-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RKzF9nwrMgZGWSDLpCInuCj9ITcZgn+CWD43tMaFQYGEGUItsGKYLMucLv97RjYD ozo4Kw9BBL5qvFsbxogeug== 0001047469-05-002274.txt : 20050203 0001047469-05-002274.hdr.sgml : 20050203 20050203164458 ACCESSION NUMBER: 0001047469-05-002274 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050203 DATE AS OF CHANGE: 20050203 EFFECTIVENESS DATE: 20050203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRIS ASSOCIATES INVESTMENT TRUST CENTRAL INDEX KEY: 0000872323 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-06279 FILM NUMBER: 05573852 BUSINESS ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO N LASALLE ST STE 500 CITY: CHICAGO STATE: IL ZIP: 60602-3790 BUSINESS PHONE: 8004769625 MAIL ADDRESS: STREET 1: HARRIS ASSOCIATES LP STREET 2: TWO NORTH LASALLE STREET STE 500 CITY: CHICAGO STATE: IL ZIP: 60602-3790 N-30B-2 1 a2150274zn-30b_2.txt N-30B-2 [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 FIRST QUARTER REPORT DECEMBER 31, 2004 [OAKMARK LOGO] ADVISED BY HARRIS ASSOCIATES L.P. THE OAKMARK FUNDS 2005 FIRST QUARTER REPORT PRESIDENT'S LETTER 1 SUMMARY INFORMATION 2 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 4 THE OAKMARK FUND Letter from the Portfolio Managers 6 Schedule of Investments 7 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 11 Schedule of Investments 12 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 14 Schedule of Investments 17 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 23 Global Diversification Chart 25 Schedule of Investments 26 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 31 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 32 International Diversification Chart 33 Schedule of Investments 34 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 39 International Diversification Chart 40 Schedule of Investments 41 OAKMARK PHILOSOPHY AND PROCESS 49 THE OAKMARK GLOSSARY 50 TRUSTEES AND OFFICERS 53
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 stock markets rose sharply in the fourth quarter, bringing most of the broad market indexes to double-digit gains for the full year. Each of our Funds produced significant positive returns during the quarter. More importantly, every one of our Funds achieved a new all-time high asset value during the quarter. MAINTAINING A CONSISTENT INVESTMENT DISCIPLINE We have often written about how important a long-term focus is to our investing discipline. While this sounds simple, even the most sophisticated investors find it difficult to maintain such a focus in practice. The news media, brokerage firm analysts, and market makers all eagerly highlight the latest "news" and build fear, uncertainty, or hype around recent industry and company developments. With such intense scrutiny of short-term issues, investors find it challenging to maintain a proper perspective about the true long-term significance of the challenges and opportunities that companies face. Our value investing process examines a company's intrinsic business value and its ability to grow that value over the long term. Often, current marketplace concerns fade when we view them in relation to their impact on a business' long-term value. Frequently, these problems are simply short-term setbacks that are a normal part of any company's growth and evolution. They may also create an attractive investment opportunity. After analyzing a company faced with such questions, if we believe that the market is valuing the business at a substantial discount to its intrinsic value, we will buy the stock. Then, we patiently wait for the "crisis-du-jour" to fade and for the market to recognize the true, underlying value of the firm. Mutual fund investors often face the same difficulties as professional investors in maintaining a long-term investment focus. Mutual fund industry commentators often steer investors' focus to the most recent 3-6 months of a fund's performance. Human nature leads investors to want to own the current "winners," raising doubts about funds that have lagged for a quarter or two. As a result, financial advisors often find that the hottest funds in the hottest sectors are the easiest to sell--leading many investors to buy into