-----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, PvL3OiKLZl7jVAfemeHiZNNSyP6x0CHnyot8wPZWawynOxwsvNyyITaazD6ienXu MoR1VzdIWmArn6s+1LFCPQ== 0001047469-04-002431.txt : 20040130 0001047469-04-002431.hdr.sgml : 20040130 20040130111601 ACCESSION NUMBER: 0001047469-04-002431 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040130 EFFECTIVENESS DATE: 20040130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRIS ASSOCIATES INVESTMENT TRUST CENTRAL INDEX KEY: 0000872323 STATE OF INCORPORATION: MA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-06279 FILM NUMBER: 04554573 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-30B-2 1 a2126413zn-30b_2.txt N-30B-2 [GRAPHIC] THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK SMALL CAP FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND FIRST QUARTER REPORT DECEMBER 31, 2003 ADVISED BY HARRIS ASSOCIATES L.P. [OAKMARK FAMILY OF FUNDS LOGO] THE OAKMARK FAMILY OF FUNDS 2004 FIRST QUARTER REPORT PRESIDENT'S LETTER 1 SUMMARY INFORMATION 2 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 4 THE OAKMARK FUND Letter from the Portfolio Managers 6 Schedule of Investments 7 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 11 Schedule of Investments 12 THE OAKMARK SMALL CAP FUND Letter from the Portfolio Managers 14 Schedule of Investments 16 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 20 Schedule of Investments 22 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 28 Global Diversification Chart 30 Schedule of Investments 31 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 36 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 38 International Diversification Chart 39 Schedule of Investments 40 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 45 International Diversification Chart 46 Schedule of Investments 47 OAKMARK PHILOSOPHY AND PROCESS 54 THE OAKMARK GLOSSARY 55 TRUSTEES AND OFFICERS 57
FORWARD-LOOKING STATEMENT DISCLOSURE One of our most important responsibilities as mutual fund managers is to communicate with shareholders in an open and direct manner. Some of our comments in our letters to shareholders are based on current management expectations and are considered "forward-looking statements". Actual future results, however, may prove to be different from our expectations. You can identify forward-looking statements by words such as "estimate", "may", "will", "expect", "believe", "plan" and other similar terms. We cannot promise future returns. Our opinions are a reflection of our best judgment at the time this report is compiled, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise. PRESIDENT'S LETTER [PHOTO OF JOHN R. RAITT] DEAR FELLOW SHAREHOLDERS, Stock markets around the world were strong in the fourth quarter, bringing full year returns for most of the broader market indices to 25% or more. Each of our funds produced significant gains in the quarter and the year. Our relative performance was mixed, however. Some of our funds handily beat their benchmarks, while others posted numbers shy of market returns. This isn't a surprising outcome to us, given the surge in the market. Our conservative approach, buying undervalued companies for long-term appreciation, will often lag the market during those times when momentum receives more market focus than price and value. ECONOMIC RECOVERY AND REALISTIC EXPECTATIONS The world economy continues to strengthen, and corporate earnings reached new highs in the second half of 2003. We believe consumer confidence is high and low interest rates should continue to provide fuel for future economic growth. While the macroeconomic trends are strong, our bottom up investment discipline tempers our outlook. Earnings are up, but share prices are also up. Stock valuations reflect assumptions of continued economic recovery far more broadly than they did a year ago. Likewise, our analysts are finding fewer deeply undervalued new investment ideas. Looking through the rear-view mirror at 25%+ returns, the market looks great. However, history and economics suggest that returns will revert to long-term norms--with prospective returns averaging in the mid-to-high single digits. WATCHING OUT FOR OUR SHAREHOLDERS' INTERESTS These are turbulent times for the mutual fund industry. Investor trust has been shaken by the recent disclosures of improprieties at many mutual fund firms. Our thoughts and policies on these issues are discussed in detail on our website (www.oakmark.com). Those of you that are familiar with our funds know that we have always been focused on doing what is best for our shareholders. In this light, we recently announced the following: REDEMPTION FEES: Since August 1999, five of our seven funds have had a 2% fee on redemptions of Class I shares held for 90 days or less. Last month, we announced that we will impose the same 2% fee in The Oakmark Fund and The Oakmark Equity and Income Fund. These fees, payable to the funds, discourage market timers and offset any costs to the Funds associated with short-term holders of our shares. We do not believe market timing has been a problem in these two Funds, but given recent history, we feel that it is prudent to take extra measures to protect our shareholders from market timers. SLOWING CASH INFLOWS: Cash inflows into The Oakmark Global Fund and The Oakmark International Fund were substantial in 2003. In December, to prevent inflows from reaching a level that was difficult for us to accommodate in an orderly way, we chose to slow inflows by closing these two funds to new sales through brokers and intermediaries. We feel confident that we can continue to prudently invest inflows at the new slower pace. PERSONAL INVESTMENTS IN THE FUNDS: Disclosure of share ownership by mutual fund managers has become a widely discussed industry issue, with many proposals surfacing for increased disclosures. We have always encouraged broad ownership of the Oakmark Funds by our employees, because we believe that significant fund ownership correctly aligns our interests with those of our shareholders. We also believe in direct, honest and open communications with shareholders. WITH THIS IN MIND, WE HAVE CHOSEN TO DISCLOSE OUR FUND SHARE OWNERSHIP AHEAD OF ANY NEW RULES, AND LAST MONTH ANNOUNCED THAT AS OF THE BEGINNING OF DECEMBER 2003, THE EMPLOYEES OF THE FUNDS' ADVISER, HARRIS ASSOCIATES L.P., AND THE FUNDS' OFFICERS AND TRUSTEES HAD OVER $145 MILLION INVESTED IN THE OAKMARK FAMILY OF FUNDS. As a final note, on January 1, I succeeded Bob Levy as President of The Oakmark Funds. This completes a transition that began early last year, but does not decrease Bob's important involvement with The Oakmark Funds. After several years as President of the Funds, Bob will now be able to allocate more of his time to his duties as Chief Investment Officer of Harris Associates, leading the domestic investment team that has produced such outstanding performance for the Funds. Thank you for investing with The Oakmark Family of Funds. We welcome your comments and questions; you can reach us via email at ContactOakmark@oakmark.com. /s/ John R. Raitt JOHN R. RAITT PRESIDENT OF THE OAKMARK FUNDS PRESIDENT AND CEO OF HARRIS ASSOCIATES L.P. 1 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION
THE OAKMARK THE OAKMARK PERFORMANCE FOR THE OAKMARK SELECT SMALL CAP PERIOD ENDED FUND FUND FUND DECEMBER 31, 2003(1) (OAKMX) (OAKLX) (OAKSX) - ---------------------------------------------------------------------------------------------------------------------- 3 MONTHS* 11.35% 11.53% 10.94% - ---------------------------------------------------------------------------------------------------------------------- 6 MONTHS* 11.71% 11.57% 17.36% - ---------------------------------------------------------------------------------------------------------------------- 1 YEAR 25.30% 29.00% 26.81% - ---------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 8.26% 12.49% 11.66% - ---------------------------------------------------------------------------------------------------------------------- 5 YEAR 4.89% 15.43% 6.00% - ---------------------------------------------------------------------------------------------------------------------- 10 YEAR 10.91% N/A N/A - ---------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 17.14% 22.23% 11.07% (8/5/91) (11/1/96) (11/1/95) - ---------------------------------------------------------------------------------------------------------------------- VALUE OF $10,000 FROM INCEPTION DATE $ 71,301 $ 42,181 $ 23,581 - ---------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY HOLDINGS Washington Washington Tupperware AS OF DECEMBER 31, 2003(2) Mutual, Inc. 3.4% Mutual, Inc. 16.3% Corporation 4.9% H&R Block, Inc. 2.8% H&R Block, Inc. 8.1% Checkpoint First Data Yum! Brands, Inc. 5.6% Systems, Inc. 4.8% COMPANY AND % OF TOTAL Corporation 2.7% First Data Ralcorp Holdings, Inc. 4.8% NET ASSETS Yum! Brands, Inc. 2.3% Corporation 5.4% eFunds Corporation 4.4% Fannie Mae 2.3% Burlington Instituform Resources Inc. 4.2% Technologies Inc. Class A 4.0% - ---------------------------------------------------------------------------------------------------------------------- TOP FIVE INDUSTRIES Retail 10.6% Banks & Thrifts 16.3% Computer Software 8.6% AS OF DECEMBER 31, 2003 Pharmaceuticals 8.7% Other Consumer Food & Beverage 8.2% Food & Beverage 7.9% Goods & Services 12.0% Banks & Thrifts 7.2% INDUSTRIES AND % OF TOTAL Banks & Thrifts 6.8% Retail 10.4% Medical Products 7.2% NET ASSETS Other Consumer Information Services 6.9% Building Materials & Goods & Services 6.4% Pharmaceuticals 6.7% Construction 6.3% - ----------------------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized 2 THE OAKMARK FAMILY OF FUNDS SUMMARY INFORMATION
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK EQUITY ANDK GLOBAL INTERNATIONAL INTERNATIONAL INCOME FUND FUND FUND SMALL CAP FUND (OAKBX) (OAKGX) (OAKIX) (OAKEX) - ------------------------------------------------------------------------------------------------------------------------- 9.19% 13.88% 15.75% 17.81% - ------------------------------------------------------------------------------------------------------------------------- 11.38% 24.76% 24.66% 34.44% - ------------------------------------------------------------------------------------------------------------------------- 23.21% 48.98% 38.04% 52.41% - ------------------------------------------------------------------------------------------------------------------------- 12.47% 20.52% 6.23% 17.78% - ------------------------------------------------------------------------------------------------------------------------- 12.97% N/A 13.46% 18.01% - ------------------------------------------------------------------------------------------------------------------------- N/A N/A 8.58% N/A - ------------------------------------------------------------------------------------------------------------------------- 14.81% 17.34%(3) 11.81% 11.37% (11/1/95) (8/4/99) (9/30/92) (11/1/95) - ------------------------------------------------------------------------------------------------------------------------- $ 30,908 $ 20,242 $ 35,152 $ 24,109 - ------------------------------------------------------------------------------------------------------------------------- Burlington Diageo plc 5.2% Diageo plc 3.8% Baycorp Advantage Resources Inc. 3.1% Nestle SA 4.4% Aventis S.A. 3.7% Limited 4.7% SAFECO Corporation 2.7% Euronext 3.6% GlaxoSmithKline plc 3.3% Neopost SA 4.2% Laboratory Aventis S.A. 3.4% Vivendi Universal SA 3.2% Kobenhavns Lufthavne Corporation of Takeda Chemical Nestle SA 3.1% A/S (Copenhagen America Holdings 2.4% Industries, Ltd. 3.4% Airports A/S) 3.6% Cardinal Health, Inc. 2.4% Schindler Holding AG 3.5% XTO Energy, Inc. 2.3% Gurit-Heberlein AG 3.4% - ------------------------------------------------------------------------------------------------------------------------- U.S. Government Food & Beverage 12.9% Food & Beverage 13.9% Retail 8.7% Notes 25.2% Pharmaceuticals 9.1% Banks & Thrifts 11.5% Machinery & Oil & Natural Gas 6.7% Banks & Thrifts 6.7% Pharmaceuticals 11.4% Industrial Processing 7.8% Retail 6.5% Other Financial 6.4% Chemicals 8.1% Airport Maintenance 6.7% Food & Beverage 5.1% Information Services 6.3% Other Financial 7.0% Diversified Conglomerates 6.2% Health Care Services 4.7% Food & Beverage 5.6% - -------------------------------------------------------------------------------------------------------------------------
3 THE OAKMARK AND OAKMARK SELECT FUNDS AT OAKMARK, WE LOOK FOR STOCKS WITH PRICES LESS THAN 60% OF INTRINSIC VALUE, WITH INTRINSIC VALUE THAT IS LIKELY TO GROW AND WITH MANAGEMENT THAT ACTS IN THE INTEREST OF OUTSIDE SHAREHOLDERS. THE COMBINATION OF THESE FACTORS CREATES OUR BIGGEST COMPETITIVE ADVANTAGE--THE ABILITY TO BE MORE PATIENT THAN MOST INVESTORS. [PHOTO OF WILLIAM C. NYGREN] What a year! When 2003 began, anyone who expected a double-digit return was viewed as a hopeless optimist. Well, even the optimists underestimated the stock market recovery. Equity mutual funds increased in value by well into the double-digits with most showing gains of 25% or more. What a contrast to 2002 when almost all equity mutual funds showed negative returns! In 2002 we received numerous e-mails from shareholders concerned about our negative returns. They shared a common theme--what were we suddenly doing wrong? After the market began its ascent in March those e-mails stopped coming. A few even congratulated us on whatever steps we had taken to turn things around. Of course the truth is we hadn't changed anything; it was just the market that had changed. I guess you can't blame investors for believing (erroneously) that a change in what they can observe--our results--must have been caused by a change in what they can't observe--our process. Over the holidays I read an excellent book by former Treasury Secretary and Goldman Sachs Chief Executive Officer, Robert Rubin. In his book, IN AN UNCERTAIN WORLD--TOUGH CHOICES FROM WALL STREET TO WASHINGTON,(4) Rubin discusses his career-long approach to decision making in a world that lacks certainty and his belief that decision making should be judged by quality of process rather than by results alone. The book includes humorous anecdotes, such as complications in paying cab fare because the President never carries cash and keeping the President on hold while Rubin landed a fish he'd just hooked. The book also gives good advice to investors; of course the advice I liked best was that individuals should purchase value mutual funds! But the most useful content in the book was the material covering Rubin's approach to decision making. Perhaps I liked it because what he describes so closely resembles how we go about selecting stocks for our funds. HIGHLIGHTS - - Decision-making should be judged by quality of process rather than by results alone. - - Short-term results will be inconsistent despite applying a consistent process. - - The Oakmark Family has relied on the same investment process throughout its history. Rubin writes about running the