net assets applicable to fund shares outstanding $ 6,923,957,882 $ 1,227,894,386 ------------------------- ------------------------- ------------------------- ------------------------- Fund shares outstanding 206,454,614 73,251,709 ------------------------- ------------------------- ------------------------- ------------------------- ................................................................................. PRICE OF SHARES Net asset value per share $ 33.54 $ 16.76 ------------------------- ------------------------- ------------------------- ------------------------- ................................................................................. ANALYSIS OF NET ASSETS Paid in capital $ 6,156,111,515 $ 1,149,816,590 Accumulated undistributed net realized gain (loss) on sale of investments, forward contracts and foreign currency exchange transactions 375,272,768 67,603,248 Net unrealized appreciation (depreciation) of investments 314,719,146 8,772,910 Net unrealized appreciation (depreciation) of foreign currency portfolio hedges 0 0 Net unrealized appreciation (depreciation)--other 0 0 Accumulated undistributed net investment income (loss) 77,854,453 1,701,638 ------------------------- ------------------------- Net assets applicable to Fund shares outstanding $ 6,923,957,882 $ 1,227,894,386 ------------------------- ------------------------- ------------------------- -------------------------
38 THE OAKMARK FAMILY OF FUNDS ......................................................................
THE OAKMARK THE OAKMARK THE OAKMARK SMALL CAP EQUITY AND INTERNATIONAL FUND INCOME FUND FUND ------------------------- ------------------------- ------------------------- - ----------------------------------------------------------------------------------------------------------- ASSETS Investments, at market value $ 616,231,232 $ 57,497,107 $ 739,175,430 (cost: $682,325,649) (cost: $54,364,763) (cost: $1,088,039,399) Cash 1,013,396 585 601 Foreign currency, at value 0 0 1,367,813 Collateral for securities loaned, at value 26,009,161 1,759,177 73,675,393 Receivable for: Forward foreign currency contracts 0 0 2,446,315 Securities sold 12,674,906 0 15,095,665 Fund shares sold 1,033,409 15,175 203,924 Dividends and interest 532,476 461,512 5,128,670 ------------------------- ------------------------- ------------------------- Total receivables 14,240,791 476,687 22,874,574 Other assets 8,548 3,274 5,399 ------------------------- ------------------------- ------------------------- Total assets $ 657,503,128 $ 59,736,830 $ 837,099,210 ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ........................................................................................................... LIABILITIES AND NET ASSETS Payable for: Collateral for securities loaned, at value $ 26,009,161 $ 1,759,177 $ 73,675,393 Securities purchased 11,122,483 0 0 Fund shares redeemed 1,436,217 135,567 2,048,641 Due to adviser 670,322 34,324 683,804 Forward foreign currency contracts 0 0 3,977,540 Other 270,183 61,907 609,524 ------------------------- ------------------------- ------------------------- Total liabilities 39,508,366 1,990,975 80,994,902 ------------------------- ------------------------- ------------------------- Net assets applicable to fund shares outstanding $ 617,994,762 $ 57,745,855 $ 756,104,308 ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- Fund shares outstanding 48,938,247 4,127,329 72,552,725 ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ........................................................................................................... PRICE OF SHARES Net asset value per share $ 12.63 $ 13.99 $ 10.42 ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ........................................................................................................... ANALYSIS OF NET ASSETS Paid in capital $ 684,807,280 $ 52,589,935 $ 1,015,075,572 Accumulated undistributed net realized gain (loss) on sale of investments, forward contracts and foreign currency exchange transactions 6,202,400 1,002,213 52,470,799 Net unrealized appreciation (depreciation) of investments (66,094,417) 3,132,344 (348,864,154) Net unrealized appreciation (depreciation) of foreign currency portfolio hedges 0 0 (1,515,552) Net unrealized appreciation (depreciation)--other 0 0 198,784 Accumulated undistributed net investment income (loss) (6,920,501) 1,021,363 38,738,859 ------------------------- ------------------------- ------------------------- Net assets applicable to Fund shares outstanding $ 617,994,762 $ 57,745,855 $ 756,104,308 ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- THE OAKMARK INTERNATIONAL SMALL CAP FUND ------------------------- ------------------------- ------------------------- - ------------------------------ ASSETS Investments, at market value $ 50,528,245 (cost: $79,424,722) Cash 940 Foreign currency, at value 31,436 Collateral for securities loaned, at value 3,218,851 Receivable for: Forward foreign currency contracts 1,877 Securities sold 1,087,279 Fund shares sold 24,414 Dividends and interest 512,069 ------------------------- Total receivables 1,625,639 Other assets 3,350 ------------------------- Total assets $ 55,408,461 ------------------------- ------------------------- .............................. LIABILITIES AND NET ASSETS Payable for: Collateral for securities loaned, at value $ 3,218,851 Securities purchased 0 Fund shares redeemed 34,598 Due to adviser 58,195 Forward foreign currency contracts 179,274 Other 146,968 ------------------------- Total liabilities 3,637,886 ------------------------- Net assets applicable to fund shares outstanding $ 51,770,575 ------------------------- ------------------------- Fund shares outstanding 7,514,807 ------------------------- ------------------------- .............................. PRICE OF SHARES Net asset value per share $ 6.89 ------------------------- ------------------------- .............................. ANALYSIS OF NET ASSETS Paid in capital $ 80,845,737 Accumulated undistributed net realized gain (loss) on sale of investments, forward contracts and foreign currency exchange transactions (1,634,583) Net unrealized appreciation (depreciation) of investments (28,896,480) Net unrealized appreciation (depreciation) of foreign currency portfolio hedges (179,057) Net unrealized appreciation (depreciation)--other 5,883 Accumulated undistributed net investment income (loss) 1,629,075 ------------------------- Net assets applicable to Fund shares outstanding $ 51,770,575 ------------------------- -------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 39 THE OAKMARK FAMILY OF FUNDS STATEMENT OF OPERATIONS--YEAR ENDED SEPTEMBER 30, 1998 ........................................................................