the latest fad at the peak of overvaluation. In contrast, we believe that to invest successfully in funds, one must resist the temptation to chase short-term trends and should instead choose fund managers with disciplined, long-term strategies, patiently giving them time to let their strategies work. At Oakmark, we recognize that there will be periods when our performance differs significantly (in either direction) from that of the market. Given our long-term value approach and the volatility of short-term investor sentiment, the market may lag in recognizing the undervaluation of our holdings. Over the past decade, all of our Funds have had quarters near the top and near the bottom of their peer groups. Our long-term investors should expect more of the same. We like to emphasize, however, that all of our Funds have generated substantial long-term returns. We believe that following a patient, disciplined and long-term mutual fund investment strategy has richly rewarded our investors. PLEASE SEE OUR WEBSITE (www.oakmark.com/peerperformance) FOR DETAILS OF OUR LONG TERM INVESTMENT RESULTS AND PERFORMANCE RELATIVE TO OUR PEERS. [PHOTO OF JOHN R. RAITT] CHAD CLARK NAMED INTERNATIONAL SMALL CAP FUND CO-MANAGER As we recently announced, Chad Clark will become co-portfolio manager of The Oakmark International Small Cap Fund effective January 28, 2005. He will join current co-manager, David Herro, Chief Investment Officer of International Equities, who has managed the International Small Cap Fund since its inception in November 1995. This change reflects the increasing strength and depth of our international investing team. Chad succeeds Michael Welsh, who continues as co-manager of The Oakmark International Fund and The Oakmark Global Fund. OAKMARK TRUSTEE MORGENSTERN TO RETIRE Victor Morgenstern, who stepped down as Chairman of the Oakmark Board of Trustees in October, has resigned from the Board effective year-end 2004. Once again, I would like to thank Victor for his many years of service to Oakmark shareholders, first as CEO of the Funds' advisor and then as a Trustee and Oakmark Board Chairman. Thank you for your continued investment and confidence in The Oakmark 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 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 DECEMBER 31, 2004(1) (OAKMX) (OAKLX) (OAKBX) - ---------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* 8.44% 7.69% 5.11% - ---------------------------------------------------------------------------------------------------------------------------- 1 YEAR 11.73% 9.73% 10.36% - ---------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: - ---------------------------------------------------------------------------------------------------------------------------- 3 YEAR 6.21% 7.40% 9.98% - ---------------------------------------------------------------------------------------------------------------------------- 5 YEAR 9.63% 14.45% 13.47% - ---------------------------------------------------------------------------------------------------------------------------- 10 YEAR 11.78% N/A N/A - ---------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 16.73% 20.62% 14.31% (8/5/91) (11/1/96) (11/1/95) - ---------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY Washington Washington Burlington HOLDINGS AS OF Mutual, Inc. 2.8% Mutual, Inc. 16.3% Resources Inc. 3.6% DECEMBER 31, 2004(2) McDonald's Yum! Brands, Inc. 7.5% XTO Energy, Inc. 3.1% Corporation 2.5% H&R Block, Inc. 7.0% Diageo plc 2.7% Liberty Media First Data Nestle SA 2.6% COMPANY AND % OF TOTAL Corporation, Corporation 5.7% General Dynamics NET ASSETS Class A 2.5% Time Warner Inc. 5.1% Corporation 2.5% Time Warner Inc. 2.4% Yum! Brands, Inc. 2.4% - ---------------------------------------------------------------------------------------------------------------------------- SECTOR Consumer Consumer U.S. Government ALLOCATION AS OF Discretionary 42.5% Discretionary 41.6% Securities 32.1% DECEMBER 31, 2004 Financials 16.1% Financials 23.8% Consumer Consumer Staples 12.3% Industrials 12.0% Discretionary 12.7% Industrials 9.6% Information Energy 10.2% Information Technology 11.5% Industrials 10.1% Technology 8.5% Health Care 7.0% Consumer Staples 9.9% SECTOR AND % OF Health Care 7.5% Energy 4.1% Health Care 9.8% MARKET VALUE Energy 3.5% Financials 7.8% Information Technology 5.4% Foreign Government Securities 1.6% Materials 0.4% - ----------------------------------------------------------------------------------------------------------------------------