Treasury: "Meetings produced the best results if those who disagreed with the accepted view were encouraged to speak out. So if a meeting seemed to be moving to a consensus... I would encourage someone to play the role of the devils advocate. Just as important as the freedom to disagree, I think was that this group of high-powered intellects in large measure avoided investing their egos in their arguments. It was a common search for the best answer..." This sounds very much like our weekly stock selection meetings. Analysts present new stock recommendations and all the other investment professionals attempt to shoot holes in their rationale. We have always said that our goal is to identify as many of our mistakes as possible before we lose any money on them. A young analyst's attack on a seasoned analyst's recommendation is not just tolerated, but strongly encouraged. At these meetings we also have reviews of existing holdings that we call "devil's advocate reviews." In these reviews an analyst is assigned to present the most negative arguments against our position. Attacking ideas without being perceived as attacking individuals is critical to the success of our process. Rubin goes on to talk about how he and Larry Summers would mark up pages of budget numbers: "Larry said to me afterward that people react to sheets of figures in two ways. Some people look at them, take them as a given, and go from there. Others look at numbers and start to question them, looking for inconsistencies, asking what they mean and what stories they tell, wondering about the relationship between them. Larry and I shared that kind of disposition, not just toward numbers but toward all sorts of supposed certainties." We're the type of people that take nothing as given. The afternoon before our stock selection meetings, a packet of reports written by our analysts is distributed to all of our investment people. The next day we each arrive at the meeting with scribbles all over the reports challenging in every way the analysts view of a 4 company's future. Intellectual curiosity combined with a healthy level of skepticism--because things that look too good to be true usually are--has allowed us to take high quality input from our analysts and make it even better. One of Rubin's more interesting observations concerns investor's shrinking time horizons: "When I left Washington in 1999, I was astonished at how much greater the short-term focus had become during the bull market. Commentators on the business news channels virtually never spoke about the five-year prospects of companies or had serious discussions of valuation. Today, an analyst who forecasts the five-year prospects for Ford Motor Company will probably never make a living. His customers want to know what the next quarter is like." We often say that our greatest competitive advantage is our long-term investment time horizon. We attempt to project how a business will change over the next five years, whereas most of our competitors are more worried about the next five months! Just as mutual fund investors observe a change in short-term results and erroneously assume the quality of work has changed, stock investors often observe changes in quarterly earnings and assume the quality of the business has changed. This tendency to overreact makes stock prices more volatile than underlying business values. By looking at a longer time-horizon we can apply our efforts to assessing business quality and can take advantage of such short-term over-reactions. The shorter the time frame becomes for the average stock market investor, we believe the greater our long-term advantage becomes. Since the inception of The Oakmark Family of Funds, these reports have always stressed our long-term approach. For investors in our funds to be successful, we believe it is vital that they share our long-term horizon. As I think about the twelve year history of all the Oakmark portfolios, we have seen both economic booms and recessions. We have seen both war and peace. We have seen amazingly powerful bull markets and equally powerful bear markets. We have seen our short-term performance both lead the fund industry and trail the market averages. But throughout the life of The Oakmark Funds, one thing has remained constant--our investment process. We have always tried to identify businesses that have growing values that are managed by people who think like owners. We have purchased those businesses only if they sell at steep discounts to our estimates of value. Then we have patiently waited for the market to recognize that value. Throughout that process, our investment professionals have worked as a team to maximize our chances for making correct decisions. Most every mutual fund advertisement contains fine print saying, "past performance is no guarantee of future results." In an uncertain world, there are obviously no promises about how future returns on any fund will compare with past returns. The only--and the best--promise we can make is that the investment process we have been using isn't changing. Best wishes, /s/ William C. Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com 5 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. NYGREN] [PHOTO OF KEVIN G. GRANT] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (12/31/03) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(5) [CHART]
THE OAKMARK FUND S&P 500 8/1/91 $ 10,000 $ 10,000 12/31/91 $ 13,020 $ 10,909 3/31/92 $ 14,690 $ 10,634 6/30/92 $ 15,230 $ 10,836 9/30/92 $ 16,800 $ 11,178 12/31/92 $ 19,386 $ 11,741 3/31/93 $ 20,927 $ 12,253 6/30/93 $ 21,494 $ 12,313 9/30/93 $ 23,095 $ 12,631 12/31/93 $ 25,300 $ 12,924 3/31/94 $ 24,242 $ 12,434 6/30/94 $ 24,951 $ 12,486 9/30/94 $ 26,663 $ 13,097 12/31/94 $ 26,138 $ 13,095 3/31/95 $ 28,539 $ 14,370 6/30/95 $ 30,303 $ 15,741 9/30/95 $ 32,841 $ 16,992 12/31/95 $ 35,134 $ 18,015 3/31/96 $ 36,386 $ 18,982 6/30/96 $ 37,661 $ 19,834 9/30/96 $ 37,945 $ 20,447 12/31/96 $ 40,828 $ 22,152 3/31/97 $ 42,456 $ 22,746 6/30/97 $ 48,917 $ 26,716 9/30/97 $ 52,009 $ 28,717 12/31/97 $ 54,132 $ 29,542 3/31/98 $ 59,517 $ 33,663 6/30/98 $ 57,909 $ 34,775 9/30/98 $ 49,899 $ 31,316 12/31/98 $ 56,155 $ 37,985 3/31/99 $ 55,888 $ 39,877 6/30/99 $ 62,332 $ 42,688 9/30/99 $ 53,882 $ 40,023 12/31/99 $ 50,277 $ 45,977 3/31/2000 $ 45,767 $ 47,032 6/30/2000 $ 46,950 $ 45,783 9/30/2000 $ 49,815 $ 45,339 12/31/2000 $ 56,201 $ 41,791 3/31/2001 $ 60,342 $ 36,837 6/30/2001 $ 65,927 $ 38,993 9/30/2001 $ 59,986 $ 33,269 12/31/2001 $ 66,479 $ 36,824 3/31/2002 $ 69,250 $ 36,926 6/30/2002 $ 63,463 $ 31,979 9/30/2002 $ 52,927 $ 26,454 12/31/2002 $ 56,902 $ 28,686 3/31/2003 $ 54,576 $ 27,783 6/30/2003 $ 63,826 $ 32,059 9/30/2003 $ 64,034 $ 32,907 12/31/2003 $ 71,301 $ 36,914
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (8/5/91) - --------------------------------------------------------------------------------------- OAKMARK FUND 11.35% 25.30% 4.89% 10.91% 17.14% S&P 500 12.18% 28.68% -0.57% 11.06% 11.09% Dow Jones Average(6) 13.32% 28.21% 4.54% 13.06% 12.99% Lipper Large Cap 13.37% 28.00% 1.20% 10.05% 10.69% Value Index(7)
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Fund increased in value by 11% last quarter, bringing the calendar year increase to 25%. The fund also ended 2003 at a new all-time high NAV(8) (adjusted for dividends.) This accomplishment is especially significant when compared to the S&P 500, which remains 23% below its March 2000 peak. Our job satisfaction comes from making money for shareholders, which as our President's letter states, includes not only the two of us, but most of the employees of our company. It feels great to be able to say that each and every investor who has entrusted us with their capital now has a profit! The magnitude of the fund's price increase in both the quarter and the year was due more to the strong market than to our stock selection. The S&P 500 increased by 12% in the quarter and 29% for the year. Returns of that magnitude are historically unusual, and we caution investors that long-term returns are likely to fall far short of that level. Although we continue to believe equities are likely to provide long-term returns that exceed bond returns, we expect mid-to-high single-digit annual returns rather than a continuation of the unusually strong 2003. As expected in such a broad, strong market, value investors like us found few new opportunities--our only portfolio addition last quarter was Kohl's Corporation. KOHL'S CORP. (KSS--$45) Kohl's is a chain of specialty department stores that emphasizes value pricing, selling primarily apparel and housewares. Kohl's became a public company in 1992, and over the next ten years its EPS(9) grew twelve-fold--a compound annual growth rate of 29%. Kohl's was a natural holding for growth stock portfolios, but the stock always sold at prices we felt fully recognized its great fundamental performance. The stock peaked at $79 in 2002, a price that equated to over 40 times earnings. Kohl's stumbled somewhat in 2003 and is expected to show little change from prior year earnings. Reasons include industry-wide weakness in women's sportswear and sharper competition from competitors, like Gap and JC Penney (both are also held in The Oakmark Fund). Kohl's stock fell nearly in half, hitting a low during the quarter of $42. Kohl's is now priced like an average company--about 18 times expected 2004 earnings. We are pleased to add this great company to our portfolio. Best wishes, /s/ William C. Nygren /s/ Kevin G. Grant WILLIAM C. NYGREN, CFA KEVIN G. GRANT, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com kgrant@oakmark.com 6 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2003 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - --------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.3% FOOD & BEVERAGE--7.9% Diageo plc (b) 1,821,000 $ 96,258,060 Kraft Foods Inc. 2,845,000 91,665,900 Anheuser-Busch Companies, Inc. 1,600,000 84,288,000 H.J. Heinz Company 2,310,000 84,153,300 General Mills, Inc. 1,805,000 81,766,500 -------------- 438,131,760 HOUSEHOLD PRODUCTS--1.2% The Clorox Company 1,390,200 $ 67,508,112 OTHER CONSUMER GOODS & SERVICES--6.4% H&R Block, Inc. 2,829,300 $ 156,658,341 Fortune Brands, Inc. 1,745,600 124,792,944 Mattel, Inc. 3,874,300 74,657,761 -------------- 356,109,046 BROADCASTING & PROGRAMMING--2.4% Liberty Media Corporation, Class A (a) 8,399,400 $ 99,868,866 The Walt Disney Company 1,500,000 34,995,000 -------------- 134,863,866 BUILDING MATERIALS & CONSTRUCTION--1.7% Masco Corporation 3,533,000 $ 96,839,530 CABLE SYSTEMS & SATELLITE TV--5.4% Time Warner Inc. (a) 5,727,700 $ 103,041,323 Hughes Electronics Corporation (a) 5,021,618 83,107,778 EchoStar Communications Corporation (a) 2,075,000 70,550,000 Comcast Corporation, Special Class A (a) 1,300,000 40,664,000 -------------- 297,363,101 HARDWARE--1.7% The Black & Decker Corporation 1,922,200 $ 94,802,904 MOTORCYCLES--1.3% Harley-Davidson, Inc. 1,577,500 $ 74,978,575 PUBLISHING--2.7% Gannett Co., Inc. 884,500 $ 78,862,020 Knight-Ridder, Inc. 916,000 70,870,920 -------------- 149,732,940 RECREATION & ENTERTAINMENT--1.2% Carnival Corporation (c) 1,678,300 $ 66,678,859
7
NAME SHARES HELD MARKET VALUE - --------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.3% (CONT.) RESTAURANTS--4.5% Yum! Brands, Inc (a) 3,674,000 $ 126,385,600 McDonald's Corporation 4,900,000 121,667,000 -------------- 248,052,600 RETAIL--10.6% The Home Depot, Inc. 3,281,500 $ 116,460,435 The Kroger Co. (a) 5,790,000 107,172,900 The Gap, Inc. 4,576,700 106,225,207 J.C. Penney Company, Inc. 3,377,900 88,771,212 Safeway Inc. (a) 3,327,000 72,894,570 Kohl's Corporation (a) 1,250,000 56,175,000 Toys 'R' Us, Inc. (a) 3,125,000 39,500,000 -------------- 587,199,324 BANK & Thrifts--6.8% Washington Mutual, Inc. 4,687,300 $ 188,054,476 U.S. Bancorp 3,700,000 110,186,000 The Bank of New York Company, Inc. 2,300,000 76,176,000 -------------- 374,416,476 INSURANCE--3.2% MGIC Investment Corporation 1,840,600 $ 104,803,764 AFLAC Incorporated 2,067,000 74,784,060 -------------- 179,587,824 OTHER FINANCIAL--2.3% Fannie Mae 1,670,000 $ 125,350,200 HEALTH CARE SERVICES--1.0% AmerisourceBergen Corp 1,000,000 $ 56,150,000 MEDICAL PRODUCTS--2.2% Baxter International Inc. 2,500,000 $ 76,300,000 Guidant Corporation 756,700 45,553,340 -------------- 121,853,340 PHARMACEUTICALS--8.7% Bristol-Myers Squibb Company 3,950,000 $ 112,970,000 Merck & Co., Inc. 2,350,000 108,570,000 Abbott Laboratories 2,300,000 107,180,000 Schering-Plough Corporation 5,625,000 97,818,750 Chiron Corporation (a) 929,900 52,995,001 -------------- 479,533,751 TELECOMMUNICATIONS--1.7% Sprint Corporation 5,741,800 $ 94,280,356
8
SHARES HELD/ NAME PAR VALUE MARKET VALUE - --------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.3% (CONT.) COMPUTER SERVICES--5.6% First Data Corporation 3,615,000 $ 148,540,350 SunGard Data Systems, Inc. (a) 3,203,700 88,774,527 Automatic Data Processing, Inc. 1,800,000 71,298,000 -------------- 308,612,877 COMPUTER SYSTEMS--1.4% Sun Microsystems, Inc. (a) 17,450,000 $ 78,350,500 OFFICE EQUIPMENT--1.5% Xerox Corporation (a) 5,887,400 $ 81,246,120 AEROSPACE & Defense--2.8% Honeywell International, Inc. 3,250,000 $ 108,647,500 The Boeing Company 1,152,800 48,578,992 -------------- 157,226,492 OTHER INDUSTRIAL GOODS & SERVICES--0.9% Illinois Tool Works Inc. 604,200 $ 50,698,422 WASTE DISPOSAL--1.9% Waste Management, Inc. 3,474,300 $ 102,839,280 OIL & NATURAL GAS--3.3% ConocoPhillips 1,435,335 $ 94,114,916 Burlington Resources, Inc. 1,571,100 87,007,518 -------------- 181,122,434 TOTAL COMMON STOCKS (COST: $3,917,874,002) 5,003,528,689 SHORT TERM INVESTMENTS--9.2% U.S. GOVERNMENT BILLS--6.3% United States Treasury Bills, 0.895% - 0.93% due 1/8/2004 - 5/6/2004 $ 350,000,000 $ 349,495,829 TOTAL U.S. GOVERNMENT BILLS (COST: $349,471,414) 349,495,829
9
PAR VALUE MARKET VALUE - --------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--9.2% (CONT.) REPURCHASE AGREEMENTS--2.9% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $156,007,367 collateralized by U.S. Government Agency Securities $ 156,000,000 $ 156,000,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $2,307,095 collateralized by a U.S. Government Agency Security 2,306,999 2,306,999 -------------- TOTAL REPURCHASE AGREEMENTS (COST: $158,306,999) 158,306,999 TOTAL SHORT TERM INVESTMENTS (COST: $507,778,413) 507,802,828 Total Investments (Cost $4,425,652,415)--99.5% $5,511,331,517 Other Assets In Excess Of Other Liabilities--0.5% 26,792,641 -------------- TOTAL NET ASSETS--100% $5,538,124,158 ==============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a foreign domiciled corporation. 10 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. NYGREN] [PHOTO OF HENRY BERGHOEF] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (12/31/03) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(5) [CHART]
