N-CSR 1 a2145844zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06279 Harris Associates Investment Trust (Exact name of Registrant as specified in charter) Two North La Salle Street, Suite 500 Chicago, Illinois 60602-3790 (Address of principal executive offices) (Zip Code) John R. Raitt Cameron S. Avery Harris Associates L.P. Bell, Boyd & Lloyd LLC Two North La Salle Street, #500 Three First National Plaza, #3100 Chicago, Illinois 60602 Chicago, Illinois 60602 (Name and address of agents for service) Registrant's telephone number, including area code: (312) 621-0600 Date of fiscal year end: 09/30/04 Date of reporting period: 09/30/04 ITEM 1. REPORTS TO SHAREHOLDERS. [GRAPHIC] THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND ANNUAL REPORT SEPTEMBER 30, 2004 ADVISED BY HARRIS ASSOCIATES L.P. [OAKMARK FAMILY OF FUNDS LOGO] THE OAKMARK FAMILY OF FUNDS 2004 ANNUAL REPORT PRESIDENT'S LETTER 1 SUMMARY INFORMATION 2 FUND EXPENSES 4 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 6 THE OAKMARK FUND Letter from the Portfolio Managers 8 Schedule of Investments 9 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 13 Schedule of Investments 14 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 16 Schedule of Investments 18 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 25 Global Diversification Chart 27 Schedule of Investments 28 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 33 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 34 International Diversification Chart 35 Schedule of Investments 36 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 42 International Diversification Chart 43 Schedule of Investments 44 FINANCIAL STATEMENTS Statements of Assets and Liabilities 50 Statements of Operations 52 Statements of Changes in Net Assets 54 Notes to Financial Statements 60 TRUSTEES AND OFFICERS 79 OAKMARK PHILOSOPHY AND PROCESS 82 THE OAKMARK GLOSSARY 83
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 DEAR FELLOW SHAREHOLDERS, World markets turned in mixed results in the third quarter. The broader stock market indices showed small gains or losses, with small and mid-cap stocks worldwide generally outperforming large caps. Our Funds also achieved mixed results in the quarter, either slightly leading or lagging behind their benchmarks. Importantly, year to date, all of our six funds have posted positive absolute returns, and most have beaten their benchmarks as well. THE ECONOMY AND THE MARKET Despite slowing economic growth, we still believe that most businesses will continue to report higher earnings. The Fed has raised short-term rates, but long rates, which we view as more important to the stock market, remain relatively unchanged. Energy prices are also a concern, but we believe they should not significantly slow growth. Yet some recent market volatility has created opportunities to buy excellent companies at attractive prices, particularly in international markets. So, we still believe that equities' prospective returns remain attractive compared to other asset classes. DON'T FORGET OUR ANALYSTS! Mutual fund manager incentives and compensation have attracted considerable attention over the past year. Listening to this debate--and the complete inattention to the role of analysts--we are reminded of how much the investment process at Oakmark differs from the industry norm. The traditional mutual fund industry investment process places the portfolio manager in a starring and a directing role. Portfolio managers are in charge. They direct the research agenda, make their own stock calls, and dominate the compensation pool. Analysts serve the portfolio managers and aspire to become a PM themselves one day, so that they can become well paid. At Oakmark, our process is research driven and team oriented. Analysts on our investment team play an equal role with portfolio managers. Their bottom-up research drives our investment agenda, and the entire investment team works together to evaluate the merits of an analyst's new idea. (Bill Nygren writes very eloquently about our team approach this quarter in his letter.) Our process depends on quality people, and we set high standards for our analyst hires. Our seasoned analysts have an average of 12 years of experience, and their experience, insight, and investment maturity give us an edge in generating superior performance. It's worth noting that research can be a very rewarding career at Oakmark. Nine of our firm's seventeen partners spend the majority of their time doing stock analysis, and analysts rank among the most highly compensated people at our firm. Establishing the correct incentives and compensation system is a key component to investment success. However, the right system has to be in place for both portfolio managers AND ANALYSTS. We have paid considerable attention to ensuring that our compensation system ties rewards to an individual's long-term contribution to the Funds' investment success. Our partnership structure, the passion that our team has for our business, and our high fund share ownership reinforce this alignment. [PHOTO OF JOHN R. RAITT] OAKMARK BOARD ELECTS A NEW CHAIRMAN After leading the Oakmark board since the inception of the Funds in 1991, Victor Morgenstern has stepped down as chairman. Gary N. Wilner, M.D., an Oakmark trustee since 1993, has been elected to serve as the new chairman. Gary brings dedication, leadership, and long tenure as an Oakmark trustee to his new position. I would like to thank Victor for his many years of service to Oakmark shareholders as Oakmark chairman; he will continue to serve as an Oakmark board member. LIQUIDATION OF THE OAKMARK SMALL CAP FUND Our goal has always been to deliver superior long-term performance to our shareholders. When we concluded recently that we could not achieve this with The Oakmark Small Cap Fund, we decided that the best step was to close and liquidate the Fund. We are committed to act with integrity and honesty with our clients and we believe that this action underlines that commitment. We completed the liquidation of the Fund on September 28. FUND DISTRIBUTION POLICY Most of Oakmark's shareholders, like us, are taxable investors. As shareholders and fiduciaries, we strive to maximize the long-term, after-tax return of our investments. Inevitably, however, we are forced to recognize taxable income--and that's a good thing! This year we plan to pay annual capital gains and income distributions in mid-December (a little later than we historically have) and will post estimates on Oakmark.com in advance of these fund payouts. Thank you for your continued investment and confidence in The Oakmark Family of Funds. We welcome your comments and questions. You can reach us via e-mail 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 THE OAKMARK EQUITY AND INCOME PERFORMANCE FOR PERIOD FUND--CLASS I SELECT FUND--CLASS I FUND--CLASS I ENDED SEPTEMBER 30, 2004(1) (OAKMX) (OAKLX) (OAKBX) --------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* -0.64% 1.00% -1.07% --------------------------------------------------------------------------------------------------------------------------- 1 YEAR 14.73% 13.64% 14.64% --------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 6.98% 7.60% 10.96% --------------------------------------------------------------------------------------------------------------------------- 5 YEAR 6.39% 14.29% 13.11% --------------------------------------------------------------------------------------------------------------------------- 10 YEAR 10.66% N/A N/A --------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 16.36% 20.21% 14.10% (8/5/91) (11/1/96) (11/1/95) --------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY Washington Washington Burlington HOLDINGS AS OF Mutual, Inc. 2.8% Mutual, Inc. 16.1% Resources Inc. 3.6% SEPTEMBER 30, 2004(2) McDonald's H&R Block, Inc. 7.5% XTO Energy, Inc. 3.1% Corporation 2.5% Yum! Brands, Inc. 6.7% First Data Corporation 2.8% First Data Corporation 2.4% First Data Corporation 6.1% General Dynamics COMPANY AND % OF TOTAL H&R Block, Inc. 2.3% Time Warner, Inc. 4.4% Corporation 2.6% NET ASSETS Yum! Brands, Inc. 2.3% Diageo plc 2.6% --------------------------------------------------------------------------------------------------------------------------- SECTOR Consumer Consumer U.S. Government ALLOCATION AS OF Discretionary 40.4% Discretionary 35.3% Securities 39.1% SEPTEMBER 30, 2004 Financials 15.3% Financials 24.3% Industrials 10.4% Consumer Staples 12.0% Industrials 12.7% Health Care 9.0% Industrials 10.2% Information Consumer SECTOR AND % OF Health Care 9.6% Technology 11.3% Discretionary 8.6% MARKET VALUE Information Health Care 11.1% Consumer Staples 8.6% Technology 8.1% Energy 4.1% Energy 8.5% Energy 3.7% Telecommunication Financials 6.4% Telecommunications Services 1.2% Information Services 0.7% Technology 6.2% Foreign Government Securities 2.4% Materials 0.8% ---------------------------------------------------------------------------------------------------------------------------
The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data call 1-800-OAKMARK. * Not annualized 2
THE OAKMARK THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL PERFORMANCE FOR PERIOD GLOBAL FUND--CLASS I FUND--CLASS I SMALL CAP FUND--CLASS I ENDED SEPTEMBER 30, 2004(1) (OAKGX) (OAKIX) (OAKEX) --------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* -2.86% -0.16% 3.69% --------------------------------------------------------------------------------------------------------------------------- 1 YEAR 16.54% 21.92% 33.94% --------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 23.20% 15.97% 25.12% --------------------------------------------------------------------------------------------------------------------------- 5 YEAR 17.65% 9.14% 12.15% --------------------------------------------------------------------------------------------------------------------------- 10 YEAR N/A 9.25% N/A --------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 15.15%(3) 11.52% 11.96% (8/4/99) (9/30/92) (11/1/95) --------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY Diageo plc 5.1% GlaxoSmithKline plc 3.9% Grupo Aeroportuario HOLDINGS AS OF First Data Diageo plc 3.5% del Sureste S.A. de SEPTEMBER 30, 2004(2) Corporation 4.8% Bank of Ireland 3.3% C.V. 3.9% Takeda Euronext NV 3.3% Neopost SA 3.8% Pharmaceutical Novartis AG 2.9% Julius Baer Holding COMPANY AND % OF TOTAL Co., Ltd. 4.3% Ltd., Zurich 3.7% NET ASSETS GlaxoSmithKline plc 4.2% Gurit-Heberlein AG 3.5% Bank of Ireland 4.0% Ansell Limited 3.4% --------------------------------------------------------------------------------------------------------------------------- SECTOR Health Care 17.2% Financials 24.1% Industrials 32.5% ALLOCATION AS OF Financials 16.8% Consumer Information SEPTEMBER 30, 2004 Information Discretionary 23.2% Technology 17.0% Technology 15.5% Consumer Staples 15.2% Consumer Consumer Staples 14.8% Health Care 12.7% Discretionary 13.0% SECTOR AND % OF Consumer Materials 9.1% Financials 10.5% MARKET VALUE Discretionary 14.0% Industrials 8.9% Materials 9.1% Industrials 9.7% Telecommunication Consumer Staples 8.7% Materials 6.2% Services 4.2% Health Care 7.1% Energy 3.9% Energy 1.9% Telecommunication Telecommunication Information Services 2.0% Services 1.8% Technology 0.5% Forward Foreign Forward Foreign Forward Foreign Currency Contracts 0.1% Currency Contracts 0.1% Currency Contracts 0.2% ---------------------------------------------------------------------------------------------------------------------------
3 FUND EXPENSES A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds. ACTUAL EXPENSES The following table provides information about actual account values and actual fund expenses for Class I of each Fund. The table shows the expenses a Class I shareholder would have paid on a $1,000 investment in each Fund from April 1, 2004 to September 30, 2004 as well as how much a $1,000 investment would be worth at the close of the period, assuming actual fund returns and expenses. A Class I shareholder can estimate expenses incurred for the period by dividing the account value at September 30, 2004 by $1,000 and multiplying the result by the number in the Expenses Paid During Period row as shown below. Certain accounts invested for 90 days or less may be charged a 2% redemption fee. Please consult the Fund's prospectus at www.oakmark.com for more information.
THE THE THE OAKMARK THE THE OAKMARK THE OAKMARK INTERNATIONAL OAKMARK OAKMARK EQUITY AND OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND ------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT VALUE $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 ------------------------------------------------------------------------------------------------------------------- ENDING ACCOUNT VALUE $ 1,015.80 $ 994.60 $ 1,007.80 $ 985.00 $ 1,016.60 $ 1,067.20 ------------------------------------------------------------------------------------------------------------------- EXPENSES PAID DURING PERIOD* $ 5.24 $ 5.04 $ 4.62 $ 6.35 $ 6.05 $ 7.70 ------------------------------------------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIO 1.04% 1.01% 0.92% 1.28% 1.20% 1.49% -------------------------------------------------------------------------------------------------------------------
* Expenses are equal to each fund's annualized expense ratio for Class I, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 366 (to reflect the one-half year period). 4 HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The following table provides information about hypothetical account values and hypothetical expenses for Class I of each Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses shareholders paid for the period. Shareholders may use this information to compare the ongoing costs of investing in a Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption fees. Therefore, the third line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
THE THE THE OAKMARK THE THE OAKMARK THE OAKMARK INTERNATIONAL OAKMARK OAKMARK EQUITY AND OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND ------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT VALUE $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 ------------------------------------------------------------------------------------------------------------------- ENDING ACCOUNT VALUE $ 1,019.80 $ 1,019.95 $ 1,020.40 $ 1,018.60 $ 1,019.00 $ 1,017.55 ------------------------------------------------------------------------------------------------------------------- EXPENSES PAID DURING PERIOD* $ 5.25 $ 5.10 $ 4.65 $ 6.46 $ 6.06 $ 7.52 ------------------------------------------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIO 1.04% 1.01% 0.92% 1.28% 1.20% 1.49% -------------------------------------------------------------------------------------------------------------------
* Expenses are equal to each fund's annualized expense ratio for Class I, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 366 (to reflect the one-half year period). 5 THE OAKMARK AND OAKMARK SELECT FUNDS At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close. [PHOTO OF BILL NYGREN] "Teamwork and intelligence win championships." Michael Jordan Following the rapid trading scandal in the mutual fund industry, many investors have recently become attracted to hedge funds, and financial services companies are showing increased interest in buying hedge fund management companies. Hedge funds, whose portfolios generally combine long and short equity positions, tend to achieve their best performance relative to the stock market during periods of declining stock prices. We believe that investors chasing recent performance are likely to be disappointed with hedge funds. First, the proliferation of hedge funds makes it much harder to argue that the industry is composed of just a handful of highly talented managers. Although some managers will continue to produce good results, as the hedge fund industry grows we believe the industry must trend toward mediocrity. Second, fee levels have stayed extraordinarily high and in many cases are increasing--in addition to a base fee that is higher than most mutual funds, hedge fund managers normally keep at least 20% of their investors' profits. And finally, most hedge funds compare themselves to the S&P 500(4), which has a negative return for the trailing five years, an unusual event that seems unlikely to recur. So, for all those reasons, we discourage mutual fund investors from experimenting with hedge funds. Having said that, the history of hedge funds includes some great investors such as Michael Steinhardt, George Soros and Julian Robertson. Following books about Steinhardt and Soros, last quarter JULIAN ROBERTSON--A TIGER IN THE LAND OF BULLS AND BEARS(5) by Daniel Strachman was published. Robertson's investment approach is certainly worthy of study, his Tiger Fund achieved an astonishing eighteen year compound annual growth rate of 32%. As an aside, one of the funniest stories in the book covers how Tiger got its name: it was suggested by Robertson's seven-year old son because that's what his father called everyone whose name he couldn't remember! The marketing department must have been glad he didn't use "dude" or "big guy." There were certainly many ways Tiger differed from Oakmark. An obvious difference was the product, a hedge fund is designed to appeal to very wealthy investors while a mutual fund appeals to a much broader group of investors. The degree of diversification was also different. Hedge funds generally have a much higher degree of concentration than mutual funds do; therefore, the success or failure of any individual investment can have a very large effect on the fund's performance. We have made a similar argument about our most concentrated Fund, Oakmark Select, relative to the more diversified Oakmark Fund. But hedge funds go a step further. By using borrowed funds, they significantly amplify the positive or negative return of each security--that's why hedge funds are only suited to wealthy investors. In some ways, you could think of a hedge fund as a concentrated mutual fund on steroids! Regarding investment philosophy, a big difference was Tiger's frequent use of big picture, or top-down, bets versus Oakmark's bottom-up, individual stock focus. The book chronicles one of Tiger's most successful bets--that the price of a commodity, copper, would fall sharply. Although Robertson was very successful with so-called "macro" investing, we don't think many investors have that ability, and most importantly, we know we don't, so we don't try. Despite these differences, what most struck me when reading the book was the important similarities between Tiger and Oakmark. Like Oakmark, Tiger believed in the ability of research to add value: "Robertson didn't operate on tips. In order for him to commit capital, the team would have to see and touch the industry first hand. It was a dirt-under-your-fingernails type of work. Robertson sent his analysts on planes and trains to get as much information as possible." Those same words could easily have been spoken by our Director of Research, Henry Berghoef. Another similarity was the way ideas were presented at Tiger: "A key part of the research model was the firm's Friday lunch meetings where ideas were presented. The analysts would gather around a table and go through ideas one story at a time, picking apart every little aspect and reviewing every angle of a potential investment opportunity to determine if it was worthy of being in the portfolio." Change that "Friday" to "Tuesday," and it would describe Oakmark's process. Robertson also was quick to react to new information. After an analyst [SIDENOTE] HIGHLIGHTS - Oakmark starts with the belief that research adds value. - Oakmark employs and hires team-oriented individuals. - MONEYBALL update - the A's are still value investing. 6 convinced him that WTD Industries was not attractive, Robertson sold his entire position. Asked to explain the flip-flop, he simply said, "I was wrong." WTD later declared bankruptcy. In previous reports, I have referenced Oakmark's belief that mistake management is as important to our performance as picking our winners. The most important similarity between Tiger and Oakmark, however, is the concept of team. After studying Tiger, the author concluded, "Non-athletes are fine, but the ones who really shine and become something on the Street are those who were part of a team, understand competition, and know the difference between winning and losing." Our Chief Investment Officer, Bob Levy, is as important to our corporate culture as Robertson was to Tiger's. Bob has often said he likes to hire individuals who enjoy the competition of team sports, but he would rather hire the ones who got cut from the team rather than the star because he knows that their competitive fire is still burning. Robertson certainly shared our belief that hiring decisions are among the most important decisions a firm makes. In fact, during Tiger's rapid growth phase, Robertson spent most of his time hiring analysts. Similarly, no analyst joins Oakmark before being interviewed by our most senior investment people. A tribute to Robertson's success is the reputation of the "Tiger Cubs"--analysts who worked for Tiger and now manage their own hedge funds. Not only are some of today's most successful hedge fund managers ex-Tiger employees, but the book claims these alumni are now responsible for 10% of all the hedge fund assets! At Oakmark, despite a handful of our people capturing most of the media's attention, the reason for our success is the depth of our team. John Raitt's role as CEO allows our investment people the luxury of focusing on investing rather than on operating the business. Our analysts scour the investment universe in search of those stocks most worthy of consideration for our portfolios. Our traders work on acquiring and disposing of our positions with minimum price impact. That allows our portfolio managers to stay focused on what matters most to performance--which stocks we own. Like a good athletic team, we all have our roles, and the results we achieve reflect the efforts of every team member. As much as we enjoy Budweiser's Leon ad campaign (ANNOUNCER: "There's no I in team" LEON: "Well, there ain't no we either"), I don't think Leon could have worked at Tiger, and I know he couldn't work at Oakmark! /s/ William C. Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com P.S. Speaking of teams, in this space last June, I wrote about the Michael Lewis book, MONEYBALL. The book highlights baseball's Oakland A's method for evaluating players. Using statistical analysis that challenges conventional baseball wisdom, the A's get far more value out of their salary dollars than do most Major League Baseball teams. The similarity between Oakland's "value investing" in baseball players and Oakmark's value investing in the stock market is striking. So, let's look at the 2004 update. In 2004, the New York Yankees had baseball's highest payroll at $183 million. The A's, at just below $60 million, were spending less than one-third what the Yankees spent. Further, two teams in the A's American League Western Division, the Anaheim Angels and the Seattle Mariners, were spending $101 million and $82 million, respectively. That's 68% and 36% more than the A's. The A's did finish 2004 an amazing twenty-eight games ahead of Seattle and went into the last week of the season ahead of Anaheim. But they fell one game short of capturing their third consecutive division title and fifth consecutive appearance in the playoffs. Despite them coming up short this year, as value investors, we have great admiration for how the A's construct their "portfolio" of players. And this October, they're saying the same thing we are saying in Chicago: "Wait 'til next year!" 7 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN AND KEVIN GRANT] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (9/30/04) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(4)
THE OAKMARK FUND (CLASS I) 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 3/31/2004 $ 72,327 $ 37,539 6/30/2004 $ 73,941 $ 38,186 9/30/2004 $ 73,467 $ 37,473
ANNUAL AVERAGE TOTAL RETURNS (AS OF 09/30/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (8/5/91) -------------------------------------------------------------------------------- OAKMARK FUND (CLASS I) -0.64% 14.73% 6.39% 10.66% 16.36% S&P 500 -1.87% 13.87% -1.31% 11.08% 10.56% Dow Jones Average(6) -2.90% 10.99% 1.43% 12.33% 12.03% Lipper Large Cap Value Index(7) -0.54% 16.69% 1.35% 10.26% 10.29%