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 DECEMBER 31, 2004(1) (OAKGX) (OAKIX) (OAKEX) - ---------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* 13.00% 13.07% 13.41% - ---------------------------------------------------------------------------------------------------------------------------- 1 YEAR 15.63% 19.09% 28.95% - ---------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: - ---------------------------------------------------------------------------------------------------------------------------- 3 YEAR 19.01% 14.58% 23.06% - ---------------------------------------------------------------------------------------------------------------------------- 5 YEAR 18.56% 9.93% 13.92% - ---------------------------------------------------------------------------------------------------------------------------- 10 YEAR N/A 11.54% N/A - ---------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 17.01% 12.39% 13.16% (8/4/99) (9/30/92) (11/1/95) - ---------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY Diageo plc 5.0% GlaxoSmithKline plc 3.6% Gurit-Heberlein AG 3.4% HOLDINGS AS OF Bank of Ireland 4.3% Bank of Ireland 3.5% Julius Baer DECEMBER 31, 2004(2) Takeda Pharmaceutical Diageo plc 3.4% Holding Ltd., Company Limited 4.1% Bayerische Motoren Zurich 3.4% First Data Werke (BMW) AG 3.1% Neopost SA 3.3% COMPANY AND % OF TOTAL Corporation 4.1% Euronext NV 3.1% Saurer AG 3.3% NET ASSETS Nestle SA 4.0% Interpump Group S.p.A 3.1% - ---------------------------------------------------------------------------------------------------------------------------- SECTOR Health Care 17.3% Financials 26.1% Industrials 34.1% ALLOCATION AS OF Consumer Consumer Information DECEMBER 31, 2004 Discretionary 16.8% Discretionary 20.3% Technology 15.5% Financials 16.7% Consumer Staples 16.8% Financials 12.0% Consumer Staples 15.5% Health Care 12.0% Consumer Information Industrials 9.1% Discretionary 12.0% Technology 12.4% Materials 9.0% Materials 9.8% SECTOR AND % OF Industrials 9.1% Telecommunication Consumer Staples 9.2% MARKET VALUE Materials 6.5% Services 4.5% Health Care 5.7% Energy 3.6% Energy 1.7% Telecommunication Telecommunication Information Services 1.7% Services 2.1% Technology 0.5% - ----------------------------------------------------------------------------------------------------------------------------
3 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 WILLIAM C. NYGREN] My high school-aged son came home recently telling me how excited he was that one of his school projects was a contest to create and trade a phantom $100,000 stock portfolio. At the end of one month, the student with the most money wins. I only wish that studying the stock market had been part of the curriculum back when I was in high school! I could see my son's relief: after years of frustration from a father's job that was difficult to understand, much less explain, finally a payoff. Since this is Dad's profession, he can help me win the contest! A healthy discussion followed covering how we select stocks for The Oakmark Funds. We talked about how buying a stock is like investing in a business partnership--not only do you need a good business plan and partners that you trust, but the price has to be attractive relative to what you believe the business is worth. We also talked about how the emotions of fear and greed can push stock prices away from fair value and discussed the benefit of staying rational when other investors aren't. We covered the importance of being a patient investor because it often takes several years for a stock's price to reflect its underlying business value. And we even discussed a topic that throws off some academics in finance--diversification. Diversification is a wonderful tool for the investor trying to minimize the risk of loss, but for an investor trying to maximize the probability of