THE OAKMARK SELECT FUND S&P 500 10/31/96 $ 10,000 $ 10,000 12/31/96 $ 11,420 $ 10,543 3/31/97 $ 12,140 $ 10,826 6/30/97 $ 14,180 $ 12,715 9/30/97 $ 16,340 $ 13,668 12/31/97 $ 17,704 $ 14,060 3/31/98 $ 20,078 $ 16,021 6/30/98 $ 20,462 $ 16,551 9/30/98 $ 16,936 $ 14,904 12/31/98 $ 20,575 $ 18,078 3/31/99 $ 22,766 $ 18,979 6/30/99 $ 24,482 $ 20,317 9/30/99 $ 22,028 $ 19,048 12/31/99 $ 23,557 $ 21,882 3/31/2000 $ 25,667 $ 22,384 6/30/2000 $ 24,324 $ 21,790 9/30/2000 $ 27,432 $ 21,578 12/31/2000 $ 29,637 $ 19,890 3/31/2001 $ 32,826 $ 17,532 6/30/2001 $ 35,865 $ 18,558 9/30/2001 $ 34,496 $ 15,834 12/31/2001 $ 37,359 $ 17,526 3/31/2002 $ 38,306 $ 17,574 6/30/2002 $ 35,206 $ 15,220 9/30/2002 $ 29,720 $ 12,590 12/31/2002 $ 32,699 $ 13,653 3/31/2003 $ 32,535 $ 13,223 6/30/2003 $ 37,806 $ 15,258 9/3/2003 $ 37,820 $ 15,662 12/31/2003 $ 42,181 $ 17,569
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/96) - -------------------------------------------------------------------------------- OAKMARK SELECT FUND 11.53% 29.00% 15.43% 22.23% S&P 500 12.18% 28.68% -0.57% 8.18% S&P MidCap 400(10) 13.19% 35.62% 9.20% 14.18% Lipper Mid Cap Value Index(11) 14.77% 39.08% 9.41% 10.17%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark Select Fund increased by 12% last quarter, bringing the calendar year increase to 29%. Normally, we don't get too excited about just matching the return of the S&P 500, but the past four years have hardly been normal! From March 2000 to March 2003, the S&P 500 lost nearly half of its value; yet, the Fund increased in value due to our continual focus on business valuation. From its low in March of 2003, the S&P 500 then increased by over 40% with the most speculative industries increasing the most. Despite minimal exposure to those stocks, we kept pace with a market that achieved its highest annual return since 1997. That's why we're excited! We're also extremely gratified that the fund ended 2003 at a new all-time high NAV(8). As fiduciaries, shareholders, and professionals who take pride in our work, we are very pleased that as of today, all shareholders have earned a profit on their investment. Last quarter, every stock in our fund increased in value. Typically, the absence of losers is sufficient for producing superior results. That we only kept pace with the S&P during that quarter shows how strong the market has been and reinforces our desire to dampen expectations for future market returns. Xerox was our best performer for both the quarter and the year, gaining 35% and 71% respectively. CEO Anne Mulcahy deserves a great deal of credit for leading this turnaround. Today's cost structure and balance sheet at Xerox bear little resemblance to the troubled company we invested in just over two years ago. And early signs indicate that Xerox has a significant new product success with its iGen 3 digital press. We have sold some of our Xerox shares to prevent the position size from growing too much. Despite those sales, Xerox remains an above average weighting in the portfolio. Selling at less than a market P/E(12) multiple on expected 2004 earnings and with expectations for above-average earnings growth beyond 2004, Xerox--in our estimation--continues to represent a very attractive investment opportunity. We neither added any new companies nor eliminated any existing holdings from the portfolio last quarter. The largest change was an increase in the weighting of First Data Corporation. First Data stock under performed the market despite continuing its streak of above-average earnings increases. We believe First Data is a growth company selling at a value price--our favorite combination. Thank you for your continued support, /s/ William C. Nygren /s/ Henry R. Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com berghoef@oakmark.com 11 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2003 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------ COMMON STOCKS--90.9% OTHER CONSUMER GOODS & SERVICES--12.0% H&R Block, Inc. 8,359,800 $ 462,882,126 Mattel, Inc. 11,670,900 224,898,243 --------------- 687,780,369 CABLE SYSTEMS & SATELLITE TV--4.0% Time Warner Inc.(a) 12,710,000 $ 228,652,900 HOTELS & MOTELS--1.7% Starwood Hotels & Resorts Worldwide, Inc. 2,680,000 $ 96,399,600 INFORMATION SERVICES--6.9% The Dun & Bradstreet Corporation (a) 4,034,900 $ 204,609,779 Moody's Corporation 3,123,600 189,133,980 --------------- 393,743,759 PUBLISHING--3.5% Knight-Ridder, Inc. 2,606,500 $ 201,664,905 RESTAURANTS--5.6% Yum! Brands, Inc (a) 9,307,000 $ 320,160,800 RETAIL--10.4% The Kroger Co.(a) 12,675,700 $ 234,627,207 Office Depot, Inc. (a) 11,384,900 190,241,679 Toys 'R' Us, Inc. (a) 13,697,700 173,138,928 --------------- 598,007,814 BANK & THRIFTS--16.3% Washington Mutual, Inc. 23,351,400 $ 936,858,168 INVESTMENT MANAGEMENT--2.6% Janus Capital Group, Inc. 9,169,600 $ 150,473,136 HEALTH CARE SERVICES--3.7% IMS Health Incorporated 8,503,441 $ 211,395,543 PHARMACEUTICALS--6.7% Bristol-Myers Squibb Company 6,990,200 $ 199,919,720 Chiron Corporation (a) 3,211,100 183,000,589 --------------- 382,920,309 TELECOMMUNICATIONS--3.8% Sprint Corporation 13,334,600 $ 218,954,132 COMPUTER SERVICES--5.4% First Data Corporation 7,508,600 $ 308,528,374 OFFICE EQUIPMENT--4.1% Xerox Corporation (a) 16,989,700 $ 234,457,860
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SHARES HELD/ NAME PAR VALUE MARKET VALUE - ------------------------------------------------------------------------------------------------ COMMON STOCKS--90.9% (CONT.) OIL & NATURAL GAS--4.2% Burlington Resources, Inc. 4,326,800 $ 239,618,184 TOTAL COMMON STOCKS (COST: $3,448,426,578) 5,209,615,853 SHORT TERM INVESTMENTS--8.7% U.S. GOVERNMENT BILLS--4.9% United States Treasury Bills, 0.88% - 0.925% due 1/2/2004 - 4/22/2004 $ 280,000,000 $ 279,623,070 TOTAL U.S. GOVERNMENT BILLS (COST: $279,609,643) 279,623,070 REPURCHASE AGREEMENTS--3.8% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $218,010,294 collateralized by U.S. Government Agency Securities $ 218,000,000 $ 218,000,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $2,510,688 collateralized by a U.S. Government Agency Security 2,510,583 2,510,583 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $220,510,583) 220,510,583 TOTAL SHORT TERM INVESTMENTS (COST: $500,120,226) 500,133,653 Total Investments (Cost $3,948,546,804)--99.6% $ 5,709,749,506 Other Assets In Excess Of Other Liabilities--0.4% 25,145,695 --------------- TOTAL NET ASSETS--100% $ 5,734,895,201 ===============
(a) Non-income producing security. 13 THE OAKMARK SMALL CAP FUND REPORT FROM JAMES P. BENSON AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF JAMES P. BENSON] [PHOTO OF EDWARD A. STUDZINSKI] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/03) AS COMPARED TO THE RUSSELL 2000 INDEX(13) [CHART]
THE OAKMARK SMALL CAP FUND RUSSELL 2000 10/31/95 $ 10,000 $ 10,000 12/31/95 $ 10,330 $ 10,695 3/31/96 $ 11,460 $ 11,241 6/30/96 $ 12,470 $ 11,803 9/30/96 $ 13,250 $ 11,843 12/31/96 $ 14,440 $ 12,459 3/31/97 $ 15,220 $ 11,815 6/30/97 $ 17,660 $ 13,730 9/30/97 $ 20,340 $ 15,774 12/31/97 $ 20,290 $ 15,245 3/31/98 $ 21,732 $ 16,779 6/30/98 $ 20,467 $ 15,997 9/30/98 $ 14,976 $ 12,774 12/31/98 $ 17,620 $ 14,857 3/31/99 $ 16,069 $ 14,051 6/30/99 $ 18,205 $ 16,237 9/30/99 $ 16,558 $ 15,210 12/31/99 $ 16,224 $ 18,015 3/31/2000 $ 15,974 $ 19,292 6/30/2000 $ 15,926 $ 18,562 9/30/2000 $ 18,014 $ 18,768 12/31/2000 $ 16,937 $ 17,471 3/31/2001 $ 17,816 $ 16,335 6/30/2001 $ 21,218 $ 18,688 9/30/2001 $ 18,026 $ 14,788 12/31/2001 $ 21,391 $ 17,906 3/31/2002 $ 24,014 $ 18,619 6/30/2002 $ 22,369 $ 17,064 9/30/2002 $ 17,445 $ 13,412 12/31/2002 $ 18,595 $ 14,238 3/31/2003 $ 17,185 $ 13,598 6/30/2003 $ 20,092 $ 16,784 9/30/2003 $ 21,255 $ 18,307 12/31/2003 $ 23,581 $ 20,966
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - --------------------------------------------------------------------------------- OAKMARK SMALL CAP FUND 10.94% 26.81% -6.00% 11.07% Russell 2000 14.52% 47.25% 7.13% 9.48% S&P Small Cap 600(14) 14.77% 38.79% 9.66% 11.98% Lipper Small Cap Value Index(15) 16.46% 47.54% 12.67% 13.12%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized Looking back over 2003, it is hard to believe how rapidly and positively events unfolded. It is easy to forget that until mid-March stock prices were generally under pressure and questions concerning an economic recovery were numerous. As of the close of the year, we suspect most investors were very happy with the gains they achieved during 2003 after the difficult market conditions experienced over the prior couple of years. The double-digit positive returns we achieved during the fourth calendar quarter of 2003 built upon the solid returns of the prior two quarters. Investors appeared to become more confident in the future growth of corporate profitability and this confidence was reflected in higher equity prices. As we stated in our last letter, we believe the fiscal and monetary stimulus in the economy is likely to create a sustained economic recovery. Our primary objective in 2004 is to invest in reasonably valued companies that we expect to do well in an economic recovery, but these companies must also possess the staying power to do reasonably well if the economy unexpectedly fades. During the just concluded quarter the S&P 500 Index(5) rose by 12% and the Russell 2000 Index climbed by 15%. Your Fund experienced a gain of 11% during the past three months, which places its performance just below the S&P 500 Index and the Russell 2000 Index. CONSISTENCY As measured by the broad-based S&P 500 Index, 2003 was the first year this Index recorded a positive return since 1999. Over the past four years there have been three years of decline for the broad market as measured by the S&P 500, yet your Fund has achieved positive returns in three of the last four years. The key reasons for our success are: 1) Small cap stocks have generally performed better than their larger cap peers, thus we enjoyed a "tailwind" over the past few years (the Russell 2000 Index has realized positive returns in two of the past four years); 2) Our value-based investment style leads us to be principally invested in companies that we believe should generate solid cash flows over time. This value bias often means we are sometimes not heavily invested in a sector of the stock market that is doing well because our analysts believe the expected future cash flows from these businesses are insufficient to justify owning these stocks. By 14 HIGHLIGHTS - - Despite higher stock prices, our analysts were able to uncover several attractively priced stocks. - - Three new stocks were added and four stocks were sold from the portfolio this past quarter. - - Our long-term value approach remains consistent regardless of short-term stock price movements. staying disciplined in our approach, we believe we can avoid many (although clearly not all) valuation mistakes. Despite your Fund's 27% gain in 2003, we trailed the annual return of our benchmark index, the Russell 2000(13), for the first time since 1999. We prefer to invest in companies where we believe our invested capital can earn above average rates of return over the long-term and we do not change our investment approach based upon the short-term stock price movements of some stock sectors. PORTFOLIO ADDITIONS Despite generally higher stock prices during the fourth quarter of 2003, our analysts were able to uncover several attractively priced stocks. During the past quarter we purchased shares in Herley Industries, Teledyne Technologies and USI Holdings Corp. Herley is a supplier of microwave components and systems to both military and commercial aerospace customers. Teledyne produces aerospace engines and defense electronics and we believe both Herley and Teledyne should benefit from increased defense spending and a recovering commercial aerospace sector. USI is a growing distributor of insurance and financial products and services to businesses in the U.S. We believe USI's product and service offerings are becoming increasingly attractive to businesses as insurance products become both more complex and more expensive. In addition to the three stocks we purchased we will be receiving shares in Levitt Corporation when its spin-off from BankAtlantic is completed in early 2004. Levitt is a growing builder of homes for retirees in Florida and based upon demographic trends we believe Levitt has a bright future. PORTFOLIO DELETIONS During the third quarter we sold four stocks from your Fund's portfolio. The companies we sold were Berry Petroleum, Department 56, Inc., Prime Hospitality Corp. and Surebeam Corp. We sold Berry after this stock appreciated to the point where we believed it had reached a fair valuation for the underlying business. Department 56 was sold based upon our belief that intensifying international competition would continue to pressure their profit margins. We sold Prime Hospitality after this hotel operator's stock almost doubled from its 2003 low and reached a price that we considered to be its fair value. Surebeam was sold as slower than expected acceptance by consumers of irradiated food products hindered their results. SUMMATION We would like to thank our shareholders for your continuing interest in and your support of The Oakmark Small Cap Fund. We look forward to communicating with you in 2004. /s/ James P. Benson /s/ Edward A. Studzinski JAMES P. BENSON, CFA EDWARD A. STUDZINSKI, CFA Portfolio Manager Portfolio Manager jbenson@oakmark.com estudzinski@oakmark.com 15 THE OAKMARK SMALL CAP FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2003 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------ COMMON STOCKS--93.2% FOOD & BEVERAGE--8.2% Ralcorp Holdings, Inc.(a) 575,000 $ 18,032,000 Del Monte Foods Company (a) 1,260,000 13,104,000 --------------- 31,136,000 HOUSEHOLD PRODUCTS--4.9% Tupperware Corporation 1,060,000 $ 18,380,400 OTHER CONSUMER GOODS & SERVICES--2.7% Callaway Golf Company 475,000 $ 8,003,750 Central Parking Corporation 137,200 2,048,396 --------------- 10,052,146 SECURITY SYSTEMS--4.8% Checkpoint Systems, Inc. (a) 968,300 $ 18,310,553 APPAREL--3.5% Oakley, Inc. 671,200 $ 9,289,408 R.G. Barry Corporation (a) 900,000 3,951,000 --------------- 13,240,408 AUTOMOBILE RENTALS--2.6% Dollar Thrifty Automotive Group, Inc. (a) 375,000 $ 9,727,500 BUILDING MATERIALS & CONSTRUCTION--6.3% Insituform Technologies, Inc., Class A (a) 908,600 $ 14,991,900 Integrated Electrical Services, Inc. (a) 956,600 8,848,550 --------------- 23,840,450 HUMAN RESOURCES--1.5% Hudson Highland Group, Inc. (a) 245,000 $ 5,843,250 INFORMATION SERVICES--4.4% eFunds Corporation (a) 950,000 $ 16,482,500 MARKETING SERVICES--1.8% Grey Global Group, Inc. 10,000 $ 6,830,500 RESTAURANTS--4.0% Triarc Companies, Inc., Class B 500,000 $ 5,390,000 Jack in the Box Inc. (a) 210,000 4,485,600 Triarc Companies, Inc. 250,000 2,955,000 Landry's Restaurants, Inc. 88,700 2,281,364 --------------- 15,111,964 RETAIL--2.1% ShopKo Stores, Inc. (a)(b) 517,600 $ 7,893,400