THE OAKMARK THE OAKMARK SELECT FUND FUND ------------------------- ------------------------- - ----------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 132,309,356 $ 10,572,619 Interest Income 47,671,926 5,735,556 Securities lending income 0 109,602 Foreign taxes withheld (1,820,235) (169,788) ------------------------- ------------------------- Total investment income 178,161,047 16,247,989 ......................................................................................... EXPENSES: Investment advisory fee 72,196,251 11,525,158 Transfer and dividend disbursing agent fees 4,376,441 1,063,152 Other shareholder servicing fees 3,387,013 764,027 Reports to shareholders 1,664,357 318,511 Custody and accounting fees 868,661 178,446 Registration and blue sky expenses 673,806 335,384 Trustees fees 90,748 30,422 Legal fees 58,259 19,206 Audit fees 27,925 20,999 Other 343,480 46,872 ------------------------- ------------------------- Total expenses 83,686,941 14,302,177 Expense offset arrangements (6,489) (2,712) ------------------------- ------------------------- Net expenses 83,680,452 14,299,465 ------------------------- ------------------------- ......................................................................................... NET INVESTMENT INCOME (LOSS): 94,480,595 1,948,524 ......................................................................................... NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on investments 1,258,937,339 69,415,172 Net realized gain (loss) on foreign currency transactions (8,898) 0 Net change in unrealized appreciation (depreciation) of investments and foreign currencies (1,704,966,868) (78,902,257) Net change in appreciation of forward currency exchange contracts 0 0 Net change in appreciation (depreciation)--other 0 0 ------------------------- ------------------------- ......................................................................................... NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: (446,038,427) (9,487,085) ------------------------- ------------------------- ......................................................................................... NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (351,557,832) $ (7,538,561) ------------------------- ------------------------- ------------------------- -------------------------
40 THE OAKMARK FAMILY OF FUNDS ......................................................................
THE OAKMARK THE OAKMARK THE OAKMARK SMALL CAP EQUITY AND INTERNATIONAL FUND INCOME FUND FUND ------------------------- ------------------------- ------------------------- - ----------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 8,702,112 $ 737,103 $ 38,964,663 Interest Income 3,864,378 1,064,634 2,761,336 Securities lending income 434,864 5,635 1,625,921 Foreign taxes withheld 0 (1,560) (3,542,574) ------------------------- ------------------------- ------------------------- Total investment income 13,001,354 1,805,812 39,809,346 ....................................................................................................................... EXPENSES: Investment advisory fee 15,863,707 359,708 12,623,371 Transfer and dividend disbursing agent fees 780,579 95,816 967,291 Other shareholder servicing fees 700,403 12,676 580,069 Reports to shareholders 301,533 20,847 335,053 Custody and accounting fees 179,707 49,662 1,350,813 Registration and blue sky expenses 55,750 43,519 53,679 Trustees fees 30,535 18,442 27,749 Legal fees 20,157 11,337 17,726 Audit fees 21,041 19,544 26,722 Other 56,482 7,909 123,111 ------------------------- ------------------------- ------------------------- Total expenses 18,009,894 639,460 16,105,584 Expense offset arrangements (48,678) (212) (105,661) ------------------------- ------------------------- ------------------------- Net expenses 17,961,216 639,248 15,999,923 ------------------------- ------------------------- ------------------------- ....................................................................................................................... NET INVESTMENT INCOME (LOSS): (4,959,862) 1,166,564 23,809,423 ....................................................................................................................... NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on investments 124,757,914 1,578,730 86,532,713 Net realized gain (loss) on foreign currency transactions 0 0 (3,890,444) Net change in unrealized appreciation (depreciation) of investments and foreign currencies (374,056,372) (2,325,892) (502,914,491) Net change in appreciation of forward currency exchange contracts 0 0 (2,045,738) Net change in appreciation (depreciation)--other 0 0 195,384 ------------------------- ------------------------- ------------------------- ....................................................................................................................... NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: (249,298,458) (747,162) (422,122,576) ------------------------- ------------------------- ------------------------- ....................................................................................................................... NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (254,258,320) $ 419,402 $ (398,313,153) ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- THE OAKMARK INTERNATIONAL SMALL CAP FUND ------------------------- ------------------ ------------------------- - ------------------------------ INVESTMENT INCOME: Dividends $ 2,777,457 Interest Income 214,453 Securities lending income 7,556 Foreign taxes withheld (304,967) ------------------------- Total investment income 2,694,499 .............................. EXPENSES: Investment advisory fee 827,611 Transfer and dividend disbursing agent fees 112,828 Other shareholder servicing fees 27,531 Reports to shareholders 31,378 Custody and accounting fees 176,922 Registration and blue sky expenses 35,377 Trustees fees 18,433 Legal fees 12,111 Audit fees 24,144 Other 13,299 ------------------------- Total expenses 1,279,634 Expense offset arrangements (292) ------------------------- Net expenses 1,279,342 ------------------------- .............................. NET INVESTMENT INCOME (LOSS): 1,415,157 .............................. NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain (loss) on investments (96,290) Net realized gain (loss) on foreign currency transactions (162,499) Net change in unrealized appreciation (depreciation) of investments and foreign currencies (27,728,327) Net change in appreciation of forward currency exchange contracts (179,057) Net change in appreciation (depreciation)--other 2,414 ------------------------- .............................. NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: (28,163,759) ------------------------- .............................. NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (26,748,602) ------------------------- -------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 41 THE OAKMARK FAMILY OF FUNDS STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 1998 ........................................................................
THE OAKMARK FUND ------------------------------------------------------- YEAR ENDED ELEVEN MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 94,480,595 $ 55,858,346 Net realized gain on sale of investments 1,258,937,339 239,442,987 Net realized gain (loss) on foreign currency transactions (8,898) (2,673) Net change in unrealized appreciation (1,704,966,868) 1,231,138,352 ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS (351,557,832) 1,526,437,012 ......................................................................................... DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income (66,321,023) (41,659,757) Net realized short-term gain (25,210,618) (13,947,126) Net realized long-term gain (1,098,260,243) (212,039,549) ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,189,791,884) (267,646,432) ......................................................................................... FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 2,836,315,983 2,107,074,877 Reinvestment of dividends and capital gain distributions 1,133,761,068 256,384,877 Payments for shares redeemed (2,119,718,081) (941,237,366) ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 1,850,358,970 1,422,222,388 ------------------------- ------------------------- ......................................................................................... TOTAL INCREASE IN NET ASSETS 309,009,254 2,681,012,968 NET ASSETS: Beginning of period 6,614,948,628 3,933,935,660 ------------------------- ------------------------- End of period $ 6,923,957,882 $ 6,614,948,628 ------------------------- ------------------------- ------------------------- ------------------------- Undistributed net investment income $ 77,854,452 $ 49,694,881 ------------------------- ------------------------- ------------------------- ------------------------- (1) DISTRIBUTIONS PER SHARE: Net investment income 0.3996 0.3441 Net realized short-term gain 0.1519 0.1152 Net realized long-term gain 5.8556 1.7514 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 6.4071 $ 2.2107