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. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized The Oakmark Fund declined in value by 1% last quarter, slightly less than the 2% loss for the S&P 500. Strong gains by Black & Decker, Limited Brands, and Kohl's were offset by losses in Gap, Merck, and MGIC. Year-to-date, Oakmark's 3% gain slightly exceeds the 2% gain for the S&P 500. During the quarter, we sold positions in Hospira, Clorox, Boeing, and Schering Plough. Because the reasons for the sales were so different, we'll explain all four. As mentioned last quarter, we received Hospira as a spinoff from our Abbott holding. As a mid-sized business, Hospira was not consistent with The Oakmark Fund's focus on larger companies. We thought this small position was too cheap to sell last quarter, but after the stock price rose, we no longer saw it as more undervalued than the large businesses we own. Clorox and Boeing were sold for our favorite reason--the stock prices increased to our estimates of business value. Unfortunately, we can't say the same for Schering Plough. When we purchased Schering, we underestimated how rapidly their Claritin franchise would deteriorate and how severely earnings would be hit. Recently, we have enjoyed a good recovery in Schering's stock price (though not enough to eliminate our loss) and felt that management's decision to issue more stock suggested they felt their stock was now appropriately valued. We have also added three new positions: JP Morgan Chase is described below; Viacom and Coca-Cola Enterprises are described on our website. JP MORGAN CHASE (JPM--$40) JP Morgan Chase stock peaked in 2000 at $67 per share. Two years later when the stock had fallen to $15, we were not confident that management could turn things around. In July, the company completed the acquisition of Bank One, which brought not only a strong retail bank but also a great manager. Living in Chicago, we saw firsthand Jamie Dimon's success in changing the culture and lowering expenses at Bank One. Now as President and heir apparent of the combined company--JP Morgan, Chase Manhattan, Chemical, Manufacturers Hanover, Bank One, First Chicago, NBD+--we believe Mr. Dimon can achieve aggressive cost cutting goals. At twelve times trailing earnings, JPM might appear appropriately priced relative to other financial services companies; however, we believe cost reductions will produce superior earnings growth. 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 + These are the seven major banks that now operate as JP Morgan Chase. 8 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2004
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--92.5% APPAREL RETAIL--4.1% Limited Brands 6,000,000 $ 133,740,000 The Gap, Inc. 7,066,700 132,147,290 ---------------- 265,887,290 BROADCASTING & CABLE TV--7.3% Liberty Media Corporation, Class A (a) 16,199,400 $ 141,258,768 Comcast Corporation, Special Class A (a) 4,725,000 131,922,000 EchoStar Communications Corporation, Class A (a) 2,975,000 92,582,000 The DIRECTV Group, Inc. (a) 5,012,600 88,171,634 Liberty Media International, Inc., Class A (a) 579,970 19,348,959 ---------------- 473,283,361 DEPARTMENT STORES--1.9% Kohl's Corporation (a) 2,550,500 $ 122,908,595 HOME IMPROVEMENT RETAIL--2.1% The Home Depot, Inc. 3,581,500 $ 140,394,800 HOTELS, RESORTS & CRUISE LINES--1.2% Carnival Corporation (b) 1,678,300 $ 79,366,807 HOUSEHOLD APPLIANCES--2.3% The Black & Decker Corporation 1,922,200 $ 148,855,168 HOUSEWARES & SPECIALTIES--2.0% Fortune Brands, Inc. 1,745,600 $ 129,331,504 LEISURE PRODUCTS--1.1% Mattel, Inc. 3,874,300 $ 70,241,059 MOTORCYCLE MANUFACTURERS--1.8% Harley-Davidson, Inc. 1,962,500 $ 116,651,000 MOVIES & ENTERTAINMENT--6.0% Time Warner Inc. (a) 8,997,700 $ 145,222,878 The Walt Disney Company 5,950,000 134,172,500 Viacom Inc., Class B 3,400,000 114,104,000 ---------------- 393,499,378 PUBLISHING--2.1% Gannett Co., Inc. 884,500 $ 74,085,720 Knight-Ridder, Inc. 916,000 59,952,200 ---------------- 134,037,920 RESTAURANTS--4.7% McDonald's Corporation 5,700,000 $ 159,771,000 Yum! Brands, Inc. 3,674,000 149,384,840 ---------------- 309,155,840
9
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--92.5% (CONT.) SPECIALTY STORES--0.8% Toys 'R' Us, Inc. (a)(d) 3,125,000 $ 55,437,500 BREWERS--2.1% Anheuser-Busch Companies, Inc. 2,700,000 $ 134,865,000 DISTILLERS & VINTNERS--1.7% Diageo plc (c) 2,221,000 $ 112,005,030 HYPERMARKETS & SUPER CENTERS--2.0% Wal-Mart Stores, Inc. 2,500,000 $ 133,000,000 PACKAGED FOODS & MEATS--4.3% General Mills, Inc. 2,506,000 $ 112,519,400 Kraft Foods Inc., Class A 2,645,000 83,899,400 H.J. Heinz Company 2,310,000 83,206,200 ---------------- 279,625,000 SOFT DRINKS--1.0% Coca-Cola Enterprises, Inc. 3,500,000 $ 66,150,000 INTEGRATED OIL & GAS--1.8% ConocoPhillips 1,435,335 $ 118,917,505 OIL & GAS EXPLORATION & PRODUCTION--1.6% Burlington Resources Inc. 2,506,800 $ 102,277,440 ASSET MANAGEMENT & CUSTODY BANKS--1.1% The Bank of New York Company, Inc. 2,500,000 $ 72,925,000 DIVERSIFIED BANKS--1.8% U.S. Bancorp 4,100,000 $ 118,490,000 LIFE & HEALTH INSURANCE--1.7% AFLAC Incorporated 2,767,000 $ 108,494,070 OTHER DIVERSIFIED FINANCIAL SERVICES--3.2% Citigroup Inc. 2,900,000 $ 127,948,000 JP Morgan Chase & Co. 2,000,000 79,460,000 ---------------- 207,408,000 THRIFTS & MORTGAGE FINANCE--6.4% Washington Mutual, Inc. 4,687,300 $ 183,179,684 Fannie Mae 1,995,000 126,483,000 MGIC Investment Corporation 1,640,600 109,181,930 ---------------- 418,844,614 BIOTECHNOLOGY--1.1% Chiron Corporation (a) 1,659,900 $ 73,367,580
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NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--92.5% (CONT.) HEALTH CARE DISTRIBUTORS--1.0% AmerisourceBergen Corp 1,200,000 $ 64,452,000 HEALTH CARE EQUIPMENT--2.0% Baxter International Inc. 4,000,000 $ 128,640,000 PHARMACEUTICALS--4.8% Abbott Laboratories 2,837,300 $ 120,188,028 Bristol-Myers Squibb Company 4,650,000 110,065,500 Merck & Co., Inc. 2,600,000 85,800,000 ---------------- 316,053,528 AEROSPACE & DEFENSE--3.4% Raytheon Company 3,000,000 $ 113,940,000 Honeywell International, Inc. 3,050,000 109,373,000 ---------------- 223,313,000 BUILDING PRODUCTS--2.2% Masco Corporation 4,233,600 $ 146,186,208 DIVERSIFIED COMMERCIAL SERVICES--2.3% H&R Block, Inc. (d) 3,029,300 $ 149,708,006 ENVIRONMENTAL SERVICES--1.5% Waste Management, Inc. 3,474,300 $ 94,987,362 COMPUTER HARDWARE--1.5% Sun Microsystems, Inc. (a) 24,370,000 $ 98,454,800 DATA PROCESSING & OUTSOURCED SERVICES--4.7% First Data Corporation 3,615,000 $ 157,252,500 SunGard Data Systems, Inc. (a) 3,203,700 76,151,949 Automatic Data Processing, Inc. 1,800,000 74,376,000 ---------------- 307,780,449 OFFICE ELECTRONICS--1.3% Xerox Corporation (a) 5,972,400 $ 84,091,392 INTEGRATED TELECOMMUNICATION SERVICES--0.6% Sprint Corporation 1,961,800 $ 39,491,034 TOTAL COMMON STOCKS (COST: $4,874,825,235) 6,038,577,240
11
NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--8.3% U.S. GOVERNMENT BILLS--6.0% United States Treasury Bills, 1.28% - 1.72% due 10/7/2004 - 1/6/2005 $ 390,000,000 $ 389,158,935 TOTAL U.S. GOVERNMENT BILLS (COST: $389,182,987) 389,158,935 REPURCHASE AGREEMENTS--2.3% IBT Repurchase Agreement, 1.62% dated 9/30/2004 due 10/1/2004, repurchase price $147,506,638 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $154,875,000 $ 147,500,000 $ 147,500,000 IBT Repurchase Agreement, 1.27% dated 9/30/2004 due 10/1/2004, repurchase price $2,212,884 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $2,323,446 2,212,806 2,212,806 ---------------- TOTAL REPURCHASE AGREEMENTS (COST: $149,712,806) 149,712,806 TOTAL SHORT TERM INVESTMENTS (COST: $538,895,793) 538,871,741 Total Investments (Cost $5,413,721,028)--100.8% $ 6,577,448,981 Other Liabilities In Excess Of Other Assets--(0.8)% (51,554,257) ---------------- TOTAL NET ASSETS--100% $ 6,525,894,724 ================
(a) Non-income producing security. (b) Represents a foreign domiciled corporation. (c) Represents an American Depository Receipt. (d) See footnote number six in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN AND HENRY BERGHOEF] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/04) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(4)
THE OAKMARK SELECT FUND (CLASS I) 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 3/31/2004 $ 43,214 $ 17,866 6/30/2004 $ 42,553 $ 18,174 9/30/2004 $ 42,980 $ 17,835
ANNUAL AVERAGE TOTAL RETURNS (AS OF 09/30/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/96) --------------------------------------------------------------------------------- OAKMARK SELECT FUND (CLASS I) 1.00% 13.64% 14.29% 20.21% S&P 500 -1.87% 13.87% -1.31% 7.58% S&P MidCap 400(8) -2.10% 17.55% 10.50% 13.30% Lipper Mid Cap Value Index(9) -0.95% 22.69% 10.79% 10.09%
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. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized The Oakmark Select Fund increased in value by 1% during the quarter, bringing the calendar year-to-date increase to 2%. Five stocks in the portfolio had double-digit increases: Limited Brands, Sprint, Moody's, Burlington Resources, and Toys R Us. We are pleased with continuing good results at these businesses. Earnings at Burlington are increasing due to higher energy prices, and Toys R Us' decision to explore selling their toy division highlighted its real estate value. We can't tie the price increases for the others to any specific news. On the downside, our double-digit losers were Gap, Office Depot and Janus. Modest sales and earnings disappointments have not significantly changed our favorable long-term outlooks. No new positions were added, and no existing holdings were eliminated during the quarter. Our largest holding, Washington Mutual (WM), was up slightly after a difficult second quarter. As we previously noted, WM reported a large shortfall in its mortgage banking division. That negative news made WM our worst performer in the second quarter. We did not sell our shares in WM because we had confidence that their retail banking business alone was worth at least the current stock price. Last month, we were pleased to have management report that cost-cutting in mortgage banking is progressing well and that retail banking continues to show good growth. We have kept WM as our largest position because of our confidence that current business value exceeds the stock price, and because of our confidence that business value is likely to grow at an above-average rate. Shifting gears, this is the time of year when our taxable shareholders typically begin asking about capital gains distributions. The financial statements that appear later in this report show that including all gains taken through September 30, we have a very small capital loss carry forward. Fund distributions are based on October fiscal years, so trading this month will determine whether or not a distribution is necessary. We believe it is probable that no distribution will be needed for 2004, but if one is needed, at least it will be small. Given that our loss carry forward has been virtually exhausted, we can't promise the same for 2005. What we can commit to is that we will continue to manage the Fund to maximize the long-term, after-tax return of our investments. Best wishes, /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 13 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2004
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--91.9% APPAREL RETAIL--7.8% Limited Brands 10,965,000 $ 244,409,850 The Gap, Inc. 10,060,000 188,122,000 ---------------- 432,531,850 LEISURE PRODUCTS--3.8% Mattel, Inc. 11,770,900 $ 213,406,417 MOVIES & ENTERTAINMENT--4.4% Time Warner Inc. (a) 15,240,000 $ 245,973,600 PUBLISHING--3.1% Knight-Ridder, Inc. 2,606,500 $ 170,595,425 RESTAURANTS--6.7% Yum! Brands, Inc. 9,207,000 $ 374,356,620 SPECIALTY STORES--6.6% Toys 'R' Us, Inc. (a)(b) 11,872,700 $ 210,621,698 Office Depot, Inc. (a) 10,419,900 156,611,097 ---------------- 367,232,795 OIL & GAS EXPLORATION & PRODUCTION--3.8% Burlington Resources Inc. 5,183,600 $ 211,490,880 ASSET MANAGEMENT & CUSTODY BANKS--2.1% Janus Capital Group, Inc. 8,444,300 $ 114,926,923 SPECIALIZED FINANCE--4.1% Moody's Corporation 3,123,600 $ 228,803,700 THRIFTS & MORTGAGE FINANCE--16.1% Washington Mutual, Inc. 22,917,400 $ 895,611,992 BIOTECHNOLOGY--3.7% Chiron Corporation (a) 4,641,100 $ 205,136,620 HEALTH CARE SERVICES--3.6% IMS Health Incorporated 8,303,441 $ 198,618,308 PHARMACEUTICALS--3.0% Bristol-Myers Squibb Company 6,990,200 $ 165,458,034 DIVERSIFIED COMMERCIAL SERVICES--11.7% H&R Block, Inc. (b) 8,459,800 $ 418,083,316 The Dun & Bradstreet Corporation (a)(b) 3,934,900 230,978,630 ---------------- 649,061,946
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SHARES HELD/ NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- COMMON STOCKS--91.9% (CONT.) DATA PROCESSING & OUTSOURCED SERVICES--6.1% First Data Corporation 7,815,400 $ 339,969,900 OFFICE ELECTRONICS--4.2% Xerox Corporation (a) 16,746,400 $ 235,789,312 INTEGRATED TELECOMMUNICATION SERVICES--1.1% Sprint Corporation 3,034,600 $ 61,086,498 TOTAL COMMON STOCKS (COST: $3,361,595,896) 5,110,050,820 SHORT TERM INVESTMENTS--7.3% U.S. GOVERNMENT BILLS--4.8% United States Treasury Bills, 1.505% - 1.695% due 10/21/2004 - 1/6/2005 $ 270,000,000 $ 269,250,856 TOTAL U.S. GOVERNMENT BILLS (COST: $269,261,510) 269,250,856 REPURCHASE AGREEMENTS--2.5% IBT Repurchase Agreement, 1.62% dated 9/30/2004 due 10/1/2004, repurchase price $138,006,210 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $144,900,000 $ 138,000,000 $ 138,000,000 IBT Repurchase Agreement, 1.27% dated 9/30/2004 due 10/1/2004, repurchase price $765,690 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $803,947 765,664 765,664 ---------------- TOTAL REPURCHASE AGREEMENTS (COST: $138,765,664) 138,765,664 TOTAL SHORT TERM INVESTMENTS (COST: $408,027,174) 408,016,520 Total Investments (Cost $3,769,623,070)--99.2% $ 5,518,067,340 Other Assets In Excess Of Other Liabilities--0.8% 42,965,749 ---------------- TOTAL NET ASSETS--100% $ 5,561,033,089 ================
(a) Non-income producing security. (b) See footnote number six in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15 THE OAKMARK SELECT FUND THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. MCGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. MCGREGOR AND EDWARD A. STUDZINSKI] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/04) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(10)
THE OAKMARK EQUITY AND LIPPER INCOME FUND BALANCED (CLASS I) 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 3/31/2004 $ 32,200 $ 19,410 6/30/2004 $ 32,803 $ 19,384 9/30/2004 $ 32,452 $ 19,420
ANNUAL AVERAGE TOTAL RETURNS (AS OF 09/30/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) --------------------------------------------------------------------------------- OAKMARK EQUITY & INCOME FUND (CLASS I) -1.07% 14.64% 13.11% 14.10% Lipper Balanced Fund Index 0.18% 10.58% 3.08% 7.72% S&P 500(4) -1.87% 13.87% -1.31% 9.31% Lehman Govt./Corp. Bond(11) 3.56% 3.33% 7.73% 6.94%
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. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized QUARTER AND ANNUAL REVIEW Fiscal 2004 was a successful year for The Oakmark Equity and Income Fund, though the fourth quarter proved disappointing. The quarterly result for the Fund was -1%, which lagged behind the breakeven outcome of the Lipper Balanced Fund Index. Yearly returns were more favorable, as the Fund earned 15% contrasted to the Lipper Balanced Fund Index's 11%. In an odd coincidence, the Fund's return for the year is essentially equal to the annualized return of the Fund since inception. The loss for the quarter derived from unexpectedly bad earnings announcements from an amazing 22% of the equity holdings in the portfolio at the start of the quarter. Offenders included companies from a variety of sectors, especially consumer products (Nestle, Dean Foods, Cool Brands, Diageo), technology (Synopsys, Mentor Graphics, Imation), and distribution (Office Depot, Cardinal Health). It is a surprising development that at this point--in what has been a broad-based economic expansion--so many companies are experiencing earnings difficulty. Clearly, managers have had trouble offsetting the cost increases of raw materials and employee health care. We do not center our investment process on our ability to correctly forecast future earnings. Earnings outcomes can have a depressingly large impact on Fund returns in any given quarter, but in the long run, our ability to identify mis-priced securities is what we believe will determine our success. CHANGE IN DURATION The word "duration" in the title above refers to a mathematical term used to measure sensitivity to changes in interest rates. It is primarily used to describe risk in a fixed income portfolio. Two years ago we began to shorten the maturity structure of the Fund's fixed income holdings. Shortening maturities reduces the price sensitivity (I.E. duration) of a bond to changes in the investing environment. Over this time we (and many of you, given the extraordinary flow of e-mail to us on this subject) judged that economic recovery and fiscal deficits would lead to higher rates of inflation, higher interest rates, and lower bond prices. Generally, we choose to take on risk in the equity portion of the portfolio because potential return of equities is unbounded. With an equity security, if events play out better than expected, the stock price goes up. With bonds, good fundamental outcomes simply increase the likelihood that you will receive that which already is contractually owed to you. In other words, bonds typically do not reward successful analysis with any excess return. Accordingly, our fixed income approach 16 is always risk averse. Given our perception of abnormal risk in the bond market, by June 30 of this year we had reduced the average maturity and duration of the Fund's fixed income portfolio by half of what it had been in early 2002. This was not cost-free, however, as the lower duration also meant lower interest income to the Fund. In the quarter just ended we reversed course and extended the duration from 1.7 to 2.8 years. Many factors influenced our thinking. Inflation has remained quiescent, economic growth is moderate, and foreign governments appear to have a limitless appetite for our country's securities. Most important was our observation we had become part of a very narrow consensus that believed long term bonds were unattractive. To our knowledge a consensus has never correctly anticipated a bear market in anything. Accordingly, we have moved back to a more neutral position in our fixed income holdings. We have also modestly increased the proportion of the fixed income portfolio invested in sovereign debt (foreign government issued securities) both to increase our interest income and to provide some hedge against possible weakness in the dollar. LOW VOLATILITY? Statisticians can demonstrate that almost all types of investments exhibit considerable volatility in their record of annual returns. For example, stocks are often described as having an expected return of approximately 10%, but the standard deviation (a measure of probability) around that 10% is more than 20%! Simply put, equity returns are very volatile from one year to the next and even within individual years. This calendar year has been an exception, however, as indices of stock prices have stayed confined within a narrow band. Beneath this placid surface, prices of individual stocks continue to be volatile, and this has been true for some of your Fund's most successful holdings. Given that this report closes our fiscal year, we will briefly take note of the year's exceptional contributors. The Fund's four energy stocks (Burlington Resources, Cabot Oil & Gas, Saint Mary Land & Exploration, and XTO Energy) were large contributors to total return in fiscal 2004. While we could wax eloquent as to the individual attributes of each of these enterprises, the fact of the matter is that rising prices for oil and natural gas lifted the share prices of virtually every company in this area. Aerospace (General Dynamics, Raytheon, Rockwell Collins, and Textron) turned in a strong performance as did a potpourri of industrial names (Honeywell, Monsanto, Plum Creek Timber, and Rockwell Automation). In contrast to other successful years, fiscal 2004 saw the Fund benefit from only one takeover, Apogent Technologies. During the year we sold the Fund's positions in four issues that had contributed substantially to the overall return: Edwards Lifesciences, JC Penney, Laboratory Corporation of America, and Novell. Many investors currently profess a belief that returns to equities for the next three to five years will be positive but dull--say, between 5 and 8%. Calendar 2004 may well produce a return to stock market indices that falls within that range. While we would prefer to have a differing point of view, we have no argument with this emerging consensus. Realize, however, that three strong up years and two down years could easily produce a 5-year return of 5-8%. We believe that the low volatility of 2004 is more likely to be the exception than the norm. In closing, we once again thank you, our shareholders, for entrusting us with the management of 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 [SIDENOTE] HIGHLIGHTS - We focus on underlying fundamentals rather than short-term earnings announcements. - We reversed course from early this year and have extended our bond duration slightly. - We believe that the low volatility of 2004 is more likely to be the exception than the norm. 17 THE OAKMARK EQUITY AND INCOME FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2004
NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--52.8% COMMON STOCKS--52.8% APPAREL RETAIL--1.8% The TJX Companies, Inc. 6,550,200 $ 144,366,408 AUTO PARTS & EQUIPMENT--0.4% Delphi Corporation 3,830,800 $ 35,588,132 BROADCASTING & CABLE TV--1.2% The DIRECTV Group, Inc. (a) 5,026,722 $ 88,420,040 Cox Communications Inc., Class A (a) 200,000 6,626,000 ---------------- 95,046,040 HOUSEHOLD APPLIANCES--0.5% The Stanley Works 962,100 $ 40,918,113 PUBLISHING--0.6% Tribune Company 1,127,700 $ 46,404,855 RESTAURANTS--1.6% Darden Restaurants, Inc. (b) 3,500,000 $ 81,620,000 McDonald's Corporation 1,500,000 42,045,000 Triarc Companies, Inc., Class B 500,000 5,735,000 Triarc Companies, Inc., Class A 250,000 2,857,500 ---------------- 132,257,500 SPECIALTY STORES--0.4% Office Depot, Inc. (a) 2,230,000 $ 33,516,900 DISTILLERS & VINTNERS--2.6% Diageo plc (c) 4,100,000 $ 206,763,000 HYPERMARKETS & SUPER CENTERS--1.7% Costco Wholesale Corporation 3,200,000 $ 132,992,000 PACKAGED FOODS & MEATS--3.7% Nestle SA (b) 3,250,000 $ 186,615,000 Dean Foods Company (a) 2,108,000 63,282,160 American Italian Pasta Company, Class A 825,000 21,573,750 Kraft Foods Inc., Class A 330,000 10,467,600 CoolBrands International, Inc. (a)(d) 1,002,900 7,352,057 Del Monte Foods Company (a) 608,000 6,377,920 ---------------- 295,668,487 OIL & GAS EXPLORATION & PRODUCTION--8.1% Burlington Resources Inc. 7,150,000 $ 291,720,000 XTO Energy, Inc. 7,699,416 250,077,032 St. Mary Land & Exploration Company 1,450,000 57,724,500 Cabot Oil & Gas Corporation 1,125,000 50,512,500 ---------------- 650,034,032
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NAME SHARES HELD MARKET VALUE ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--52.8% (CONT.) OTHER DIVERSIFIED FINANCIAL SERVICES--1.7% Citigroup Inc. 3,100,000 $ 136,772,000 PROPERTY & CASUALTY INSURANCE--2.8% SAFECO Corporation 4,000,000 $ 182,600,000 The Progressive Corporation 500,000 42,375,000 ---------------- 224,975,000 REAL ESTATE INVESTMENT TRUSTS--1.2% Plum Creek Timber Company, Inc. 2,657,044 $ 93,076,251 REINSURANCE--0.4% RenaissanceRe Holdings Ltd. (d) 600,000 $ 30,948,000 BIOTECHNOLOGY--0.9% MedImmune, Inc. (a) 1,910,000 $ 45,267,000 Techne Corporation (a) 750,000 28,635,000 ---------------- 73,902,000 HEALTH CARE DISTRIBUTORS--0.7% AmerisourceBergen Corp 1,000,000 $ 53,710,000 HEALTH CARE EQUIPMENT--2.4% Hospira, Inc. (a) 3,750,000 $ 114,750,000 Varian Inc. (a) 1,649,400 62,462,778 CONMED Corporation (a) 462,600 12,166,380 ---------------- 189,379,158 HEALTH CARE SERVICES--1.7% Caremark Rx, Inc. (a) 4,250,000 $ 136,297,500 PHARMACEUTICALS--2.6% Abbott Laboratories 4,000,000 $ 169,440,000 Watson Pharmaceuticals, Inc. (a) 1,375,000 40,507,500 ---------------- 209,947,500 AEROSPACE & DEFENSE--6.6% General Dynamics Corporation 2,060,300 $ 210,356,630 Raytheon Company 3,599,700 136,716,606 Rockwell Collins, Inc. 3,107,900 115,427,406 Honeywell International, Inc. 1,889,500 67,757,470 ---------------- 530,258,112 COMMERCIAL PRINTING--1.9% R.R. Donnelley & Sons Company 4,909,500 $ 153,765,540 CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS--0.0% Alamo Group, Inc. 97,400 $ 1,822,354
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SHARES HELD/ NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--52.8% (CONT.) DIVERSIFIED COMMERCIAL SERVICES--0.9% ChoicePoint Inc. (a) 1,500,000 $ 63,975,000 Watson Wyatt & Company Holdings 237,000 6,233,100 ---------------- 70,208,100 ELECTRICAL COMPONENTS & EQUIPMENT--0.4% Rockwell Automation, Inc. 915,000 $ 35,410,500 APPLICATION SOFTWARE--1.0% The Reynolds and Reynolds Company, Class A 1,715,100 $ 42,311,517 Mentor Graphics Corporation (a)(e) 3,640,000 39,912,600 ---------------- 82,224,117 COMPUTER STORAGE & PERIPHERALS--0.5% Imation Corp. 1,215,000 $ 43,241,850 DATA PROCESSING & OUTSOURCED SERVICES--3.9% First Data Corporation 5,250,000 $ 228,375,000 Ceridian Corporation (a) 4,800,000 88,368,000 ---------------- 316,743,000 SYSTEMS SOFTWARE--0.1% Sybase, Inc. (a) 800,000 $ 11,032,000 FERTILIZERS & AGRICULTURAL CHEMICALS--0.4% Monsanto Company 818,100 $ 29,795,202 PAPER PRODUCTS--0.1% Schweitzer-Mauduit International, Inc. 347,400 $ 11,255,760 TOTAL COMMON STOCKS (COST: $3,446,439,182) 4,248,319,411 TOTAL EQUITY AND EQUIVALENTS (COST: $3,446,439,182) 4,248,319,411 FIXED INCOME--41.7% PREFERRED STOCKS--0.0% THRIFTS & MORTGAGE FINANCE--0.0% Fidelity Capital Trust I, Preferred, 8.375% $ 43,500 $ 442,395 TOTAL PREFERRED STOCKS (COST: $435,000) 442,395 CORPORATE BONDS--2.4% APPAREL RETAIL--0.1% The Gap, Inc., 6.90% due 9/15/2007 $ 9,187,000 $ 9,990,863