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NAME SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------ COMMON STOCKS--93.2% (CONT.) BANK & THRIFTS--7.2% People's Bank of Bridgeport, Connecticut 360,000 $ 11,736,000 BankAtlantic Bancorp, Inc., Class A 559,000 10,621,000 PennFed Financial Services, Inc. 150,000 5,025,000 --------------- 27,382,000 INSURANCE--3.4% The PMI Group, Inc. 300,000 $ 11,169,000 U.S.I. Holdings Corporation (a) 143,000 1,866,150 --------------- 13,035,150 OTHER FINANCIAL--3.2% NCO Group, Inc. (a) 530,000 $ 12,068,100 REAL ESTATE--1.7% Trammell Crow Company (a) 495,000 $ 6,558,750 MEDICAL PRODUCTS--7.2% Hanger Orthopedic Group, Inc. (a) 950,000 $ 14,791,500 CONMED Corporation (a) 400,000 9,520,000 Advanced Medical Optics, Inc. (a) 150,000 2,947,500 --------------- 27,259,000 COMPUTER SERVICES--4.4% CIBER, Inc. (a) 1,625,000 $ 14,072,500 Interland, Inc. (a) 400,000 2,612,000 --------------- 16,684,500 COMPUTER SOFTWARE--8.6% MSC.Software Corp. (a) 1,350,000 $ 12,757,500 Sybase, Inc. (a) 495,000 10,187,100 Mentor Graphics Corporation (a) 650,000 9,451,000 --------------- 32,395,600 COMPUTER SYSTEMS--1.5% Optimal Robotics Corp., Class A (a)(c) 723,500 $ 5,780,765 DATA STORAGE--2.0% Imation Corp. 215,000 $ 7,557,250 AEROSPACE & DEFENSE--0.9% Teledyne Technologies Incorporated (a) 140,000 $ 2,639,000 Herley Industries, Inc. (a) 28,300 585,810 --------------- 3,224,810
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SHARES HELD/ NAME PAR VALUE MARKET VALUE - ------------------------------------------------------------------------------------------------ COMMON STOCKS--93.2% (CONT.) FORESTRY PRODUCTS--1.7% Schweitzer-Mauduit International, Inc. 222,000 $ 6,611,160 --------------- OIL & NATURAL GAS--4.6% St. Mary Land & Exploration Company 350,000 9,975,000 Cabot Oil & Gas Corporation 250,000 7,337,500 --------------- 17,312,500 TOTAL COMMON STOCKS (COST: $286,968,330) 352,718,656 SHORT TERM INVESTMENTS--7.3% U.S. GOVERNMENT BILLS--5.0% United States Treasury Bills, 0.87% - 0.925% due 1/2/2004 - 1/15/2004 $ 19,000,000 $ 18,997,534 TOTAL U.S. GOVERNMENT BILLS (COST: $18,997,534) 18,997,534 REPURCHASE AGREEMENTS--2.3% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $6,500,307 collateralized by U.S. Government Agency Securities $ 6,500,000 $ 6,500,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $2,267,229 collateralized by a U.S. Government Agency Security 2,267,135 2,267,135 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $8,767,135) 8,767,135 TOTAL SHORT TERM INVESTMENTS (COST: $27,764,669) 27,764,669 Total Investments (Cost $314,732,999)--100.5% $ 380,483,325
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NAME SHARES SUBJECT TO CALL MARKET VALUE - ------------------------------------------------------------------------------------------------ CALL OPTIONS WRITTEN--0.0% RETAIL--0.0% ShopKo Stores, Inc., March 17.50 Calls (45,000) $ (19,125) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(58,897))--0.0% (19,125) Other Liabilities In Excess Of Other Assets--(0.5%) (1,903,339) --------------- TOTAL NET ASSETS--100% $ 378,560,861 ===============
(a) Non-income producing security. (b) A portion of this security has been segregated to cover written option contracts. (c) Represents a foreign domiciled corporation. 19 THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. McGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. McGREGOR] [PHOTO OF EDWARD A. STUDZINSKI] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/03) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(16) [CHART]
THE OAKMARK EQUITY AND INCOME FUND LIPPER BALANCED FUND INDEX 10/31/95 $ 10,000 $ 10,000 12/31/95 $ 10,240 $ 10,473 3/31/96 $ 10,500 $ 10,707 6/30/96 $ 11,040 $ 10,925 9/30/96 $ 11,110 $ 11,213 12/31/96 $ 11,805 $ 11,840 3/31/97 $ 12,153 $ 11,895 6/30/97 $ 13,430 $ 13,178 9/30/97 $ 14,810 $ 14,024 12/31/97 $ 14,941 $ 14,243 3/31/98 $ 16,233 $ 15,370 6/30/98 $ 16,320 $ 15,599 9/30/98 $ 15,191 $ 14,701 12/31/98 $ 16,792 $ 16,392 3/31/99 $ 16,792 $ 16,655 6/30/99 $ 18,457 $ 17,402 9/30/99 $ 17,518 $ 16,682 12/31/99 $ 18,119 $ 17,863 3/31/2000 $ 18,924 $ 18,396 6/30/2000 $ 18,886 $ 18,174 9/30/2000 $ 20,761 $ 18,535 12/31/2000 $ 21,723 $ 18,290 3/31/2001 $ 22,621 $ 17,374 6/30/2001 $ 24,445 $ 17,984 9/30/2001 $ 23,751 $ 16,621 12/31/2001 $ 25,635 $ 17,698 3/31/2002 $ 26,708 $ 17,805 6/30/2002 $ 25,855 $ 16,628 9/30/2002 $ 23,640 $ 14,986 12/31/2002 $ 25,087 $ 15,807 3/31/2003 $ 24,515 $ 15,516 6/30/2003 $ 27,750 $ 17,209 9/30/2003 $ 28,308 $ 17,562 12/31/2003 $ 30,908 $ 18,958
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - ----------------------------------------------------------------------------------- OAKMARK EQUITY & INCOME FUND 9.19% 23.21% 12.97% 14.81% S&P 500(5) 12.18% 28.68% -0.57% 10.01% Lehman Govt./Corp. Bond(17) -0.03% 4.67% 6.65% 7.16% Lipper Balanced Fund Index 7.95% 19.94% 2.95% 8.14% - -----------------------------------------------------------------------------------
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized "Virtue has never been as respectable as money." Mark Twain OUR RESULTS The Oakmark Equity and Income Fund increased 9% for the quarter ended December 31. For the calendar year 2003, the Fund gained 23% lagging the broad market averages while outperforming our primary benchmark, the Lipper Balanced Fund Index, which gained 20% during the year. We are pleased with this result, as we have consistently said that absolute positive returns preserve and grow your capital. We are even more pleased that, looking back over the past three-year and five-year periods, we have grown and compounded the capital of our long-term investors (ourselves included) at a 12% and 13% rate respectively. Please do not think for one moment that those returns are going to make us complacent. We started the year 2003 cautiously pessimistic, and remained that way for most of the year. We have ushered in 2004 feeling pretty much the same way, agreeing with Don Marquis that, "An optimist is a man who has never had much experience." Our experience tells us to be wary of the cheerful consensus. We prefer to keep a weather eye towards the investment horizon and be positioned for a range of potential eventualities, in order that we may continue to preserve and grow your capital. AND THE LAST SHALL BE FIRST Particularly strong performers during the quarter were Diageo PLC, Laboratory Corporation of America, Rockwell Automation, Varian, and XTO Energy. Over time, we have noted that many of the strong performers of the past quarter were the worst performers of the quarter before. We mention that as it again says something about the importance of having a long-term focus in investing. Allowing one's self to be swayed by the vagaries of short-term perceptions, these shifts have little, if anything, to do with the long-term business value of a company. The worst performer during the quarter was First Health Corporation, which saw its share price decline dramatically when it reported Q3 earnings and guided to a lower growth rate (and lower expectations) for calendar year 2004. A substantial amount of market (as opposed to business) value was erased. At the same time, it should be noted that there has been some erosion of FHCC's franchise at the edges, and the nature of its business model will continue to change as the regional managed-care companies become national players. At current prices, though, we feel that FHCC is too cheap to be sold, given both the quality of the management and the cash-generating abilities of the business model. Only one position, Cooper Industries, was eliminated during the quarter. We initiated four new 20 HIGHLIGHTS - - Our goal is to produce absolute positive returns that preserve and grow your capital. - - Many of the strong performing companies of the past quarter were the worst performers of the quarter before. - - We continue to ignore short-term issues that have little, if anything, to do with long-term business values. positions in TJX Companies, Dean Foods, First Data, and Imation. We are comfortable with our holdings and the asset-allocation of the fund. The turnover, or lack thereof, reflects that. For the most part, the buoyant market of 2003 has eliminated most of the compelling values that we were seeing (and took advantage of) at the beginning of 2003. By the same token, the securities that we own have not appreciated to the point where a wholesale liquidation is called for based The oakmark equity and income fundon valuation. We would point out that there IS a reason why we construct portfolios rather than focus on individual stocks. Ours is a business, to use a baseball analogy, of hitting singles and doubles. If every now and then, there is a home run, that's nice, but it is the single and doubles that allow us the consistency of return over time while controlling the risk we are undertaking. We know at some point the market and its participants will present us again with the opportunity to buy a lot of very high quality securities at very reasonable prices. In the interim, all we are looking for is one or two really good ideas a year. A WORD ABOUT BONDS Probably one of the most frustrating things for us over the last twelve months has been the dearth of what we considered to be good opportunities to invest in fixed income. After all, as many of you have pointed out, the fund has an income component and the bonds have not been providing much of one recently. For most of this year, we have kept the duration on the fund short- around two years. This is has been because we thought the risk of substantial capital loss from lengthening both duration and maturity outweighed the potential returns. We still feel that way. And while we would have liked to be able to put lots of money to work in high-yield securities, we were unable to do so in issues that meet our stringent criteria. To date, many of the concerns about the return of inflation, the problems of the U.S. currency, and ballooning budget deficits, have been just that, concerns. So overall, the potential rewards for lengthening maturity and duration, as well as lowering credit quality, remain at best illusory while the potential for a "Perfect Storm" environment in the bond market remains. THE RETURN OF HYPE We have often spoken about our criteria for stock selection. Ideally we would like to buy a stock at 60% of our assessment of intrinsic value, where the business value is growing and the management actually thinks and acts like shareholders and stewards of capital. During the last six months of the year, we were surprised (although we shouldn't have been) to see technology stocks vaulting to the top of both the performance and recommended lists of both Wall Street and cable television commentators. Many of these issues are showing little but the hints of improved prospects. It would appear that turnarounds are also in the eye of the beholder. We wonder about the willingness of the investing public to accept the pabulum which they are routinely spoon-fed, especially from cable television, rather than be somewhat more discerning as to the sources of their investment information and advice. This is especially puzzling after the huge capital displacements many of them have suffered over the last three years. For ourselves, we have come to the conclusion that much of what passed for entertainment as reality television today is anything but, and that most cable television business reporting is of the same ilk. As David Frost once said, "Television is an invention that permits you to be entertained in your living room by people you wouldn't have in your home." PREDICTIONS We don't make predictions, so this heading is something of a misnomer. We have no crystal balls, nor the modern equivalent, a string of supercomputers wired together to spit out real-time analysis of various asset classes and the markets they are trading in, with a view to identifying short-term anomalies (or arbitrage opportunities, before that strategy became viewed somewhat differently than in the past). Rather, we are just plodding along, looking to see whether we can unearth the occasional diamond in the rough as an investment opportunity. One thing in our favor is the rather wholesale bloodletting that has taken place at most Wall Street firms, putting into place a new class of analysts who have yet to make their mistakes of both omission and commission, which may lead to opportunities of displacement in the marketplace. A second thing in our favor is the continued and even intensified focus on short-term events that drives much of investment analysis and portfolio management decisions today. Sometimes (actually more than sometimes), doing nothing is the correct decision if you have confidence in the correctness of your original assessment. In any event, we are not going to do anything different this coming year than what we have done in the past. We will continue to search for business values in the market place at that margin of safety discount to intrinsic value that we like. We remain grateful to you, our shareholders and partners, for your patience and confidence in entrusting us with your capital. /s/ Clyde S. McGregor /s/ Edward A. Studzinski CLYDE S. McGREGOR, CFA EDWARD A. STUDZINSKI, CFA Portfolio Manager Portfolio Manager mcgregor@oakmark.com estudzinski@oakmark.com 21 THE OAKMARK EQUITY AND INCOME FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2003 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--58.3% COMMON STOCKS--58.3% FOOD & BEVERAGE--5.1% Diageo plc (b) 2,300,000 $ 121,578,000 Nestle SA (b) 1,600,000 99,854,400 Kraft Foods Inc. 1,000,000 32,220,000 Dean Foods Company (a) 750,000 24,652,500 ------------------ 278,304,900 CABLE SYSTEMS & SATELLITE TV--1.5% Hughes Electronics Corporation (a) 5,026,722 $ 83,192,249 HARDWARE--0.7% The Stanley Works 962,100 $ 36,434,727 INFORMATION SERVICES--1.8% Ceridian Corporation (a) 4,800,000 $ 100,512,000 MARKETING SERVICES--1.6% The Interpublic Group of Companies, Inc. (a) 5,750,000 $ 89,700,000 RESTAURANTS--0.7% Darden Restaurants, Inc. 1,750,000 $ 36,820,000 RETAIL--6.1% Costco Wholesale Corporation (a) 2,960,000 $ 110,052,800 The TJX Companies, Inc. 4,960,000 109,368,000 J.C. Penney Company, Inc. 2,950,000 77,526,000 Office Depot, Inc. (a) 2,230,000 37,263,300 ------------------ 334,210,100 INSURANCE--3.2% SAFECO Corporation 3,750,000 $ 145,987,500 RenaissanceRe Holdings Ltd. (c) 600,000 29,430,000 ------------------ 175,417,500 REAL ESTATE--0.4% Hospitality Properties Trust 488,500 $ 20,165,280 HEALTH CARE SERVICES--4.3% Cardinal Health, Inc. 2,109,700 $ 129,029,252 Caremark Rx, Inc. (a) 4,250,000 107,652,500 ------------------ 236,681,752 MANAGED CARE SERVICES--1.4% First Health Group Corp. (a) 3,950,000 $ 76,867,000 MEDICAL CENTERS--2.4% Laboratory Corporation of America Holdings (a) 3,500,000 $ 129,325,000