42 THE OAKMARK FAMILY OF FUNDS ......................................................................
SELECT FUND THE OAKMARK ------------------------------------------------------- YEAR ENDED ELEVEN MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 1,948,524 $ (246,886) Net realized gain on sale of investments 69,415,172 5,070,435 Net realized gain (loss) on foreign currency transactions 0 0 Net change in unrealized appreciation (78,902,257) 87,675,167 ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS (7,538,561) 92,498,716 ......................................................................................... DISTRIBUTION TO SHAREHOLDERS FROM (1): Net investment income 0 0 Net realized short-term gain (6,882,359) 0 Net realized long-term gain -- 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (6,882,359) 0 ......................................................................................... FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 1,440,695,723 571,117,746 Reinvestment of dividends and capital gain distributions 6,568,333 0 Payments for shares redeemed (719,123,322) (149,441,890) ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 728,140,734 421,675,856 ------------------------- ------------------------- ......................................................................................... TOTAL INCREASE IN NET ASSETS 713,719,814 514,174,572 NET ASSETS: Beginning of period 514,174,572 0 ------------------------- ------------------------- End of period $ 1,227,894,386 $ 514,174,572 ------------------------- ------------------------- ------------------------- ------------------------- Undistributed net investment income $ 1,701,638 $ (246,886) ------------------------- ------------------------- ------------------------- ------------------------- (1) DISTRIBUTIONS PER SHARE: Net investment income 0 0 Net realized short-term gain 0.1678 0 Net realized long-term gain 0 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 0.1678 $ 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 43 THE OAKMARK FAMILY OF FUNDS STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 1998 CONT. ........................................................................
SMALL CAP FUND THE OAKMARK ------------------------------------------------------- YEAR ENDED ELEVEN MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ (4,959,862) $ (1,684,439) Net realized gain on sale of investments 124,757,914 46,501,798 Net realized gain (loss) on foreign currency transactions 0 0 Net change in unrealized appreciation (374,056,372) 287,859,202 ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS (254,258,320) 332,676,561 ......................................................................................... DISTRIBUTION TO SHAREHOLDERS FROM: (1) Net investment income 0 0 Net realized short-term gain (35,041,133) 0 Net realized long-term gain (129,772,888) 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (164,814,021) 0 ......................................................................................... FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 416,817,749 1,289,718,462 Reinvestment of dividends and capital gain distributions 156,645,973 0 Payments for shares redeemed (1,049,792,259) (327,419,790) ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS (476,328,537) 962,298,672 ------------------------- ------------------------- ......................................................................................... TOTAL INCREASE IN NET ASSETS (895,400,878) 1,294,975,233 NET ASSETS: Beginning of period 1,513,395,640 218,420,407 ------------------------- ------------------------- End of period $ 617,994,762 $ 1,513,395,640 ------------------------- ------------------------- ------------------------- ------------------------- Undistributed net investment income $ (6,920,502) $ (1,960,639) ------------------------- ------------------------- ------------------------- ------------------------- (1) DISTRIBUTIONS PER SHARE: Net investment income 0 0 Net realized short-term gain 0.4738 0 Net realized long-term gain 2.3874 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 2.8612 $ 0
44 THE OAKMARK FAMILY OF FUNDS ......................................................................
THE OAKMARK EQUITY AND INCOME FUND ------------------------------------------------------- YEAR ENDED ELEVEN MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 1,166,564 $ 471,744 Net realized gain on sale of investments 1,578,730 904,824 Net realized gain (loss) on foreign currency transactions 0 0 Net change in unrealized appreciation (2,325,892) 4,554,518 ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 419,402 5,931,086 ......................................................................................... DISTRIBUTION TO SHAREHOLDERS FROM: (1) Net investment income (594,007) (148,466) Net realized short-term gain (882,071) (162,188) Net realized long-term gain (599,021) 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (2,075,099) (310,654) ......................................................................................... FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 43,125,943 24,903,007 Reinvestment of dividends and capital gain distributions 1,964,129 288,850 Payments for shares redeemed (19,151,033) (11,148,702) ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 25,939,039 14,043,155 ------------------------- ------------------------- ......................................................................................... TOTAL INCREASE IN NET ASSETS 24,283,342 19,663,587 NET ASSETS: Beginning of period 33,462,513 13,798,926 ------------------------- ------------------------- End of period $ 57,745,855 $ 33,462,513 ------------------------- ------------------------- ------------------------- ------------------------- Undistributed net investment income $ 1,021,363 $ 448,806 ------------------------- ------------------------- ------------------------- ------------------------- (1) DISTRIBUTIONS PER SHARE: Net investment income 0.2359 0.1202 Net realized short-term gain 0.3503 0.1311 Net realized long-term gain 0.2379 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 0.8241 $ 0.2513
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 45 THE OAKMARK FAMILY OF FUNDS STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 1998 CONT. ........................................................................
INTERNATIONAL FUND THE OAKMARK ------------------------------------------------------- YEAR ENDED ELEVEN MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 23,809,423 $ 27,666,383 Net realized gain on sale of investments 86,532,713 217,090,057 Net realized gain (loss) on foreign currency transactions (3,890,444) 17,724,883 Net change in unrealized appreciation (depreciation) (502,914,491) 70,717,122 Net change in unrealized appreciation (depreciation) of forward currency exchange contracts (2,045,738) 3,426,674 Net change in unrealized appreciation (depreciation)--other 195,384 197,532 ------------------------- ------------------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (398,313,153) 336,822,651 ......................................................................................... DISTRIBUTION TO SHAREHOLDERS FROM: (1) Net investment income (46,460,573) (12,477,945) Net realized short-term gain (57,985,224) 0 Net realized long-term gain (173,099,244) 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (277,545,041) (12,477,945) ......................................................................................... FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 482,976,228 710,447,882 Reinvestment of dividends and capital gain distributions 263,415,429 11,903,359 Payments for shares redeemed (961,776,686) (572,115,610) ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS (215,385,029) 150,235,631 ------------------------- ------------------------- ......................................................................................... TOTAL INCREASE (DECREASE) IN NET ASSETS (891,243,223) 474,580,337 NET ASSETS: Beginning of period 1,647,347,531 1,172,767,194 ------------------------- ------------------------- End of period $ 756,104,308 $ 1,647,347,531 ------------------------- ------------------------- ------------------------- ------------------------- Undistributed net investment income $ 38,738,859 $ 61,390,009 ------------------------- ------------------------- ------------------------- ------------------------- (1) DISTRIBUTIONS PER SHARE: Net investment income 0.5758 0.1617 Net realized short-term gain 0.7186 0 Net realized long-term gain 2.1453 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 3.4397 $ 0.1617