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NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- FIXED INCOME--41.7% (CONT.) BROADCASTING & CABLE TV--0.5% Cablevision Systems New York Group, 144A, 8.00% due 4/15/2012 (f) $ 20,000,000 $ 20,900,000 Liberty Media Corporation, 8.25% due 2/1/2030, Debenture 12,900,000 14,317,839 CSC Holdings Inc., 7.875% due 12/15/2007 3,000,000 3,183,750 ---------------- 38,401,589 MOVIES & ENTERTAINMENT--0.6% Time Warner Inc., 5.625% due 5/1/2005 $ 50,000,000 $ 50,896,450 PUBLISHING--0.1% PRIMEDIA Inc., 144A, 8.00% due 5/15/2013 (f) $ 10,000,000 $ 9,512,500 SPECIALTY STORES--0.2% Toys 'R' Us, Inc., 7.875% due 4/15/2013 $ 20,000,000 $ 19,950,000 DRUG RETAIL--0.2% NeighborCare, Inc., 6.875% due 11/15/2013 $ 10,000,000 $ 10,400,000 Rite Aid Corporation, 7.625% due 4/15/2005, Senior Notes 4,900,000 4,973,500 ---------------- 15,373,500 HEALTH CARE DISTRIBUTORS--0.2% Omnicare, Inc., 6.125% due 6/1/2013 $ 20,000,000 $ 20,100,000 INDUSTRIAL MACHINERY--0.0% Columbus McKinnon Corporation New York, 8.50% due 4/1/2008 $ 3,000,000 $ 2,925,000 OFFICE ELECTRONICS--0.2% Xerox Corporation, 7.125% due 6/15/2010 $ 15,000,000 $ 16,012,500 PAPER PACKAGING--0.3% Sealed Air Corporation, 144A, 5.625% due 7/15/2013 (f) $ 20,000,000 $ 20,562,800 MULTI-UTILITIES & UNREGULATED POWER--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 $ 172,075 $ 182,212 TOTAL CORPORATE BONDS (COST: $198,900,538) 203,907,414 GOVERNMENT AND AGENCY SECURITIES--39.3% CANADIAN GOVERNMENT BONDS--2.0% Canada Government, 3.00% due 12/1/2005 CAD 100,000,000 $ 79,308,131 Canada Government, 3.00% due 6/1/2006 CAD 100,000,000 79,132,985 ---------------- 158,441,116 DANISH GOVERNMENT BONDS--0.2% Kingdom of Denmark, 4.00% due 11/15/2004 DKK 100,000,000 $ 16,740,680
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NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- FIXED INCOME--41.7% (CONT.) SWEDISH GOVERNMENT BONDS--0.1% Kingdom of Sweden, 3.50% due 4/20/2006 SEK 40,000,000 $ 5,554,014 U.S. GOVERNMENT NOTES--35.3% United States Treasury Notes, 5.00% due 8/15/2011 $ 400,000,000 $ 429,890,800 United States Treasury Notes, 2.75% due 8/15/2007 400,000,000 398,906,400 United States Treasury Notes, 2.25% due 4/30/2006 400,000,000 398,843,600 United States Treasury Notes, 2.375% due 8/31/2006 400,000,000 398,515,600 United States Treasury Notes, 1.625% due 2/28/2006 400,000,000 395,922,000 United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed 254,641,500 272,058,469 United States Treasury Notes, 1.875% due 12/31/2005 200,000,000 198,976,600 United States Treasury Notes, 3.00% due 2/15/2009 200,000,000 197,992,200 United States Treasury Notes, 4.00% due 2/15/2014 100,000,000 99,226,600 United States Treasury Notes, 2.50% due 5/31/2006 50,000,000 50,021,500 ---------------- 2,840,353,769 U.S. GOVERNMENT AGENCIES--1.7% Federal Home Loan Mortgage Corporation, 2.75% due 9/8/2009 $ 32,490,000 $ 32,577,950 Federal Home Loan Mortgage Corporation, 3.00% due 8/17/2009 10,000,000 10,055,240 Federal Home Loan Mortgage Corporation, 3.00% due 11/17/2006 10,000,000 10,010,160 Federal Home Loan Mortgage Corporation, 2.375% due 9/27/2007 10,000,000 10,003,080 Federal Home Loan Mortgage Corporation, 2.00% due 4/27/2007 10,000,000 9,984,010 Fannie Mae, 3.00% due 10/6/2009 10,000,000 9,961,840 Federal Home Loan Mortgage Corporation, 3.50% due 9/28/2012 8,660,000 8,600,272 Fannie Mae, 3.50% due 10/14/2010 7,550,000 7,544,994 Fannie Mae, 3.20% due 12/30/2008 6,975,000 6,869,894 Federal Home Loan Bank, 3.00% due 12/30/2009 5,000,000 5,074,165 Federal Home Loan Mortgage Corporation, 3.00% due 1/7/2011 4,900,000 4,902,876 Federal Home Loan Bank, 4.52% due 8/26/2009 4,825,000 4,898,499 Fannie Mae, 5.125% due 5/4/2012 4,013,000 4,021,463 Federal Home Loan Bank, 2.25% due 2/22/2007 4,000,000 3,998,392 Federal Home Loan Bank, 3.125% due 7/10/2009 4,000,000 3,892,292 Fannie Mae, 4.125% due 9/14/2012 2,300,000 2,303,984 Federal Home Loan Bank, 3.875% due 12/15/2004 1,000,000 1,004,000 ---------------- 135,703,111 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $3,137,918,256) 3,156,792,690 TOTAL FIXED INCOME (COST: $3,337,253,794) 3,361,142,499
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NAME PAR VALUE MARKET VALUE ----------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--5.5% U.S. GOVERNMENT BILLS--3.9% United States Treasury Bills, 1.31% - 1.655% (b) due 10/14/2004 - 12/23/2004 $ 320,000,000 $ 319,431,269 TOTAL U.S. GOVERNMENT BILLS (COST: $319,452,894) 319,431,269 REPURCHASE AGREEMENTS--1.1% IBT Repurchase Agreement, 1.62% dated 9/30/2004 due 10/1/2004, repurchase price $85,503,847 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $89,775,000 $ 85,500,000 $ 85,500,000 IBT Repurchase Agreement, 1.27% dated 9/30/2004 due 10/1/2004, repurchase price $1,200,513 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,260,494 1,200,471 1,200,471 ---------------- TOTAL REPURCHASE AGREEMENTS (COST: $86,700,471) 86,700,471 GOVERNMENT AND AGENCY SECURITIES--0.5% CANADIAN GOVERNMENT BILLS--0.5% Canada Treasury Bills due 3/24/2005 (g) CAD 50,000,000 $ 39,128,626 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $36,862,945) 39,128,626 TOTAL SHORT TERM INVESTMENTS (COST: $443,016,310) 445,260,366 Total Investments (Cost $7,226,709,286)--100.0% $ 8,054,722,276
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SHARES SUBJECT TO CALL/ NAME SHARES SUBJECT TO PUT MARKET VALUE ----------------------------------------------------------------------------------------------------- CALL OPTIONS WRITTEN--0.0% RESTAURANTS--0.0% Darden Restaurants, Inc., October 22.50 Calls (650,000) $ (650,000) TOTAL CALL OPTIONS WRITTEN (PREMIUMS RECEIVED: $(426,990))--0.0% $ (650,000) PUT OPTIONS WRITTEN--0.0% RESTAURANTS--0.0% Darden Restaurants, Inc., October 20 Puts (650,000) $ (32,500) TOTAL PUT OPTIONS WRITTEN (PREMIUMS RECEIVED: $(521,987))--0.0% $ (32,500) Other Assets In Excess Of Other Liabilities--0.0% 2,517,906 ---------------- TOTAL NET ASSETS--100% $ 8,056,557,682 ================
(a) Non-income producing security. (b) A portion of this security has been segregated to cover written option contracts. (c) Represents an American Depository Receipt. (d) Represents a foreign domiciled corporation. (e) See footnote number six in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (f) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. (g) Zero coupon bond. Key to abbreviations: CAD: Canadian Dollar DKK: Danish Krone SEK: Swedish Krona SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 THE OAKMARK GLOBAL FUND REPORT FROM CLYDE S. MCGREGOR AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. MCGREGOR AND MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (9/30/04) AS COMPARED TO THE MSCI WORLD INDEX(12)
THE OAKMARK GLOBAL FUND MSCI WORLD (CLASS I) 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 3/31/2004 $ 21,029 $ 9,121 6/30/2004 $ 21,323 $ 9,201 9/30/2004 $ 20,714 $ 9,109
ANNUAL AVERAGE TOTAL RETURNS
SINCE TOTAL RETURN (AS OF 09/30/04) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (8/4/99) -------------------------------------------------------------------------------- OAKMARK GLOBAL FUND (CLASS I) -2.86% 16.54% 17.65% 15.15%(3) MSCI World -1.00% 17.10% -1.62% -1.79% Lipper Global Fund Index(13) -1.11% 16.49% 0.79% 0.57%
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. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized FELLOW SHAREHOLDERS, The Oakmark Global Fund lost 3% for the three-month period ending September 30, 2004, compared with 1% declines for both the MSCI World Index and the Lipper Global Fund Index. More importantly however, since inception the Fund has returned 15% annualized compared to a 2% decline in the MSCI World Index and 1% return in the Lipper Global Fund Index. CURRENT ENVIRONMENT In general, the past quarter was a fairly quiet period for share prices around the world, even if it was not so quiet in economic and political news. As mentioned in last quarter's letter, volatility in financial markets remains very low, which seems puzzling given world events and the tremendous amounts of money continuing to pour into hedge funds. One would think that these funds' focus on short-term performance and high portfolio turnover would lead to sharper price swings. Yet, this lack of volatility is a global phenomenon, as highlighted in a recent breakfast we had with the CFO of Euronext, one of the Fund's largest holdings. Euronext's results have been adversely affected by decreased volatility in derivative and equity prices. SIGNIFICANT MOVERS Our underperformance was a result of weakness in a few specific positions, including Synopsys Inc., Cardinal Health, and Nestle S.A. Synopsys, a leading player in the oligopolistic electronic design automation (EDA) industry, shocked investors (ourselves included) with a forecast of significantly lower revenues for the remainder of fiscal 2004 as well as for all of 2005. EDA software moves forward in a step function. Synopsys holds a leading position in ASIC, a design system that was considered state of the art during the past decade. However, ASIC is moving out of favor, as semiconductor manufacturing technology moves to sub-100 nanometer line widths. While Synopsys supplies many products used in the development of the new chips, it is not as competitive in that sector. Perhaps more troubling is the serious demand slowdown occurring throughout the EDA industry. We have maintained that the EDA industry occupies a favored position because its customers will continue to order the industry's offerings despite shrinking end-user demand. The industry's performance this year has cast doubt on this thesis. We will continue to monitor this situation carefully. 25 Cardinal Health, another U.S. holding, announced a mildly disappointing earnings report and a reduced forecast for its fiscal 2005 (6/30 year). This along with the disclosure of some potential accounting issues caused significant declines in its share price. Cardinal's primary business is the distribution of pharmaceuticals. This business is now evolving rapidly in the U.S. as the pharmaceutical manufacturers transition to a model where they no longer attempt to flood the market shortly before a product goes off patent. Cardinal and other distributors had profited significantly from this sort of activity, but they are now moving to a fee-for-service business model. Clearly this transition has proven problematic for Cardinal, although the company still reported an increase in profit. Subsequent to its earnings report, Cardinal announced the resignation of the company's Chief Financial Officer and his replacement by a former General Motors executive. Our conversations with him suggest that any accounting issues should prove minor and quickly fixed. Nestle's price decline for the quarter was prompted by the release of first half 2004 sales results, which were hurt by decreased ice cream and beverage demand caused by colder than usual weather in the U.S. and Europe. Despite this one-off effect, organic growth was still strong at almost 5%, outperforming its competitors. We continue to be impressed with management's focus on increasing efficiency and believe that Nestle is an excellent franchise at a very cheap price. We also had a number of strong positive contributors this quarter, including Burlington Resources and Lab Corp of America in the U.S., Australia's Ansell Ltd., Grupo Televisa in Mexico, and GlaxoSmithKline plc in the UK. Burlington has continued to benefit from strong gas prices and remains very well positioned. Ansell reported excellent results during the quarter, and free cash flow continues to be very strong--so strong in fact that it has prompted management to announce a tender offer for 10% of outstanding shares. This amount is in addition to the 5+% already repurchased in 2004. PORTFOLIO CHANGES We did some buying and selling of positions in the United States during the quarter. We sold our positions in Fannie Mae, Interpublic Group, and Liberty Media International, and we initiated a position in Tribune Company and a small holding in United Stationers. We sold Fannie Mae because it was a small position and we felt the proceeds could be better deployed in more undervalued opportunities. We sold our holding in Interpublic due to concerns about management's strategy to improve profitability. Liberty Media International was a small spin-off from our existing holding in Liberty Media Corporation, Class A. We initiated a new position in Tribune Company. Tribune is a large media conglomerate based here in Chicago. Approximately, two-thirds of the company's income derives from newspapers (Los Angeles, Chicago, New York, Florida), and one-third comes from 25 television stations. The stock has fallen substantially because of issues with subscriber accounting and because of a desultory media climate in most of the company's local markets. This decline afforded us an attractive entry point for the stock. Geographic composition remains relatively stable from last quarter, with roughly 35% of the Fund in U.S. stocks, 13% in the UK, 34% in other European stocks, 15% in Pacific Rim, and 3% in Mexico. LOOKING FORWARD We remain excited about the prospects for equities in the Oakmark Global Fund, and we thank you for your continued confidence. /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 [SIDENOTE] HIGHLIGHTS - Market volatility remains very low, puzzling given tumultuous world events. - We continue to focus on growing companies with attractive valuations and strong managements. - Price declines of high-quality companies afford us attractive entry points for their stocks. 26 THE OAKMARK GLOBAL FUND GLOBAL DIVERSIFICATION--SEPTEMBER 30, 2004 [CHART]
% OF FUND EQUITY MARKET VALUE --------------------------------------------------------- - EUROPE 47.2% Great Britain 13.2% Switzerland 10.7% * France 6.5% * Netherlands 6.5% * Ireland 4.1% * Italy 3.8% * Germany 2.4% - UNITED STATES 34.6% - PACIFIC RIM 14.6% Japan 7.4% Australia 4.6% Korea 2.6% - LATIN AMERICA 3.0% Mexico 3.0% - OTHER 0.6% Israel 0.6%
* Euro currency countries comprise 23.3% of the Fund. 27 THE OAKMARK GLOBAL FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2004
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.5% APPAREL RETAIL--2.4% The TJX Companies, Inc. (United States) Discount Apparel & Home Fashion Retailer 1,501,000 $ 33,082,040 APPAREL, ACCESSORIES & LUXURY GOODS--2.4% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 3,236,100 $ 32,298,519 BROADCASTING & CABLE TV--3.7% Grupo Televisa S.A (Mexico) (b) Television Production & Broadcasting 566,500 $ 29,871,545 Liberty Media Corporation, Class A (United States) (a) Broadcast Services & Programming 2,356,000 20,544,320 --------------- 50,415,865 MOTORCYCLE MANUFACTURERS--0.2% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 1,790,000 $ 2,373,154 MOVIES & ENTERTAINMENT--3.7% Vivendi Universal SA (France) (a) Multimedia 1,430,500 $ 36,703,098 Time Warner Inc. (United States) (a) Motion Picture Production, Distribution, & Other Services 833,000 13,444,620 --------------- 50,147,718 PUBLISHING--1.3% Tribune Company (United States) Publishing & Broadcast Services 417,000 $ 17,159,550 DISTILLERS & VINTNERS--5.1% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 5,517,500 $ 69,084,176 HOUSEHOLD PRODUCTS--2.3% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 456,800 $ 31,814,841 PACKAGED FOODS & MEATS--6.3% Nestle SA (Switzerland) Food & Beverage Manufacturer 227,200 $ 52,183,746 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 4,383,000 33,872,613 --------------- 86,056,359
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NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.5% (CONT.) SOFT DRINKS--0.7% Lotte Chilsung Beverage Co., Ltd. (Korea) (c) Soft Drinks, Juices & Sports Drinks Manufacturer 13,430 $ 9,645,341 OIL & GAS EXPLORATION & PRODUCTION--3.8% Burlington Resources Inc. (United States) Oil & Natural Gas Exploration & Production 1,260,000 $ 51,408,000 ASSET MANAGEMENT & CUSTODY BANKS--2.6% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 129,300 $ 35,564,769 DIVERSIFIED BANKS--7.4% Bank of Ireland (Ireland) Commercial Bank 4,029,000 $ 54,367,910 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 2,260,000 31,295,375 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 863,600 15,164,643 --------------- 100,827,928 DIVERSIFIED CAPITAL MARKETS--0.4% Credit Suisse Group (Switzerland) (a) Investment Services & Insurance 190,700 $ 6,102,951 INVESTMENT BANKING & BROKERAGE--1.0% Daiwa Securities Group Inc. (Japan) Stock Broker 2,062,000 $ 13,081,354 SPECIALIZED FINANCE--3.8% Euronext NV (Netherlands) (c) Stock Exchange 1,814,000 $ 51,686,605 THRIFTS & MORTGAGE FINANCE--1.2% Washington Mutual, Inc. (United States) Thrift 415,000 $ 16,218,200 HEALTH CARE DISTRIBUTORS--2.0% Cardinal Health, Inc. (United States) Wholesale Drug Distributor 607,500 $ 26,590,275
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NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.5% (CONT.) HEALTH CARE SERVICES--2.9% Laboratory Corporation of America Holdings (United States) (a) Medical Laboratory & Testing Services 892,000 $ 38,998,240 HEALTH CARE SUPPLIES--2.2% Ansell Limited (Australia) Protective Rubber & Plastics Products 4,708,100 $ 30,301,153 PHARMACEUTICALS--9.8% Takeda Pharmaceuticals Company Ltd. (Japan) Pharmaceuticals & Food Supplements 1,281,000 $ 58,214,042 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 2,614,200 56,701,057 Sanofi-Aventis (France) Pharmaceuticals 247,185 17,953,561 --------------- 132,868,660 AIRPORT SERVICES--0.7% Grupo Aeroportuario del Sureste S.A. de C.V (Mexico) (b)(c) Airport Operator 463,000 $ 10,232,300 DIVERSIFIED COMMERCIAL SERVICES--4.6% Equifax Inc. (United States) Credit Reporting & Collection 1,367,000 $ 36,034,120 Meitec Corporation (Japan) (c) Software Engineering Services 760,000 27,353,783 --------------- 63,387,903 EMPLOYMENT SERVICES--1.2% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 4,815,400 $ 16,054,929 ENVIRONMENTAL SERVICES--2.4% Waste Management, Inc. (United States) Waste Management Services 1,175,000 $ 32,124,500 OFFICE SERVICES & SUPPLIES--0.5% United Stationers Inc. (United States) (a) Business Products Distributor 150,000 $ 6,510,000
30
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.5% (CONT.) APPLICATION SOFTWARE--2.5% Fair Isaac Corporation (United States) Computer Services 725,800 $ 21,193,360 Synopsys, Inc. (United States) (a) Electronic Design Automation 803,000 12,711,490 --------------- 33,904,850 DATA PROCESSING & OUTSOURCED SERVICES--9.7% First Data Corporation (United States) Data Processing & Management 1,495,750 $ 65,065,125 eFunds Corporation (United States) (a) Electronic Debit Payment Services 2,295,000 42,664,050 Ceridian Corporation (United States) (a) Data Management Services 1,348,000 24,816,680 --------------- 132,545,855 ELECTRONIC EQUIPMENT MANUFACTURERS--0.5% Orbotech, Ltd. (Israel) (a)(c) Optical Inspection Systems 412,700 $ 7,218,123 OFFICE ELECTRONICS--2.3% Neopost SA (France) Mailroom Equipment Supplier 494,750 $ 31,812,074 DIVERSIFIED CHEMICALS--2.6% Akzo Nobel N.V (Netherlands) Chemical Producer 992,300 $ 35,086,131 SPECIALTY CHEMICALS--3.5% Lonza Group AG, Registered Shares (Switzerland) (c) Industrial Organic Chemicals 710,400 $ 32,205,332 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 25,300 15,421,378 --------------- 47,626,710 WIRELESS TELECOMMUNICATION SERVICES--1.8% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 162,390 $ 24,749,844 TOTAL COMMON STOCKS (COST: $1,130,220,796) 1,326,978,917
31
NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--1.2% REPURCHASE AGREEMENTS--1.2% IBT Repurchase Agreement, 1.62% dated 9/30/2004 due 10/1/2004, repurchase price $15,000,675 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $15,750,000 $ 15,000,000 $ 15,000,000 IBT Repurchase Agreement, 1.27% dated 9/30/2004 due 10/1/2004, repurchase price $1,456,118 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,528,870 1,456,067 1,456,067 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $16,456,067) 16,456,067 TOTAL SHORT TERM INVESTMENTS (COST: $16,456,067) 16,456,067 Total Investments (Cost $1,146,676,863)--98.7% $ 1,343,434,984 Foreign Currencies (Cost $734,547)--0.1% $ 740,230 Other Assets In Excess Of Other Liabilities--1.2% 16,846,426 --------------- TOTAL NET ASSETS--100% $ 1,361,021,640 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number six in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 32 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS FELLOW SHAREHOLDERS, Your Oakmark International and International Small Cap Funds continued to perform satisfactorily in Q3 2004 with a loss of less than 1% for the International Fund and a 4% return for International Small Cap while the MSCI World ex U.S. Index14 was flat. More importantly Oakmark International's return is 12% since its inception versus 6% for the Index and Oakmark International Small Cap's return is 12% since its inception versus 5% for the Index. A PLEASING EARNINGS SEASON Though share prices have had an extremely lackluster summer, we happily report that, from an operational perspective, the companies in The Oakmark International Funds' portfolios are doing well in our opinion. With industrial production rising throughout the world and consumer spending remaining strong, companies across most industrial sectors are posting what we consider to be very robust operating results. These results are the reason that we are so optimistic about share prices going forward: given low valuations around the world, we believe that share prices should rise if these earnings conditions stay intact. And, if "the market" does not respond by buying shares, we believe even more stock buybacks may occur from the companies we own. Many of these companies are taking advantage of low equity prices by "de-capitalizing"--or, buying back their own shares. Diageo, BP, Associated British Ports, Takeda , Euronext, Givaudan, and Swatch are just some of the examples of companies we own who are currently involved in stock buy backs. Five years ago, this would have been a rarity, which shows that foreign companies are not only becoming more concerned about returns but that they also understand their own share price does not always reflect reality. GLOBALIZATION IS WORKING Remember all the messy protests surrounding The World Trade Organization and The World Bank meetings? Though it is not perfectly clear what the protestors were rallying against, a common theme of anti "globalization" was heard. We believe globalization is triggering global prosperity. Consider the boom today in "old economy" industries like steel, coal, mining, shipping, and construction equipment. An industry once believed to be dead--the Great Lakes iron ore trade--has awakened, with iron again being shipped en masse from the iron range of Northern Minnesota to the steel mills of Northern Indiana. What is causing this? China and India are now becoming wealthy enough to actually be consumers as well as producers. This ultimately translates into a higher level of global aggregate demand. And as long as any company or economy is competitive, there will be benefits for both consumers and producers. Yes, we have to watch that this expansion in economic activity does not strain our environment, but overall, we believe this expansion is great for the global economy and will lead to a higher level of global employment and higher living standards. /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 [SIDENOTE] HIGHLIGHTS - We believe solid operational performance by our companies is not yet reflected in their share prices. - With low valuations worldwide, we believe share prices should rise if earnings conditions stay intact. - Companies continue to take advantage of low equity prices through share buybacks. 33 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO AND MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (9/30/04) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(14)
THE OAKMARK INTERNATIONAL MSCI WORLD FUND EX (CLASS I) 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 3/31/2004 $ 36,419 $ 21,063 6/30/2004 $ 37,083 $ 21,084 9/30/2004 $ 37,024 $ 21,124
ANNUAL AVERAGE TOTAL RETURNS
SINCE TOTAL RETURN (AS OF 09/30/03) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (9/30/92) ---------------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND (CLASS I) -0.16% 21.92% 9.14% 9.25% 11.52% MSCI World ex. U.S. 0.19% 22.32% -0.42% 4.32% 6.43% MSCI EAFE(15) -0.28% 22.08% -0.88% 4.01% 6.19% Lipper International Fund Index(16) -0.17% 19.69% 0.84% 5.31% 7.53%
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. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized The Oakmark International Fund had a loss of less than 1% for the quarter, slightly worse than the relevant indices. For the past twelve months, the Fund is up 22%. Individual securities that contributed significantly to performance during the quarter were Mexican media company Grupo Televisa and South Korean beverage company Lotte Chilsung. The most significant detractors from quarterly performance were Swiss food company Nestle and UK food company Cadbury Schweppes. Televisa experienced higher-than-expected growth in profits and free cash flow during the quarter, on top of exceptional election-year earnings in 2003, and management has raised its guidance for the year. Management has also begun to return substantial amounts of free cash flow to its shareholders. Lotte Chilsung saw exceptional revenue growth and margin expansion during the first half of the year, despite a very sluggish consumer environment in Korea, and it has continued to gain market share. Nestle's price decline for the quarter was prompted by the release of first half 2004 sales results, which were hurt by decreased ice cream and beverage demand caused by colder than usual weather in the U.S. and Europe. Despite this one-off effect, organic growth was still strong at almost 5%, outperforming the competition. We continue to be impressed with management's focus on efficiency, and we continue to believe Nestle is an excellent franchise at a very cheap price. Both Nestle and Cadbury have been affected by commodity price volatility. At the start of the year inflation occurred in raw material inputs, and now the pressure has shifted to packaging materials. In our view, these temporary fluctuations will not harm either company's long-term intrinsic value. Recent new positions added to the Fund include UK bank Lloyds TSB and UK-based mobile operator Vodafone. With approximately 20% of the market share, Lloyds is the largest UK retail bank, which we were able to buy for less than 10x estimated 2005 net earnings. In addition, we purchased Vodafone, the world's largest cellular operator, at less than 8x estimated 2005 EBIT.(17) 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 34 THE OAKMARK INTERNATIONAL FUND INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2004 [CHART]