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NAME SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--58.3% (CONT.) MEDICAL PRODUCTS--1.5% Apogent Technologies, Inc. (a) 2,264,400 $ 52,171,776 Techne Corporation (a) 750,000 28,335,000 Edwards Lifesciences Corporation (a) 100,000 3,008,000 ------------------ 83,514,776 PHARMACEUTICALS--3.1% Watson Pharmaceuticals, Inc. (a) 2,750,000 $ 126,500,000 Abbott Laboratories 1,000,000 46,600,000 ------------------ 173,100,000 COMPUTER SERVICES--3.1% First Data Corporation 2,500,000 $ 102,725,000 Concord EFS, Inc. (a) 4,500,000 66,780,000 ------------------ 169,505,000 COMPUTER SOFTWARE--2.8% Synopsys, Inc. (a) 3,690,000 $ 124,574,400 Novell, Inc. (a) 1,500,000 15,780,000 Mentor Graphics Corporation (a) 800,000 11,632,000 ------------------ 151,986,400 COMPUTER SYSTEMS--0.7% The Reynolds and Reynolds Company, Class A 1,355,100 $ 39,365,655 DATA STORAGE--0.6% Imation Corp. 1,000,000 $ 35,150,000 AEROSPACE & DEFENSE--4.6% General Dynamics Corporation 1,050,000 $ 94,909,500 Rockwell Collins, Inc. 3,107,900 93,330,237 Honeywell International, Inc. 1,889,500 63,165,985 ------------------ 251,405,722 AGRICULTURAL EQUIPMENT--0.0% Alamo Group, Inc. 141,900 $ 2,165,394 DIVERSIFIED CONGLOMERATES--0.4% Textron, Inc. 404,000 $ 23,052,240 INSTRUMENTS--1.2% Varian, Inc. (a) 1,649,400 $ 68,829,462 MACHINERY & INDUSTRIAL PROCESSING--1.1% Rockwell Automation, Inc. 1,781,000 $ 63,403,600 AGRICULTURAL OPERATIONS--1.8% Monsanto Company 3,500,000 $ 100,730,000 FORESTRY PRODUCTS--1.5% Plum Creek Timber Company, Inc. 2,657,044 $ 80,906,990
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SHARES HELD/ NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--58.3% (CONT.) OIL & NATURAL GAS--6.7% Burlington Resources, Inc. 3,075,000 $ 170,293,500 XTO Energy, Inc. 4,499,933 127,348,104 St. Mary Land & Exploration Company 1,200,000 34,200,000 Cabot Oil & Gas Corporation 1,125,000 33,018,750 Cross Timbers Royalty Trust 33,295 949,573 ------------------ 365,809,927 TOTAL COMMON STOCKS (COST: $2,480,576,897) 3,206,555,674 TOTAL EQUITY AND EQUIVALENTS (COST: $2,480,576,897) 3,206,555,674 FIXED INCOME--31.6% PREFERRED STOCKS--0.0% BANK & THRIFTS--0.0% Fidelity Capital Trust I, Preferred, 8.375% $ 43,500 $ 441,525 TOTAL PREFERRED STOCKS (COST: $435,000) 441,525 CORPORATE BONDS--1.7% BROADCASTING & PROGRAMMING--0.3% Liberty Media Corporation, 8.25% due 2/1/2030, Debenture $ 12,900,000 $ 15,435,121 BUILDING MATERIALS & CONSTRUCTION--0.0% Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note $ 750,000 $ 817,500 CABLE SYSTEMS & SATELLITE TV--0.1% CSC Holdings Inc., 7.875% due 12/15/2007 $ 3,000,000 $ 3,165,000 HOTELS & MOTELS--0.0% Park Place Entertainment, 7.00% due 7/15/2004, Senior Notes $ 2,750,000 $ 2,818,750 RETAIL--0.4% The Gap, Inc., 6.90% due 9/15/2007 $ 9,187,000 $ 10,140,151 Toys 'R' Us, Inc., 7.875% due 4/15/2013 5,000,000 5,378,750 Rite Aid Corporation, 7.625% due 4/15/2005, Senior Notes 4,900,000 4,973,500 ------------------ 20,492,401 HEALTH CARE SERVICES--0.4% Omnicare, Inc., 6.125% due 6/1/2013 $ 20,000,000 $ 20,050,000 MEDICAL PRODUCTS--0.0% Apogent Technologies Inc., 6.50% due 5/15/2013 $ 1,000,000 $ 1,042,500
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NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------- FIXED INCOME--31.6% (CONT.) OFFICE EQUIPMENT--0.3% Xerox Corporation, 7.125% due 6/15/2010 $ 15,000,000 $ 16,050,000 MACHINERY & INDUSTRIAL PROCESSING--0.0% Columbus McKinnon Corporation New York, 8.50% due 4/1/2008 $ 3,000,000 $ 2,805,000 OTHER INDUSTRIAL GOODS & SERVICES--0.2% Sealed Air Corporation, 144A, 5.625% due 7/15/2013 $ 8,300,000 $ 8,493,315 ELECTRIC UTILITIES--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 $ 458,221 $ 494,879 TOTAL CORPORATE BONDS (COST: $83,954,155) 91,664,466 GOVERNMENT AND AGENCY SECURITIES--29.9% CANADIAN GOVERNMENT BONDS--2.8% Canada Government, 3.50% due 6/1/2004 $ 100,000,000 $ 77,672,187 Canada Government, 3.00% due 12/1/2005 100,000,000 77,429,964 ------------------ 155,102,151 DANISH GOVERNMENT BONDS--0.3% Kingdom of Denmark, 4.00% due 11/15/2004 $ 100,000,000 $ 17,142,004 NEW ZEALAND GOVERNMENT BONDS--0.1% New Zealand Government, 6.50% due 2/15/2005 $ 10,000,000 $ 6,630,500 UNITED KINGDOM GOVERNMENT BONDS--0.7% United Kingdom of Great Britain and Northern Ireland, 5.00% due 6/7/2004 $ 20,000,000 $ 35,883,178 U.S. GOVERNMENT NOTES--25.2% United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed $ 248,722,230 $ 269,436,066 United States Treasury Notes, 1.50% due 7/31/2005 225,000,000 224,824,275 United States Treasury Notes, 5.75% due 11/15/2005 200,000,000 214,734,400 United States Treasury Notes, 1.625% due 1/31/2005 200,000,000 200,773,400 United States Treasury Notes, 1.50% due 2/28/2005 150,000,000 150,345,750 United States Treasury Notes, 1.25% due 5/31/2005 150,000,000 149,601,600 United States Treasury Notes, 1.625% due 4/30/2005 100,000,000 100,300,800 United States Treasury Notes, 1.875% due 9/30/2004 75,000,000 75,424,800 ------------------ 1,385,441,091
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NAME PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------- FIXED INCOME--31.6% (CONT.) U.S. GOVERNMENT AGENCIES--0.8% Federal Home Loan Mortgage Corporation, 3.00% due 11/17/2006 $ 10,000,000 $ 10,098,520 Federal Home Loan Bank, 2.65% due 4/24/2006 8,850,000 8,850,328 Federal Home Loan Mortgage Corporation, 2.35% due 5/5/2008 7,100,000 7,131,574 Fannie Mae, 2.25% due 12/30/2008 6,975,000 6,819,674 Federal Home Loan Bank, 3.00% due 12/30/2009 5,000,000 5,067,050 Federal Home Loan Bank, 3.125% due 7/10/2009 4,000,000 3,858,492 Federal Home Loan Bank, 3.875% due 12/15/2004 1,000,000 1,024,059 ------------------ 42,849,697 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $1,603,367,277) 1,643,048,621 TOTAL FIXED INCOME (COST: $1,687,756,432) 1,735,154,612 SHORT TERM INVESTMENTS--9.4% U.S. GOVERNMENT BILLS--6.9% United States Treasury Bills, 0.89% - 0.94% due 1/2/2004 - 4/15/2004 $ 380,000,000 $ 379,577,212 TOTAL U.S. GOVERNMENT BILLS (COST: $379,541,480) 379,577,212 REPURCHASE AGREEMENTS--2.5% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $133,006,281 collateralized by U.S. Government Agency Securities $ 133,000,000 $ 133,000,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $2,705,879 collateralized by a U.S. Government Agency Security 2,705,766 2,705,766 TOTAL REPURCHASE AGREEMENTS (COST: $135,705,766) 135,705,766 TOTAL SHORT TERM INVESTMENTS (COST: $515,247,246) 515,282,978 Total Investments (Cost $4,683,580,575)--99.3% $ 5,456,993,264
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CONTRACTS HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- CALL OPTIONS PURCHASED--0.0% MANAGED CARE SERVICES--0.0% First Health Group Corp., January 30 Calls 42,000 $ 2,100 TOTAL CALL OPTIONS PURCHASED (COST: $55,010)--0.0% $ 2,100 Other Assets In Excess Of Other Liabilities--0.7% 36,016,938 ------------------ TOTAL NET ASSETS--100% $ 5,493,012,302 ==================
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a foreign domiciled corporation. 27 THE OAKMARK GLOBAL FUND REPORT FROM CLYDE S. McGREGOR AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. McGREGOR] [PHOTO OF MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (12/31/03) AS COMPARED TO THE MSCI WORLD INDEX(18) [CHART]
THE OAKMARK GLOBAL FUND MSCI WORLD INDEX 8/1/99 $ 10,000 $ 10,000 9/30/99 $ 9,180 $ 9,883 12/31/99 $ 9,981 $ 11,550 3/31/2000 $ 10,061 $ 11,668 6/30/2000 $ 10,381 $ 11,255 9/30/2000 $ 10,922 $ 10,689 12/31/2000 $ 11,562 $ 10,028 3/31/2001 $ 11,480 $ 8,739 6/30/2001 $ 13,289 $ 8,959 9/30/2001 $ 11,071 $ 7,676 12/31/2001 $ 13,880 $ 8,335 3/31/2002 $ 15,387 $ 8,364 6/30/2002 $ 14,372 $ 7,601 9/30/2002 $ 11,828 $ 6,204 12/31/2002 $ 13,587 $ 6,678 3/31/2003 $ 12,153 $ 6,340 6/30/2003 $ 16,225 $ 7,420 9/30/2003 $ 17,774 $ 7,779 12/31/2003 $ 20,242 $ 8,889
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 3-YEAR (8/4/99) - ---------------------------------------------------------------------------------- OAKMARK GLOBAL FUND 13.88% 48.98% 20.52% 17.34%(3) MSCI World 14.26% 33.11% -3.92% -2.63% Lipper Global Fund Index(19) 14.14% 31.96% -3.30% 0.21%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized FELLOW SHAREHOLDERS, The Oakmark Global Fund gained 14% for the three-month period ending December 31, 2003, compared with the 14% increases for the MSCI World Index and the Lipper Global Fund Index. For the twelve months calendar year 2003, The Oakmark Global Fund has returned 49%, compared to the smaller gains of 33% and 32% for the MSCI World Index and the Lipper Global Fund Index, respectively. Most importantly, since inception, the Fund has returned 17% annualized compared to a 3% decline in the MSCI World Index and 0% return in the Lipper Global Fund Index. CHANGE IN CO-PORTFOLIO MANAGER On October 29, 2003 Clyde McGregor was named co-portfolio manager of The Oakmark Global Fund, replacing Greg Jackson. Greg left Harris Associates L.P., the Funds' adviser, primarily to move back to Utah to be closer to family. We wish to extend our heartfelt thanks to Greg for his tremendous contribution to the success of The Oakmark Global Fund. We will miss him as a colleague, and wish him and his family the best success in all future endeavors. All of us here at Harris Associates are very excited to have Clyde aboard. Clyde has one of the longest tenures of any professional in the Firm, joining Harris Associates in 1981, and has built a tremendous investment record over the eight-year life of The Oakmark Equity and Income Fund. Clyde has a M.B.A. in Finance from the University of Wisconsin-Madison (1977) and a B.A. in Economics and Religion from Oberlin College (1974). He has over twenty-five years of investment experience and is a CFA charterholder. Oakmark Global will continue to be managed using the same value approach employed since its inception. The Fund invests in companies around the world that are trading at a significant discount to estimated intrinsic value, that demonstrate the potential to grow per-share business value over time, and possess company management whose interests are aligned with shareholders. 28 HIGHLIGHTS - - Clyde McGregor joined the Fund as co-manager in October 2003. - - The Fund continues to be managed using the same value approach employed since its inception. - - The strong recovery in global stocks that began in March 2003 continued through year-end. A FEW NEW ADDITIONS We have added a few new names in the past quarter. Burlington Resources is the second largest independent energy producer in North America. 80% of Burlington's reserves are natural gas, the fuel of choice in the US. Over the last seven years Burlington has experienced favorable finding costs for its energy reserves, a critical variable in generating good returns and growing per-share value in this business. We calculate a current liquidation value for Burlington of $68/share, using conservative estimates of market prices for gas and oil in the future. In fact, there is significant upside potential in our medium term estimates of gas prices. Management seems to agree with our analysis as the company has been repurchasing stock at a meaningful rate. Bank of Ireland is a leading financial institution in Ireland -the 2nd largest mortgage lender, one of the largest life insurance underwriters and one of the top retail lenders. Loans and book value per share have grown at a rate of 10% over the past 5+ years and returns have been excellent, greater than 20%, during that time. Despite these attractive qualities we are able to buy this business for 11x March 2005 earnings, by our calculations roughly 65% of fair value. Despite the Fund's strong performance this year we remain excited about the values in the portfolio. We thank you for your support. /s/ Clyde S. Mcgregor /s/ Michael J. Welsh CLYDE S. McGREGOR, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager mcgregor@oakmark.com mwelsh@oakmark.com 29 THE OAKMARK GLOBAL FUND [CHART] GLOBAL DIVERSIFICATION--DECEMBER 31, 2003 (UNAUDITED)
% OF FUND EQUITY MARKET VALUE ------------------- - - EUROPE 46.1% Great Britain 12.7% * France 9.0% * Netherlands 6.9% Switzerland 6.9% * Italy 3.8% * Germany 3.1% * Ireland 3.1% Sweden 0.6% - - UNITED STATES 37.2% - - PACIFIC RIM 13.3% Japan 6.6% Australia 3.8% Korea 2.9% - - LATIN AMERICA 2.9% Mexico 2.9% - - OTHER 0.5% Israel 0.5%
* Euro currency countries comprise 25.9% of the Fund. 30 THE OAKMARK GLOBAL FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2003 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.3% FOOD & BEVERAGE--12.9% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 4,691,700 $ 61,501,719 Nestle SA (Switzerland) Food & Beverage Manufacturer 207,900 51,899,418 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 4,383,000 32,130,262 Lotte Chilsung Beverage Co., Ltd. (Korea) Soft Drinks, Juices & Sports Drinks Manufacturer 13,430 6,695,275 ------------------ 152,226,674 HOUSEHOLD PRODUCTS--2.8% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 456,800 $ 33,539,208 BROADCASTING & PROGRAMMING--2.5% Grupo Televisa S.A (Mexico) (b) Television Production & Broadcasting 566,500 $ 22,580,690 Liberty Media Corporation, Class A (United States) (a) Broadcast Services & Programming 650,000 7,728,500 ------------------ 30,309,190 CABLE SYSTEMS & SATELLITE TV--1.0% Time Warner Inc. (United States) (a) Motion Picture Production, Distribution, & Other Services 675,000 $ 12,143,250 HUMAN RESOURCES--1.4% Michael Page International plc (Great Britain) Recruitment Consultancy Services 4,815,400 $ 16,092,348 INFORMATION SERVICES--6.3% eFunds Corporation (United States) (a) Electronic Debit Payment Services 1,745,000 $ 30,275,750 Ceridian Corporation (United States) (a) Data Management Services 1,348,000 28,227,120 Equifax Inc. (United States) Credit Reporting & Collection 610,900 14,967,050 ------------------ 73,469,920
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NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.3% (CONT.) MARKETING SERVICES--2.7% The Interpublic Group of Companies, Inc. (United States) (a) Advertising & Marketing Services 2,045,000 $ 31,902,000 MOTORCYCLES--0.4% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 2,628,923 $ 4,549,852 RETAIL--5.1% The TJX Companies, Inc. (United States) Discount Apparel & Home Fashion Retailer 1,501,000 $ 33,097,050 Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 2,890,100 26,753,079 ------------------ 59,850,129 BANK & THRIFTS--6.7% Bank of Ireland (Ireland) Commercial Bank 2,421,000 $ 32,995,499 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 1,481,000 19,717,921 Washington Mutual, Inc. (United States) Thrift 415,000 16,649,800 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 586,100 9,909,551 ------------------ 79,272,771 FINANCIAL SERVICES--1.9% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 45,200 $ 15,227,339 Credit Suisse Group (Switzerland) Investment Services & Insurance 190,700 6,971,381 ------------------ 22,198,720 OTHER FINANCIAL--6.4% Euronext (Netherlands) Stock Exchange 1,664,000 $ 42,066,206 Fannie Mae (United States) Mortgage Provider 250,000 18,765,000 Daiwa Securities Group Inc. (Japan) Stock Broker 2,062,000 14,032,842 ------------------ 74,864,048 HEALTH CARE SERVICES--1.9% Cardinal Health, Inc. (United States) Wholesale Drug Distributor 360,000 $ 22,017,600