46 THE OAKMARK FAMILY OF FUNDS ......................................................................
SMALL CAP FUND THE OAKMARK INTERNATIONAL ------------------------------------------------------- YEAR ENDED ELEVEN MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 1,415,157 $ 646,048 Net realized gain on sale of investments (96,290) 6,250,624 Net realized gain (loss) on foreign currency transactions (162,499) (232,740) Net change in unrealized appreciation (depreciation) (27,728,327) (1,464,546) Net change in unrealized appreciation (depreciation) of forward currency exchange contracts (179,057) 0 Net change in unrealized appreciation (depreciation)--other 2,414 5,257 ------------------------- ------------------------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS (26,748,602) 5,204,643 ......................................................................................... DISTRIBUTION TO SHAREHOLDERS FROM: (1) Net investment income (308,015) (279,216) Net realized short-term gain (3,477,982) (1,285,114) Net realized long-term gain (3,890,139) 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (7,676,136) (1,564,330) ......................................................................................... FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold 77,339,314 63,012,100 Reinvestment of dividends and capital gain distributions 7,427,846 1,523,977 Payments for shares redeemed (64,544,647) (41,955,631) ------------------------- ------------------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 20,222,513 22,580,446 ------------------------- ------------------------- ......................................................................................... TOTAL INCREASE (DECREASE) IN NET ASSETS (14,202,225) 26,220,759 NET ASSETS: Beginning of period 65,972,800 39,752,041 ------------------------- ------------------------- End of period $ 51,770,575 $ 65,972,800 ------------------------- ------------------------- ------------------------- ------------------------- Undistributed net investment income $ 1,629,074 $ 521,933 ------------------------- ------------------------- ------------------------- ------------------------- (1) DISTRIBUTIONS PER SHARE: Net investment income 0.0559 0.0777 Net realized short-term gain 0.6312 0.3581 Net realized long-term gain 0.7060 0 ------------------------- ------------------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS $ 1.3931 $ 0.4358
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 47 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 International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap") collectively referred to as "the Funds", each a series of the Harris Associates Investment Trust (a Massachusetts business trust). These policies are in conformity with generally accepted accounting principles ("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. SECURITY VALUATION-- Investments are stated at current value. Securities traded on securities exchanges and securities traded on the NASDAQ National Market are valued at the last sales price on the day of valuation, or if lacking any reported sales that day, at the most recent bid quotation. Over-the-counter securities not so traded are valued at the most recent bid quotation. Money market instruments having a maturity of 60 days or less from the date of valuation are valued on an amortized cost basis which approximates market value. Securities for which quotations are not readily available are valued at a fair value as determined by the Trustees. FOREIGN CURRENCY TRANSLATIONS-- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the mean of the bid and offer prices of such currencies at the time of valuation. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized gain or loss from investments. Net realized gains on foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds' books, and the U.S. dollar equivalent of the amounts actually received or paid, and the realized gains or losses resulting from the portfolio and transaction hedges. At September 30, 1998, only the International and Int'l Small Cap Funds had foreign currency transactions. Net unrealized appreciation (depreciation)-other includes the following components:
INTERNATIONAL INTERNATIONAL SMALL CAP - ---------------------------------------------------------- Unrealized appreciation on dividends and dividend reclaims receivable $238,449 $ 12,428 Unrealized depreciation on open securities purchases and sales (17,431) (6,912) Unrealized appreciation (depreciation) on transaction hedge purchases and sales (15,673) 1,660 Unrealized depreciation on tax expense payable (6,561) (1,293) --------- ---------- Net Unrealized Appreciation - Other $198,784 $ 5,883 --------- ---------- --------- ----------
SECURITY TRANSACTIONS AND INVESTMENT INCOME-- Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on the accrual basis. Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the close of regular trading on the New York Stock Exchange on each day the Exchange is open for trading by dividing the total value of the Fund's investments and other assets, less liabilities, by the number of Fund shares outstanding. FORWARD FOREIGN CURRENCY CONTRACTS-- At September 30, 1998, International and Int'l Small Cap had entered into forward foreign currency contracts under which they are obligated to exchange currencies at specified future dates. The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions. 48 THE OAKMARK FAMILY OF FUNDS The contractual amounts of forward foreign exchange contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values. The International Fund had the following outstanding contracts at September 30, 1998: PORTFOLIO HEDGES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998 - ------------------------------------------------------------------------------------------------------------- $25,000,000 31,235,000 Brazilian Real January 1998 $ 1,310,201 20,000,000 24,992,000 Brazilian Real January 1998 1,112,769 30,654,500 18,500,000 Pound Sterling October 1998 (753,068) 37,289,250 22,500,000 Pound Sterling November 1998 (894,688) 14,801,400 9,000,000 Pound Sterling November 1998 (466,449) 14,794,200 9,000,000 Pound Sterling November 1998 (473,649) 14,607,000 9,000,000 Pound Sterling November 1998 (658,415) 14,233,120 8,800,000 Pound Sterling November 1998 (692,253) ------------------- $(1,515,552) ------------------- -------------------
TRANSACTION HEDGES: FOREIGN CURRENCY SALES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998 - --------------------------------------------------------------------------------------------------------------- $3,738,928 20,963,421 French Franc October 1998 $ (4,674) 3,143,545 1,865,827 Pound Sterling October 1998 (28,545) 1,594,391 933,429 Pound Sterling October 1998 7,468 3,223,084 1,886,499 Pound Sterling October 1998 15,848 1,844,181 1,087,820 Pound Sterling October 1998 (5,221) 472,144 278,043 Pound Sterling October 1998 (556) 14,664 20,353,856 South Korean Won October 1998 29 24,850 49,700 New Zealand Dollar October 1998 (22) ---------- $ (15,673) ---------- ----------
The Int'l Small Cap Fund had the following outstanding contracts: PORTFOLIO HEDGES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998 - ------------------------------------------------------------------------------------------------------------- $7,456,500 4,500,000 Pound Sterling November 1998 $ (179,057) ---------- ----------
TRANSACTION HEDGES: FOREIGN CURRENCY SALES--
UNREALIZED APPRECIATION (DEPRECIATION) AT US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998 - ------------------------------------------------------------------------------------------------------------------ $ 36,402 55,680 Canadian Dollar October 1998 $ (99) 441,298 259,480 Pound Sterling October 1998 156 214,840 125,748 Pound Sterling October 1998 1,057 7,541 1,025,913 Japanese Yen October 1998 31 60,660 8,252,168 Japanese Yen October 1998 251 92,447 12,576,472 Japanese Yen October 1998 382 131,033 262,066 New Zealand Dollar October 1998 (118) ------ $1,660 ------ ------
At September 30, 1998, International and Int'l Small Cap Funds each had sufficient cash and/or securities to cover any commitments under these contracts. THE OAKMARK FAMILY OF FUNDS 49 THE OAKMARK FAMILY OF FUNDS - -------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) ........................................................................ SECURITIES LENDING-- Each Fund except The Oakmark Fund may lend portfolio securities to broker- dealers and banks. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The Funds receive income from lending securities by investing the collateral and continue to earn income on the loaned securities. Security loans are subject to the risk of failure by the borrower to return the loaned securities, in which case the lending Fund could incur a loss. The market values (in thousands) of securities on loan to broker-dealers at September 30, 1998 are shown below.