% OF FUND EQUITY MARKET VALUE --------------------------------------------------------- - EUROPE 78.8% Great Britain 28.3% Switzerland 15.7% * France 11.0% * Germany 7.6% * Netherlands 7.5% * Italy 3.9% * Ireland 3.4% * Finland 1.4% - PACIFIC RIM 18.2% Japan 7.0% Korea 4.4% Australia 4.3% Singapore 1.7% Hong Kong 0.8% - LATIN AMERICA 2.5% Mexico 2.5% - OTHER 0.5% Israel 0.5%
* Euro currency countries comprise 34.8% of the Fund. 35 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2004
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.4% ADVERTISING--4.4% Publicis Groupe (France) Advertising & Media Services 3,835,100 $ 109,941,905 Aegis Group plc (Great Britain) Media Services 43,844,900 77,063,550 --------------- 187,005,455 APPAREL RETAIL--0.8% Giordano International Limited (Hong Kong) Pacific Rim Clothing Retailer & Manufacturer 61,424,300 $ 33,874,274 APPAREL, ACCESSORIES & LUXURY GOODS--1.6% Swatch Group AG, Bearer Shares (Switzerland) Watch Manufacturer 513,000 $ 69,418,969 Swatch Group AG, Registered Shares (Switzerland) Watch Manufacturer 24,700 681,372 --------------- 70,100,341 AUTOMOBILE MANUFACTURERS--2.8% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 2,903,400 $ 119,522,729 BROADCASTING & CABLE TV--2.4% Grupo Televisa S.A (Mexico) (b) Television Production & Broadcasting 1,811,300 $ 95,509,849 British Sky Broadcasting Group plc (Great Britain) Television Production & Broadcasting 1,080,000 9,349,376 --------------- 104,859,225 MOVIES & ENTERTAINMENT--2.0% Vivendi Universal SA (France) (a) Multimedia 3,260,300 $ 83,651,248 PUBLISHING--4.2% Reed Elsevier plc (Great Britain) Publisher 11,996,300 $ 105,860,630 John Fairfax Holdings Limited (Australia) Newspaper Publisher 27,564,100 74,452,440 --------------- 180,313,070 SPECIALTY STORES--2.3% Signet Group plc (Great Britain) Jewelry Retailer 48,376,200 $ 100,587,181
36
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.4% (CONT.) TEXTILES--0.6% Chargeurs SA (France) (c) Wool, Textile Production & Trading 790,182 $ 26,730,782 TIRES & RUBBER--1.1% Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 884,300 $ 45,003,976 BREWERS--1.4% Heineken Holding NV, Class A (Netherlands) Brewer 1,631,800 $ 43,917,723 Heineken NV (Netherlands) Brewer 497,500 14,998,276 --------------- 58,915,999 DISTILLERS & VINTNERS--4.4% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 12,023,000 $ 150,539,021 Pernod-Ricard SA (France) Manufactures Wines, Spirits, & Fruit Juices 299,000 39,752,507 --------------- 190,291,528 HOUSEHOLD PRODUCTS--2.0% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 1,251,000 $ 87,128,647 PACKAGED FOODS & MEATS--5.4% Nestle SA (Switzerland) Food & Beverage Manufacturer 519,300 $ 119,273,852 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 14,165,200 109,471,215 --------------- 228,745,067 SOFT DRINKS--1.4% Lotte Chilsung Beverage Co., Ltd. (Korea) (c) Soft Drinks, Juices & Sports Drinks Manufacturer 83,400 $ 59,897,351 INTEGRATED OIL & GAS--1.9% BP p.l.c. (Great Britain) Oil & Natural Gas Exploration & Production 6,294,100 $ 60,217,921 Total SA (France) Oil & Natural Gas Exploration & Production 100,000 20,396,680 --------------- 80,614,601
37
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.4% (CONT.) DIVERSIFIED BANKS--15.0% Bank of Ireland (Ireland) Commercial Bank 10,462,900 $ 141,187,890 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 7,348,800 101,762,589 Lloyds TSB Group plc (Great Britain) Commercial Bank 10,056,200 78,672,770 BNP Paribas SA (France) Commercial Banking 1,156,000 74,761,294 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 8,395,368 68,273,257 UniCredito Italiano S.p.A (Italy) Banking Services 12,586,700 63,508,598 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 2,938,400 51,597,717 Sanpaolo IMI S.p.A (Italy) Banking Services 3,933,600 44,504,510 Kookmin Bank (Korea) (a) Commercial Banking 623,668 19,741,814 --------------- 644,010,439 DIVERSIFIED CAPITAL MARKETS--1.5% Credit Suisse Group (Switzerland) (a) Investment Services & Insurance 2,004,200 $ 64,140,194 INVESTMENT BANKING & BROKERAGE--0.8% Daiwa Securities Group Inc. (Japan) Stock Broker 5,342,000 $ 33,889,716 REINSURANCE--0.2% Hannover Rueckversicherung AG (Germany) Reinsurance 220,000 $ 7,141,325 SPECIALIZED FINANCE--5.6% Euronext NV (Netherlands) (c) Stock Exchange 4,946,200 $ 140,932,903 Deutsche Boerse AG (Germany) Electronic Trading Systems 1,935,200 98,005,232 --------------- 238,938,135 HEALTH CARE EQUIPMENT--1.3% Olympus Corporation (Japan) Optical Equipment Manufacturer 2,925,000 $ 56,492,843
38
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.4% (CONT.) PHARMACEUTICALS--10.8% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 7,688,600 $ 166,762,966 Novartis AG (Switzerland) Pharmaceuticals 2,693,900 125,911,484 Takeda Pharmaceuticals Company Ltd. (Japan) Pharmaceuticals & Food Supplements 2,651,100 120,477,164 Sanofi-Aventis (France) Pharmaceuticals 721,008 52,368,311 --------------- 465,519,925 AIRPORT SERVICES--0.1% Grupo Aeroportuario del Sureste S.A. de C.V (Mexico) (b)(c) Airport Operator 242,000 $ 5,348,200 DIVERSIFIED COMMERCIAL SERVICES--1.7% Meitec Corporation (Japan) (c) Software Engineering Services 2,052,500 $ 73,873,211 EMPLOYMENT SERVICES--1.8% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 23,687,200 $ 78,975,020 INDUSTRIAL CONGLOMERATES--0.0% Haw Par Corporation Limited (Singapore) Healthcare & Leisure Products 58,338 $ 171,761 INDUSTRIAL MACHINERY--2.6% Metso Corporation (Finland) Paper & Pulp Machinery 4,523,200 $ 58,111,455 Enodis plc (Great Britain) (a)(c) Food Processing Equipment 33,585,320 50,967,402 --------------- 109,078,857 MARINE PORTS & SERVICES--2.3% Associated British Ports Holdings plc (Great Britain) Port Operator 12,131,399 $ 97,050,949 ELECTRONIC EQUIPMENT MANUFACTURERS--0.5% Orbotech, Ltd. (Israel) (a)(c) Optical Inspection Systems 1,237,700 $ 21,647,373 DIVERSIFIED CHEMICALS--2.5% Akzo Nobel N.V (Netherlands) Chemical Producer 3,052,300 $ 107,924,417
39
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.4% (CONT.) FERTILIZERS & AGRICULTURAL CHEMICALS--1.6% Syngenta AG (Switzerland) (a) Crop Protection Products 738,500 $ 70,576,213 SPECIALTY CHEMICALS--4.5% Lonza Group AG, Registered Shares (Switzerland) (c) Industrial Organic Chemicals 2,267,700 $ 102,804,100 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 151,100 92,101,590 --------------- 194,905,690 WIRELESS TELECOMMUNICATION SERVICES--3.9% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 651,130 $ 99,238,658 Vodafone Group Plc (Great Britain) Mobile Telecommunications 24,050,500 57,742,845 Vodafone Group Plc (Great Britain) (b) Mobile Telecommunications 606,000 14,610,660 --------------- 171,592,163 TOTAL COMMON STOCKS (COST: $3,353,796,432) $ 4,098,517,905
40
NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--3.7% U.S. GOVERNMENT BILLS--0.9% United States Treasury Bills, 1.53%-1.545% due 10/14/2004 - 10/28/2004 $ 40,000,000 $ 39,965,892 TOTAL U.S. GOVERNMENT BILLS (COST: $39,965,892) 39,965,892 REPURCHASE AGREEMENTS--2.8% IBT Repurchase Agreement, 1.62% dated 9/30/2004 due 10/1/2004, repurchase price $119,005,355 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $124,950,000 $ 119,000,000 $ 119,000,000 IBT Repurchase Agreement, 1.27% dated 9/30/2004 due 10/1/2004, repurchase price $1,357,594 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,425,423 1,357,546 1,357,546 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $120,357,546) 120,357,546 TOTAL SHORT TERM INVESTMENTS (COST: $160,323,438) 160,323,438 Total Investments (Cost $3,514,119,870)--99.1% $ 4,258,841,343 Foreign Currencies (Cost $2,153,973)--0.1% $ 2,170,628 Other Assets In Excess Of Other Liabilities--0.8% 35,098,327 --------------- TOTAL NET ASSETS100% $ 4,296,110,298 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number six in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 41 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO AND MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/04) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(14)
THE OAKMARK INTERNATIONAL SMALL CAP MSCI WORLD EX FUND (CLASS I) U.S. INDEX 10/31/95 $ 10,000 $ 10,000 12/31/95 $ 9,630 $ 10,684 3/31/96 $ 10,970 $ 11,006 6/30/96 $ 11,570 $ 11,186 9/30/96 $ 11,590 $ 11,195 12/31/96 $ 12,038 $ 11,418 3/31/97 $ 12,080 $ 11,241 6/30/97 $ 13,181 $ 12,699 9/30/97 $ 12,672 $ 12,652 12/31/97 $ 9,642 $ 11,677 3/31/98 $ 11,429 $ 13,394 6/30/98 $ 9,892 $ 13,499 9/30/98 $ 8,211 $ 11,513 12/31/98 $ 10,529 $ 13,868 3/31/99 $ 13,118 $ 14,086 6/30/99 $ 15,317 $ 14,493 9/30/99 $ 15,439 $ 15,114 12/31/99 $ 16,190 $ 17,741 3/31/2000 $ 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 3/31/2004 $ 25,685 $ 14,783 6/30/2004 $ 26,436 $ 14,798 9/30/2004 $ 27,411 $ 14,826
ANNUAL AVERAGE TOTAL RETURNS
SINCE TOTAL RETURN (AS OF 09/30/04) INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) -------------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND (CLASS I) 3.69% 33.94% 12.15% 11.96% MSCI World ex. U.S. 0.19% 22.32% -0.42% 4.51% Lipper International Small Cap Average(18) -0.06% 23.81% 7.16% 10.08%
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. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized The Oakmark International Small Cap Fund gained 4% for the quarter, outperforming our benchmark indices. For the past twelve months, your Fund is up 34%. Strong performers for the quarter were Mexican airport operator Grupo Aeroportuario del Sureste ("Asur") and three of our Australasian holdings: latex manufacturer Ansell Ltd., and credit services company Baycorp Advantage--both headquartered in Australia--and Fletcher Building in New Zealand. Asur enjoyed significant profit growth because of strong, double-digit passenger volume growth and increased per-passenger fees. Ansell shares reacted favorably to strong half-year results that exceeded management's guidance and authorization of an additional 10% share repurchase. Both Baycorp and Fletcher Building reported very strong half-year results during the period. The most significant detractor from quarterly performance was Swiss specialty materials producer Gurit-Heberlein. While Gurit-Heberlein showed solid organic growth, competition and currency hurt its margins for the period. However, we remain optimistic about Gurit's opportunities during an aerospace recovery, and the recently renewed tax credits for windfarms should bolster demand for Gurit's specialty materials, which are used in the blades of wind turbines. PORTFOLIO COMPOSITION New positions initiated during the quarter include Swiss textile machinery manufacturer Saurer AG, two Korean regional banks Pusan Bank and Daegu Bank, and the Turkish holding company Dogan Sirketler. Long-time shareholders of Oakmark International Fund also possessing a superb memory may recognize Saurer, as it was a successful investment for us over seven years ago. Also during the quarter we sold our position in DFS Furniture at a substantial profit. The company is to be taken private in a buyout led by founder and current chairman Graham Kirkham. Geographically, our portfolio weightings remain very similar to last quarter with Europe and the UK representing around 70% of investments, 26% in the Pacific Rim, and 4% in Latin America. We continue to like the quality and price attractiveness of the portfolio. 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 42 THE OAKMARK INTERNATIONAL SMALL CAP FUND INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2004 [CHART]
% OF FUND EQUITY MARKET VALUE --------------------------------------------------------- - EUROPE 70.2% Switzerland 16.8% * France 13.2% Great Britain 10.7% * Italy 8.1% Denmark 6.8% * Spain 3.7% * Germany 3.3% * Finland 3.1% Turkey 2.5% Sweden 1.7% * Greece 0.3% - PACIFIC RIM 25.7% Australia 6.8% Japan 6.8% Korea 5.9% New Zealand 3.2% Hong Kong 2.0% Thailand 0.6% Philippines 0.4% - LATIN AMERICA 4.1% Mexico 4.1%
* Euro currency countries comprise 31.7% of the Fund. 43 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2004
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% ADVERTISING--3.0% Asatsu-DK, Inc. (Japan) Advertising Services Provider 459,700 $ 12,659,768 G2R Inc. (Korea) Advertising & Marketing Services 487,420 9,185,422 --------------- 21,845,190 APPAREL, ACCESSORIES & LUXURY GOODS--2.4% Bulgari S.p.A (Italy) Jewelry Manufacturer & Retailer 1,785,300 $ 17,818,530 HOME FURNISHINGS--0.4% Royal Doulton plc (Great Britain) (a)(b) Tableware & Giftware 22,373,000 $ 2,787,116 HOME IMPROVEMENT RETAIL--2.1% Carpetright plc (Great Britain) Carpet Retailer 813,700 $ 15,584,667 MOTORCYCLE MANUFACTURERS--0.5% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 3,015,650 $ 3,998,101 PHOTOGRAPHIC PRODUCTS--1.5% Vitec Group plc (Great Britain) Photo Equipment & Supplies 1,956,607 $ 11,292,009 PUBLISHING--2.5% Tamedia AG (Switzerland) (a) TV Broadcasting & Publishing 139,354 $ 11,415,120 Matichon Public Company Limited, Foreign Shares (Thailand) (b) Newspaper Publisher 2,039,500 4,189,909 Recoletos Grupo de Comunicacion, S.A (Spain) Publisher 295,000 2,260,052 --------------- 17,865,081 AGRICULTURAL PRODUCTS--2.0% Geest plc (Great Britain) Fresh Produce Distributor 1,562,400 $ 14,948,043 BREWERS--4.0% Davide Campari - Milano S.p.A. (Italy) Soft Drinks, Wines, & Spirits Producer 301,500 $ 15,197,759 Kook Soon Dang Brewery Co., Ltd. (Korea) Wine & Spirits Manufacturer 759,176 8,900,457 Hite Brewery Co., Ltd. (Korea) Brewer 68,000 4,995,918 --------------- 29,094,134
44
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) DISTILLERS & VINTNERS--1.9% Baron de Ley, S.A (Spain) (a) Wines & Spirits Manufacturer 337,037 $ 14,042,293 PACKAGED FOODS & MEATS--0.4% Alaska Milk Corporation (Philippines) (b) Milk Producer 49,394,000 $ 2,636,690 ASSET MANAGEMENT & CUSTODY BANKS--3.7% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 97,500 $ 26,817,981 DIVERSIFIED BANKS--2.0% Jyske Bank A/S (Denmark) (a) Commercial Banking 222,400 $ 14,494,410 MULTI-SECTOR HOLDINGS--2.8% Pargesa Holding AG (Switzerland) Diversified Operations 5,754 $ 17,559,589 Eurazeo (France) Investment Company 39,500 2,802,647 --------------- 20,362,236 OTHER DIVERSIFIED FINANCIAL SERVICES--0.2% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 157,000 $ 1,185,794 REGIONAL BANKS--1.1% Pusan Bank (Korea) Commercial Banking 859,000 $ 5,184,585 Daegu Bank (Korea) Commercial Banking 562,400 3,203,946 --------------- 8,388,531 SPECIALIZED FINANCE--0.3% Athens Stock Exchange S.A (Greece) (a) Exchange Services 293,000 $ 2,332,186 HEALTH CARE EQUIPMENT--0.0% Golden Meditech Company Limited (China) Medical Instruments & Supplies 296,000 $ 62,258 HEALTH CARE SUPPLIES--4.7% Ansell Limited (Australia) Protective Rubber & Plastics Products 3,906,150 $ 25,139,833 Coloplast A/S, Class B (Denmark) Healthcare Products & Services Provider 101,500 9,820,775 --------------- 34,960,608
45
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) PHARMACEUTICALS--2.0% Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 810,000 $ 14,613,497 AIR FREIGHT & LOGISTICS--1.7% Mainfreight Limited (New Zealand) (b) Logistics Services 8,935,381 $ 12,417,454 AIRPORT SERVICES--7.1% Grupo Aeroportuario del Sureste S.A. de C.V (Mexico) (b)(c) Airport Operator 1,288,400 $ 28,473,640 Kobenhavns Lufthavne A/S (Copenhagen Airports A/S - CPH) (Denmark) Airport Management & Operations 151,700 23,145,018 --------------- 51,618,658 CONSTRUCTION & ENGINEERING--1.3% Tae Young Corp. (Korea) Heavy Construction 283,560 $ 9,825,483 DIVERSIFIED COMMERCIAL SERVICES--1.7% Prosegur, Compania de Seguridad SA (Spain) Security & Transportation Services 564,200 $ 9,304,483 Konami Sports Corporation (Japan) Fitness Centers 149,400 2,736,115 --------------- 12,040,598 ELECTRICAL COMPONENTS & EQUIPMENT--3.2% Pfeiffer Vacuum Technology AG (Germany) Vacuum Pump Manufacturer 397,840 $ 15,338,602 Carbone Lorraine SA (France) (a) Electrical Systems Manufacturer 210,000 8,161,781 Carbone Lorraine SA, Rights (France) (a) Electrical Systems Manufacturer 210,000 345,276 --------------- 23,845,659 EMPLOYMENT SERVICES--1.0% DIS Deutscher Industrie Service AG (Germany) Recruitment Consultancy Services 265,615 $ 7,597,944 INDUSTRIAL CONGLOMERATES--2.4% Dogan Sirketler Grubu Holding A.S (Turkey) (a) Diversified Holding Company 9,859,711,000 $ 17,700,252
46
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) INDUSTRIAL MACHINERY--11.9% Schindler Holding AG (Switzerland) Elevator & Escalator Manufacturer 69,900 $ 21,752,530 Interpump Group S.p.A (Italy) Pump & Piston Manufacturer 3,821,000 19,940,138 Saurer AG (Switzerland) (a) Textile Equipment Manufacturer 254,300 13,887,247 Kone Oyj, Class B (Finland) Elevators 187,800 11,327,993 Alfa Laval AB (Sweden) Filtration & Separation Equipment 672,500 9,791,223 LISI (France) Industrial Fastener Manufacturer 162,413 7,932,267 Munters AB (Sweden) Cooling & Moisture Control Systems 77,400 1,913,605 NSC Groupe (France) Textile Equipment Manufacturer 12,316 1,026,266 --------------- 87,571,269 OFFICE SERVICES & SUPPLIES--0.6% Societe BIC SA (France) Consumer & Office Supplies 101,800 $ 4,697,181 Domino Printing Sciences plc (Great Britain) Printing Equipment 70,000 282,219 --------------- 4,979,400 COMPUTER STORAGE & PERIPHERALS--1.8% Lectra (France) Manufacturing Process Systems 1,617,500 $ 12,874,782 DATA PROCESSING & OUTSOURCED SERVICES--3.1% Baycorp Advantage Limited (Australia) (a) Credit Reference Services 9,741,300 $ 22,765,813 ELECTRONIC EQUIPMENT MANUFACTURERS--1.4% Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 415,300 $ 10,020,267 HOME ENTERTAINMENT SOFTWARE--1.6% Square Enix Co., Ltd. (Japan) Entertainment Software 436,800 $ 11,989,421 IT CONSULTING & OTHER SERVICES--4.5% Morse plc (Great Britain) (b) Business & Technology Solutions 9,527,500 $ 19,421,809 Alten (France) (a) Systems Consulting & Engineering 456,041 8,899,026 Sopra Group (France) Computer Engineering 111,930 4,877,825 --------------- 33,198,660
47
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) OFFICE ELECTRONICS--3.8% Neopost SA (France) Mailroom Equipment Supplier 433,100 $ 27,848,022 CONSTRUCTION MATERIALS--1.3% Fletcher Building Limited (New Zealand) Building Materials Manufacturer 2,414,400 $ 9,771,229 INDUSTRIAL GASES--0.6% Taiyo Ink Mfg. Co., Ltd. (Japan) Manufacturer of Resist Inks 131,400 $ 4,645,726 SPECIALTY CHEMICALS--6.8% Gurit-Heberlein AG (Switzerland) (b) Chemical Producer 36,075 $ 25,871,326 Financiere Marc de Lacharriere SA (Fimalac) (France) Chemical Storage & Diversified Operations 311,232 12,967,155 Croda International plc (Great Britain) Chemical Producer 2,115,600 10,685,790 Financiere Marc de Lacharriere SA (Fimalac), Warrants (France) (a) Chemical Storage & Diversified Operations 31,866 134,748 --------------- 49,659,019 ALTERNATIVE CARRIERS--1.9% Asia Satellite Telecommunications Holdings Limited (Hong Kong) Satellite Operator 7,305,000 $ 13,865,747 TOTAL COMMON STOCKS (COST: $505,444,547) 699,364,758
48
NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.6% U.S. GOVERNMENT BILLS--2.1% United States Treasury Bills, 1.53%-1.54% due 10/7/2004 - 10/28/2004 $ 15,000,000 $ 14,991,696 TOTAL U.S. GOVERNMENT BILLS (COST: $14,991,696) 14,991,696 REPURCHASE AGREEMENTS--2.5% IBT Repurchase Agreement, 1.62% dated 9/30/2004 due 10/1/2004, repurchase price $17,000,765 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $17,850,000 $ 17,000,000 $ 17,000,000 IBT Repurchase Agreement, 1.27% dated 9/30/2004 due 10/1/2004, repurchase price $1,711,532 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,797,045 1,711,472 1,711,472 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $18,711,472) 18,711,472 TOTAL SHORT TERM INVESTMENTS (COST: $33,703,168) 33,703,168 Total Investments (Cost $539,147,715)--99.8% $ 733,067,926 Foreign Currencies (Cost $49,328)--0.0% $ 49,438 Other Assets In Excess Of Other Liabilities--0.2% 1,466,461 --------------- TOTAL NET ASSETS--100% $ 734,583,825 ===============
(a) Non-income producing security. (b) See footnote number six in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. (c) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 49 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF ASSETS AND LIABILITIES--SEPTEMBER 30, 2004
THE OAKMARK THE OAKMARK SELECT FUND FUND ----------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 6,372,303,475 $ 4,658,383,696 Investments in affiliated securities, at value (b) 205,145,506 859,683,644 Foreign currency, at value (c) 0 0 Receivable for: Securities sold 19,950,906 24,526,592 Fund shares sold 13,058,723 18,249,783 Dividends and interest 9,364,575 5,237,213 Forward foreign currency contracts 0 0 Tax reclaim 0 0 ---------------- ---------------- Total receivables 42,374,204 48,013,588 Other assets 2,518 2,534 ---------------- ---------------- Total assets $ 6,619,825,703 $ 5,566,083,462 LIABILITIES AND NET ASSETS Options written, at value (d) $ 0 $ 0 Payable for: Securities purchased 89,267,460 0 Fund shares redeemed 2,222,394 3,147,628 Due to Adviser 153,730 129,590 Due to transfer agent 247,697 121,566 Trustee fees 24,290 23,000 Deferred trustee compensation 815,273 682,967 Foreign tax expense 0 0 Other 1,200,135 945,622 ---------------- ---------------- Total liabilities 93,930,979 5,050,373 ---------------- ---------------- Net assets applicable to fund shares outstanding $ 6,525,894,724 $ 5,561,033,089 ================ ================ ANALYSIS OF NET ASSETS Paid in capital $ 5,604,817,454 $ 3,815,819,298 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency exchange transactions (268,182,155) (22,167,615) Net unrealized appreciation (depreciation) of investments 1,163,727,953 1,748,444,270 Net unrealized appreciation (depreciation)other 0 0 Accumulated undistributed net investment income 25,531,472 18,937,136 ---------------- ---------------- Net assets applicable to Fund shares outstanding $ 6,525,894,724 $ 5,561,033,089 ================ ================ PRICE OF SHARES Net asset value per share: Class I $ 38.68 $ 31.20 ================ ================ Class I--Net assets $ 6,474,041,733 $ 5,463,016,464 Class I--Shares outstanding (Unlimited shares authorized) 167,356,667 175,097,313 Net asset value per share: Class II $ 38.45 $ 31.00 ================ ================ Class II--Net assets $ 51,852,991 $ 98,016,625 Class II--Shares outstanding (Unlimited shares authorized) 1,348,535 3,161,477 (a) Identified cost of investments in unaffiliated securities $ 5,291,556,489 $ 3,382,924,627 (b) Identified cost of investments in affiliated securities 122,164,539 386,698,443 (c) Identified cost of foreign currency 0 0 (d) Premiums received on options written 0 0
50