significant outperformance, diversification is counter-productive. I went to bed that night feeling great. I'd had a wonderful father-son discussion concerning my profession. My son had a high level of interest in my job and an understanding of why our mutual funds have been such good investments for our shareholders. The next day, he returned with a follow-up request that burst my bubble: "Dad, what I'm really looking for isn't a stock like you'd invest in. What I need is one that is at rock bottom now compared to where it will be in a month." And in the snap of a finger, I was on autopilot dealing with just another investor with unrealistic expectations! Now I'm not sure if I should be rooting for my son's choice, TASER International, to go up so he wins his contest, or to see it fall to a rational price so that he learns a lesson! It is understandable why a school contest utilizes such a short time horizon, it unfortunately just isn't practical to spend a rational investment time frame, like five years, on a stock market study module. What is less understandable is why so many investors who don't have those same constraints also often look out only a month or so! The quarterly letters from all of our fund managers continually stress the importance of a long time horizon. This repetition isn't because we forgot we'd already written about looking at the long term or because we think our readers haven't understood! We keep writing about a long-term horizon because it is probably the single most important aspect of the Oakmark approach to investing. As we all know, in the short-run, just about anything can happen in the stock market. In the very long-run, however, the laws of economics demand that stock prices reflect fundamental business value. By looking long-term, we can rely on estimates of business value and how that value will change over time. We can search for opportunities to invest at prices below our value estimates and look to benefit from the long-term convergence of price and value. Only by looking at the long-term do stock price movements begin to look rational. The financial media, with their need to create urgency for viewers and readers, often shifts focus to near-term issues that may affect today's trading but won't even be remembered in a few years. Combined with the fact that bad news sells better than good news, it is no surprise that the media seems to highlight the news items that might cause a market decline. Even though I work on stocks every day, I was somewhat taken aback to see that in late December, the S&P 500(3) had reached a level that was 50% higher than it was as recently as March 2003. The magnitude of the gain had just snuck up on me. Over nearly two years when the attention centered on a lingering war, higher oil prices, expectations for higher interest rates, a declining dollar, the likelihood of more terrorist attacks, and a deep political division in the U.S., the stock market quietly marched upward and produced outstanding returns. Seems like the media barely even mentioned the viewpoint that an amazing rebound in corporate earnings combined with the lowest long-term interest rates in a generation JUSTIFIED a stock market move of this magnitude. Instead, the commentary on the market [SIDENOTE] HIGHLIGHTS - - A long-term horizon is the most important aspect of our investment approach. - - Many investors miss the big picture by focusing on short-term news. - - In the long term a stock's price needs to reflect business value. 4 increase was usually tempered by a mention that an investor who bought an S&P index fund in early 2000 had still lost money. I'm pleased to say that like the market, Oakmark and Oakmark Select are also more than 50% above their March 2003 lows. More important, unlike the market, both Oakmark and Oakmark Select also reached new all-time high NAVs(4) during the last week of 2004. Another fact that kind of snuck up was the performance of both Funds' largest holding, Washington Mutual. It was a disappointing year for Washington Mutual's mortgage banking division. Because of problems in that division, Washington Mutual fell short of 2004 earnings expectations and instead showed a significant