INT'L SMALL EQUITY & SMALL SELECT CAP INCOME INTERNATIONAL CAP - ------------------------------------------------------------------------------------------ Market Value of Securities Loaned $153,993 $24,519 $ 1,696 $67,416 $ 2,988 Collateral (Cash and U.S. Treasuries) 159,033 26,009 1,759 73,675 3,219
FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS-- No provision is made for Federal income taxes since the Funds elect to be taxed as "regulated investment companies" and make such distributions to their shareholders as to be relieved of all Federal income taxes under provisions of current Federal tax law. The Funds hereby designate the following long term capital gain distributions for purposes of the dividends received deduction (in thousands):
INT'L SMALL EQUITY & SMALL OAKMARK SELECT CAP INCOME INTERNATIONAL CAP - ------------------------------------------------------------------------------------------------------ Long Term Capital Gain $1,111,813 $ 67,892 $124,758 $ 1,111 $23,108 $ 0
BANK LOANS-- The Funds have two unsecured lines of credit with a syndication of banks. One line of credit is a committed line of $350 million and the other is an uncommitted line of $250 million. Borrowings under this arrangement bear interest at .50% above the Federal Funds Effective Rate. As of September 30, 1998, there were no outstanding borrowings. 2. TRANSACTIONS WITH AFFILIATES Each fund has an investment advisory agreement with Harris Associates L.P. (Adviser). For management services and facilities furnished, the Funds pay the Adviser monthly fees at annual rates as follows. Oakmark pays 1% on the first $2.5 billion of net assets, .95% on the next $1.25 billion of net assets, .90% on the next $1.25 billion of net assets and .85% on the excess of $5 billion of net assets. International pays 1% on the first $2.5 billion of net assets, .95% on the next $2.5 billion of net assets and .90% on the excess of $5 billion of net assets. Select pays 1% on the first $1 billion and .95% on the next $500 million, .90% on the next $500 million, .85% on the next $500 million and .80% on the excess of $2.5 million of net assets. Small Cap pays 1.25% on the first $1 billion of net assets, 1.15% on the next $500 million, 1.10% on the next $500 million, 1.05% on the next $500 million, and 1% on the excess of $2.5 billion. Equity and Income pays .75% of net assets and Int'l Small Cap pays 1.25% of net assets. Each fee is calculated on the total net assets as determined at the end of each preceding calendar month. Beginning October 1, 1998, additional breakpoints will be as follows: Oakmark will pay .80% on net assets in excess of $10 billion and Select will pay .75% on excess of $5 billion of net assets. The Adviser has voluntarily agreed to reimburse the Funds to the extent that annual expenses, excluding certain expenses, exceed 1.5% for domestic funds and 2.0% for international funds. In connection with the organization of the Funds, expenses of approximately $146,500 and $47,000 were advanced to Oakmark and International, approximately $7,283 each to Small Cap, Equity and Income and Int'l Small Cap, and $3,500 to Select by the Adviser. These expenses are being amortized on a straight line basis through October, 2000 for Small Cap, Equity and Income and Int'l Small Cap, and October, 2001 for Select. Oakmark and International have fully amortized all organization expenses. During the year ended September 30, 1998, the Funds incurred brokerage commissions of $7,658,348, $2,399,359, $1,956,260, $66,195, $4,295,208 and $384,909 of which $2,068,690, $589,570, $193,708, $41,979, $0, and $0 were paid by Oakmark, Select, Small Cap, Equity and Income, International and Int'l Small Cap, respectively, to an affiliate of the Adviser. 50 THE OAKMARK FAMILY OF FUNDS 3. FUND SHARE TRANSACTIONS Proceeds and payments on Fund shares as shown in the Statement of Changes in Net Assets are in respect of the following number of shares (in thousands):
YEAR ENDED SEPTEMBER 30, 1998 -------------------------------------------------------------------- EQUITY & INT'L SMALL OAKMARK SELECT SMALL CAP INCOME INTERNATIONAL CAP - ------------------------------------------------------------------------------------------------------------- Shares sold 68,340 81,093 22,121 3,014 34,513 8,604 Shares issued in reinvestment of dividends 30,513 410 9,667 149 20,108 786 Less shares redeemed (52,910) (39,717) (57,261) (1,344) (69,820) (7,284) ------- ------- --------- -------- ------------- ----- Net increase (decrease) in shares outstanding 45,943 41,786 (25,473) 1,819 (15,199) 2,106 ------- ------- --------- -------- ------------- ----- ------- ------- --------- -------- ------------- -----
ELEVEN MONTHS ENDED SEPTEMBER 30, 1997 -------------------------------------------------------------------- EQUITY & INT'L SMALL OAKMARK SELECT SMALL CAP INCOME INTERNATIONAL CAP - ------------------------------------------------------------------------------------------------------------- Shares sold 57,226 42,529 78,065 1,941 41,288 5,229 Shares issued in reinvestment of dividends 7,962 0 0 25 793 135 Less shares redeemed (26,115) (11,063) (20,201) (880) (32,946) (3,438) ------- ------- --------- -------- ------ ----------- Net increase in shares outstanding 39,073 31,466 57,864 1,086 9,135 1,926 ------- ------- --------- -------- ------ ----------- ------- ------- --------- -------- ------ -----------
4. INVESTMENT TRANSACTIONS Transactions in investment securities (excluding short term securities) were as follows (in thousands):
EQUITY & INT'L SMALL OAKMARK SELECT SMALL CAP INCOME INTERNATIONAL CAP - ------------------------------------------------------------------------------------------------------------------------ Purchases $3,681,990 $1,219,648 $391,185 $41,789 $502,915 $57,346 Proceeds from sales 2,991,049 601,544 968,060 20,783 923,456 41,576
THE OAKMARK FAMILY OF FUNDS 51 THE OAKMARK FAMILY OF FUNDS - -------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONT.) ........................................................................ 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, 1998 is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK FUND