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND ----------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 8,014,809,676 $ 1,189,038,571 Investments in affiliated securities, at value (b) 39,912,600 154,396,413 Foreign currency, at value (c) 0 740,230 Receivable for: Securities sold 7,823,271 19,024,824 Fund shares sold 26,089,078 1,213,832 Dividends and interest 28,026,936 3,085,100 Forward foreign currency contracts 0 1,595,515 Tax reclaim 0 649,507 ---------------- ---------------- Total receivables 61,939,285 25,568,778 Other assets 2,516 12,880 ---------------- ---------------- Total assets $ 8,116,664,077 $ 1,369,756,872 LIABILITIES AND NET ASSETS Options written, at value (d) $ 682,500 $ 0 Payable for: Securities purchased 53,915,001 7,251,753 Fund shares redeemed 2,703,735 648,447 Due to Adviser 157,077 36,678 Due to transfer agent 161,259 43,684 Trustee fees 27,877 12,683 Deferred trustee compensation 472,832 266,993 Foreign tax expense 0 0 Other 1,986,114 474,994 ---------------- ---------------- Total liabilities 60,106,395 8,735,232 ---------------- ---------------- Net assets applicable to fund shares outstanding $ 8,056,557,682 $ 1,361,021,640 ================ ================ ANALYSIS OF NET ASSETS Paid in capital $ 6,987,288,659 $ 1,134,016,292 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency exchange transactions 193,663,146 23,306,784 Net unrealized appreciation (depreciation) of investments 828,279,593 198,359,319 Net unrealized appreciation (depreciation)other 126,672 76,926 Accumulated undistributed net investment income 47,199,612 5,262,319 ---------------- ---------------- Net assets applicable to Fund shares outstanding $ 8,056,557,682 $ 1,361,021,640 ================ ================ PRICE OF SHARES Net asset value per share: Class I $ 23.12 $ 19.73 ================ ================ Class I--Net assets $ 7,577,873,183 $ 1,336,308,202 Class I--Shares outstanding (Unlimited shares authorized) 327,695,235 67,714,805 Net asset value per share: Class II $ 23.03 $ 19.53 ================ ================ Class II--Net assets $ 478,684,499 $ 24,713,438 Class II--Shares outstanding (Unlimited shares authorized) 20,786,881 1,265,528 (a) Identified cost of investments in unaffiliated securities $ 7,179,383,897 $ 1,010,496,198 (b) Identified cost of investments in affiliated securities 47,325,389 136,180,665 (c) Identified cost of foreign currency 0 734,547 (d) Premiums received on options written 948,977 0 THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND ----------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 3,697,665,001 $ 637,269,982 Investments in affiliated securities, at value (b) 561,176,342 95,797,944 Foreign currency, at value (c) 2,170,628 49,438 Receivable for: Securities sold 18,148,063 263,936 Fund shares sold 5,575,256 1,379,743 Dividends and interest 12,061,955 596,951 Forward foreign currency contracts 8,398,390 674,325 Tax reclaim 3,110,858 737,971 ---------------- ---------------- Total receivables 47,294,522 3,652,926 Other assets 2,384 2,156 ---------------- ---------------- Total assets $ 4,308,308,877 $ 736,772,446 LIABILITIES AND NET ASSETS Options written, at value (d) $ 0 $ 0 Payable for: Securities purchased 4,045,416 1,149,443 Fund shares redeemed 6,035,817 258,202 Due to Adviser 109,201 23,376 Due to transfer agent 94,900 15,101 Trustee fees 19,430 10,802 Deferred trustee compensation 454,714 273,780 Foreign tax expense 0 239,373 Other 1,439,101 218,544 ---------------- ---------------- Total liabilities 12,198,579 2,188,621 ---------------- ---------------- Net assets applicable to fund shares outstanding $ 4,296,110,298 $ 734,583,825 ================ ================ ANALYSIS OF NET ASSETS Paid in capital $ 3,484,490,169 $ 526,745,650 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency exchange transactions 6,460,252 9,627,220 Net unrealized appreciation (depreciation) of investments 753,124,601 194,354,882 Net unrealized appreciation (depreciation)other 295,903 36,757 Accumulated undistributed net investment income 51,739,373 3,819,316 ---------------- ---------------- Net assets applicable to Fund shares outstanding $ 4,296,110,298 $ 734,583,825 ================ ================ PRICE OF SHARES Net asset value per share: Class I $ 18.98 $ 18.26 ================ ================ Class I--Net assets $ 4,036,883,539 $ 734,122,273 Class I--Shares outstanding (Unlimited shares authorized) 212,697,335 40,194,270 Net asset value per share: Class II $ 18.86 $ 18.25 ================ ================ Class II--Net assets $ 259,226,759 $ 461,552 Class II--Shares outstanding (Unlimited shares authorized) 13,745,716 25,289 (a) Identified cost of investments in unaffiliated securities $ 3,072,901,521 $ 451,796,343 (b) Identified cost of investments in affiliated securities 441,218,349 87,351,372 (c) Identified cost of foreign currency 2,153,973 49,328 (d) Premiums received on options written 0 0
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF OPERATIONS--YEAR ENDED SEPTEMBER 30, 2004
THE OAKMARK THE OAKMARK SELECT FUND FUND -------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 79,776,909 $ 71,470,705 Dividends from affiliated securities 3,411,728 9,454,532 Interest Income 5,612,596 3,670,367 Securities lending income 0 0 Other income 12,156 52,731 Foreign taxes withheld (86,768) 0 ---------------- ---------------- Total investment income 88,726,621 84,648,335 EXPENSES: Investment advisory fee 50,652,178 48,070,958 Transfer and dividend disbursing agent fees 2,942,576 1,488,884 Other shareholder servicing fees 5,055,637 4,490,884 Service Fee--Class II 93,506 165,847 Reports to shareholders 1,229,408 1,000,249 Custody and accounting fees 619,832 603,672 Registration and blue sky expenses 280,357 105,466 Trustee fees 111,125 107,100 Deferred trustee compensation 125,814 127,432 Legal fees 89,023 88,063 Audit fees 46,357 42,736 Other 315,530 315,973 ---------------- ---------------- Total expenses 61,561,343 56,607,264 ---------------- ---------------- Net expenses 61,561,343 56,607,264 NET INVESTMENT INCOME: 27,165,278 28,041,071 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 49,330,325 95,737,774 Net realized gain (loss) on affiliated securities 13,028,681 57,494,684 Net realized gain on options written 2,454,446 2,924,572 Net realized gain (loss) on short sales (737) (1,959) Net realized gain (loss) on foreign currency transactions 0 0 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 636,919,637 511,522,774 Net change in appreciation (depreciation)other 0 0 Net realized and unrealized gain on investments and foreign currency transactions: 701,732,352 667,677,845 ---------------- ---------------- Net increase in net assets resulting from operations $ 728,897,630 $ 695,718,916 ================ ================
52
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND -------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 40,138,015 $ 19,537,599 Dividends from affiliated securities 2,141,500 3,216,076 Interest Income 69,277,402 859,614 Securities lending income 0 53,773 Other income 38,688 0 Foreign taxes withheld (680,001) (1,963,492) ---------------- ---------------- Total investment income 110,915,604 21,703,570 EXPENSES: Investment advisory fee 46,997,810 12,245,761 Transfer and dividend disbursing agent fees 1,736,983 434,475 Other shareholder servicing fees 7,497,728 1,242,856 Service Fee--Class II 921,230 40,361 Reports to shareholders 1,498,868 306,925 Custody and accounting fees 784,732 1,059,568 Registration and blue sky expenses 620,688 172,192 Trustee fees 122,659 57,649 Deferred trustee compensation 128,640 63,057 Legal fees 96,056 45,958 Audit fees 52,830 30,838 Other 331,310 119,243 ---------------- ---------------- Total expenses 60,789,534 15,818,883 ---------------- ---------------- Net expenses 60,789,534 15,818,883 NET INVESTMENT INCOME: 50,126,070 5,884,687 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 284,152,401 30,101,048 Net realized gain (loss) on affiliated securities (15,625,092) (6,912,122) Net realized gain on options written 571,712 363,653 Net realized gain (loss) on short sales 0 0 Net realized gain (loss) on foreign currency transactions 227,056 (199,643) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 416,194,976 116,594,459 Net change in appreciation (depreciation)other 39,804 102,037 Net realized and unrealized gain on investments and foreign currency transactions: 685,560,857 140,049,432 ---------------- ---------------- Net increase in net assets resulting from operations $ 735,686,927 $ 145,934,119 ================ ================ THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND -------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 97,164,219 $ 12,283,694 Dividends from affiliated securities 11,723,411 3,383,772 Interest Income 1,714,491 279,033 Securities lending income 1,248,738 0 Other income 0 12,701 Foreign taxes withheld (10,762,812) (1,906,580) ---------------- ---------------- Total investment income 101,088,047 14,052,620 EXPENSES: Investment advisory fee 36,337,644 7,616,526 Transfer and dividend disbursing agent fees 1,117,583 166,242 Other shareholder servicing fees 3,865,215 570,689 Service Fee--Class II 532,422 44 Reports to shareholders 924,262 122,640 Custody and accounting fees 3,838,366 703,303 Registration and blue sky expenses 224,171 53,714 Trustee fees 89,107 49,315 Deferred trustee compensation 98,880 55,074 Legal fees 71,966 39,318 Audit fees 41,157 28,240 Other 231,382 92,740 ---------------- ---------------- Total expenses 47,372,155 9,497,845 ---------------- ---------------- Net expenses 47,372,155 9,497,845 NET INVESTMENT INCOME: 53,715,892 4,554,775 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 214,537,262 41,374,709 Net realized gain (loss) on affiliated securities 2,998,826 2,122,741 Net realized gain on options written 0 0 Net realized gain (loss) on short sales 0 0 Net realized gain (loss) on foreign currency transactions (603,088) (41,546) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 401,911,292 124,228,709 Net change in appreciation (depreciation)other 168,158 (23,302) Net realized and unrealized gain on investments and foreign currency transactions: 619,012,450 167,661,311 ---------------- ---------------- Net increase in net assets resulting from operations $ 672,728,342 $ 172,216,086 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53 THE OAKMARK FAMILY OF FUNDS STATEMENTS OF CHANGES IN NET ASSETS--SEPTEMBER 30, 2004
THE OAKMARK FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 27,165,278 $ 19,384,779 Net realized gain (loss) on investments 64,812,715 (137,687,746) Net change in unrealized appreciation (depreciation) of investments 636,919,637 867,321,548 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 728,897,630 749,018,581 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (20,505,874) (13,880,781) Net investment income--Class II (37,100) (29,599) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (20,542,974) (13,910,380) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,919,971,722 1,533,121,113 Proceeds from shares sold--Class II 36,194,109 17,938,866 Reinvestment of distributions--Class I 18,843,547 13,078,556 Reinvestment of distributions--Class II 8,676 700 Payments for shares redeemed--Class I (939,233,385) (810,690,610) Payments for shares redeemed--Class II (9,099,878) (6,723,524) Redemption fees--Class I 340,142 0 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 1,027,024,933 746,725,101 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 1,735,379,589 1,481,833,302 NET ASSETS: Beginning of period 4,790,515,135 3,308,681,833 ---------------- ---------------- End of period $ 6,525,894,724 $ 4,790,515,135 ================ ================ Undistributed net investment income $ 25,531,472 $ 18,909,168 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 50,926,355 49,341,298 Shares issued in reinvestment of dividends 534,720 425,457 Less shares redeemed (24,984,586) (26,435,618) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 26,476,489 23,331,137 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 968,163 576,827 Shares issued in reinvestment of dividends 247 23 Less shares redeemed (247,309) (225,241) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 721,101 351,609 ================ ================
54
THE OAKMARK SELECT FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 28,041,071 $ 10,063,549 Net realized gain (loss) on investments 156,155,071 (101,697,160) Net change in unrealized appreciation (depreciation) of investments 511,522,774 1,121,320,614 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 695,718,916 1,029,687,003 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (18,710,631) (3,934,423) Net investment income--Class II (118,882) 0 ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (18,829,513) (3,934,423) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 807,786,818 917,786,177 Proceeds from shares sold--Class II 33,570,613 37,698,020 Reinvestment of distributions--Class I 17,456,336 3,705,408 Reinvestment of distributions--Class II 58,212 0 Payments for shares redeemed--Class I (1,019,983,750) (654,181,633) Payments for shares redeemed--Class II (40,937,360) (26,725,613) Redemption fees--Class I 105,547 0 ---------------- ---------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS (201,943,584) 278,282,359 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 474,945,819 1,304,034,939 NET ASSETS: Beginning of period 5,086,087,270 3,782,052,331 ---------------- ---------------- End of period $ 5,561,033,089 $ 5,086,087,270 ================ ================ Undistributed net investment income $ 18,937,136 $ 9,725,578 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 26,433,387 36,086,657 Shares issued in reinvestment of dividends 595,510 150,625 Less shares redeemed (33,158,816) (26,578,347) ---------------- ---------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING (6,129,919) 9,658,935 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 1,102,241 1,482,025 Shares issued in reinvestment of dividends 1,944 0 Less shares redeemed (1,342,449) (1,069,612) ---------------- ---------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING (238,264) 412,413 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55
THE OAKMARK EQUITY AND INCOME FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 50,126,070 $ 34,174,070 Net realized gain on investments 269,099,021 9,562,063 Net realized gain on foreign currency transactions 227,056 370,636 Net change in unrealized appreciation (depreciation) of investments 416,194,976 517,697,982 Net change in unrealized appreciation (depreciation)--other 39,804 87,469 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 735,686,927 561,892,220 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (30,409,117) (33,616,359) Net investment income--Class II (1,530,815) (1,569,445) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (31,939,932) (35,185,804) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 3,583,813,621 2,076,491,027 Proceeds from shares sold--Class II 277,231,468 144,338,218 Reinvestment of distributions--Class I 29,355,530 32,429,243 Reinvestment of distributions--Class II 514,106 321,834 Payments for shares redeemed--Class I (836,471,290) (709,955,319) Payments for shares redeemed--Class II (86,816,396) (46,269,411) Redemption fees--Class I 534,637 0 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 2,968,161,676 1,497,355,592 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 3,671,908,671 2,024,062,008 NET ASSETS: Beginning of period 4,384,649,011 2,360,587,003 ---------------- ---------------- End of period $ 8,056,557,682 $ 4,384,649,011 ================ ================ Undistributed net investment income $ 47,199,612 $ 23,545,227 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 159,855,520 109,874,694 Shares issued in reinvestment of dividends 1,399,884 1,796,634 Less shares redeemed (37,388,817) (38,350,539) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 123,866,587 73,320,789 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 12,464,461 7,706,490 Shares issued in reinvestment of dividends 24,563 17,840 Less shares redeemed (3,887,834) (2,462,923) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 8,601,190 5,261,407 ================ ================
56
THE OAKMARK GLOBAL FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 5,884,687 $ 9,446 Net realized gain on investments 23,552,579 3,814,882 Net realized loss on foreign currency transactions (199,643) (168,173) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 116,594,459 114,576,882 Net change in unrealized appreciation (depreciation)--other 102,037 (43,405) ---------------- ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 145,934,119 118,189,632 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (54,303) 0 Net realized gain--Class I (2,851,872) 0 Net realized gain--Class II (25,574) 0 ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (2,931,749) 0 FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 782,660,249 524,732,272 Proceeds from shares sold--Class II 21,752,122 6,645,694 Reinvestment of distributions--Class I 2,804,200 0 Reinvestment of distributions--Class II 20,731 0 Payments for shares redeemed--Class I (296,067,961) (112,770,994) Payments for shares redeemed--Class II (4,061,520) (2,412,970) Redemption fees--Class I 314,014 0 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 507,421,835 416,194,002 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 650,424,205 534,383,634 NET ASSETS: Beginning of period 710,597,435 176,213,801 ---------------- ---------------- End of period $ 1,361,021,640 $ 710,597,435 ================ ================ Undistributed net investment income (loss) $ 5,262,319 $ (290,559) ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 41,298,499 34,670,227 Shares issued in reinvestment of dividends 155,616 0 Less shares redeemed (15,250,479) (8,703,761) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 26,203,636 25,966,466 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 1,131,427 462,296 Shares issued in reinvestment of dividends 1,160 0 Less shares redeemed (211,953) (171,894) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 920,634 290,402 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57
THE OAKMARK INTERNATIONAL FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 53,715,892 $ 20,158,139 Net realized gain (loss) on investments 217,536,088 (194,137,263) Net realized loss on foreign currency transactions (603,088) (659,981) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 401,911,292 712,978,826 Net change in unrealized appreciation (depreciation)--other 168,158 294,152 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 672,728,342 538,633,873 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (20,084,750) (15,119,015) Net investment income--Class II (570,848) (515,254) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (20,655,598) (15,634,269) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,465,810,386 1,342,461,828 Proceeds from shares sold--Class II 183,258,922 210,555,153 Reinvestment of distributions--Class I 18,162,578 13,994,235 Reinvestment of distributions--Class II 279,537 172,223 Payments for shares redeemed--Class I (744,490,290) (573,914,822) Payments for shares redeemed--Class II (79,196,627) (158,686,779) Redemption fees--Class I 367,912 0 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 844,192,418 834,581,838 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 1,496,265,162 1,357,581,442 NET ASSETS: Beginning of period 2,799,845,136 1,442,263,694 ---------------- ---------------- End of period $ 4,296,110,298 $ 2,799,845,136 ================ ================ Undistributed net investment income $ 51,739,373 $ 19,282,167 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 81,784,418 98,256,816 Shares issued in reinvestment of dividends 1,091,501 1,050,618 Less shares redeemed (40,952,323) (43,071,914) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 41,923,596 56,235,520 ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 10,166,362 15,141,504 Shares issued in reinvestment of dividends 16,860 12,959 Less shares redeemed (4,345,978) (11,241,101) ---------------- ---------------- NET INCREASE IN SHARES OUTSTANDING 5,837,244 3,913,362 ================ ================
58
THE OAKMARK INTERNATIONAL SMALL CAP FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2004 SEPTEMBER 30, 2003 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 4,554,775 $ 3,739,176 Net realized gain (loss) on investments 43,497,450 (33,475,417) Net realized loss on foreign currency transactions (41,546) (58,650) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 124,228,709 160,461,142 Net change in unrealized appreciation (depreciation)--other (23,302) 36,163 Deferred foreign taxes 0 0 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 172,216,086 130,702,414 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (4,209,195) (3,076,432) Net investment income--Class II (2,982) (1,637) Net realized gain--Class I 0 (9,181,861) Net realized gain--Class II 0 (6,548) ---------------- ---------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (4,212,177) (12,266,478) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 188,831,597 122,746,015 Proceeds from shares sold--Class II 54,188 978,707 Reinvestment of distributions--Class I 3,863,970 11,533,652 Reinvestment of distributions--Class II 1,508 4,554 Payments for shares redeemed--Class I (104,507,785) (132,515,271) Payments for shares redeemed--Class II (171,984) (945,332) Redemption fees--Class I 263,993 0 ---------------- ---------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 88,335,487 1,802,325 ---------------- ---------------- TOTAL INCREASE IN NET ASSETS 256,339,396 120,238,261 NET ASSETS: Beginning of period 478,244,429 358,006,168 ---------------- ---------------- End of period $ 734,583,825 $ 478,244,429 ================ ================ Undistributed net investment income $ 3,819,316 $ 3,518,265 ================ ================ FUND SHARE TRANSACTIONS--CLASS I: Shares sold 11,434,258 11,051,169 Shares issued in reinvestment of dividends 260,200 1,095,314 Less shares redeemed (6,274,556) (12,545,416) ---------------- ---------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING 5,419,902 (398,933) ================ ================ FUND SHARE TRANSACTIONS--CLASS II: Shares sold 3,350 88,462 Shares issued in reinvestment of dividends 102 432 Less shares redeemed (10,276) (85,057) ---------------- ---------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING (6,824) 3,837 ================ ================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59 THE OAKMARK FAMILY OF FUNDS NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies of The Oakmark Fund ("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Equity and Income Fund ("Equity and Income"), The Oakmark Global Fund ("Global"), The Oakmark International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap") collectively referred to as "the Funds", each a series of Harris Associates Investment Trust (the "Trust"), a Massachusetts business trust, which is registered as an investment company under the Investment Company Act of 1940. These policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The Oakmark Small Cap Fund, formerly a series of the Trust, was terminated on September 28, 2004. Financial Statements for The Oakmark Small Cap Fund for the period ended September 30, 2004 can be found at www.oakmark.com or by calling 1-800-625-6275. CLASS DISCLOSURE-- Each Fund offers two classes of shares: Class I Shares and Class II Shares. Class I Shares are offered to the general public. Class II Shares are offered to certain retirement plans such as 401(k) and profit sharing plans. Class II Shares pay a service fee at the annual rate of 0.25% of average net assets of Class II Shares of the Funds. This service fee is paid to an administrator for performing the services associated with the administration of such retirement plans. Income, realized and unrealized capital gains and losses and expenses of the Funds that are not directly attributable to a specific class of shares are prorated among the classes based on the relative net assets of each class. Expenses directly attributable to a class of shares are recorded to the specific class. REDEMPTION FEES-- Each Fund imposes a short-term trading fee on redemptions of Class I Shares held for 90 days or less to offset two types of costs to the Fund caused by short-term trading: portfolio transaction and market impact costs associated with erratic redemption activity and administrative costs associated with processing redemptions. The fee is 2% of the redemption value and is deducted from the redemption proceeds and retained by the Fund. The "first-in, first-out" (FIFO) method is used to determine the holding period. SECURITY VALUATION-- Securities traded on securities exchanges and over-the-counter securities are valued at the last sales price on the day of valuation, or lacking any reported sales that day, at the most recent bid quotation. Securities traded on the NASDAQ National Market are valued at the NASDAQ Official Closing Price ("NOCP"), or lacking an NOCP, at the most recent bid quotation on the NASDAQ National Market. Debt obligations and money market instruments maturing in more than 60 days from the date of purchase are valued at the latest bid quotation. Debt obligations and money market instruments maturing in less than 61 days from the date of purchase are valued on an amortized cost basis which approximates market value. Options are valued at the last reported sale price on the day of valuation, or lacking any reported sales that day, at the mean of the most recent bid and ask quotations. Securities traded in foreign markets are valued using prices reported by local foreign markets. Securities for which quotations are not readily available, or securities which may have been affected by a significant event after the price was determined, and other assets are valued at a fair value as determined by or under the direction of pricing committees established by the Board of Trustees. The Funds' net asset values are determined at the time of the close of the New York Stock Exchange. The pricing committees will evaluate movements in the U.S. markets after the close of foreign markets and may adjust security prices to reflect changes in reaction to U.S. markets as determined by a third party model. At September 30, 2004, the Funds held no securities for which quotations were not readily available, and no securities which may have been affected by a significant event prior to the computation of NAV. FOREIGN CURRENCY TRANSLATIONS-- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the mean of the bid and offer prices of such currencies at the time net asset value is determined. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized gain or loss from securities. Net realized gains or losses on foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded and the U.S. dollar equivalent of the amounts actually received or paid, and the realized gains or losses 60 resulting from portfolio and transaction hedges. Net unrealized foreign exchange gains and losses arise from changes in the fair value of assets and liabilities, other than investments in securities at fiscal year end, resulting from changes in exchange rates. For the year ended September 30, 2004, net unrealized appreciation (depreciation) - other included the following components:
EQUITY AND INT'L INCOME GLOBAL INTERNATIONAL SMALL CAP ------------------------------------------------------------------------------------------------------------------ Unrealized appreciation (depreciation) on dividends and dividend reclaims receivable $ 126,551 $ 79,926 $ 286,811 $ 36,845 Unrealized appreciation (depreciation) on open securities purchases and sales 121 0 9,092 (88) ---------- ---------- ---------- ---------- Net Unrealized appreciation (depreciation)--Other $ 126,672 $ 79,926 $ 295,903 $ 36,757 ========== ========== ========== ==========
FORWARD FOREIGN CURRENCY CONTRACTS-- The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions. The contractual amounts of forward foreign exchange contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values. At September 30, 2004, Global, International and Int'l Small Cap held the following outstanding forward foreign currency contracts: THE OAKMARK GLOBAL FUND
CONTRACT SETTLEMENT VALUATION UNREALIZED AMOUNT DATE AT 9/30/04 APPRECIATION ------------------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD: British Pound Sterling 47,900,000 July 2005 $ 85,089,115 $ 1,595,515 ============== ==============
THE OAKMARK INTERNATIONAL FUND
CONTRACT SETTLEMENT VALUATION UNREALIZED AMOUNT DATE AT 9/30/04 APPRECIATION ------------------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD: British Pound Sterling 142,000,000 July 2005 $ 252,276,711 $ 3,735,088 British Pound Sterling 140,000,000 July 2005 248,694,698 4,663,302 -------------- -------------- $ 500,971,409 $ 8,398,390 ============== ==============
THE OAKMARK INTERNATIONAL SMALL CAP FUND
CONTRACT SETTLEMENT VALUATION UNREALIZED AMOUNT DATE AT 9/30/04 APPRECIATION ------------------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD: British Pound Sterling 11,200,000 July 2005 $ 19,897,881 $ 294,599 British Pound Sterling 11,400,000 July 2005 20,250,854 379,726 -------------- -------------- $ 40,148,735 $ 674,325 ============== ==============
SECURITY TRANSACTIONS AND INVESTMENT INCOME-- Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on an accrual basis. Bond discount is accreted and premium is amortized over the expected life of each applicable security. Withholding taxes on foreign dividends have been provided for in accordance with the Funds' understanding of the applicable country's tax rules and rates. Corporate gains taxes on the appreciation of certain foreign securities have been accrued for in accordance with the Funds' understanding of the applicable country's tax rules and rates, and are recorded as Deferred Foreign Tax Expense on the Statements of Operations. Net realized gains and losses on investments are determined by the specific identification method. DISTRIBUTIONS TO SHAREHOLDERS-- Income, dividends and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. Tax and book differences are primarily related to foreign currency transactions, deferral of losses on wash sales, and character of capital loss carryforwards. The Funds also utilize, when appropriate, earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. SHORT SALES-- Each Fund may sell a security it does not own in anticipation of a decline in the fair value of that security. When the Fund sells a security short, it must borrow the security sold short and deliver it to the 61 broker-dealer through which it made the short sale. A gain, limited to the price at which the Fund sold the security short, or loss, unlimited in size, will be recognized upon the termination of a short sale. At September 30, 2004, the Funds had no securities sold short. ACCOUNTING FOR OPTIONS-- When a Fund writes an option, the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options that expire are recorded by the Fund on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund has realized a gain or a loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Fund. In writing an option, the Fund bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Fund could result in the Fund selling or buying a security or currency at a price different from the current market value. Options written by the Funds do not give rise to counterparty credit risk, as they obligate the Funds, not their counterparties, to perform. At September 30, 2004, Equity & Income had outstanding written option contracts which are disclosed in the Schedule of Investments, for which portfolio securities valued at $30,131,341 were held in escrow by the custodian as cover for the written options. When a Fund purchases an option, the premium paid by the Fund is recorded as an asset and is subsequently adjusted to the current market value of the option purchased. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying security to determine the realized gain or loss. The risks associated with purchasing put and call options are potential loss of the premium paid and the failure of the counterparty to honor their portion of the contract. COMMITTED LINE OF CREDIT-- The Funds have an unsecured committed line of credit with Investors Bank & Trust Company ("IBT") in the amount of $450 million. Borrowings under that arrangement bear interest at .45% above the Federal Funds Effective Rate. There were no borrowings during the year ended September 30, 2004. REPURCHASE AGREEMENTS-- Each Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is each Fund's policy that the market value of the collateral be at least equal to 105% of the repurchase price, including interest. The Fund's adviser is responsible for determining that the value of the collateral is at all times at least equal to 105% of the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon a Fund's ability to dispose of the underlying securities. EXPENSE OFFSET ARRANGEMENT-- IBT serves as custodian of the Funds. IBT's fee may be reduced by credits which are an earnings allowance calculated on the average daily cash balances each Fund maintains with IBT. Credit balances used to reduce the Funds' custodian fees, if any, are reported as a reduction of total expenses in the Statements of Operations. At September 30, 2004, there were no expense offsets. SECURITY LENDING-- Each Fund except Oakmark Fund may lend its portfolio securities to broker-dealers and banks. Any such loan must be continuously secured by collateral in cash or cash equivalents maintained on a current basis in an amount at least equal to the fair value of the securities loaned by the Fund. Collateral is marked to market and monitored daily. The Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned, and would also receive an additional return that may be in the form of a fixed fee or a percentage of the earnings on the collateral. The Fund would have the right to call the loan and obtain the securities loaned at any time, and the counterparty shall return the securities within five business days or less. In the event of bankruptcy or other default of the borrower, the Fund could experience delays in liquidating the loan collateral or recovering the loaned securities and incur expenses related to enforcing its rights. In addition, there could be a decline in the value of the collateral or in the fair value of the securities loaned while the Fund seeks to enforce its rights thereto and the Fund could experience subnormal levels of income or lack of access to income during that period. 62 2. TRANSACTIONS WITH AFFILIATES Each Fund has an investment advisory agreement with Harris Associates L.P. ("Adviser"). For management services and facilities furnished, the Funds pay the Adviser monthly fees. Each fee is calculated on the total net assets as determined at the end of each preceding calendar month. Annual fee rates are as follows:
FUND ADVISORY FEES FUND ADVISORY FEES ---------------------------------------------------------------------------------------------------------------- Oakmark 1.00% up to $2 billion; Equity and Income 0.75% up to $5 billion 0.90% on the next $1 billion; 0.70% on the next $2.5 billion 0.80% on the next $2 billion; and 0.675% on the next $2.5 billion; and 0.75% over $5 billion 0.65% over $10 billion Select 1.00% up to $1 billion; Global 1.00% up to $2 billion 0.95% on the next $500 million; 0.95% on the next $2 billion; and 0.90% on the next $500 million; 0.90% over $4 billion 0.85% on the next $500 million; 0.80% on the next $2.5 billion; and International 1.00% up to $2 billion; 0.75% over $5 billion 0.95% on the next $1 billion; and 0.85% over $3 billion Int'l Small Cap 1.25% up to $500 million; and 1.10% over $500 million
The Adviser undertakes to reimburse each Fund Class to the extent, but only to the extent, that its annualized expenses (excluding taxes, interest, all commissions and other normal charges incident to the purchase and sale of portfolio securities, and extraordinary charges such as litigation costs, but excluding fees paid to the Adviser) exceed the percent set forth opposite the Fund Class of average daily net assets of the Fund Class through January 31, 2005.
FUND CLASS I CLASS II ---------------------------------------------------------------------------------- Oakmark 1.50% 1.75% Select 1.50 1.75 Equity and Income 1.00 1.25 Global 1.75 2.00 International 2.00 2.25 Int'l Small Cap 2.00 2.25
For the year ended September 30, 2004, the Funds incurred brokerage commissions, including commissions paid to an affiliate of the Adviser, Harris Associates Securities L.P., as follows:
FUND TOTAL COMMISSIONS COMMISSIONS PAID TO AFFILIATE ------------------------------------------------------------------------------------------------- Oakmark $ 5,076,567 $ 188,945 Select 3,554,160 37,119 Equity and Income 6,440,305 251,104 Global 1,899,282 45,825 International 5,431,968 0 Int'l Small Cap 1,086,752 0
IXIS Asset Management Services Co., an affiliate of the Adviser, provides transfer agent services to the Funds. The fees are based on the number of open accounts and the reimbursement of out-of-pocket expenses. For the year ended September 30, 2004, the Funds incurred the following transfer agent expenses:
FUND TRANSFER AGENT FEES --------------------------------------------------------------------------------------- Oakmark $ 2,942,576 Select 1,488,884 Equity and Income 1,736,983 Global 434,475 International 1,117,583 Int'l Small Cap 166,242
63 The Adviser has entered into agreements with financial intermediaries to provide recordkeeping, processing, shareholder communications and other services to the Funds. These services would be provided by the Funds if the shares were held in accounts registered directly with the Funds' transfer agent. Accordingly, the Funds pay a portion of these fees pursuant to a separate agreement with the Adviser. These fees are reflected as other shareholder servicing fees in the Statements of Operations. The non-interested Trustees of the Trust may participate in the Trust's Deferred Compensation Plan for Independent Trustees. Participants in the plan may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Trust and represent an unfunded obligation of the Trust. The value of amounts deferred for a participant is determined by reference to the change in value of Class I shares of one or more of the Funds or a money market fund as specified by the participant. Benefits under the plan are payable upon retirement. The interested trustees are not compensated by the Funds. 3. FEDERAL INCOME TAXES It is the policy of each Fund to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required.
COST OF INVESTMENTS NET UNREALIZED FOR FEDERAL INCOME GROSS UNREALIZED GROSS UNREALIZED APPRECIATION FUND TAX PURPOSES APPRECIATION (DEPRECIATION) (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------------- Oakmark $ 5,419,978,326 $ 1,240,109,793 $ (82,639,138) $ 1,157,470,655 Select 3,778,917,489 1,794,128,955 (54,979,104) 1,739,149,851 Equity and Income 7,225,630,399 863,786,748 (34,694,871) 829,091,877 Global 1,149,006,532 215,762,399 (21,333,947) 194,428,452 International 3,520,118,309 766,280,366 (27,557,332) 738,723,034 Int'l Small Cap 545,560,327 196,495,791 (8,988,192) 187,507,599
As of September 30, 2004, the net capital loss carryovers noted below are available to offset future realized capital gains and thereby reduce future taxable gains distributions.
FUND 2008 2009 2010 2011 2012 TOTAL --------------------------------------------------------------------------------------------------------------------- Oakmark $ 23,897,178 $ 139,015,880 $ 2,634,325 $ 27,893,934 $ 68,483,540 $ 261,924,857 Select -- -- -- 12,873,196 -- 12,873,196
For the year ended September 30, 2004, the components of distributable earnings (excluding unrealized appreciation (depreciation) disclosed below) on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG- TOTAL DISTRIBUTABLE FUND ORDINARY INCOME TERM GAIN EARNINGS --------------------------------------------------------------------------------------------------------- Oakmark $ 26,290,546 $ 0 $ 26,290,546 Select 19,568,993 0 19,568,993 Equity and Income 46,090,137 194,102,676 240,192,813 Global 7,095,235 25,636,453 32,731,688 International 60,641,910 12,364,662 72,912,543 Int'l Small Cap 10,730,805 10,050,074 14,831,286
64 During the year ended September 30, 2004, the tax character of distributions paid was as follows:
DISTRIBUTIONS PAID DISTRIBUTIONS PAID FROM ORDINARY FROM LONG-TERM FUND INCOME CAPITAL GAIN -------------------------------------------------------------------------------- Oakmark $ 20,542,974 $ 0 Select 18,829,513 0 Equity and Income 31,939,932 0 Global 54,303 2,877,446 International 20,655,598 0 Int'l Small Cap 4,212,177 0
4. INVESTMENT TRANSACTIONS For the year ended September 30, 2004, transactions in investment securities (excluding short term and U.S. Government securities) were as follows (in thousands):
EQUITY AND INT'L OAKMARK SELECT INCOME GLOBAL INTERNATIONAL SMALL CAP ------------------------------------------------------------------------------------------------------------------------ Purchases $ 1,964,346 $ 708,110 $ 2,642,250 $ 703,813 $ 1,544,366 $ 254,645 Proceeds from sales 1,016,634 983,915 1,415,096 187,375 766,729 176,119
Purchases at cost and proceeds from sales of long-term U.S. Government securities for the year ended September 30, 2004 were $4,548,306 and $2,778,797 respectively for Equity and Income. Transactions in options written during the year ended September 30, 2004 were as follows:
OAKMARK SELECT EQUITY AND INCOME ---------------------------------------------------------------------------------------- NUMBER OF PREMIUMS NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED CONTRACTS RECEIVED ------------------------------------------------------------------------------------------------------------------------ Options outstanding at September 30, 2003 0 $ 0 0 $ 0 0 $ 0 Options written 44,050 3,275,394 52,950 3,595,332 23,000 2,460,641 Options terminated in closing purchase transactions (6,993) (683,121) (8,397) (811,727) (7,522) $ (1,135,011) Options expired (28,507) (1,870,762) (37,578) (2,257,703) (2,478) (376,653) Options exercised (8,550) (721,511) (6,975) (525,902) 0 0 ---------- ---------- ---------- ---------- ---------- ------------- Options outstanding at September 30, 2004 0 $ 0 0 $ 0 13,000 $ 948,977 ========== ========== ========== ========== ========== ============= GLOBAL ---------------------------- NUMBER OF PREMIUMS CONTRACTS RECEIVED ---------------------------- Options outstanding at September 30, 2003 3,000 $ 255,988 Options written 1,000 155,663 Options expired (3,000) $ (363,653) Options exercised (1,000) (47,998) ---------- ------------- Options outstanding at September 30, 2004 0 $ 0 ========== =============
65 5. INVESTMENTS IN AFFILIATED ISSUERS An affiliated issuer, as defined under the Investment Company Act of 1940, is one in which the Trust's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. A summary of each Fund's investments in securities of these issuers for the year ended September 30, 2004, is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES SHARES (COST) PROCEEDS INCOME 2004 ------------------------------------------------------------------------------------------------------------------------- Burlington Resources Inc.* 2,506,800 $ 0 $ 25,056,788 $ 974,082 $ 102,277,440 H&R Block, Inc. 3,029,300 9,714,775 10,836,227 2,437,646 149,708,006 Toys 'R' Us, Inc.+ 3,125,000 0 0 0 55,437,500 -------------- -------------- -------------- -------------- TOTALS $ 9,714,775 $ 35,893,015 $ 3,411,728 $ 307,422.946 ============== ============== ============== ==============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SELECT FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES SHARES (COST) PROCEEDS INCOME 2004 ------------------------------------------------------------------------------------------------------------------------- Burlington Resources Inc.* 5,183,600 $ 0 $ 131,201,776 $ 2,453,116 $ 211,490,880 H&R Block, Inc. 8,459,800 19,428,879 42,867,975 7,001,416 418,083,316 The Dun & Bradstreet Corporation+ 3,934,900 0 29,537,786 0 230,978,630 Toys 'R' Us, Inc.+ 11,872,700 1,567,695 29,529,779 0 210,621,698 -------------- -------------- -------------- --------------- TOTALS $ 20,996,574 $ 233,137,316 $ 9,454,532 $ 1,071,174,524 ============== ============== ============== ===============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK EQUITY AND INCOME FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES SHARES (COST) PROCEEDS INCOME 2004 ------------------------------------------------------------------------------------------------------------------------- Burlington Resources Inc.* 7,150,000 $ 74,735,466 $ 0 $ 2,141,500 $ 291,720,000 First Health Group Corp.**+ 0 0 78,854,452 0 0 Mentor Graphics+ 3,640,000 39,895,500 0 0 39,912,600 -------------- -------------- -------------- --------------- TOTALS $ 114,630,966 $ 78,854,452 $ 2,141,500 $ 331,632,600 ============== ============== ============== ===============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK GLOBAL FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES SHARES (COST) PROCEEDS INCOME 2004 ------------------------------------------------------------------------------------------------------------------------- Burlington Resources Inc.* 1,260,000 $ 33,267,449 $ 0 $ 341,700 $ 51,408,000 Ducati Motor Holding S.p.A.*+ 1,790,000 1,208,621 1,221,415 0 2,373,154 eFunds Corporation*+ 2,295,000 9,207,000 1,547,877 0 42,664,050 Euronext 1,814,000 20,811,931 0 1,107,311 51,686,605 First Health Corp.** 0 2,356,713 22,330,271 0 0 Grupo Aeroportuario del Sureste S.A. de C.V 463,000 0 0 225,759 10,232,300 Lonza group AG, Registered Shares 710,400 36,774,467 0 660,532 32,205,332 Lotte Chilsung Beverage Co., Ltd. 13,430 0 0 22,753 9,645,341 Meitec Corporation 760,000 13,382,051 0 518,494 27,353,783 Michael Page International plc 4,815,400 0 0 339,527 16,054,929 Orbotech+ 412,700 3,628,963 0 0 7,218,123 -------------- -------------- -------------- --------------- TOTALS $ 120,638,195 $ 25,099,563 $ 3,216,076 $ 250,841,617 ============== ============== ============== ===============
66 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES SHARES (COST) PROCEEDS INCOME 2004 ------------------------------------------------------------------------------------------------------------------------- Chargeurs SA 790,182 $ 0 $ 9,271,912 $ 1,685,223 $ 26,730,782 Enodis plc+ 33,585,320 0 0 0 50,967,402 Euronext 4,946,200 44,005,582 0 2,873,393 140,932,903 Giordano International Limited* 61,424,300 0 13,935,454 1,732,594 33,874,274 Grupo Aeroportuario del Sureste S.A. de C.V 242,000 0 0 117,999 5,348,200 Orbotech Ltd+ 1,237,700 0 20,576,486 0 21,647,373 Lonza Group AG, Registered Shares 2,267,700 90,347,901 0 1,973,936 102,804,100 Lotte Chilsung Beverage Co., Ltd. 83,400 0 0 141,296 59,897,351 Meitec Corporation 2,052,500 15,751,931 0 1,571,819 73,873,211 Michael Page International plc 23,687,200 3,040,452 3,009,020 1,627,151 78,975,020 -------------- -------------- -------------- --------------- TOTALS $ 153,145,866 $ 46,792,872 $ 11,723,411 $ 595,050,616 ============== ============== ============== ===============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INT'L SMALL CAP FUND
MARKET VALUE PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES SHARES (COST) PROCEEDS INCOME 2004 ------------------------------------------------------------------------------------------------------------------------- Alaska Milk Corporation 49,394,000 $ 0 $ 0 $ 265,072 $ 2,636,690 Baycorp Advantage Limited*+ 9,741,300 0 9,411,341 0 22,765,813 Ducati Motor Holding S.p.A.*+ 3,015,650 5,265,491 4,850,972 0 3,998,101 Grupo Aeroportuario del Sureste S.A. de C.V 1,288,400 4,235,199 0 524,950 28,473,640 Gurit-Heberlein 36,075 6,271,391 0 585,202 25,871,326 Interpump Group S.p.A.* 3,821,000 8,107,126 4,908,218 671,069 19,940,138 Mainfreight Limited 8,935,381 960,574 0 419,260 12,417,454 Matichon Public Company Limited, Foreign Shares 2,039,500 0 0 234,395 4,189,909 Morse 9,527,500 9,900,421 3,409,255 347,968 19,421,809 Pfeiffer Vacuum Technology AG* 397,840 0 2,983,335 335,857 15,338,602 Royal Doulton plc+ 22,373,000 0 0 0 2,787,116 -------------- -------------- -------------- --------------- TOTALS $ 34,740,202 $ 25,563,121 $ 3,383,773 $ 157,840,598 ============== ============== ============== ===============
* Due to transactions during the year, the issuer is no longer an affiliated security. ** Position in issuer liquidated during the year. + Non-income producing security. 67 THE OAKMARK FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 33.85 $ 28.08 $ 32.01 $ 26.95 $ 34.37 Income (Loss) From Investment Operations: Net Investment Income 0.16 0.13 0.12 0.07 0.49 Net Gains (Losses) (both realized and unrealized) 4.81 5.75 (3.85) 5.38 (2.91) ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 4.97 5.88 (3.73) 5.45 (2.42) Less Distributions: Dividends (from net investment income) (0.14) (0.11) (0.20) (0.39) (0.26) Distributions (from capital gains) 0.00 0.00 0.00 0.00 (4.74) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.14) (0.11) (0.20) (0.39) (5.00) ------------ ------------ ------------ ------------ ------------ Redemption fee per share 0.00(a) -- -- -- -- Net Asset Value, End of Period $ 38.68 $ 33.85 $ 28.08 $ 32.01 $ 26.95 ============ ============ ============ ============ ============ Total Return 14.73% 20.99% (11.77)% 20.42% (7.55)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 6,474.0 $ 4,769.4 $ 3,300.9 $ 3,109.1 $ 2,038.7 Ratio of Expenses to Average Net Assets 1.05% 1.14% 1.17% 1.15% 1.21% Ratio of Net Investment Income to Average Net Assets 0.47% 0.48% 0.38% 0.73% 1.42% Portfolio Turnover Rate 19% 21% 44% 57% 50%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 5, 2001 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 (b) -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 33.68 $ 28.04 $ 31.97 $ 32.09 Income (Loss) From Investment Operations: Net Investment Income 0.04(c) 0.05 0.16 0.05 Net Gains (Losses) on Securities (both realized and unrealized) 4.78 5.69 (3.92) (0.17) ------------ ------------ ------------ ------------ Total From Investment Operations: 4.82 5.74 (3.76) (0.12) Less Distributions: Dividends (from net investment income) (0.05) (0.10) (0.17) 0.00 Distributions (from capital gains) 0.00 0.00 0.00 0.00 ------------ ------------ ------------ ------------ Total Distributions (0.05) (0.10) (0.17) 0.00 Net Asset Value, End of Period $ 38.45 $ 33.68 $ 28.04 $ 31.97 ============ ============ ============ ============ Total Return 14.32% 20.52% (11.85)% (0.37)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 51.9 $ 21.1 $ 7.7 $ 0.1 Ratio of Expenses to Average Net Assets 1.40% 1.53% 1.44% 1.32%* Ratio of Net Investment Income to Average Net Assets 0.11% 0.06% 0.35% 0.46%* Portfolio Turnover Rate 19% 21% 44% 57%
* Data has been annualized. (a) Amount rounds to less than $0.01 (b) The date on which Class II shares were first sold to the public was April 5, 2001. (c) Computed using average shares outstanding throughout the period. 68 THE OAKMARK SELECT FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 27.55 $ 21.67 $ 25.20 $ 21.45 $ 20.92 Income (Loss) From Investment Operations: Net Investment Income 0.15(a) 0.05 0.02 0.03 0.13 Net Gains (Losses) on Securities (both realized and unrealized) 3.60 5.85 (3.50) 5.17 4.32 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 3.75 5.90 (3.48) 5.20 4.45 Less Distributions: Dividends (from net investment income) (0.10) (0.02) (0.05) (0.09) (0.20) Distributions (from capital gains) 0.00 0.00 0.00 (1.36) (3.72) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.10) (0.02) (0.05) (1.45) (3.92) ------------ ------------ ------------ ------------ ------------ Redemption Fee Per Share 0.00(b) -- -- -- -- Net Asset Value, End of Period $ 31.20 $ 27.55 $ 21.67 $ 25.20 $ 21.45 ============ ============ ============ ============ ============ Total Return 13.64% 27.25% (13.85)% 25.75% 24.53% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 5,463.0 $ 4,993.0 $ 3,717.6 $ 4,161.4 $ 1,772.0 Ratio of Expenses to Average Net Assets 1.00% 1.02% 1.07% 1.08% 1.17% Ratio of Net Investment Income to Average Net Assets 0.50% 0.23% 0.09% 0.26% 0.76% Portfolio Turnover Rate 14% 20% 32% 21% 69%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