decline in earnings. I received far more shareholder e-mail expressing frustration with Washington Mutual and questioning our judgment for holding that stock than I did on any other topic. But a funny thing happened--by the end of the year, Washington Mutual stock had not only increased, but it had a total return of 10%. That Washington Mutual could perform so well in a year when earnings were so disappointing is evidence of our risk-reducing stock selection criteria. It also shows Washington Mutual's success in its other business, retail banking. Since Washington Mutual has been held in both Funds for such a long time, it provides a good example of how a long-term focus can provide more clarity than focusing on short-term results. Washington Mutual was first purchased in Oakmark in early 1998. After briefly underperforming our other holdings, it became one of my favorite 20 stocks and was purchased in Select. Washington Mutual started 1998 at just over $28, after earning $1.43 and paying a dividend of 47CENTS per share in 1997. Since then, on a per-share basis, the dividend has increased more than three-fold, and earnings have grown at a double-digit rate (using 2005 consensus) as have retail banking deposits. During that period, the stock, which many have oddly considered disappointing, has returned an average of 9% per year (while the S&P returned 5%). It's amazing how the attention on quarterly earnings shortfalls and the focus on bad quarters rather than good have obscured a great retail banking success story. I'll end this with a "hot tip" from Oakmark. Instead of reading the plethora of stories telling you where to invest your money for 2005, do yourself a favor, beat the rush and start investing now for 2010 and beyond! Happy New Year, /s/ Bill Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com 5 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF 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 (12/31/04) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(3)
THE OAKMARK FUND (CLASS I) S & P 500 8/5/1991 $ 10,000 $ 10,000 12/31/1991 $ 13,020 $ 10,909 3/31/1992 $ 14,690 $ 10,634 6/30/1992 $ 15,230 $ 10,836 9/30/1992 $ 16,800 $ 11,178 12/31/1992 $ 19,386 $ 11,741 3/31/1993 $ 20,927 $ 12,253 6/30/1993 $ 21,494 $ 12,313 9/30/1993 $ 23,095 $ 12,631 12/31/1993 $ 25,300 $ 12,924 3/31/1994 $ 24,242 $ 12,434 6/30/1994 $ 24,951 $ 12,486 9/30/1994 $ 26,663 $ 13,097 12/31/1994 $ 26,138 $ 13,095 3/31/1995 $ 28,539 $ 14,370 6/30/1995 $ 30,303 $ 15,741 9/30/1995 $ 32,841 $ 16,992 12/31/1995 $ 35,134 $ 18,015 3/31/1996 $ 36,386 $ 18,982 6/30/1996 $ 37,661 $ 19,834 9/30/1996 $ 37,945 $ 20,447 12/31/1996 $ 40,828 $ 22,152 3/31/1997 $ 42,456 $ 22,746 6/30/1997 $ 48,917 $ 26,716 9/30/1997 $ 52,009 $ 28,717 12/31/1997 $ 54,132 $ 29,542 3/31/1998 $ 59,517 $ 33,663 6/30/1998 $ 57,909 $ 34,775 9/30/1998 $ 49,899 $ 31,316 12/31/1998 $ 56,155 $ 37,985 3/31/1999 $ 55,888 $ 39,877 6/30/1999 $ 62,332 $ 42,688 9/30/1999 $ 53,882 $ 40,023 12/31/1999 $ 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 12/31/2004 $ 79,667 $ 40,931
ANNUAL AVERAGE TOTAL RETURNS (as of 12/31/04)
SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (8/5/91) - ----------------------------------------------------------------------------------------------------- OAKMARK FUND (CLASS I) 8.44% 11.73% 9.63% 11.78% 16.73% S&P 500 9.23% 10.88% -2.30% 12.06% 11.08% Dow Jones Average(5) 7.55% 5.27% 0.67% 13.09% 12.40% Lipper Large Cap Value Index(6) 8.80% 12.00% 1.42% 11.28% 10.78%
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 had a very strong quarter, increasing in value by 8%. Our increase nearly mirrored the increase in the S&P 500, which gained 9%. For all of 2004, your Fund increased in value by 12% slightly bettering the 11% gain in the S&P 500. S&P 500 earnings are estimated to have grown by about 20% in 2004. Because a good part of that earnings growth is just cyclic recovery, we believe that stock price growth was consistent with business value growth in 2004. For this reason, we look to the New Year with the same optimism with which we started last year. To us, stocks look modestly undervalued and, therefore, are the asset class with the highest long-term