PURCHASE SALES DIVIDEND MARKET AFFILIATES COST PROCEEDS INCOME VALUE - ----------------------------------------------------------------------------------------------- AC Nielsen Corporation $ - $ - $ - $ 105,999,000 Brunswick Corporation 47,321,680 - 1,789,400 94,195,350 GC Companies, Inc. - - - 15,334,125 H & R Block, Inc. 340,780,489 - 2,941,950 317,172,475 Juno Lighting, Incorporated - - 390,600 24,276,875 Knight Ridder 128,013,079 - 4,480,340 308,358,300 Polaroid Corporation 11,171,805 - 2,731,440 111,818,325 R. H. Donnelley Corporation 10,418,862 - 1,835,978 25,965,967 SPX Corporation - - - 36,156,700 The Black & Decker Corporation 46,677,053 - 3,899,160 344,113,875 The Dun & Bradstreet Corporation 107,175,516 - 6,115,747 283,265,100 ------------ ----------- ----------- -------------- TOTALS $691,558,484 - $24,184,615 $1,666,656,092
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SELECT FUND
PURCHASE SALES DIVIDEND MARKET AFFILIATES COST PROCEEDS INCOME VALUE - ----------------------------------------------------------------------------------------------- USG Corporation $ 96,334,193 $ 3,793,551 $ 26,492 $ 118,539,600 US Industries Inc. 148,983,455 16,251,897 1,212,415 113,179,625 ------------ ----------- ----------- -------------- TOTALS $245,317,648 $20,045,448 $ 1,238,907 $ 231,719,225
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SMALL CAP FUND
PURCHASE SALES DIVIDEND MARKET AFFILIATES COST PROCEEDS INCOME VALUE - ----------------------------------------------------------------------------------------------- Ascent Entertainment Group, Inc. $ 3,794,484 $ 5,437,319 $ - $ 12,000,000 Barry (R.G.) Corporation 3,388,252 - - 11,781,263 Binks Sames Corporation 1,078,125 - 24,700 4,675,000 Columbus McKinnon Corporation 5,432,270 1,724,192 249,816 17,325,000 Duff & Phelps Credit Rating Company 3,082,142 - 38,808 16,121,875 Finger Lakes Financial Corp. - - 41,360 2,068,000 Northwest Pipe Company 1,520,000 2,103,411 - 9,250,000 Ralcorp Holdings, Inc. - 23,429,934 - 24,500,000 ROHN Industries, Inc. 17,335,121 - 50,000 5,812,500 Scotsman Industries, Inc. - 1,664,975 100,612 22,240,375 Triarc Companies, Inc. 1,959,905 10,981,722 - 19,453,125 Ugly Duckling Corporation 20,320,181 8,194,979 - 8,695,288 ------------ ----------- ----------- -------------- TOTALS $ 57,910,480 $53,536,532 $ 505,296 $ 153,922,426
52 THE OAKMARK FAMILY OF FUNDS SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL FUND
PURCHASE SALES DIVIDEND MARKET AFFILIATES COST PROCEEDS INCOME VALUE - --------------------------------------------------------------------------------------------- Banco Latinoamericano de Exportaciones,S.A. Class E $ 39,751,365 $ 3,301,540 $ 849,888 $ 21,146,282 Chargeurs International SA - 9,934,608 1,430,885 25,752,067 Cordiant Communications Group PLC 2,891,044 - 420,931 40,015,927 Dongah Tire Industry Company 5,643,713 - - 4,603,390 European Vinyls Corporation Intl. NV - 3,188,031 1,951,039 15,126,783 Fernz Corporation Ltd. 6,718,676 2,115,546 1,574,294 33,797,841 Fila Holding S.p.A. 20,288,049 187,177 685,787 21,885,800 Giordano International Limited 8,556,185 98,829 89,476 9,391,028 Hong Kong Aircraft Engineering Company 3,216,275 607,632 1,026,373 13,175,134 Keumkang Ltd. 2,940,243 - 159,292 4,956,792 Lamex Holdings Ltd. - - 181,184 322,517 Lotte Chilsung Beverage Company 3,009,525 - 17,504 3,095,452 Saatchi & Saatchi PLC 523,408 7,666,881 492,036 31,699,125 Tae Young Corporation 13,975,221 1,023,976 88,023 4,770,261 USIMINAS 12,560,055 - 5,885,389 21,852,288 Woongjin Publishing Company 2,936,743 - 34,695 1,259,204 ------------ ----------- ----------- ------------ TOTALS $123,010,502 $28,124,220 $14,886,796 $252,849,891
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL SMALL CAP FUND
PURCHASE SALES DIVIDEND MARKET AFFILIATES COST PROCEEDS INCOME VALUE - --------------------------------------------------------------------------------------------- Daimon $ 836,251 $ 61,037 $ 63,270 $ 1,516,602 Designer Textiles (NZ) Limited - - 56,322 459,213 Matichon Public Company Limited, Foreign Shares 648,794 - 75,237 1,746,991 Parbury Limited 2,899,156 - 65,550 1,581,357 Solution 6 Holdings Ltd. 431,130 - - 1,992,286 Yip's Hang Cheung Ltd. 539,149 2,540 89,119 845,532 ------------ ----------- ----------- ------------ TOTALS $ 5,354,480 $ 63,577 $ 349,498 $ 8,141,981
6. INTRODUCTION OF THE EURO The European Monetary Union intends to establish a common European currency for participating countries to be called the "euro." Each participating country will supplement its existing currency with the euro on January 1, 1999 and replace its existing currency with the euro on July 2, 2002. The consequences of the euro conversion for foreign exchange rates, interest rates and the value of European securities are presently unclear. Uncertainties include whether operational systems of banks and other financial institutions will be ready by January 1, 1999; the application of exchange rates for existing currencies and the euro; the creation of suitable clearing and settlement systems for the new currency; the legal treatment of certain outstanding financial contracts after January 1, 1999 that refer to existing currencies rather than the euro; and whether the interest rate, tax and labor regimes of European countries participating in the euro will converge over time. These and other factors, including economic and political risks, could cause market disruptions before or after the introduction of the euro, and could adversely affect the value of securities held by the Funds. THE OAKMARK FAMILY OF FUNDS 53 THE OAKMARK FUND - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS ............................................................................... FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------ 1998 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 41.21 $ 32.39 $ 28.47 $ 25.21 $ 24.18 $ 17.11 Income From Investment Operations: Net Investment Income (Loss) 0.47 0.36 0.34 0.30 0.27 0.17 Net Gains or Losses on Securities (both realized and unrealized) (1.73) 10.67 4.70 4.66 1.76 7.15 -------- -------------- --------- --------- --------- --------- Total From Investment Operations: (1.26) 11.03 5.04 4.96 2.03 7.32 Less Distributions: Dividends (from net investment income) (0.40) (0.34) (0.28) (0.23) (0.23) (0.04) Distributions (from capital gains) (6.01) (1.87) (0.84) (1.47) (0.77) (0.21) -------- -------------- --------- --------- --------- --------- Total Distributions (6.41) (2.21) (1.12) (1.70) (1.00) (0.25) -------- -------------- --------- --------- --------- --------- Net