DECEMBER 31, 1999 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 (c) ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 27.37 $ 21.56 $ 25.10 $ 21.40 $ 18.42 Income (Loss) From Investment Operations: Net Investment Income (Loss) 0.09(a) 0.00(b) (0.04) 0.00(b) 0.10 Net Gains (Losses) on Securities (both realized and unrealized) 3.58 5.81 (3.50) 5.10 2.88 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 3.67 5.81 (3.54) 5.10 2.98 Less Distributions: Dividends (from net investment income) (0.04) 0.00 0.00 (0.06) 0.00 Distributions (from capital gains) 0.00 0.00 0.00 (1.34) 0.00 ------------ ------------ ------------ ------------ ------------ Total Distributions (0.04) 0.00 0.00 (1.40) 0.00 Net Asset Value, End of Period $ 31.00 $ 27.37 $ 21.56 $ 25.10 $ 21.40 ============ ============ ============ ============ ============ Total Return 13.40% 26.95% (14.10)% 25.28% 16.18% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 98.0 $ 93.1 $ 64.4 $ 35.4 $ 6.8 Ratio of Expenses to Average Net Assets 1.21% 1.29% 1.36% 1.40% 1.41%* Ratio of Net Investment Income (Loss) to Average Net Assets 0.29% (0.04)% (0.19)% (0.08)% 0.59%* Portfolio Turnover Rate 14% 20% 32% 21% 69%
* Data has been annualized. (a) Computed using average shares outstanding throughout the period. (b) Amount rounds to less than $0.01 per share. (c) The date on which Class II shares were first sold to the public was December 31, 1999. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 69 THE OAKMARK EQUITY AND INCOME FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 20.30 $ 17.18 $ 17.45 $ 16.50 $ 15.68 Income (Loss) From Investment Operations: Net Investment Income 0.15 0.17 0.33(a) 0.08 0.35 Net Gains (Losses) on Securities (both realized and unrealized) 2.81 3.19 (0.40) 2.11 2.28 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 2.96 3.36 (0.07) 2.19 2.63 Less Distributions: Dividends (from net investment income) (0.14) (0.24) (0.16) (0.24) (0.45) Distributions (from capital gains) 0.00 0.00 (0.04) (1.00) (1.36) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.14) (0.24) (0.20) (1.24) (1.81) Redemption fee per share 0.00(b) -- -- -- -- Net Asset Value, End of Period $ 23.12 $ 20.30 $ 17.18 $ 17.45 $ 16.50 ============ ============ ============ ============ ============ Total Return 14.64% 19.75% (0.47)% 14.40% 18.51% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 7,577.9 $ 4,138.0 $ 2,241.9 $ 620.1 $ 54.5 Ratio of Expenses to Average Net Assets 0.92% 0.93% 0.96% 0.98% 1.24% Ratio of Net Investment Income to Average Net Assets 0.78% 1.07% 1.71% 2.07% 3.04% Portfolio Turnover Rate 72% 48% 73% 124% 87%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JULY 13, 2000 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 (c) ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 20.24 $ 17.15 $ 17.40 $ 16.49 $ 15.51 Income (Loss) From Investment Operations: Net Investment Income 0.11 0.16 0.30(a) 0.07 0.30 Net Gains (Losses) on Securities (both realized and unrealized) 2.79 3.15 (0.40) 2.08 0.68 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 2.90 3.31 (0.10) 2.15 0.98 Less Distributions: Dividends (from net investment income) (0.11) (0.22) (0.11) (0.24) 0.00 Distributions (from capital gains) 0.00 0.00 (0.04) (1.00) 0.00 ------------ ------------ ------------ ------------ ------------ Total Distributions (0.11) (0.22) (0.15) (1.24) 0.00 Net Asset Value, End of Period $ 23.03 $ 20.24 $ 17.15 $ 17.40 $ 16.49 ============ ============ ============ ============ ============ Total Return 14.36% 19.46% (0.60)% 14.07% 6.32% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 478.7 $ 246.6 $ 118.7 $ 3.3 $ 0.4 Ratio of Expenses to Average Net Assets 1.17% 1.17% 1.20% 1.23% 1.32%* Ratio of Net Investment Income to Average Net Assets 0.53% 0.84% 1.50% 1.95% 2.59%* Portfolio Turnover Rate 72% 48% 73% 124% 87%
* Data has been annualized. (a) Computed using average shares outstanding throughout the period. (b) Amount rounds to less than $0.01 per share. (c) The date on which Class II shares were first sold to the the public was July 13, 2000. 70 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 16.98 $ 11.30 $ 10.83 Income (Loss) From Investment Operations: Net Investment Income 0.09 0.01 0.00(a)(b) Net Gains (Losses) on Securities (both realized and unrealized) 2.71 5.67 0.76(c) ------------- ------------- ------------- Total From Investment Operations: 2.80 5.68 0.76 Less Distributions: Dividends (from net investment income) 0.00(a) 0.00 0.00 Distributions (from capital gains) (0.05) 0.00 (0.29) ------------- ------------- ------------- Total Distributions (0.05) 0.00 (0.29) ------------- ------------- ------------- Redemption fee per share 0.00(a) -- -- Net Asset Value, End of Period $ 19.73 $ 16.98 $ 11.30 ============= ============= ============= Total Return 16.54% 50.27% 6.84% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 1,336.3 $ 704.8 $ 175.6 Ratio of Expenses to Average Net Assets 1.26% 1.28% 1.55% Ratio of Net Investment Income (Loss) to Average Net Assets 0.47% 0.00%(d) (0.01)% Portfolio Turnover Rate 16% 42% 86% YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 --------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 10.91 $ 9.18 Income (Loss) From Investment Operations: Net Investment Income 0.03 0.11 Net Gains (Losses) on Securities (both realized and unrealized) 0.12 1.63 ------------- ------------- Total From Investment Operations: 0.15 1.74 Less Distributions: Dividends (from net investment income) (0.17) (0.01) Distributions (from capital gains) (0.06) 0.00 ------------- ------------- Total Distributions (0.23) (0.01) ------------- ------------- Redemption fee per share -- -- Net Asset Value, End of Period $ 10.83 $ 10.91 ============= ============= Total Return 1.37% 18.97% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 48.2 $ 27.2 Ratio of Expenses to Average Net Assets 1.75%(e) 1.75%(e) Ratio of Net Investment Income (Loss) to Average Net Assets 0.00(e) 0.54%(e) Portfolio Turnover Rate 114% 147%
(a) Amount rounds to less than $0.01 per share. (b) Computed using average shares outstanding throughout the period. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating net asset value per share of the class. (d) Amount rounds to less than 0.01%. (e) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
SEPTEMBER 30, SEPTEMBER 30, 2001 2000 --------------------------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.80% 1.96% Ratio of Net Income (Loss) to Average Net Assets (0.05)% 0.34%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 71 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
OCTOBER 10, 2001 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 (a) -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 16.84 $ 11.24 $ 11.25 Income (Loss) From Investment Operations: Net Investment Income (Loss) 0.05 0.02 (0.03) Net Gains (Losses) on Securities (both realized and unrealized) 2.69 5.58 0.31(b) -------------- -------------- -------------- Total From Investment Operations: 2.74 5.60 0.28 Less Distributions: Dividends (from net investment income) 0.00 0.00 0.00 Distributions (from capital gains) (0.05) 0.00 (0.29) -------------- -------------- -------------- Total Distributions (0.05) 0.00 (0.29) Net Asset Value, End of Period $ 19.53 $ 16.84 $ 11.24 ============== ============== ============== Total Return 16.32% 49.82% 2.31% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 24.7 $ 5.8 $ 0.6 Ratio of Expenses to Average Net Assets 1.50% 1.46% 1.86%* Ratio of Net Investment Income (Loss) to Average Net Assets 0.37% (0.01)% (0.26)%* Portfolio Turnover Rate 16% 42% 86%
* Data has been annualized. (a) The date on which Class II shares were first offered for sale to the public was October 10, 2001. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating net asset value per share of the class. 72 THE OAKMARK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 15.67 $ 12.17 $ 12.51 $ 15.40 $ 13.95 Income (Loss) From Investment Operations: Net Investment Income 0.24 0.11 0.14 0.20 1.02 Net Gains (Losses) on Securities (both realized and unrealized) 3.18 3.52 (0.31) (2.07) 0.92 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 3.42 3.63 (0.17) (1.87) 1.94 Less Distributions: Dividends (from net investment income) (0.11) (0.13) (0.17) (0.51) (0.49) Distributions (from capital gains) 0.00 0.00 0.00 (0.51) 0.00 ------------ ------------ ------------ ------------ ------------ Total Distributions (0.11) (0.13) (0.17) (1.02) (0.49) ------------ ------------ ------------ ------------ ------------ Redemption fee per share 0.00(a) -- -- -- -- Net Asset Value, End of Period $ 18.98 $ 15.67 $ 12.17 $ 12.51 $ 15.40 ============ ============ ============ ============ ============ Total Return 21.92% 29.97% (1.53)% (13.10)% 14.27% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 4,036.9 $ 2,676.6 $ 1,393.8 $ 738.5 $ 782.4 Ratio of Expenses to Average Net Assets 1.20% 1.25% 1.31% 1.30% 1.30% Ratio of Net Investment Income to Average Net Assets 1.40% 1.03% 1.34% 1.40% 1.87% Portfolio Turnover Rate 21% 34% 24% 58% 64%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
NOVEMBER 4, 1999 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 (b) ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 15.58 $ 12.13 $ 12.47 $ 15.37 $ 14.36 Income (Loss) From Investment Operations: Net Investment Income 0.18 0.08 0.15 0.17 0.96 Net Gains (Losses) on Securities (both realized and unrealized) 3.16 3.48 (0.37) (2.10) 0.54 ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 3.34 3.56 (0.22) (1.93) 1.50 Less Distributions: Dividends (from net investment income) (0.06) (0.11) (0.12) (0.49) (0.49) Distributions (from capital gains) 0.00 0.00 0.00 (0.48) 0.00 ------------ ------------ ------------ ------------ ------------ Total Distributions (0.06) (0.11) (0.12) (0.97) (0.49) Net Asset Value, End of Period $ 18.86 $ 15.58 $ 12.13 $ 12.47 $ 15.37 ============ ============ ============ ============ ============ Total Return 21.52% 29.52% (1.76)% (13.44)% 10.79% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 259.2 $ 123.2 $ 48.5 $ 1.9 $ 0.1 Ratio of Expenses to Average Net Assets 1.53% 1.67% 1.58% 1.64% 1.50%* Ratio of Net Investment Income to Average Net Assets 1.18% 0.69% 1.33% 0.62% 1.98%* Portfolio Turnover Rate 21% 34% 24% 58% 64%
* Data has been annualized. (a) Amount rounds to less than $0.01 per share. (b) The date on which Class II shares were first sold to the public was November 4, 1999. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 73 THE OAKMARK INTERNATIONAL SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 13.74 $ 10.17 $ 10.00 $ 11.51 $ 12.64 Income (Loss) From Investment Operations: Net Investment Income 0.11 0.11 0.11 0.13 0.23 Net Gains (Losses) on Securities (both realized and unrealized) 4.52 3.82 0.36(a) (0.81) (0.66) ------------ ------------ ------------ ------------ ------------ Total From Investment Operations: 4.63 3.93 0.47 (0.68) (0.43) Less Distributions: Dividends (from net investment income) (0.12) (0.09) (0.16) (0.34) (0.11) Distributions (from capital gains) 0.00 (0.27) (0.14) (0.49) (0.59) ------------ ------------ ------------ ------------ ------------ Total Distributions (0.12) (0.36) (0.30) (0.83) (0.70) ------------ ------------ ------------ ------------ ------------ Redemption Fee Per Share 0.01 -- -- -- -- Net Asset Value, End of Period $ 18.26 $ 13.74 $ 10.17 $ 10.00 $ 11.51 ============ ============ ============ ============ ============ Total Return 33.94% 39.78% 4.68% (6.18)% (3.44)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 734.1 $ 477.8 $ 357.7 $ 118.9 $ 90.3 Ratio of Expenses to Average Net Assets 1.49% 1.57% 1.64% 1.74% 1.77% Ratio of Net Investment Income to Average Net Assets 0.72% 0.99% 1.28% 1.83% 1.99% Portfolio Turnover Rate 29% 30% 42% 49% 40%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JANUARY 8, 2001 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2001 (b) ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 13.69 $ 10.14 $ 9.97 $ 10.73 Income (Loss) From Investment Operations: Net Investment Income 0.13 0.08 0.13(c) 0.15 Net Gains (Losses) on Securities (both realized and unrealized) 4.52 3.81 0.30(a) (0.91) ------------ ------------ ------------ ------------ Total From Investment Operations: 4.65 3.89 0.43 (0.76) Less Distributions: Dividends (from net investment income) (0.09) (0.07) (0.12) 0.00 Distributions (from capital gains) 0.00 (0.27) (0.14) 0.00 ------------ ------------ ------------ ------------ Total Distributions (0.09) (0.34) (0.26) 0.00 Net Asset Value, End of Period $ 18.25 $ 13.69 $ 10.14 $ 9.97 ============ ============ ============ ============ Total Return 34.11% 39.39% 4.25% (7.08)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.5 $ 0.4 $ 0.3 $ 0.0 Ratio of Expenses to Average Net Assets 1.39% 1.81% 1.87% 1.97%* Ratio of Net Investment Income to Average Net Assets 0.75% 0.72% 1.06% 1.76%* Portfolio Turnover Rate 29% 30% 42% 49%
* Data has been annualized. (a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating net asset value per share of the class. (b) The date on which Class II shares were first sold to the public was January 8, 2001. (c) Computed using average shares outstanding throughout the period. 74 THE OAKMARK FAMILY OF FUNDS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF HARRIS ASSOCIATES INVESTMENT TRUST: WE HAVE AUDITED THE ACCOMPANYING STATEMENT OF ASSETS AND LIABILITIES, INCLUDING THE SCHEDULES OF INVESTMENTS, OF HARRIS ASSOCIATES INVESTMENT TRUST COMPRISING THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK GLOBAL FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND (COLLECTIVELY, THE "FUNDS"), AS OF SEPTEMBER 30, 2004, THE RELATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED, THE STATEMENTS OF CHANGES IN NET ASSETS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED, AND THE FINANCIAL HIGHLIGHTS FOR EACH OF THE THREE YEARS IN THE PERIOD THEN ENDED. THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE THE RESPONSIBILITY OF THE FUNDS' MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS BASED ON OUR AUDITS. THE FUNDS' FINANCIAL HIGHLIGHTS FOR THE PERIODS ENDED PRIOR TO SEPTEMBER 30, 2002 WERE AUDITED BY OTHER AUDITORS WHO HAVE CEASED OPERATIONS. THOSE AUDITORS EXPRESSED AN UNQUALIFIED OPINION ON THOSE FINANCIAL HIGHLIGHTS IN THEIR REPORT DATED OCTOBER 26, 2001. WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH STANDARDS OF THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (UNITED STATES). THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE FREE OF MATERIAL MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. OUR PROCEDURES INCLUDED CONFIRMATION OF SECURITIES OWNED AS OF SEPTEMBER 30, 2004, BY CORRESPONDENCE WITH THE FUNDS' CUSTODIAN AND BROKERS; WHERE REPLIES WERE NOT RECEIVED FROM BROKERS, WE PERFORMED OTHER AUDITING PROCEDURES. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION. IN OUR OPINION, THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF EACH OF THE FUNDS AS OF SEPTEMBER 30, 2004, THE RESULTS OF THEIR OPERATIONS FOR THE YEAR THEN ENDED, THE CHANGES IN THEIR NET ASSETS AND THEIR FINANCIAL HIGHLIGHTS FOR THE RESPECTIVE STATED PERIODS, IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. /s/ DELOITTE & TOUCHE LLP Chicago, Illinois October 27, 2004 75 FEDERAL TAX INFORMATION (UNAUDITED) Global, International and Int'l Small Cap paid qualifying foreign taxes of $1,916,498, $10,245,147 and $1,906,580 and earned $20,181,214, $108,932,465 and $15,654,765 foreign source income during the year ended September 30, 2004, respectively. Pursuant to Section 853 of the Internal Revenue Code, Global, International and Int'l Small Cap designated $0.03, $0.05 and $0.05 per share as foreign taxes paid and $0.29, $0.48 and $0.39 per share as income earned from foreign sources for the year ended September 30, 2004, respectively. Qualified dividend income ("QDI") received by the Funds through September 30, 2004 that qualified for a reduced tax rate pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003 are as follows:
FUND QDI --------------------------------------------------------------------- Oakmark $ 81,150,924 Select 80,755,137 Equity and Income 40,348,482 Global 21,855,375 International 83,032,159 Int'l Small Cap 15,145,196
For corporate shareholders, a portion of the ordinary dividends paid during the Funds' year ended September 30, 2004, qualified for the dividends received deduction, as follows:
FUND --------------------------------------------------------------------- Oakmark 100.00% Select 100.00% Equity and Income 54.99%
A portion of the dividends paid during the Funds' year ended September 30, 2004, qualified as QDI, as follows:
FUND QDI % --------------------------------------------------------------------- Oakmark 68% Select 87% Equity and Income 71% Global 100% International 95% Int'l Small Cap 99%
76 This material must be preceded or accompanied by a prospectus. To order a prospectus, which explains management fees and expenses and the special risks of investing in the funds, visit www.oakmark.com or call 1-800-OAKMARK. Please read the prospectus carefully before investing. The discussion of investments and investment strategy of the funds represents the investments of the funds and the views of fund managers and Harris Associates L.P., the funds' investment adviser, at the time of this article, and are subject to change without notice. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on Class I shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data call 1-800-OAKMARK. 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 EQUITY & INCOME FUND CLOSED TO CERTAIN NEW INVESTORS AS OF 5/7/04. EQUITY AND INCOME INVESTS IN MEDIUM- AND LOWER-QUALITY DEBT SECURITIES THAT HAVE HIGHER YIELD POTENTIAL BUT PRESENT GREATER INVESTMENT AND CREDIT RISK THAN HIGHER-QUALITY SECURITIES, WHICH MAY RESULT IN GREATER SHARE PRICE VOLATILITY. AN ECONOMIC DOWNTURN COULD SEVERELY DISRUPT THE MARKET IN MEDIUM OR LOWER GRADE DEBT SECURITIES AND ADVERSELY AFFECT THE VALUE OF OUTSTANDING BONDS AND THE ABILITY OF THE ISSUERS TO REPAY PRINCIPAL AND INTEREST. THE OAKMARK GLOBAL FUND AND THE OAKMARK INTERNATIONAL FUND CLOSED TO CERTAIN NEW INVESTORS AS OF 12/15/03. 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. 1. Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain distributions. 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 - 9/30/04), IPO's contributed an annualized 1.65% 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 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. 77 5. The quoted passages are taken from "Julian Robertson- A Tiger in the Land of Bulls and Bears" written by Daniel Strachman and published in 2004 by John Wiley & Sons, Inc. 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 is an equally weighted index of the largest 30 funds within the large cap value funds investment objective as defined by Lipper Inc. The index is adjusted for the reinvestment of capital gains and income dividends. This index is unmanaged and investors cannot actually make investments in this index. 8. The S&P MidCap 400 is an unmanaged broad market-weighted index of 400 stocks that are in the next tier down from the S&P 500 and that are chosen for market size, liquidity, and industry group representation. This index is unmanaged and investors cannot actually make investments in this index. 9. 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. 10. 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. 11. Lehman Brothers Government/Corporate Bond Index is a benchmark index made up of the Lehman Brothers Government and Corporate Bond indexes, including U.S. government Treasury and agency securities as well as corporate and Yankee bonds. This index is unmanaged and investors cannot actually make investments in this index. 12. The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. As of December 2003 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. This index is unmanaged and investors cannot actually make investments in this index. 13. 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. 14. The MSCI World Index ex U.S. is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. As of April 2002 the MSCI World Index consisted of the following 22 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. This index is unmanaged and investors cannot actually make investments in this index. 15. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. As of December 2003 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. This index is unmanaged and investors cannot actually make investments in this index. 16. 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. 17. EBIT refers to Earnings Before the deduction of payments for Interest and Taxes and is a measure of operating income. 18. The Lipper International Small Cap Average includes 100 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. 78 THE OAKMARK FAMILY OF FUNDS TRUSTEES AND OFFICERS The board of trustees has overall responsibility for the conduct of the affairs of Harris Associates Investment Trust ("Trust"), and its six series, The Oakmark Family of Funds. Each trustee serves until the next annual meeting of shareholders and until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. Each trustee must retire at the end of the calendar year in which the trustee attains the age of 72. The board of trustees may fill any vacancy on the board provided that after such appointment, at least two-thirds of the trustees have been elected by the shareholders. No person shall be appointed or elected to serve as a trustee after attaining the age of 65. The shareholders may remove a trustee by a vote of two-thirds of the outstanding shares of the Trust at any meeting of shareholders called for the purpose of removing such trustee. The board of trustees elects or appoints the officers of the Trust. The president, any vice president, treasurer and secretary serves until the election and qualification of his or her successor, or until he or she dies, resigns, or is removed or disqualified. Each other officer shall serve at the pleasure of the board of trustees. The board of trustees may remove any officer at any time, with or without cause, by the vote of a majority of the trustees then in office. The names and ages of the trustees and officers, the position each holds with the Trust, the date each was first elected to office, their principal business occupations during the last five years and other directorships held are shown below. NAME AND AGE AT SEPTEMBER 30, 2004, POSITIONS HELD WITH THE TRUST, DATE FIRST ELECTED OR APPOINTED TO OFFICE, PRINCIPAL OCCUPATIONS DURING THE PAST 5 YEARS, OTHER DIRECTORSHIPS HELD TRUSTEES WHO ARE "INTERESTED PERSONS"* Peter S. Voss, 57, Trustee, 1995 Chairman and Chief Executive Officer, IXIS Asset Management Group; Chairman, President and Chief Executive Officer, IXIS Asset Management North America, L.P., formerly CDC IXIS Asset Management North America, L.P. (investment management); Director, Harris Associates, Inc. ("HAI"). John R. Raitt, 49, Trustee, 2003, President, 2004 President and Chief Executive Officer, HAI, Harris Associates Securities L.P. ("HASLP") and Harris Associates L.P. ("HALP"), since 2003; Chief Operating Officer, HALP, 2001-2002; Director of Research, HALP, 1998-2002. None. TRUSTEES WHO ARE NOT "INTERESTED PERSONS" Victor A. Morgenstern, 62, Trustee and Chairman of the Board of Trustees, 1991 President, Resolute Advisors, Inc. (private investment management firm), since 2002; Chairman, Valor Equity Partners, LLC (private equity fund), since 2002; Managing Partner, Drill Hall Partners LLC; Chairman of the Board, HAI, 1996-2000; Chairman, Harris Partners, L.L.C., 1995-2000. Trustee, Illinois Institute of Technology (educational institution); Director, Bio-Sante Pharmaceuticals Inc. (developer of hormone therapy products). Gary N. Wilner, M.D., 63, Trustee and Chairman of the Board of Trustees**, 1993 Senior Attending Physician, Evanston Hospital; Medical Director--Cardiopulmonary Wellness Program, Evanston Hospital Corporation. Director, North American Scientific, Inc. (developer of radioisotopic products for the treatment and diagnosis of disease). 