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NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.3% (CONT.) MANAGED CARE SERVICES--1.9% First Health Group Corp. (United States) (a) Health Benefits Company 1,154,000 $ 22,456,840 MEDICAL CENTERS--2.5% Laboratory Corporation of America Holdings Medical Laboratory & (United States) (a) Testing Services 798,000 $ 29,486,100 MEDICAL PRODUCTS--1.8% Ansell Limited (Australia) Protective Rubber & Plastics Products 4,468,100 $ 21,702,332 PHARMACEUTICALS--9.1% Aventis S.A. (France) Pharmaceuticals 614,800 $ 40,578,669 Takeda Chemical Industries, Ltd. (Japan) Pharmaceuticals & Food Supplements 999,000 39,635,456 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 1,174,500 26,872,388 ------------------ 107,086,513 TELECOMMUNICATIONS--2.1% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 147,000 $ 24,551,406 TELECOMMUNICATIONS EQUIPMENT--0.5% Telefonaktiebolaget LM Ericsson, Class B (Sweden) (a) Mobile & Wired Telecommunications Products 3,470,000 $ 6,220,885 COMPUTER SERVICES--5.9% First Data Corporation (United States) Data Processing & Management 743,000 $ 30,529,870 Concord EFS, Inc. (United States) (a) Electronic Processing Services 1,550,000 23,002,000 Meitec Corporation (Japan) Software Engineering Services 439,200 16,892,308 ------------------ 70,424,178
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NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.3% (CONT.) COMPUTER SOFTWARE--3.9% Synopsys, Inc. (United States) (a) Electronic Design Automation 1,018,000 $ 34,367,680 Novell, Inc. (United States) (a) Network & Internet Integration Software 1,081,000 11,372,120 ------------------ 45,739,800 OFFICE EQUIPMENT--1.9% Neopost SA (France) Mailroom Equipment Supplier 438,350 $ 22,085,826 AIRPORT MAINTENANCE--0.7% Grupo Aeroportuario del Sureste S.A. de C.V (Mexico) (b) Airport Operator 463,000 $ 8,148,800 DIVERSIFIED CONGLOMERATES--2.9% Vivendi Universal SA (France) (a) Multimedia 1,430,500 $ 34,721,800 INSTRUMENTS--0.5% Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 228,700 $ 5,470,504 WASTE DISPOSAL--1.4% Waste Management, Inc. (United States) Waste Management Services 550,000 $ 16,280,000 CHEMICALS--2.8% Akzo Nobel N.V (Netherlands) Chemical Producer 850,000 $ 32,762,196 OIL & NATURAL GAS--1.4% Burlington Resources, Inc. (United States) Oil & Natural Gas Exploration & Production 304,000 $ 16,835,520 ------------------ TOTAL COMMON STOCKS (COST: $884,075,594) 1,076,408,410
34
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--9.1% U.S. GOVERNMENT BILLS--7.6% United States Treasury Bills, 0.83% - 0.915% due 1/2/2004 - 1/22/2004 $ 90,000,000 $ 89,979,509 TOTAL U.S. GOVERNMENT BILLS (COST: $89,979,328) 89,979,509 REPURCHASE AGREEMENTS--1.5% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $15,000,708 collateralized by U.S. Government Agency Securities $ 15,000,000 $ 15,000,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $2,406,219 collateralized by a U.S. Government Agency Security 2,406,119 2,406,119 TOTAL REPURCHASE AGREEMENTS (COST: $17,406,119) 17,406,119 TOTAL SHORT TERM INVESTMENTS (COST: $107,385,447) 107,385,628 Total Investments (Cost $991,461,041)--100.4% $ 1,183,794,038 Other Liabilities In Excess Of Other Assets--(0.4%) (4,339,567) ------------------ TOTAL NET ASSETS--100% $ 1,179,454,471 ==================
(a) Non-income producing security. (b) Represents an American Depository Receipt. 35 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS FELLOW SHAREHOLDERS, The Oakmark International and International Small Cap Funds returned 16% and 18% respectively for the quarter ending December 31st while the MSCI World ex U.S. Index20 returned 17% for the same period. The strong recovery in global stocks that began in March continued through the rest of 2003 with the Funds gaining 38% and 52% for the calendar year respectively versus the MSCI World ex U.S. Index which returned 39%. Given the availability of value in overseas markets, we continue to remain enthused about prospects in global equity markets. This quarter we'll discuss the specific winners and losers for calendar year 2003 in the separate letters for Oakmark International and Oakmark International Small Cap. WHO WOULD HAVE THOUGHT...? The year ended very differently than it started. Recall the thoughts occupying investors in early 2003: the continuation of the equity bear market, the raging bull market in bonds ("why be in stocks?!"), fears of war, fears of deflation, etc. Though investors' emotions were encouraging equity market avoidance ("sell!"), fundamentals suggested the opposite: prices and valuations were attractive. Inflation was/is low, interest rates were/are low, conventional valuations like price to cash flow and dividend yield were/are (still) attractive. These two situations were not unrelated: equity market attractiveness was a manifestation of the fears listed above. Disciplined, long termed investors won. The lesson: Don't let short-term fears cloud your vision to long-term prospects. THE CHINA SYNDROME Recently, we have been getting lots of calls and letters asking why neither of the two Oakmark International Funds have any direct stock investments in Chinese companies. The questioners believe that because China is rapidly growing and is extremely vibrant economically, there must be stocks worth buying. The truth is, at this point in time, we cannot find any Chinese stocks that meet our strict value criteria. First, we are not yet satisfied by corporate governance structures. Nearly all the listed companies in China are at least partially owned by the state and in nearly all cases, controlled by the state. This creates a giant conflict: what is good for the government may not be good for the other owners, especially foreign minority owners. For example, a listed company may buy another non-listed company at an inflated price. This would benefit the governmental entity that's selling to the detriment of the listed entity owned, at least partially, by outsiders. HIGHLIGHTS - - A strong recovery in global stocks, which began in March, continued through year-end. - - Weighing risk/return prospects in emerging markets is critical to success, especially given the degree of optimism about growth prospects. - - We continue to monitor China and other emerging markets for investments that meet our criteria of price and quality. Additionally, companies are primarily viewed as political instruments. The corporation is viewed as handy tool to accomplish various goals, and building shareholder value is typically absent from the checklist. As an example, employment, whether or not its actually economically productive, is oftentimes an important goal for these companies. Even setting aside the presence of corporate governance conflicts, prices of the larger, more liquid Chinese companies (listed in Hong Kong) do not look attractive. The current trendiness of portfolio investment has really pushed valuations upward. So, when you consider price and quality, which is how we define value, we have yet to find opportunity. In our view properly weighing risk and return in emerging markets is critical to success. Emerging markets in general have performed strongly over the past several years, especially relative to the developed markets of Europe. Many of these markets are now pricing in a lot of optimism, with little discount for the political and economic instability that comes along with the exciting growth prospects. In fact, these calls for "Why aren't you in China?" sound similar to the query that we heard in late 1999 and early 2000, "Why aren't you in tech stocks?" It is easy to confuse the presence of growth with the presence of value. We will happily invest in Chinese companies when we find stocks that fit our investment criteria. Until then, we own and will continue to look for stocks in companies listed elsewhere that are benefiting from China's rapid growth and that are run for the benefit of shareholders. Currently, 36 Giordano, a HK based pan-Asian retailer, has hundreds of stores in China and a operational plan to make solid profits over time. We could continue: BMW sells cars in China, Swatch sells watches there, et.al. Remember it was only five years ago that most foreigners threw up their hands and fled emerging markets--creating what we thought was a tremendous buying opportunity. We will continue to monitor China as well as other emerging markets for investments that meet our investment criteria--price and quality. Thank you for your continued confidence and support. /s/ David G. Herro, /s/ Michael J. Welsh, DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 37 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO] [PHOTO OF MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (12/31/03) COMPARED TO THE MSCI WORLD EX U.S. INDEX(20) [CHART]
THE OAKMARK INTERNATIONAL FUND MSCI WORLD EX U.S. INDEX 9/30/92 $ 10,000 $ 10,000 12/31/92 $ 10,043 $ 9,628 3/31/93 $ 11,890 $ 10,766 6/30/93 $ 12,300 $ 11,834 9/30/93 $ 13,387 $ 12,562 12/31/93 $ 15,424 $ 12,729 3/31/94 $ 15,257 $ 13,133 6/30/94 $ 14,350 $ 13,748 9/30/94 $ 15,278 $ 13,830 12/31/94 $ 14,026 $ 13,664 3/31/95 $ 13,563 $ 13,924 6/30/95 $ 14,749 $ 14,060 9/30/95 $ 15,507 $ 14,631 12/31/95 $ 15,193 $ 15,222 3/31/96 $ 17,021 $ 15,681 6/30/96 $ 18,383 $ 15,937 9/30/96 $ 18,347 $ 15,950 12/31/96 $ 19,450 $ 16,268 3/31/97 $ 20,963 $ 16,016 6/30/97 $ 22,700 $ 18,094 9/30/97 $ 23,283 $ 18,027 12/31/97 $ 20,097 $ 16,637 3/31/98 $ 22,994 $ 19,083 6/30/98 $ 20,253 $ 19,233 9/30/98 $ 16,322 $ 16,404 12/31/98 $ 18,688 $ 19,759 3/31/99 $ 21,258 $ 20,070 6/30/99 $ 25,728 $ 20,650 9/30/99 $ 23,896 $ 21,535 12/31/99 $ 26,065 $ 25,277 3/31/2000 $ 26,012 $ 25,416 6/30/2000 $ 27,856 $ 24,530 9/30/2000 $ 27,306 $ 22,663 12/31/2000 $ 29,324 $ 21,897 3/31/2001 $ 26,763 $ 18,825 6/30/2001 $ 29,437 $ 18,629 9/30/2001 $ 23,728 $ 16,062 12/31/2001 $ 27,819 $ 17,212 3/31/2002 $ 31,006 $ 17,310 6/30/2002 $ 30,315 $ 16,923 9/30/2002 $ 23,365 $ 13,603 12/31/2002 $ 25,465 $ 14,492 3/31/2003 $ 22,481 $ 13,402 6/30/2003 $ 28,198 $ 15,978 9/30/2003 $ 30,368 $ 17,269 12/31/2003 $ 35,152 $ 20,206
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (9/30/92) - ---------------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND 15.75% 38.04% 13.46% 8.58% 11.81% MSCI World ex. U.S. 17.00% 39.42% 0.46% 4.73% 6.45% MSCI EAFE(21) 17.08% 38.59% -0.05% 4.47% 6.22% Lipper International Fund Index(22) 15.45% 36.00% 2.13% 5.31% 7.71%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Fund gained 16% for the quarter, compared to the MSCI World ex U.S. Index which gained 17%. For the twelve months ended December 31, 2003 the Fund gained 38%, similar to the 39% and 36% returns of the MSCI World ex U.S. Index and the Lipper International Fund Index, respectively. BIG CONTRIBUTORS 2003 As we do at the end of every year we like to mention those stocks which had the most significant impact on your Fund's NAV(8). Happily this year, nearly all were positive. L.M. Ericsson, the Swedish telecom equipment manufacturer, had by far the most significant positive contribution, rebounding from a tough 2002. The stock more than tripled from its March, 2003 lows. The share price responded positively to the appointment and initial actions of new CEO Carl-Henric Svanberg, as well as to better than expected cash flow generation. A number of our financials in the Fund also did extremely well. Sanpaolo IMI (Italy), BNP Paribas (France), Credit Suisse Group (Switzerland), and Daiwa Securities (Japan) all made substantial positive contributions to The Oakmark International Fund's return. In general, the market gave us a very good buying opportunity in March when share prices weakened to top up our positions in these names and others, as well as to add Credit Suisse to the portfolio. The share price of Vivendi Universal (France) rose over the past twelve months in reflection of the excellent work done by the new management team, led by Chairman Jean-Rene Fourtou. Since taking over the company in the summer of 2002, this team has restored credibility and liquidity to a very tarnished enterprise, and has done so under very difficult market conditions. Other significant winners for us in calendar 2003 included blue-chip recruitment company Michael Page plc (UK), German automaker BMW, global advertising and services giant Publicis Group (France), and media powerhouse Grupo Televisa (Mexico). The negative contributors to a lesser degree included Gambro AB A, FKI plc and Rolls-Royce Group plc. LOOKING FORWARD Given the quality of the holdings and the attractive valuation of the portfolio, we remain optimistic about potential price appreciation. Thank you for your continued confidence. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 38 THE OAKMARK INTERNATIONAL FUND [CHART] INTERNATIONAL DIVERSIFICATION--DECEMBER 31, 2003 (UNAUDITED)
% OF FUND EQUITY MARKET VALUE - ---------------------------------------------- - - EUROPE 77.8% Great Britain 23.7% * France 16.7% Switzerland 13.8% * Germany 7.6% * Netherlands 6.2% * Italy 3.8% * Ireland 2.9% Sweden 1.7% * Finland 1.4% - - PACIFIC RIM 17.3% Japan 7.3% Korea 4.0% Australia 3.5% Singapore 1.4% Hong Kong 1.1% - - LATIN AMERICA 3.6% Mexico 3.6% - - OTHER 1.3% Israel 1.3%
* Euro currency countries comprise 38.6% of the Fund. 39 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2003 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.7% FOOD & BEVERAGE--13.9% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 10,717,900 $ 140,496,894 Nestle SA (Switzerland) Food & Beverage Manufacturer 454,800 113,534,658 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 15,103,800 110,720,751 Pernod-Ricard SA (France) Manufactures Wines, Spirits, & Fruit Juices 615,425 68,332,939 Lotte Chilsung Beverage Co., Ltd. (Korea) Soft Drinks, Juices & Sports Drinks Manufacturer 83,400 41,577,507 Fomento Economico Mexicano S.A de C.V. (Mexico) (b) Soft Drink & Beer Manufacturer 1,073,000 39,572,240 ------------------ 514,234,989 HOUSEHOLD PRODUCTS--2.8% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 1,386,950 $ 101,832,759 OTHER CONSUMER GOODS & SERVICES--1.5% Swatch Group AG, Bearer Shares (Switzerland) Watch Manufacturer 457,900 $ 54,934,682 Swatch Group AG, Registered Shares (Switzerland) Watch Manufacturer 24,700 588,665 ------------------ 55,523,347 AUTOMOBILES--2.3% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 1,871,700 $ 86,641,554 AUTOMOTIVE--1.8% Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 1,454,500 $ 66,651,369 BROADCASTING & PROGRAMMING--2.2% Grupo Televisa S.A (Mexico) (b) Television Production & Broadcasting 2,056,000 $ 81,952,160
40