Asset Value, End of Period $ 33.54 $ 41.21 $ 32.39 $ 28.47 $ 25.21 $ 24.18 -------- -------------- --------- --------- --------- --------- -------- -------------- --------- --------- --------- --------- Total Return (4.06)% 39.24%* 18.07% 21.55% 8.77% 43.21% Ratios/Supplemental Data: Net Assets, End of Period ($ million) $ 6,924.0 $ 6,614.9 $ 3,933.9 $ 2,827.1 $ 1,677.3 $ 1,107.0 Ratio of Expenses to Average Net Assets 1.08% 1.08%* 1.18% 1.17% 1.22% 1.32% Ratio of Net Income (Loss) to Average Net Assets 1.22% 1.19%* 1.13% 1.27% 1.19% 0.94% Portfolio Turnover Rate 43% 17% 24% 18% 29% 18% PERIOD ENDED OCTOBER 31, 1992 1991(A) - ------------------------------ Net Asset Value, Beginning of Period $ 12.10 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) (0.03) (0.01) Net Gains or Losses on Securities (both realized and unrealized) 5.04 2.11 --------- ----------- Total From Investment Operations: 5.01 2.10 Less Distributions: Dividends (from net investment income) -- -- Distributions (from capital gains) -- -- --------- ----------- Total Distributions -- -- --------- ----------- Net Asset Value, End of Period $ 17.11 $ 12.10 --------- ----------- --------- ----------- Total Return 41.40% 87.10%* Ratios/Supplemental Data: Net Assets, End of Period ($ million) $ 114.7 $ 4.8 Ratio of Expenses to Average Net Assets 1.70% 2.50%(b)* Ratio of Net Income (Loss) to Average Net Assets (0.24)% (0.66)%(c)* Portfolio Turnover Rate 34% 0%
*Data has been annualized. (a) From August 5, 1991, the date on which Fund shares were first offered for sale to the public. (b) If the Fund had paid all of its expenses and there had been no reimbursement by the Adviser, this annualized ratio would have been 4.92% for the period. (c) Computed giving effect to the Adviser's expense limitation undertaking. 54 THE OAKMARK FAMILY OF FUNDS THE OAKMARK SELECT FUND - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS ............................................................................... FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
ELEVEN MONTHS YEAR ENDED ENDED SEPTEMBER SEPTEMBER 30, 1998 30, 1997 - ----------------------------------------------------------- Net Asset Value, Beginning of Period $ 16.34 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.03 (0.01) Net Gains or Losses on Securities (both realized and unrealized) 0.56 6.35 ---------- ---------- Total From Investment Operations: 0.59 6.34 Less Distributions: Dividends (from net investment income) 0.00 0.00 Distributions (from capital gains) (0.17) 0.00 ---------- ---------- Total Distributions (0.17) 0.00 ---------- ---------- Net Asset Value, End of Period $ 16.76 $ 16.34 ---------- ---------- ---------- ---------- Total Return 3.64% 69.16%* Ratios/Supplemental Data: Net Assets, End of Period ($ million) $ 1,227.9 $ 514.2 Ratio of Expenses to Average Net Assets (a) 1.22% 1.12%* Ratio of Net Income (Loss) to Average Net Assets (a) 0.17% (0.11)%* Portfolio Turnover Rate 56% 37%
Notes *Ratios have been annualized. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 55 THE OAKMARK SMALL CAP FUND - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS ............................................................................... FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER SEPTEMBER OCTOBER 30, 1998 30, 1997 31, 1996 - -------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 20.34 $ 13.19 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) (0.12) (0.01) (0.02) Net Gains or Losses on Securities (both realized and unrealized) (4.73) 7.16 3.21 ---------- ---------- ---------- Total From Investment Operations: (4.85) 7.15 3.19 Less Distributions: Dividends (from net investment income) 0.00 0.00 0.00 Distributions (from capital gains) (2.86) 0.00 0.00 ---------- ---------- ---------- Total Distributions (2.86) 0.00 0.00 ---------- ---------- ---------- Net Asset Value, End of Period $ 12.63 $ 20.34 $ 13.19 ---------- ---------- ---------- ---------- ---------- ---------- Total Return (26.37%) 59.14%* 31.94% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 618.0 $ 1,513.4 $ 218.4 Ratio of Expenses to Average Net Assets 1.45% 1.37%* 1.61% Ratio of Net Income (Loss) to Average Net Assets (0.40%) (0.25%)* (0.29%) Portfolio Turnover Rate 34% 27% 23%
*Data has been annualized. 56 THE OAKMARK FAMILY OF FUNDS THE OAKMARK EQUITY AND INCOME FUND - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS ............................................................................... FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER SEPTEMBER OCTOBER 30, 1998 30, 1997 31, 1996 - -------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 14.49 $ 11.29 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.29 0.21 0.10 Net Gains or Losses on Securities (both realized and unrealized) 0.04 3.24 1.19 ---------- ---------- ---------- Total From Investment Operations: 0.33 3.45 1.29 Less Distributions: Dividends (from net investment income) (0.24) (0.12) 0.00 Distributions (from capital gains) (0.59) (0.13) 0.00 ---------- ---------- ---------- Total Distributions (0.83) (0.25) 0.00 ---------- ---------- ---------- Net Asset Value, End of Period $ 13.99 $ 14.49 $ 11.29 ---------- ---------- ---------- ---------- ---------- ---------- Total Return 2.57% 34.01%* 12.91% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 57.7 $ 33.5 $ 13.8 Ratio of Expenses to Average Net Assets 1.31% 1.50%*(a) 2.50%(a) Ratio of Net Income (Loss) to Average Net Assets 2.39% 2.38%*(a) 1.21%(a) Portfolio Turnover Rate 46% 53% 66%
*Data has been annualized (a) If the fund had paid all of its expenses and there had been no expense reimbursement by the investment adviser, ratios would have been as follows:
SEPTEMBER OCTOBER 30, 1997 31, 1996 - ------------------------------------------------------ Ratio of Expenses to Average Net Assets 1.70 % 2.64 % Ratio of Net Income (Loss) to Average Net Assets 2.18 % 1.08 %