79 Michael J. Friduss, 62, Trustee, 1995 Principal, MJ Friduss & Associates, Inc. (telecommunications consultants). None. Thomas H. Hayden, 53, Trustee, 1995 President, Greenhouse Communications (advertising agency), since 2004; Executive Vice President, Campbell Mithun (advertising and marketing communication agency), prior thereto. None. Christine M. Maki, 43, Trustee, 1995 Vice President--Tax, Hyatt Corporation (hotel management). Director, Illinois CPA Society. Allan J. Reich, 56, Trustee, 1993 Partner, Seyfarth Shaw LLP (law firm), since 2003; Vice Chairman of the law firm D'Ancona & Pflaum LLC, prior thereto. None. Marv R. Rotter, 58, Trustee, 1995 Senior Advisor to Chief Executive Officer, AXA Advisors, LLC (formerly named Rotter & Associates). None. Burton W. Ruder, 60, Trustee, 1995 President, The Academy Financial Group (venture capital investment and transaction financing firm); Manager, Cedar Green Associates (real estate management firm). None. OFFICERS OF THE TRUST Henry R. Berghoef, 55, Vice President and Portfolio Manager (The Oakmark Select Fund), 2000 Director of Domestic Research, HALP, since 2003; Associate Director of Research, 2001-2002; Portfolio Manager and Analyst, HALP. None. Kevin G. Grant, 40, Vice President and Portfolio Manager (The Oakmark Fund), 2000 Portfolio Manager and Analyst, HALP. None. David G. Herro, 43, Vice President and Portfolio Manager (The Oakmark International Fund and The Oakmark International Small Cap Fund), 1992 Chief Investment Officer, International Equity, since 2003; Portfolio Manager and Analyst, HALP. None. John J. Kane, 33, Assistant Treasurer, 1999 Manager--Fund Accounting, HALP. None. Robert M. Levy, 54, Executive Vice President, 2004 Chairman, HAI, Chief Investment Officer, HALP, since 2001; President and Chief Executive Officer, HAI, HALP and HASLP, 1997-2002; Portfolio Manager, HALP. None. Clyde S. McGregor, 51, Vice President and Portfolio Manager (The Oakmark Equity and Income Fund and The Oakmark Global Fund), 1995 Portfolio Manager, HALP. None. William C. Nygren, 45, Vice President and Portfolio Manager (The Oakmark Fund and The Oakmark Select Fund), 1996 Portfolio Manager and Analyst, HALP. None. 80 Vineeta D. Raketich, 33, Vice President, 2003 Manager, International Operations and Client Relations, HALP, since 2003; Supervisor, Mutual Fund and Institutional Services, HALP, prior thereto. None. Janet L. Reali, 53, Vice President and Secretary, 2001 Vice President, General Counsel and Secretary, HAI, HALP and HASLP, since 2001; Senior Executive Vice President, General Counsel and Secretary, Everen Capital Corp. and Everen Securities, Inc. (broker/dealer), 1995-1999. None. Ann W. Regan, 56, Vice President and Assistant Secretary, 1996, Chief Compliance Officer, 2004 Director of Mutual Fund Operations, HALP, 1996-2004. None. Kristi L. Rowsell, 38, Treasurer, 1997 Director, Chief Financial Officer and Treasurer, HAI, Chief Financial Officer, HALP and HASLP, since 1999. None. Edward A. Studzinski, 55, Vice President and Portfolio Manager (The Oakmark Equity and Income Fund), 2000 Portfolio Manager and Analyst, HALP. None. Michael J. Welsh, 41, Vice President and Portfolio Manager (The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap Fund), 1997 Director of International Research, since 2003; Portfolio Manager and Analyst, HALP. None. * Mr. Voss is a trustee who is an "interested person" of the Funds as defined in the Investment Company of 1940, because he is a director of HAI, the general partner and manager of HALP, the investment adviser to the Funds. Mr. Voss is also the Chairman, President and Chief Executive Officer of IXIS Asset Management North America, L.P., formerly CDC IXIS Asset Management North America, L.P., the parent company of HALP. Mr. Raitt is a trustee who is an "interested person" of the Funds because he is the President and Chief Executive Officer of HAI, HASLP and HALP. ** Dr. Wilner will succeed Mr. Morgenstern as Chairman of the Board of Trustees on October 1, 2004. The business address of the officers and trustees is Two North LaSalle Street, #500, Chicago, Illinois 60602. The Statement of Additional Information (SAI) contains further information about the trustees and is available without charge upon your request by calling 1-800-625-6275. 81 THE OAKMARK FAMILY OF FUNDS INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with management teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: a unified effort aimed at identifying the best values in the marketplace. From the list of approved stocks, each fund manager constructs a relatively focused portfolio, built on a stock-by-stock basis from the bottom up. 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 [SIDENOTE] 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. 82 THE OAKMARK GLOSSARY BOOK VALUE - A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. A company's book value often differs substantially from economic value, especially in industries such as media. BUSINESS VALUE/INTRINSIC VALUE - The perceived or estimated actual value of a security, as opposed to its current market price or book value. Business value can be evaluated based on what a knowledgeable buyer would pay for a business if the company were sold in its entirety. GROWTH INVESTING - Investors who look for companies based on whether the stock of a company is growing earnings and/or revenue faster than the industry as a whole or the overall market. Growth investors generally expect high rates of growth to persist, and the stock, in turn, to deliver returns exceeding the market's. A growth mutual fund is generally one that emphasizes stocks believed to offer above-average growth prospects, with little to no emphasis on the stock's current price. M & A (MERGERS & ACQUISITIONS) - Merger: the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Acquisition: can also be called a takeover, and is defined as acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. MARKET CAPITALIZATION (MARKET CAP OR CAP) - The market price of an entire company on any given day, calculated by multiplying the number of shares outstanding by the price per share. MOMENTUM INVESTING - Approach to investing based on the belief that stock price trends are likely to continue. Momentum investors tend to buy stocks that have been outperforming the market and to sell those stocks when their relative performance deteriorates. Momentum investors do not consider a company's underlying value or fundamentals in their investment decisions. MULTIPLE - A ratio used to measure a stock's valuation, usually greater than 1. Sometimes used to mean price/earnings ratio. P/B OR PRICE-TO-BOOK RATIO - A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. P/E OR PRICE-TO-EARNINGS RATIO - The most common measure of a stock's valuation. It is equal to a stock's capitalization divided by its after-tax earnings over a 12-month period. The value is the same whether the calculation is done for the whole company or on a per-share basis. Equivalently, the cost an investor in a given stock must pay per dollar of current annual earnings. Also called earnings multiple. SHARE REPURCHASE - Program through which a corporation buys back its own shares in the open market, typically an indication that the corporation's management believes the stock price is undervalued. VALUE INVESTING - Investors who utilize valuation measures such as business value (including growth rate), price/earnings ratio, price/book ratio, and yield to gauge the attractiveness of a company. Managers who employ a value investment style believe that the true, underlying value of a company is not reflected in its current share price, and, over time, the price has potential to increase as the market recognizes the overall value of the business. Value stocks sell at relatively low prices in relation to their underlying business value, earnings, or book value. Stocks become undervalued for a variety of reasons, including an overall market decline, or when a specific industry falls into disfavor and investors view all companies in that industry in the same light. Consequently, an individual company's stock price may fall, even though it may be only temporarily affected by the industry's problems and its underlying value has remained unchanged. "X TIMES EARNINGS" ("12 TIMES EARNINGS") - Another way to express a stock's price-to-earnings (P/E) ratio. A stock with a P/E ratio of 12 sells at 12 times earnings. 83 [GRAPHIC] (This page has been intentionally left blank.) 84 [OAKMARK FAMILY OF FUNDS LOGO] 1-800-OAKMARK www.oakmark.com The Oakmark Funds are distributed by Harris Associates Securities L.P., member NASD. Date of first use: November 2004. THE OAKMARK FAMILY OF FUNDS OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT CDC IXIS Asset Management Services, Inc. Boston, Massachusetts LEGAL COUNSEL Bell, Boyd & Lloyd LLC Chicago, Illinois INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 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. The Funds will file its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q's are available on the SEC's website at www.sec.gov. The Funds' Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. A description of the policies and procedures the Funds use to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling toll-free 1-800-625-6275; on the Funds website at www.oakmark.com; and on the Securities and Exchange Commissions website at www.sec.gov. 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 Class I shares held for 90 days or less from any Fund. [CHART] THE OAKMARK FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (4/5/01) TO PRESENT (9/30/04) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
THE OAKMARK FUND CLASS II S & P 500 4/5/2001 $ 10,000 $ 10,000 6/30/2001 $ 10,954 $ 10,585 9/30/2001 $ 9,963 $ 9,032 12/31/2001 $ 11,040 $ 9,997 3/31/2002 $ 11,497 $ 10,024 6/30/2002 $ 10,533 $ 8,681 9/30/2002 $ 8,782 $ 7,181 12/31/2002 $ 9,434 $ 7,787 3/31/2003 $ 9,041 $ 7,542 6/30/2003 $ 10,562 $ 8,703 9/30/2003 $ 10,584 $ 8,933 12/31/2003 $ 11,773 $ 10,021 3/31/2004 $ 11,933 $ 10,191 6/30/2004 $ 12,188 $ 10,366 9/30/2004 $ 12,100 $ 10,173
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/04)
SINCE INCEPTION 1-YEAR (4/5/01) ----------------------------------------------------------------------------- OAKMARK FUND CLASS II 14.32% 5.61% S&P 500 13.63% -1.64%
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. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2004 [CHART] THE OAKMARK SELECT FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (12/31/99) TO PRESENT (9/30/04) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
THE OAKMARK SELECT FUND CLASS II S & P 500 12/31/1999 $ 10,000 $ 10,000 3/31/2000 $ 10,885 $ 9,867 6/30/2000 $ 10,309 $ 10,290 9/30/2000 $ 11,618 $ 11,024 12/31/2000 $ 12,542 $ 9,578 3/31/2001 $ 13,876 $ 9,058 6/30/2001 $ 15,146 $ 9,204 9/30/2001 $ 14,554 $ 7,662 12/31/2001 $ 15,755 $ 8,481 3/31/2002 $ 16,137 $ 8,504 6/30/2002 $ 14,821 $ 7,365 9/30/2002 $ 12,502 $ 6,835 12/31/2002 $ 13,748 $ 7,019 3/31/2003 $ 13,673 $ 6,337 6/30/2003 $ 15,871 $ 7,290 9/3/2003 $ 15,871 $ 7,660 12/31/2003 $ 17,689 $ 8,078 3/31/2004 $ 18,113 $ 8,778 6/30/2004 $ 17,822 $ 8,627 9/30/2004 $ 17,996 $ 8,150
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/04)
SINCE INCEPTION 1-YEAR (12/31/99) ------------------------------------------------------------------------------ OAKMARK SELECT FUND CLASS II 13.40% 13.16% S&P 500 13.63% -4.21%
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. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD,November 2004 [CHART] THE OAKMARK EQUITY AND INCOME FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (7/13/00) TO PRESENT (9/30/04) AS COMPARED TO THE LIPPER BALANCED FUND INDEX
THE OAKMARK EQUITY AND LIPPER BALANCED INCOME FUND CLASS II FUND INDEX 7/13/2000 $ 10,000 $ 10,000 9/30/2000 $ 10,632 $ 10,199 12/31/2000 $ 11,117 $ 10,064 3/31/2001 $ 11,563 $ 9,559 6/30/2001 $ 12,497 $ 9,895 9/30/2001 $ 12,128 $ 9,145 12/31/2001 $ 13,089 $ 9,738 3/31/2002 $ 13,637 $ 9,797 6/30/2002 $ 13,187 $ 9,149 9/30/2002 $ 12,056 $ 8,246 12/31/2002 $ 12,786 $ 8,697 3/31/2003 $ 12,487 $ 8,537 6/30/2003 $ 14,123 $ 9,469 9/30/2003 $ 14,401 $ 9,663 12/31/2003 $ 15,710 $ 10,431 3/31/2004 $ 16,354 $ 10,680 6/30/2004 $ 16,654 $ 10,666 9/30/2004 $ 16,468 $ 10,685
ANNUAL AVERAGE TOTAL RETURNS (as of 9/30/04)
SINCE INCEPTION 1-YEAR (7/13/00) ------------------------------------------------------------------------------ OAKMARK EQUITY & INCOME FUND CLASS II 14.36% 12.55% Lipper Balanced Fund Index 10.94% 1.06%
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. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2004 [CHART] THE OAKMARK GLOBAL FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (10/10/01) TO PRESENT (9/30/04) AS COMPARED TO THE MSCI WORLD INDEX
THE OAKMARK GLOBAL FUND CLASS II MSCI WORLD INDEX 10/10/2001 $ 10,000 $ 10,000 12/31/2001 $ 12,060 $ 10,859 3/31/2002 $ 13,362 $ 10,896 6/30/2002 $ 12,451 $ 9,902 9/30/2002 $ 10,231 $ 8,082 12/31/2002 $ 11,760 $ 8,700 3/31/2003 $ 10,494 $ 8,260 6/30/2003 $ 14,008 $ 9,667 9/30/2003 $ 15,328 $ 10,134 12/31/2003 $ 17,454 $ 11,580 3/31/2004 $ 18,111 $ 11,883 6/30/2004 $ 18,358 $ 11,987 9/30/2004 $ 17,828 $ 11,867
ANNUAL AVERAGE TOTAL RETURNS (as of 9/30/04)
SINCE INCEPTION 1-YEAR (10/10/01) ------------------------------------------------------------------------------ OAKMARK GLOBAL FUND CLASS II 16.32% 21.45% MSCI World 18.10% 4.74%
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. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2004 THE OAKMARK INTERNATIONAL FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (11/4/99) TO PRESENT (9/30/04) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD FUND CLASS II EX U.S. INDEX 11/4/1999 $ 10,000 $ 10,000 12/31/1999 $ 10,596 $ 11,291 3/31/2000 $ 10,567 $ 11,353 6/30/2000 $ 11,303 $ 10,977 9/30/2000 $ 11,079 $ 10,139 12/31/2000 $ 11,890 $ 9,781 3/31/2001 $ 10,836 $ 8,412 6/30/2001 $ 11,905 $ 8,346 9/30/2001 $ 9,590 $ 7,175 12/31/2001 $ 11,245 $ 7,688 3/31/2002 $ 12,525 $ 7,732 6/30/2002 $ 12,230 $ 7,559 9/30/2002 $ 9,413 $ 6,076 12/31/2002 $ 10,259 $ 6,474 3/31/2003 $ 9,046 $ 5,987 6/30/2003 $ 11,331 $ 7,137 9/30/2003 $ 12,192 $ 7,714 12/31/2003 $ 14,093 $ 9,026 3/31/2004 $ 14,595 $ 9,409 6/30/2004 $ 14,854 $ 9,418 9/30/2004 $ 14,815 $ 9,436
ANNUAL AVERAGE TOTAL RETURNS (as of 9/30/04)
SINCE INCEPTION 1-YEAR (11/4/99) --------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND CLASS II 21.52% 8.34% MSCI World ex. U.S. 25.58% -1.38%
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. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2004 [CHART] THE OAKMARK INTERNATIONAL SMALL CAP FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (1/8/01) TO PRESENT (9/30/04) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX
THE OAKMARK INTERNATIONAL MSCI WORLD SMALL CAP FUND CLASS II EX U.S. INDEX 1/8/2001 $ 10,000 $ 10,000 3/31/2001 $ 10,140 $ 8,599 6/30/2001 $ 10,494 $ 8,532 9/30/2001 $ 9,292 $ 7,335 12/31/2001 $ 11,062 $ 7,860 3/31/2002 $ 12,180 $ 7,905 6/30/2002 $ 12,466 $ 7,728 9/30/2002 $ 9,686 $ 6,212 12/31/2002 $ 10,454 $ 6,618 3/31/2003 $ 9,172 $ 6,120 6/30/2003 $ 11,845 $ 7,297 9/30/2003 $ 13,501 $ 7,886 12/31/2003 $ 15,915 $ 9,227 3/31/2004 $ 16,946 $ 9,619 6/30/2004 $ 17,433 $ 9,628 9/30/2004 $ 18,107 $ 9,647
ANNUAL AVERAGE TOTAL RETURNS (as of 9/30/04)
SINCE INCEPTION 1-YEAR (1/8/01) ----------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND CLASS II 34.11% 17.26% MSCI World ex. U.S. 25.58% -0.84%
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. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2004 FUND EXPENSES A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds. ACTUAL EXPENSES The following table provides information about actual account values and actual fund expenses for Class II of each Fund. The table shows the expenses a Class II shareholder would have paid on a $1,000 investment in each Fund from April 1, 2004 to September 30, 2004 as well as how much a $1,000 investment would be worth at the close of the period, assuming actual fund returns and expenses. A Class II shareholder can estimate expenses incurred for the period by dividing the account value at September 30, 2004 by $1,000 and multiplying the result by the number in the Expenses Paid During the Period row as shown below.
THE OAKMARK THE OAKMARK THE OAKMARK INTERNATIONAL THE OAKMARK THE OAKMARK EQUITY AND THE OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND ------------------------------------------------------------------------------------------------------------------------- Beginning Account Value $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 ------------------------------------------------------------------------------------------------------------------------- Ending Account Value $ 1,014.00 $ 993.60 $ 1,007.00 $ 984.40 $ 1,015.10 $ 1,068.50 ------------------------------------------------------------------------------------------------------------------------- Expenses Paid During Period* $ 7.00 $ 5.83 $ 5.92 $ 7.59 $ 7.86 $ 6.62 ------------------------------------------------------------------------------------------------------------------------- Annualized Expense Ratio 1.39% 1.17% 1.18% 1.53% 1.56% 1.28% -------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to each fund's annualized expense ratio for Class II, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 366 (to reflect the one-half year period). HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The following table provides information about hypothetical account values and hypothetical expenses for Class II of each Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses shareholders paid for the period. Shareholders may use this information to compare the ongoing costs of investing in a Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption fees. Therefore, the third line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
THE OAKMARK THE OAKMARK THE OAKMARK INTERNATIONAL THE OAKMARK THE OAKMARK EQUITY AND THE OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND ------------------------------------------------------------------------------------------------------------------------- Beginning Account Value $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 ------------------------------------------------------------------------------------------------------------------------- Ending Account Value $ 1,018.05 $ 1,019.15 $ 1,019.10 $ 1,017.35 $ 1,017.20 $ 1,018.60 ------------------------------------------------------------------------------------------------------------------------- Expenses Paid During Period* $ 7.01 $ 5.91 $ 5.96 $ 7.72 $ 7.87 $ 6.46 ------------------------------------------------------------------------------------------------------------------------- Annualized Expense Ratio 1.39% 1.17% 1.18% 1.53% 1.56% 1.28% -------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to each fund's annualized expense ratio for Class II, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 366 (to reflect the one-half year period). ITEM 2. CODE OF ETHICS. (a) Registrant has adopted a code of ethics (the "Code") that applies to its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. (b) No disclosures are required by this Item 2(b). (c) During the period covered by the report, no amendments were made to the provisions of the Code. (d) During the period covered by the report, Registrant did not grant any waivers, including implicit waivers, from the provisions of the Code. (e) Not applicable. (f) A copy of the Code is filed as Exhibit (a)(1) to this Form N-CSR. Copies of the Code will also be made available free of charge upon request, by writing or calling The Oakmark Funds, P.O. Box 8510, Boston, MA 02266-8510, 1-800-OAKMARK, (1-800-625-6275). ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Registrant's board of trustees has determined that each of the following five members of the Registrant's audit committee qualifies as an "audit committee financial expert," as such term is defined in Instruction 2(b) to Item 3 of Form N-CSR: Thomas H. Hayden, Christine M. Maki, Allan J. Reich, Marv R. Rotter and Gary N. Wilner, M.D. Each of those members of Registrant's audit committee is "independent" as such term is defined in paragraph (a)(2) of Item 3 of Form N-CSR. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Aggregate fees billed to the Registrant for professional services rendered by the Registrant's accountant were as follows:
FISCAL YEAR FISCAL YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 ------------- ------------- Audit Fees(1) $ 178,550 $ 171,550 Audit-Related Fees(2) $ 49,000 $ 37,250 Tax Fees(3) $ 25,850 $ 25,000 All Other Fees(4) $ 0 $ 0
During its regularly scheduled periodic meetings, the Registrant's audit committee will pre-approve all audit, audit-related, tax and other services to be provided by the principal accountants of the Registrant. The audit committee has authorized its chairman to exercise that authority in the intervals between meetings; and the chairman presents any such pre-approvals to the audit committee at its next regularly scheduled meeting. Under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, pre-approval of non-audit services may waived provided that: 1) the aggregate amount of fees for all such services provided constitutes no more than five percent of the total amount of fees paid by the Registrant to its principal accountant during the fiscal year in which such services are provided 2) such services were not recognized by management at the time of engagement as non-audit services and 3) such services are promptly brought to the attention of the Registrant's audit committee by management and approved prior to the completion of the audit. No audit-related, tax or non-audit services were approved by waiver pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Less than 50 percent of the hours expended on the principal accountant's engagement to audit the Registrant's financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. ---------- (1) "Audit Fees" include amounts for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. (2) "Audit-Related Fees" include amounts for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant's financial statements, specifically the semi-annual reviews of the Funds in fiscal year 2004 and the Sarbanes-Oxley 302 readiness for the Funds in fiscal year 2003, $37,250 of which were borne by the investment adviser, Harris Associates L.P. (and are not included in the chart). (3) "Tax Fees" include amounts for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning. The tax fees attributable to liquidation of The Oakmark Small Cap Fund were $2,100 and were borne by the investment adviser, Harris Associates L.P. (and are not included in the chart). (4) "All Other Fees" include amounts for products and services provided by the principal accountant. No such products and services were provided. The aggregate fees billed for the fiscal years ended September 30, 2004 and September 30, 2003 by the Registrant's principal accountant for non-audit services rendered to the Registrant, its investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Registrant were $253,400 and $233,800, respectively. The audit committee of Registrant's board of trustees has considered whether the provision of non-audit services that were rendered by Registrant's principal accountant to Registrant's investment adviser, and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal account's independence. No such services were rendered. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The Schedule of Investments in securities of unaffiliated issuers is included as part of the annual report to shareholders filed under Item 1 of this Form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The governance committee of Registrant's board of trustees, which is comprised entirely of independent trustees, is responsible for selecting and nominating persons for election or appointment as members of the Registrant's board of trustees ("Board"). At a Board meeting held on July 21, 2004, the Board adopted policies and procedures by which the governance committee will consider shareholder recommendations for trustee at such times as it considers electing new trustees to the Board. On July 21, 2004 the Board also adopted procedures to be followed by a shareholder wishing to propose a candidate for consideration by the committee. Under those procedures, a shareholder may recommend a candidate for election to the Board by: (a) mailing his or her recommendation in writing to the attention of the chair of the Board (Dr. Wilner) or the chair of the governance committee (Mr. Friduss), in either case c/o Janet Reali, Secretary, Harris Associates Investment Trust at Two North LaSalle Street, Suite 500, Chicago, Illinois 60602-3790; and (b) including in the recommendation, at a minimum: (i) the name, address, date of birth and business, educational, and/or other pertinent background of the person being recommended, (ii) a statement concerning whether the person is an "interested person" as defined in the Investment Company Act of 1940, (iii) any other information that the Funds would be required to include in a proxy statement concerning the person if he or she was nominated, (iv) the name and address of the person submitting the recommendation, together with the number of Fund shares held by such person and the period for which the shares have been held, and (v) the names of at least three professional references. The recommendation also can include any additional information which the person submitting it believes would assist the governance committee in evaluating the recommendation. ITEM 10. CONTROLS AND PROCEDURES. Based on an evaluation of the disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure Controls"), the Disclosure Controls are effectively designed to ensure that information required to be disclosed by the Registrant in this report is recorded, processed, summarized and reported within 90 days prior to the filing of this report, including ensuring that information required to be disclosed in this report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant's most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a)(1) Code of Ethics for Principal Executive Officer and Senior Financial Officers (as referenced in Item 2 above), attached hereto as Exhibit (a)(1). (2) Certifications of John R. Raitt, Principal Executive Officer, and Kristi L. Rowsell, Principal Financial Officer, pursuant to Rule 30a-2 under the Investment Company Act of 1940 (17 CFR 270.30a-2), attached hereto as Exhibits (a)(2)(i) and (a)(2)(ii). (b) Certification of John R. Raitt, Principal Executive Officer and Kristi L. Rowsell, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto as Exhibit (b). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Harris Associates Investment Trust By: /s/ John R. Raitt -------------------------------------- John R. Raitt Principal Executive Officer Date: November 18, 2004 -------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ John R. Raitt -------------------------------------- John R. Raitt Principal Executive Officer Date: November 18, 2004 -------------------------------------- By: /s/ Kristi L. Rowsell -------------------------------------- Kristi L. Rowsell Principal Financial Officer Date: November 18, 2004 --------------------------------------