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.7% (CONT.) HUMAN RESOURCES--2.1% Michael Page International plc (Great Britain) Recruitment Consultancy Services 22,748,600 $ 76,022,426 MARKETING SERVICES--3.6% Publicis Groupe (France) Advertising & Media Services 2,355,100 $ 76,238,638 Aegis Group plc (Great Britain) Media Services 30,524,200 53,795,583 ------------------ 130,034,221 PUBLISHING--4.9% Reed Elsevier plc (Great Britain) Publisher 10,918,300 $ 90,950,392 John Fairfax Holdings Limited (Australia) Newspaper Publisher 32,814,100 86,981,516 ------------------ 177,931,908 RECREATION & ENTERTAINMENT--0.7% Nintendo Company, Ltd. (Japan) Video Game Manufacturer 284,800 $ 26,587,005 RETAIL--4.1% Signet Group plc (Great Britain) Jewelry Retailer 31,585,100 $ 58,061,026 J Sainsbury plc (Great Britain) Food Stores 9,902,000 55,269,491 Giordano International Limited (Hong Kong) Pacific Rim Clothing Retailer & Manufacturer 82,924,300 38,451,455 ------------------ 151,781,972 BANK & THRIFTS--11.5% Bank of Ireland (Ireland) Commercial Bank 7,347,000 $ 100,131,323 Sanpaolo IMI S.p.A. (Italy) Banking Services 6,335,800 82,519,132 BNP Paribas SA (France) Commercial Banking 1,156,000 72,688,392 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Banking 2,938,400 49,681,324 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 6,178,368 48,021,232
41
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.7% (CONT.) BANK & THRIFTS (CONT.) Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 2,757,700 $ 36,715,808 Svenska Handelsbanken AB (Sweden) Commercial Banking 1,498,800 30,619,212 Kookmin Bank (Korea) Commercial Banking 231,168 8,662,737 ------------------ 429,039,160 FINANCIAL SERVICES--1.5% Credit Suisse Group (Switzerland) Investment Services & Insurance 1,552,900 $ 56,769,046 OTHER FINANCIAL--7.0% Euronext (Netherlands) Stock Exchange 4,230,800 106,955,352 Deutsche Boerse AG (Germany) Electronic Trading Systems 1,415,400 77,286,020 Daiwa Securities Group Inc. (Japan) Stock Broker 10,870,000 73,975,261 ------------------ 258,216,633 PHARMACEUTICALS--11.4% Aventis S.A. (France) Pharmaceuticals 2,061,200 $ 136,045,466 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 5,271,200 120,604,286 Takeda Chemical Industries, Ltd. (Japan) Pharmaceuticals & Food Supplements 2,371,000 94,069,735 Novartis AG (Switzerland) Pharmaceuticals 1,534,500 69,609,125 ------------------ 420,328,612 TELECOMMUNICATIONS--2.5% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 542,000 $ 90,522,870 TELECOMMUNICATIONS EQUIPMENT--0.8% Telefonaktiebolaget LM Ericsson, Class B (Sweden) (a) Mobile & Wired Telecommunications Products 16,290,000 $ 29,204,097 COMPUTER SERVICES--1.7% Meitec Corporation (Japan) Software Engineering Services 1,613,200 $ 62,046,154
42
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.7% (CONT.) AIRPORT MAINTENANCE--0.1% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b) Airport Operator 242,000 $ 4,259,200 DIVERSIFIED CONGLOMERATES--3.5% Vivendi Universal SA (France) (a) Multimedia 4,813,700 $ 116,840,495 LVMH Moet Hennessy Louis Vuitton SA (France) Diversified Luxury Goods 159,600 11,599,556 Haw Par Corporation Limited (Singapore) Healthcare & Leisure Products 58,338 153,205 ------------------ 128,593,256 INSTRUMENTS--1.2% Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 1,834,200 $ 43,874,064 MACHINERY & INDUSTRIAL PROCESSING--1.3% Metso Corporation (Finland) Paper & Pulp Machinery 3,863,000 $ 47,247,256 OTHER INDUSTRIAL GOODS & SERVICES--2.2% Enodis plc (Great Britain) (a) Food Processing Equipment 33,585,320 49,000,722 Chargeurs SA (France) Wool, Textile Production & Trading 1,050,201 34,393,663 ------------------ 83,394,385 TRANSPORTATION SERVICES--2.0% Associated British Ports Holdings plc (Great Britain) Port Operator 9,341,299 $ 74,896,338 CHEMICALS--8.1% Akzo Nobel N.V. (Netherlands) Chemical Producer 2,848,000 109,772,628 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 198,300 102,850,703 Lonza Group AG, Registered Shares (Switzerland) Industrial Organic Chemicals 1,459,300 83,823,097 ------------------ 296,446,428 TOTAL COMMON STOCKS (COST: $2,685,649,811) 3,494,031,209
43
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--5.0% U.S. GOVERNMENT BILLS--2.1% United States Treasury Bills, 0.84% - 0.925% due 1/2/2004 - 1/22/2004 $ 80,000,000 $ 79,979,449 TOTAL U.S. GOVERNMENT BILLS (COST: $79,979,449) 79,979,449 REPURCHASE AGREEMENTS--2.9% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $105,004,958 collateralized by U.S. Government Agency Securities $ 105,000,000 $ 105,000,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $170,629 collateralized by a U.S. Government Agency Security 170,622 170,622 TOTAL REPURCHASE AGREEMENTS (COST: $105,170,622) 105,170,622 TOTAL SHORT TERM INVESTMENTS (COST: $185,150,071) 185,150,071 Total Investments (Cost $2,870,799,882)--99.7% $ 3,679,181,280 Other Assets In Excess Of Other Liabilities--0.3% 11,525,883 ------------------ TOTAL NET ASSETS--100% $ 3,690,707,163 ==================
(a) Non-income producing security. (b) Represents an American Depository Receipt. 44 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO] [PHOTO OF MICHAEL J. WELSH] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/03) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(20) [CHART]
THE OAKMARK INTERNATIONAL SMALL CAP FUND MSCI WORLD EX U.S. INDEX 10/31/1995 $ 10,000 $ 10,000 12/31/1995 $ 9,630 $ 10,684 3/31/1996 $ 10,970 $ 11,006 6/30/1996 $ 11,570 $ 11,186 9/30/1996 $ 11,590 $ 11,195 12/31/1996 $ 12,038 $ 11,418 3/31/1997 $ 12,080 $ 11,241 6/30/1997 $ 13,181 $ 12,699 9/30/1997 $ 12,672 $ 12,652 12/31/1997 $ 9,642 $ 11,677 3/31/1998 $ 11,429 $ 13,394 6/30/1998 $ 9,892 $ 13,499 9/30/1998 $ 8,211 $ 11,513 12/31/1998 $ 10,529 $ 13,868 3/31/1999 $ 13,118 $ 14,086 6/30/1999 $ 15,317 $ 14,493 9/30/1999 $ 15,439 $ 15,114 12/31/1999 $ 16,190 $ 17,741 3/31/2000 $ 15,387 $ 17,839 6/30/2000 $ 15,529 $ 17,217 9/30/2000 $ 14,908 $ 15,906 12/31/2000 $ 14,756 $ 15,369 3/31/2001 $ 15,232 $ 13,213 6/30/2001 $ 15,777 $ 13,075 9/30/2001 $ 13,987 $ 11,273 12/31/2001 $ 16,671 $ 12,080 3/31/2002 $ 18,370 $ 12,149 6/30/2002 $ 18,831 $ 11,877 9/30/2002 $ 14,641 $ 9,547 12/31/2002 $ 15,818 $ 10,172 3/31/2003 $ 13,882 $ 9,406 6/30/2003 $ 17,933 $ 11,215 9/30/2003 $ 20,465 $ 12,121 12/31/2003 $ 24,109 $ 14,182
ANNUAL AVERAGE TOTAL RETURNS(1)
SINCE TOTAL RETURN (AS OF 12/31/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - ------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND 17.81% 52.41% 18.01% 11.37% MSCI World ex. U.S. 17.00% 39.42% 0.46% 4.37% Lipper International Small Cap Average(23) 15.05% 55.14% 9.52% 10.99%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. * Not annualized The Oakmark International Small Cap Fund gained 18% for the quarter, in-line with the relevant benchmark indices. For calendar year 2003 the Fund returned 52%. It was a terrific year for share prices of smaller companies overseas. BIG CONTRIBUTORS 2003 As we do at the end of every year we like to mention those stocks which had the most significant impact on your Fund's NAV8. We had a number of outsized winners and very few that had a negative impact on the Fund's NAV. Down under, credit services provider Baycorp Advantage Ltd. (Australia) had the single most significant impact this year. In our view the shares were unfairly beaten up over short-term worries regarding integration of their large New Zealand acquisition, ignoring a very strong underlying franchise. Another very strong performer was Bulgari S.p.A., the Italian luxury goods company. Various market fears--terrorism, SARS, et.al.--drove the share price to extremely attractive levels, and allowed us to build a meaningful position for The Oakmark International Small Cap Fund. The shares have more than doubled over the past twelve months. One of the Fund's worst performers in 2002 came back strongly this year: Pfeiffer Vacuum Technology (Germany). Despite sluggish markets for their products, especially in the semiconductor industry, the superb management team at Pfeiffer continued to generate enviable profitability and initiated a significant share buyback program. Other companies with significant positive contributions in calendar 2003 included: industrials Alfa Laval (Sweden) and Gurit-Heberlein (Switzerland); French mailing equipment and services company Neopost; a couple of financials, Danish commercial bank Jyske Bank A/S, and Swiss private bank Julius Baer Holding; and, Grupo Aeroportuario del Sureste ("ASUR"), the Mexican airport operator which holds the concessions for, among others, the Cancun and Cozumel airports. Companies with negative contributions included Van der Moolen Holding N.V., Natuzzi S.p.A, and Ducati Motor Holding S.p.A., however their performance had less impact. LOOKING FORWARD Despite the strong performance of the Fund this year, we still feel fairly optimistic about potential price appreciation for our holdings over the medium and long-term. Thank you for your continued confidence. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 45 THE OAKMARK INTERNATIONAL SMALL CAP FUND [CHART] INTERNATIONAL DIVERSIFICATION--DECEMBER 31, 2003 (UNAUDITED)
% OF FUND EQUITY MARKET VALUE - ----------------------------------------------- - - EUROPE 72.4% Switzerland 16.4% * France 15.5% Great Britain 10.4% * Italy 9.9% Denmark 7.0% * Germany 5.2% Sweden 3.2% * Spain 2.3% * Finland 1.9% * Austria 0.6% - - PACIFIC RIM 23.8% Japan 8.2% Australia 8.1% Korea 3.0% New Zealand 2.3% Thailand 0.9% Hong Kong 0.8% Philippines 0.5% - - LATIN AMERICA 3.8% Mexico 3.8%
* Euro currency countries comprise 35.4% of the Fund. 46 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2003 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% FOOD & BEVERAGE--5.6% Campari Group (Italy) Soft Drinks, Wines, & Spirits Producer 263,900 $ 12,784,429 Baron de Ley, S.A. (Spain) (a) Wines & Spirits Manufacturer 150,985 7,226,867 Hite Brewery Co., Ltd. (Korea) Brewer 68,000 4,987,998 Grupo Continental, S.A. (Mexico) Soft Drink Manufacturer 1,654,100 2,796,823 Alaska Milk Corporation (Philippines) Milk Producer 49,394,000 2,757,950 Kook Soon Dang Brewery Co., Ltd. (Korea) Wine & Spirits Manufacturer 122,676 2,738,717 ------------ $ 33,292,784 HOUSEHOLD PRODUCTS--0.8% Societe BIC SA (France) Consumer & Office Supplies 101,800 $ 4,698,248 OTHER CONSUMER GOODS & SERVICES--1.3% Vitec Group plc (Great Britain) Photo Equipment & Supplies 678,400 $ 4,189,162 Royal Doulton plc (Great Britain)(a) Tableware & Giftware 22,373,000 3,294,150 ------------ 7,483,312 BROADCASTING & PUBLISHING--2.7% Tamedia AG (Switzerland) TV Broadcasting & Publishing 184,151 $ 16,365,011 BUILDING MATERIALS & CONSTRUCTION--0.7% Fletcher Building Limited (New Zealand) Building Materials Manufacturer 1,489,800 $ 4,143,158 HUMAN RESOURCES--2.2% DIS Deutscher Industrie Service AG (Germany) Recruitment Consultancy Services 552,142 $ 12,873,299 INFORMATION SERVICES--4.7% Baycorp Advantage Limited (Australia)(a) Credit Reference Services 13,342,500 $ 28,133,195 MARKETING SERVICES--2.1% Asatsu-DK, Inc. (Japan) Advertising Services Provider 459,700 $ 11,844,399 LG Ad Inc. (Korea) Advertising & Marketing Services 43,000 754,259 ------------ 12,598,658
47
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% (CONT.) MOTORCYCLES--1.5% Ducati Motor Holding S.p.A. (Italy)(a) Motorcycle Manufacturer 5,190,000 $ 8,982,283 PUBLISHING--1.9% Recoletos Grupo de Comunicacion, S.A. (Spain) Publisher 820,000 $ 6,083,616 Matichon Public Company Limited, Foreign Shares (Thailand) Newspaper Publisher 2,039,500 5,198,801 ------------ 11,282,417 RECREATION & ENTERTAINMENT--2.0% Square Enix Co., Ltd. (Japan) Entertainment Software 382,100 $ 9,006,745 Konami Sports Corporation (Japan) Fitness Centers 183,000 2,972,554 ------------ 11,979,299 RETAIL--8.7% D.F.S. Furniture Company plc (Great Britain) Furniture Retailer & Manufacturer 2,680,000 $ 18,247,130 Carpetright plc (Great Britain) Carpet Retailer 1,174,500 17,439,803 Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 1,833,000 16,967,715 ------------ 52,654,648 BANK & THRIFTS--2.8% Jyske Bank A/S (Denmark) (a) Commercial Banking 222,400 $ 11,736,644 Vontobel Holding AG (Switzerland) Commercial Banking 203,700 4,648,994 ------------ 16,385,638 FINANCIAL SERVICES--2.8% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 49,090 $ 16,537,833 OTHER FINANCIAL--l1.9% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 2,443,000 $ 11,243,456
48
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% (CONT.) MEDICAL PRODUCTS--4.1% Ansell Limited (Australia) Protective Rubber & Plastics Products 3,704,750 $ 17,994,610 Coloplast A/S, Class B (Denmark) Healthcare Products & Services Provider 73,800 6,303,798 ------------ 24,298,408 PHARMACEUTICALS--1.9% Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 863,200 $ 11,499,126 TELECOMMUNICATIONS--0.8% Asia Satellite Telecommunications Holdings Limited (Hong Kong) Satellite Operator 2,531,000 $ 4,808,533 COMPUTER SERVICES--4.2% Morse plc (Great Britain) Business & Technology Solutions 6,318,300 $ 16,068,685 Sopra Group (France) Computer Engineering 111,930 4,755,492 Alten (France)(a) Systems Consulting & Engineering 298,141 4,273,627 ------------ 25,097,804 COMPUTER SYSTEMS--2.3% Lectra (France)(a) Manufacturing Process Systems 1,718,500 $ 13,528,891 OFFICE EQUIPMENT--4.2% Neopost SA (France) Mailroom Equipment Supplier 501,900 $ 25,287,730 AIRPORT MAINTENANCE--6.7% Kobenhavns Lufthavne A/S (Copenhagen Airports A/S - CPH) (Denmark) Airport Management & Operations 184,100 $ 21,548,371 Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico)(b) Airport Operator 1,064,000 18,726,400 ------------ 40,274,771 DIVERSIFIED CONGLOMERATES--6.2% Pargesa Holding AG (Switzerland) Diversified Operations 5,374 $ 14,327,193 Financiere Marc de Lacharriere SA (Fimalac) (France) Diversified Operations 386,364 14,152,192
49
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------- COMMON STOCKS--95.1% (CONT.) DIVERSIFIED CONGLOMERATES (CONT.) Tae Young Corp. (Korea) Heavy Construction 245,610 $ 8,451,540 Financiere Marc de Lacharriere SA (Fimalac), Warrants (France)(a) Diversified Operations 31,866 105,965 ------------ 37,036,890 ENVIRONMENTAL PRODUCTS & SERVICES--0.3% Munters AB (Sweden) Cooling & Moisture Control Systems 77,400 $ 1,871,644 INSTRUMENTS--1.6% Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 321,900 $ 9,491,941 MACHINERY & INDUSTRIAL PROCESSING--7.8% Pfeiffer Vacuum Technology AG (Germany) Vacuum Pump Manufacturer 471,140 $ 16,616,542 Alfa Laval (Sweden) Filtration & Separation Equipment 1,061,100 16,147,430 Carbone Lorraine SA (France) Electrical Systems Manufacturer 300,382 11,029,228 Andritz AG (Austria) General Industrial Machinery 68,000 3,250,524 ------------ 47,043,724 OTHER INDUSTRIAL GOODS & SERVICES--5.3% Schindler Holding AG (Switzerland)(a) Elevator & Escalator Manufacturer 76,150 $ 21,101,511 LISI (France) Industrial Fastener Manufacturer 241,813 9,366,070 Kone Oyj, Class B (Finland) Elevators 24,500 $ 1,399,510 ------------ 31,867,091 PRODUCTION EQUIPMENT--3.1% Interpump Group S.p.A. (Italy) Pump & Piston Manufacturer 3,933,500 $ 17,549,323 NSC Groupe (France) Textile Equipment Manufacturer 12,316 1,165,044 ------------ 18,714,367 TRANSPORTATION SERVICES--1.5% Mainfreight Limited (New Zealand) Logistics Services 8,935,381 $ 9,142,718 CHEMICALS--3.4% Gurit-Heberlein AG (Switzerland) Chemical Producer 29,134 $ 20,218,215 TOTAL COMMON STOCKS (COST: $408,726,274) 568,835,092
50
NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.7% U.S. GOVERNMENT BILLS--1.6% United States Treasury Bills, 0.83% - 0.925% due 1/2/2004 - 1/8/2004 $ 10,000,000 $ 9,999,065 TOTAL U.S. GOVERNMENT BILLS (COST: $9,999,065) 9,999,065 REPURCHASE AGREEMENTS--3.1% IBT Repurchase Agreement, 0.85% due 1/2/2004, repurchase price $16,000,756 collateralized by U.S. Government Agency Securities $ 16,000,000 $ 16,000,000 IBT Repurchase Agreement, 0.75% due 1/2/2004, repurchase price $2,405,970 collateralized by a U.S. Government Agency Security 2,405,870 2,405,870 TOTAL REPURCHASE AGREEMENTS (COST: $18,405,870) 18,405,870 TOTAL SHORT TERM INVESTMENTS (COST: $28,404,935) 28,404,935 Total Investments (Cost $437,131,209)--99.8% $ 597,240,027 Foreign Currencies (Cost $669,347)--0.1% 674,234 Other Assets In Excess Of Other Liabilities--0.1% 403,279 ------------- TOTAL NET ASSETS--100% $ 598,317,540 =============
(a) Non-income producing security. (b) Represents an American Depository Receipt. 51 This material must be preceded or accompanied by a prospectus. To order a prospectus, which explains management fees and expenses and the special risks of investing in the funds, visit www.oakmark.com or call 1-800-OAKMARK. Please read the prospectus carefully before investing. The discussion of investments and investment strategy of the funds represents the investments of the funds and the views of fund managers and Harris Associates L.P., the funds' investment adviser, at the time of this article, and are subject to change without notice. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than original cost. INVESTING IN VALUE STOCKS PRESENTS THE RISK THAT VALUE STOCKS MAY FALL OUT OF FAVOR WITH INVESTORS AND UNDERPERFORM GROWTH STOCKS DURING GIVEN PERIODS. THE OAKMARK SELECT FUND CLOSED TO NEW INVESTORS AS OF 5/4/01. BECAUSE THE OAKMARK SELECT FUND IS NON-DIVERSIFIED, THE PERFORMANCE OF EACH HOLDING WILL HAVE A GREATER IMPACT ON THE FUND'S TOTAL RETURN, AND MAY MAKE THE FUND'S RETURN MORE VOLATILE THAN A MORE DIVERSIFIED FUND. THE OAKMARK INTERNATIONAL SMALL CAP FUND CLOSED TO NEW INVESTORS AS OF 5/10/02. INVESTING IN FOREIGN SECURITIES REPRESENTS RISKS WHICH IN SOME WAY MAY BE GREATER THAN IN U.S. INVESTMENTS. THOSE RISKS INCLUDE: CURRENCY FLUCTUATION; DIFFERENT REGULATION, ACCOUNTING STANDARDS, TRADING PRACTICES AND LEVELS OF AVAILABLE INFORMATION; GENERALLY HIGHER TRANSACTION COSTS; AND POLITICAL RISKS. THE STOCKS OF SMALLER COMPANIES OFTEN INVOLVE MORE RISK THAN THE STOCKS OF LARGER COMPANIES. STOCKS OF SMALL COMPANIES TEND TO BE MORE VOLATILE AND HAVE A SMALLER PUBLIC MARKET THAN STOCKS OF LARGER COMPANIES. SMALL COMPANIES MAY HAVE A SHORTER HISTORY OF OPERATIONS THAN LARGER COMPANIES, MAY NOT HAVE AS GREAT AN ABILITY TO RAISE ADDITIONAL CAPITAL AND MAY HAVE A LESS DIVERSIFIED PRODUCT LINE, MAKING THEM MORE SUSCEPTIBLE TO MARKET PRESSURE. THE OAKMARK EQUITY AND INCOME FUND INVESTS IN MEDIUM AND LOWER-QUALITY DEBT SECURITIES WHICH HAVE HIGHER YIELD POTENTIAL BUT PRESENT GREATER INVESTMENT AND CREDIT RISK THAN HIGHER-QUALITY SECURITIES. 1. Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. The performance information for The Oakmark Select Fund, The Oakmark Small Cap Fund, The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap Fund does not reflect the imposition of a 2% redemption fee on shares held by an investor less than 90 days. The purpose of this redemption fee is to deter market timers. 2. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks. 3. During the period since inception (8/4/99 - 12/31/03), IPO's contributed an annualized 1.93% to the performance of the Oakmark Global Fund. As the IPO environment changes and the total net assets of the Fund grow, the impact of IPOs on performance is expected to diminish. "IPO" stands for Initial Public Offering, which is the first sale of stock by a company to the public. 4. The quoted passages are taken from "In an Uncertain World- Tough Choices from Wall Street to Washington" written by Robert Rubin and published in 2003 by Random House. 5. The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index. 6. The Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. This index is unmanaged and investors cannot actually make investments in this index. 7. The Lipper Large Cap Value Fund Index measures the performance of the 30 largest U.S. large-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 52 8. NAV stands for Net Asset Value. NAV is the dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities divided by the number of shares outstanding. 9. EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding. 10. The S&P MidCap 400 is an unmanaged broad market-weighted index of 400 stocks that are in the next tier down from the S&P 500 and that are chosen for market size, liquidity, and industry group representation. This index is unmanaged and investors cannot actually make investments in this index. 11. The Lipper Mid Cap Value Fund Index measures the performance of the 30 largest U.S. mid-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 12. The Price-Earnings Ratio ("P/E") is the most common measure of how expensive a stock is. 13. The Russell 2000 Index is an unmanaged, market-weighted index, with dividends reinvested, of 2,000 small companies, formed by taking the largest 3,000 small companies and eliminating the largest 1,000 of those companies. This index is unmanaged and investors cannot actually make investments in this index. 14. The S&P Small Cap 600 Index measures the performance of selected U.S. stocks with small market capitalizations. This index is unmanaged and investors cannot actually make investments in this index. 15. The Lipper Small Cap Value Fund Index measures the performance of the 30 largest U.S. small-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 16. The Lipper Balanced Fund Index measures the performance of the 30 largest U.S. balanced funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 17. The Lehman Govt./Corp. Bond Index is an unmanaged index that includes the Lehman Government and Lehman Corporate indices. This index is unmanaged and investors cannot actually make investments in this index. 18. The MSCI World Index is made up of 20 country sub-indexes, including the stock exchanges of the U.S., Europe, Canada, Australia and New Zealand, and the Far East. This index is unmanaged and investors cannot actually make investments in this index. 19. The Lipper Global Fund Index measures the performance of the 30 largest mutual funds that invest in securities throughout the world. This index is unmanaged and investors cannot actually make investments in this index. 20. The Morgan Stanley World Ex U.S. Index is made up of 19 country sub-indexes, excluding the U.S. This index is unmanaged and investors cannot actually make investments in this index. 21. Morgan Stanley Capital International Europe, Australasia and Far East Index ("EAFE") is an unmanaged index of companies throughout the world in proportion to world stock market capitalizations, excluding the U.S. and Canada. This index is unmanaged and investors cannot actually make investments in this index. 22. The Lipper International Fund Index reflects the net asset value weighted total return of the 30 largest international equity funds. This index is unmanaged and investors cannot actually make investments in this index. 23. The Lipper International Small Cap Average includes 109 mutual funds that invest in securities whose primary markets are outside of the U.S. This index is unmanaged and investors cannot actually make investments in this index. 53 THE OAKMARK FAMILY OF FUNDS INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with management teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: A UNIFIED EFFORT AIMED AT IDENTIFYING THE BEST VALUES IN THE MARKETPLACE. FROM THE LIST OF APPROVED STOCKS, EACH FUND MANAGER CONSTRUCTS A RELATIVELY FOCUSED PORTFOLIO, BUILT ON A STOCK-BY-STOCK BASIS FROM THE BOTTOM UP. WHO SHOULD INVEST Any investor who is seeking a disciplined value manager for the purposes of growing and diversifying a portfolio should consider one of The Oakmark Funds, keeping in mind that all equity investments should be considered long-term investments. As value investors, we recognize that patience is a virtue and believe that, over the long term, investors are rewarded for their patience. We generally hold the companies in which we invest for three to five years, a time horizon that we encourage our shareholders to consider as well. HOW TO USE VALUE FUNDS IN AN OVERALL PORTFOLIO Investment styles tend to move in cycles. One style may be in favor for a few years while the other is out of favor, and vice versa. Diversifying the stock portion of your portfolio may help reduce overall volatility--and potentially provide more consistent returns over time. INVEST Managers select stocks from the approved list for their specific funds APPROVED LIST Securities available for investment QUANTITATIVE AND QUALITATIVE RESEARCH Rigorous analysis is performed to ensure that the stock meets our strict value standards CRITERIA SCREENS Managers and research team screen for stocks that are worth further consideration UNIVERSE OF THOUSANDS OF EQUITY SECURITIES All stocks available for investment BOTTOM-UP INVESTMENT PROCESS 54 THE OAKMARK GLOSSARY BOOK VALUE - A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. A company's book value often differs substantially from economic value, especially in industries such as media. BUSINESS VALUE/INTRINSIC VALUE - The perceived or estimated actual value of a security, as opposed to its current market price or book value. Business value can be evaluated based on what a knowledgeable buyer would pay for a business if the company were sold in its entirety. GROWTH INVESTING - Investors who look for companies based on whether the stock of a company is growing earnings and/or revenue faster than the industry as a whole or the overall market. Growth investors generally expect high rates of growth to persist, and the stock, in turn, to deliver returns exceeding the market's. A growth mutual fund is generally one that emphasizes stocks believed to offer above-average growth prospects, with little to no emphasis on the stock's current price. M & A (MERGERS & ACQUISITIONS) - Merger: the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Acquisition: can also be called a takeover, and is defined as acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. MARKET CAPITALIZATION (MARKET CAP OR CAP) - The market price of an entire company on any given day, calculated by multiplying the number of shares outstanding by the price per share. MOMENTUM INVESTING - Approach to investing based on the belief that stock price trends are likely to continue. Momentum investors tend to buy stocks that have been outperforming the market and to sell those stocks when their relative performance deteriorates. Momentum investors do not consider a company's underlying value or fundamentals in their investment decisions. MULTIPLE - A ratio used to measure a stock's valuation, usually greater than 1. Sometimes used to mean price/earnings ratio. P/B OR PRICE-TO-BOOK RATIO - A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. P/E OR PRICE-TO-EARNINGS RATIO - The most common measure of a stock's valuation. It is equal to a stock's capitalization divided by its after-tax earnings over a 12-month period. The value is the same whether the calculation is done for the whole company or on a per-share basis. Equivalently, the cost an investor in a given stock must pay per dollar of current annual earnings. Also called earnings multiple. SHARE REPURCHASE - Program through which a corporation buys back its own shares in the open market, typically an indication that the corporation's management believes the stock price is undervalued. VALUE INVESTING - Investors who utilize valuation measures such as business value (including growth rate), price/earnings ratio, price/book ratio, and yield to gauge the attractiveness of a company. Managers who employ a value investment style believe that the true, underlying value of a company is not reflected in its current share price, and, over time, the price has potential to increase as the market recognizes the overall value of the business. Value stocks sell at relatively low prices in relation to their underlying business value, earnings, or book value. Stocks become undervalued for a variety of reasons, including an overall market decline, or when a specific industry falls into disfavor and investors view all companies in that industry in the same light. Consequently, an individual company's stock price may fall, even though it may be only temporarily affected by the industry's problems and its underlying value has remained unchanged. "x TIMES EARNINGS" ("12 TIMES EARNINGS") - Another way to express a stock's price-to-earnings (P/E) ratio. A stock with a P/E ratio of 12 sells at 12 times earnings. 55 [GRAPHIC] (This page has been intentionally left blank.) 56 THE OAKMARK FAMILY OF FUNDS TRUSTEES AND OFFICERS TRUSTEES Victor A. Morgenstern--CHAIRMAN Michael J. Friduss Thomas H. Hayden Christine M. Maki John R. Raitt Allan J. Reich Marv Rotter Burron W. Ruder Peter S. Voss Gary Wilner, M.D. OFFICERS Robert M. Levy--PRESIDENT John R. Raitt(a)--EXECUTIVE VICE PRESIDENT James P. Benson--VICE PRESIDENT Henry R. Berghoef--VICE PRESIDENT Kevin G. Grant--VICE PRESIDENT David G. Herro--VICE PRESIDENT Clyde S. McGregor--VICE PRESIDENT William C. Nygren--VICE PRESIDENT Vineeta Raketich--VICE PRESIDENT Janet L. Reali--VICE PRESIDENT AND SECRETARY Ann W. Regan--VICE PRESIDENT--SHAREHOLDER OPERATIONS AND ASSISTANT SECRETARY Edward A. Studzinski--VICE PRESIDENT Michael J. Welsh--VICE PRESIDENT Kristi L. Rowsell--TREASURER John J. Kane--ASSISTANT TREASURER OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT CDC IXIS Asset Management Services, Inc. Boston, Massachusetts LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT AUDITORS Deloitte & Touche LLP Chicago, Illinois FOR MORE INFORMATION: Please call 1-800-OAKMARK (1-800-625-6275) or 617-449-6274 WEBSITE www.oakmark.com (a) John R. Raitt succeeded Robert M. Levy as President of The Oakmark Funds on January 1, 2004. TO OBTAIN A PROSPECTUS, AN APPLICATION OR PERIODIC REPORTS, ACCESS OUR WEB SITE AT www.oakmark.com, OR CALL 1-800-OAKMARK (1-800-625-6275) OR (617)449-6274. This report is submitted for the general information of the shareholders of the Funds.The report is not authorized for distribution to prospective investors in the Funds unless it is accompanied or preceded by a currently effective prospectus of the Funds. No sales charge to the shareholder or to the new investor is made in offering the shares of the Funds, however, a shareholder may incur a 2% redemption fee on an exchange or redemption of shares held 90 days or less from any Fund except The Oakmark Fund or The Oakmark Equity and Income Fund. P.O. Box 219558 Kansas City, MO 64121-9558 [OAKMARK FAMILY OF FUNDS LOGO] 1-800-OAKMARK www.oakmark.com The Oakmark Funds are distributed by Harris Associates Securities L.P., member NASD. Date of first use: January 2004. -----END PRIVACY-ENHANCED MESSAGE-----