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 57 THE OAKMARK INTERNATIONAL FUND - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS ............................................................................... FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ELEVEN PERIOD MONTHS ENDED YEAR ENDED ENDED YEAR ENDED OCTOBER 31, OCTOBER SEPTEMBER SEPTEMBER -------------------------------------------- 31, 30, 1998 30, 1997 1996 1995 1994 1993 1992(A) - -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.77 $ 14.92 $ 12.97 $ 14.50 $ 14.09 $ 9.80 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.41 0.27 0.09 0.30 0.21 0.06 0.26 Net Gains or Losses on Securities (both realized and unrealized) (5.32) 3.74 2.90 (0.77) 0.43 4.48 (0.46) ---------- ---------- -------- -------- -------- -------- ---------- Total From Investment Operations: (4.91) 4.01 2.99 (0.47) 0.64 4.54 (0.20) Less Distributions: Dividends (from net investment income) (0.58) (0.16) 0.00 0.00 (0.08) (0.25) -- Distributions (from capital gains) (2.86) 0.00 (1.04) (1.06) (0.15) -- -- ---------- ---------- -------- -------- -------- -------- ---------- Total Distributions (3.44) (0.16) (1.04) (1.06) (0.23) (0.25) -- ---------- ---------- -------- -------- -------- -------- ---------- Net Asset Value, End of Period $ 10.42 $ 18.77 $ 14.92 $ 12.97 $ 14.50 $ 14.09 9.80 ---------- ---------- -------- -------- -------- -------- ---------- ---------- ---------- -------- -------- -------- -------- ---------- Total Return (29.90%) 29.63%* 24.90% (3.06%) 4.62% 47.49% (22.81%)* Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 756.1 $ 1,647.3 $1,172.8 $ 819.7 $1,286.0 $ 815.4 $ 23.5 Ratio of Expenses to Average Net Assets 1.32% 1.26%* 1.32% 1.40% 1.37% 1.26% 2.04%* Ratio of Net Income (Loss) to Average Net Assets 1.95% 2.09%* 1.45% 1.40% 1.44% 1.55% 37.02%* Portfolio Turnover Rate 43% 61% 42% 26% 55% 21% 0%
*Ratios have been annualized. (a) From September 30, 1992, the date on which Fund shares were first offered for sale to the public. 58 THE OAKMARK FAMILY OF FUNDS THE OAKMARK INTERNATIONAL SMALL CAP FUND - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS ............................................................................... FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ELEVEN MONTHS YEAR ENDED ENDED YEAR ENDED SEPTEMBER SEPTEMBER OCTOBER 30, 1998 30, 1997 31, 1996 - -------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 12.20 $ 11.41 $ 10.00 Income From Investment Operations: Net Investment Income (Loss) 0.18 0.13 0.04 Net Gains or Losses on Securities (both realized and unrealized) (4.09) 1.10 1.37 ---------- ---------- ---------- Total From Investment Operations: (3.91) 1.23 1.41 Less Distributions: Dividends (from net investment income) (0.06) (0.08) 0.00 Distributions (from capital gains) (1.34) (0.36) 0.00 ---------- ---------- ---------- Total Distributions (1.40) (0.44) 0.00 ---------- ---------- ---------- Net Asset Value, End of Period $ 6.89 $ 12.20 $ 11.41 ---------- ---------- ---------- ---------- ---------- ---------- Total Return (35.20%) 12.07%* 14.15% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 51.8 $ 66.0 $ 39.8 Ratio of Expenses to Average Net Assets 1.96% 1.93%* 2.50%(a) Ratio of Net Income (Loss) to Average Net Assets 2.17% 1.23%* 0.65%(a) Portfolio Turnover Rate 69% 63% 27%
Notes *Ratios have been annualized. (a) If the fund had paid all of its expenses and there had been no expense reimbursement by the investment advisor, the ratio of expenses to average net assets would have been 2.65% and the ratio of net income (loss) to average net assets would have been .50%. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 59 THE OAKMARK FAMILY OF FUNDS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ........................................................................ TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF HARRIS ASSOCIATES INVESTMENT TRUST: WE HAVE AUDITED THE ACCOMPANYING STATEMENTS OF ASSETS AND LIABILITIES OF THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK SMALL CAP FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND (EACH A SERIES OF HARRIS ASSOCIATES INVESTMENT TRUST), INCLUDING THE SCHEDULES OF INVESTMENTS ON PAGES 7-9, 12-13, 16-18, 21-23, 27-31, AND 35-37, AS OF SEPTEMBER 30, 1998, AND THE RELATED STATEMENTS OF OPERATIONS, STATEMENTS OF CHANGES IN NET ASSETS AND THE FINANCIAL HIGHLIGHTS FOR THE PERIODS INDICATED THEREON. THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE THE RESPONSIBILITY OF THE TRUST'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS BASED ON OUR AUDITS. WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS. 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, 1998, BY CORRESPONDENCE WITH THE CUSTODIAN AND BROKERS. AS TO SECURITIES PURCHASED BUT NOT RECEIVED, WE REQUESTED CONFIRMATION FROM BROKERS, AND WHEN REPLIES WERE NOT RECEIVED, WE CARRIED OUT ALTERNATIVE AUDITING PROCEDURES. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION. IN OUR OPINION, THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITIONS OF THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK SMALL CAP FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND OF THE HARRIS ASSOCIATES INVESTMENT TRUST AS OF SEPTEMBER 30, 1998, THE RESULTS OF THEIR OPERATIONS, THE CHANGES IN THEIR NET ASSETS, AND THEIR FINANCIAL HIGHLIGHTS FOR THE PERIODS INDICATED THEREON IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. ARTHUR ANDERSEN LLP Chicago, Illinois October 21, 1998 60 THE OAKMARK FAMILY OF FUNDS THE OAKMARK FAMILY OF FUNDS TRUSTEES AND OFFICERS ........................................................................ TRUSTEES Michael J. Friduss Thomas H. Hayden Christine M. Maki Victor A. Morgenstern Allan J. Reich Marv Rotter Burton W. Ruder Peter S. Voss Gary Wilner, M.D. OFFICERS Victor A. Morgenstern--CHAIRMAN Robert M. Levy--PRESIDENT Robert J. Sanborn--EXECUTIVE VICE PRESIDENT David G. Herro--VICE PRESIDENT Clyde S. McGregor--VICE PRESIDENT William C. Nygren--VICE PRESIDENT Steven J. Reid--VICE PRESIDENT Michael J. Welsh--VICE PRESIDENT Donald Terao--VICE PRESIDENT--FINANCE Anita M. Nagler--SECRETARY Ann W. Regan--VICE PRESIDENT-- SHAREHOLDER OPERATIONS AND ASSISTANT SECRETARY Kristi L. Rowsell--TREASURER OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT State Street Bank and Trust Company Attention: The Oakmark Family of Funds P.O. Box 8510 Boston, Massachusetts 02266-8510 LEGAL COUNSEL Bell, Boyd & Lloyd Chicago, Illinois INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP Chicago, Illinois FOR MORE INFORMATION: Please call 1-800-OAKMARK (1-800-625-6275) or 617-328-5000 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. OAKMARK FAMILY OF FUNDS P.O. BOX 8510 BOSTON, MA 02266-8510 -----END PRIVACY-ENHANCED MESSAGE-----