expected return. So, unlike many value funds, our portfolio continues to be over 90% invested in equities. We also believe that growth and consistency of earnings are being undervalued, so we have continued to increase our investments in what we call growth companies at value prices. During the quarter we sold five holdings--three that met price targets (Carnival, Liberty International and Sprint) and two that were fundamentally disappointing (Chiron and Merck). Our only addition is discussed below. PULTE HOMES (PHM--$63) PHM is the largest homebuilder in the United States. With expected earnings in 2005 of over $8 per share, its eight times P/E(7) multiple is among the lowest in the market. PHM earnings have grown 20% per year for the last decade. The bears say that growth has been due solely to an unsustainable boom in the housing market. Though we agree that the housing market and, thus, PHM earnings are somewhat above trend, we believe PHM has become a better business due to the economies of scale enjoyed by large builders. In addition, PHM's balance sheet has benefited greatly from its strong earnings performance--book value that was just $15 per share in 2000 should be $43 per share by the end of 2005. With nearly three times the equity it had five years ago and with growing cost advantages, we believe PHM will weather a stagnant housing environment much better than many investors expect. Best wishes, /s/ Bill Nygren /s/ Kevin G. Grant WILLIAM C. NYGREN, CFA KEVIN G. GRANT, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com kgrant@oakmark.com 6 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2004 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.9% APPAREL RETAIL--4.0% The Gap, Inc. 7,066,700 $ 149,248,704 Limited Brands 6,000,047 138,121,082 --------------- 287,369,786 BROADCASTING & CABLE TV--7.7% Liberty Media Corporation, Class A (a) 16,199,400 $ 177,869,412 Comcast Corporation, Special Class A (a) 4,725,000 155,169,000 The DIRECTV Group, Inc. (a) 6,800,000 113,832,000 EchoStar Communications Corporation, Class A 3,175,000 105,537,000 --------------- 552,407,412 DEPARTMENT STORES--1.8% Kohl's Corporation (a) 2,650,500 $ 130,325,085 HOME IMPROVEMENT RETAIL--2.1% The Home Depot, Inc. 3,581,500 $ 153,073,310 HOMEBUILDING--1.3% Pulte Homes, Inc. 1,500,000 $ 95,700,000 HOUSEHOLD APPLIANCES--2.1% The Black & Decker Corporation 1,722,200 $ 152,121,926 HOUSEWARES & SPECIALTIES--1.9% Fortune Brands, Inc. 1,745,600 $ 134,725,408 LEISURE PRODUCTS--1.0% Mattel, Inc. 3,874,300 $ 75,510,107 MOTORCYCLE MANUFACTURERS--1.7% Harley-Davidson, Inc. 1,962,500 $ 119,221,875 MOVIES & ENTERTAINMENT--6.5% Time Warner Inc. (a) 8,997,700 $ 174,915,288 The Walt Disney Company 5,950,000 165,410,000 Viacom Inc., Class B 3,629,490 132,077,141 --------------- 472,402,429 PUBLISHING--2.6% Gannett Co., Inc. 1,555,500 $ 127,084,350 Knight-Ridder, Inc. 916,000 61,317,040 --------------- 188,401,390 RESTAURANTS--4.9% McDonald's Corporation 5,700,000 $ 182,742,000 Yum! Brands, Inc. 3,674,000 173,339,320 --------------- 356,081,320
7
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.9% (CONT.) SPECIALTY STORES--0.9% Toys 'R' Us, Inc. (a) 3,125,000 $ 63,968,750 BREWERS--2.1% Anheuser-Busch Companies, Inc. 2,950,000 $ 149,653,500 DISTILLERS & VINTNERS--1.8% Diageo plc (b) 2,221,000 $ 128,551,480 HYPERMARKETS & SUPER CENTERS--2.1% Wal-Mart Stores, Inc. 2,800,000 $ 147,896,000 PACKAGED FOODS & MEATS--4.3% General Mills, Inc. 2,506,000 $ 124,573,260 Kraft Foods Inc., Class A 2,645,000 94,188,450 H.J. Heinz Company 2,310,000 90,066,900 --------------- 308,828,610 SOFT DRINKS--1.0% Coca-Cola Enterprises, Inc. 3,500,000 $ 72,975,000 INTEGRATED OIL & GAS--1.7% ConocoPhillips 1,435,335 $ 124,630,138 OIL & GAS EXPLORATION & PRODUCTION--1.5% Burlington Resources Inc. 2,442,200 $ 106,235,700 ASSET MANAGEMENT & CUSTODY BANKS--1.2% The Bank of New York Company, Inc. 2,500,000 $ 83,550,000 DIVERSIFIED BANKS--1.9% U.S. Bancorp 4,300,000 $ 134,676,000 LIFE & HEALTH INSURANCE--1.5% AFLAC Incorporated 2,767,000 $ 110,237,280 OTHER DIVERSIFIED FINANCIAL SERVICES--3.7% Citigroup Inc. 3,100,000 $ 149,358,000 JP Morgan Chase & Co. 3,000,000 117,030,000 --------------- 266,388,000 THRIFTS & MORTGAGE FINANCE--6.4% Washington Mutual, Inc. 4,687,300 $ 198,179,044 Fannie Mae 2,095,000 149,184,950 MGIC Investment Corporation 1,640,600 113,053,746 --------------- 460,417,740 HEALTH CARE DISTRIBUTORS--1.0% AmerisourceBergen Corp 1,200,000 $ 70,416,000
8
SHARES HELD/ NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.9% (CONT.) HEALTH CARE EQUIPMENT--2.1% Baxter International Inc. 4,300,000 $ 148,522,000 PHARMACEUTICALS--3.7% Abbott Laboratories 3,087,300 $ 144,022,545 Bristol-Myers Squibb Company 4,905,400 125,676,348 --------------- 269,698,893 AEROSPACE & DEFENSE--3.1% Raytheon Company 3,000,000 $ 116,490,000 Honeywell International, Inc. 3,050,000 108,000,500 --------------- 224,490,500 BUILDING PRODUCTS--2.1% Masco Corporation 4,233,600 $ 154,653,408 DIVERSIFIED COMMERCIAL SERVICES--2.1% H&R Block, Inc. 3,029,300 $ 148,435,700 ENVIRONMENTAL SERVICES--1.4% Waste Management, Inc. 3,474,300 $ 104,020,542 COMPUTER HARDWARE--1.8% Sun Microsystems, Inc. (a) 24,370,000 $ 131,110,600 DATA PROCESSING & OUTSOURCED SERVICES--4.5% First Data Corporation 3,615,000 $ 153,782,100 SunGard Data Systems, Inc. (a) 3,203,700 90,760,821 Automatic Data Processing, Inc. 1,800,000 79,830,000 --------------- 324,372,921 OFFICE ELECTRONICS--1.4% Xerox Corporation (a) 5,972,400 $ 101,590,524 TOTAL COMMON STOCKS (COST: $4,901,257,934) 6,552,659,334 SHORT TERM INVESTMENTS--9.3% U.S. GOVERNMENT BILLS--6.2% United States Treasury Bills, 1.72% - 2.215% due 1/6/2005 - 4/7/2005 $ 450,000,000 $ 448,589,195 TOTAL U.S. GOVERNMENT BILLS (COST: $448,521,726) 448,589,195
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NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--9.3% (CONT.) REPURCHASE AGREEMENTS--3.1% IBT Repurchase Agreement, 1.75% dated 12/31/2004 due 1/3/2005, repurchase price $1,233,731 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,295,229 $ 1,233,551 $ 1,233,551 IBT Repurchase Agreement, 1.55% dated 12/31/2004 due 1/3/2005, repurchase price $223,528,869 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $234,675,000 223,500,000 223,500,000 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $224,733,551) 224,733,551 TOTAL SHORT TERM INVESTMENTS (COST: $673,255,277) 673,322,746 Total Investments (Cost $5,574,513,211)--100.2% $ 7,225,982,080 Other Liabilities In Excess Of Other Assets--(0.2)% (12,284,515) --------------- TOTAL NET ASSETS--100% $ 7,213,697,565 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. 10 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. NYGREN AND HENRY R. BERGHOEF] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (12/31/04) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(3)
THE OAKMARK SELECT FUND (CLASS I) S & P 500 11/1/1996 $ 10,000 $ 10,000 12/31/1996 $ 11,420 $ 10,543 3/31/1997 $ 12,140 $ 10,826 6/30/1997 $ 14,180 $ 12,715 9/30/1997 $ 16,340 $ 13,668 12/31/1997 $ 17,704 $ 14,060 3/31/1998 $ 20,078 $ 16,021 6/30/1998 $ 20,462 $ 16,551 9/30/1998 $ 16,936 $ 14,904 12/31/1998 $ 20,575 $ 18,078 3/31/1999 $ 22,766 $ 18,979 6/30/1999 $ 24,482 $ 20,317 9/30/1999 $ 22,028 $ 19,048 12/31/1999 $ 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 12/31/2004 $ 46,286 $ 19,481
ANNUAL AVERAGE TOTAL RETURNS (AS OF 12/31/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/96) - ------------------------------------------------------------------------------------------------------------------------ OAKMARK SELECT FUND (CLASS I) 7.69% 9.73% 14.45% 20.62% S&P 500 9.23% 10.88% -2.30% 8.50% S&P MidCap 400(8) 12.16% 16.48% 9.53% 14.46% Lipper Mid Cap Value Index(9) 11.83% 19.54% 10.85% 11.28%
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, like the stock market, had a very strong quarter, increasing in value by 8%. For the year, your Fund increased by 10%. Though we are pleased with the level of absolute returns, we are always disappointed when market indices and other mutual funds increase in value more than we do. Our belief that better values had emerged in large-cap, higher quality businesses did not help our performance in 2004. Last year, the market leaders were again smaller companies and companies in industries that benefited from the cyclic rebound in corporate earnings. The increasing performance gap between stocks of high quality and low quality businesses has strengthened our conviction that today's better values are generally in large, high quality companies. Typically we like these businesses, but because of large premium P/E(7) multiples, we don't like them as stocks. Today, the P/E spreads across the market are very small, so the best performing businesses are likely to also be the best performing stocks. We believe that the portfolio is well-positioned to benefit from a return to higher P/E premiums for better businesses. During the quarter, we sold two positions. We were displeased with Chiron's communications to shareholders regarding their flu vaccine problems, and Sprint reached--and then exceeded--our sell target as investors put a higher value on wireless customers than we did. Those stocks were replaced by McDonald's and Liberty Media. SELECT FUND RE-OPENED On November 10, 2004, The Oakmark Select Fund was again opened to new investors. The Fund closed to new investors in mid-2001 to prevent unchecked growth and its resulting loss of investment flexibility. For three years, that achieved our goal of relatively stable cash flow. But early in 2004, sales from existing investors began to exceed their additional purchases. By re-opening, we hope to restore a balance between purchases and sales. And for those who expressed concern that we would be flooded with cash from new investors, take comfort that since re-opening, redemptions have continued to somewhat exceed purchases. Turns out we were right when we said that if we ever re-opened, it would most likely be at a time when nobody cared! 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 11 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2004 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.1% APPAREL RETAIL--7.3% Limited Brands 9,280,981 $ 213,648,183 The Gap, Inc. 10,060,000 212,467,200 --------------- 426,115,383 BROADCASTING & CABLE TV--2.4% Liberty Media Corporation, Class A (a) 12,750,000 $ 139,995,000 LEISURE PRODUCTS--3.3% Mattel, Inc. 9,735,700 $ 189,748,793 MOVIES & ENTERTAINMENT--5.1% Time Warner Inc. (a) 15,240,000 $ 296,265,600 PUBLISHING--3.0% Knight-Ridder, Inc. 2,606,500 $ 174,479,110 RESTAURANTS--10.8% Yum! Brands, Inc. 9,207,000 $ 434,386,260 McDonald's Corporation 6,000,000 192,360,000 --------------- 626,746,260 SPECIALTY STORES--6.5% Toys 'R' Us, Inc. (a) 10,544,600 $ 215,847,962 Office Depot, Inc. (a) 9,104,600 158,055,856 --------------- 373,903,818 OIL & GAS EXPLORATION & PRODUCTION--3.8% Burlington Resources Inc. 5,103,600 $ 222,006,600 ASSET MANAGEMENT & CUSTODY BANKS--1.4% Janus Capital Group, Inc. 4,831,200 $ 81,212,472 SPECIALIZED FINANCE--4.2% Moody's Corporation 2,823,600 $ 245,229,660 THRIFTS & MORTGAGE FINANCE--16.3% Washington Mutual, Inc. 22,417,400 $ 947,807,672 HEALTH CARE SERVICES--3.3% IMS Health Incorporated 8,303,441 $ 192,722,865 PHARMACEUTICALS--3.1% Bristol-Myers Squibb Company 6,990,200 $ 179,088,924 DIVERSIFIED COMMERCIAL SERVICES--11.0% H&R Block, Inc. 8,259,800 $ 404,730,200 The Dun & Bradstreet Corporation (a) 3,934,900 234,716,785 --------------- 639,446,985
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SHARES HELD/ NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------- COMMON STOCKS--92.1% (CONT.) DATA PROCESSING & OUTSOURCED SERVICES--5.7% First Data Corporation 7,815,400 $ 332,467,116 OFFICE ELECTRONICS--4.9% Xerox Corporation (a) 16,746,400 $ 284,856,264 TOTAL COMMON STOCKS (COST: $3,238,189,077) 5,352,092,522 SHORT TERM INVESTMENTS--7.9% U.S. GOVERNMENT BILLS--4.5% United States Treasury Bills, 1.695% - 2.125% due 1/6/2005 - 3/24/2005 $ 260,000,000 $ 259,449,400 TOTAL U.S. GOVERNMENT BILLS (COST: $259,427,613) 259,449,400 REPURCHASE AGREEMENTS--3.4% IBT Repurchase Agreement, 1.75% dated 12/31/2004 due 1/3/2005, repurchase price $2,353,004 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $2,470,294 $ 2,352,661 $ 2,352,661 IBT Repurchase Agreement, 1.55% dated 12/31/2004 due 1/3/2005, repurchase price $196,025,317 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $205,800,000 196,000,000 196,000,000 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $198,352,661) 198,352,661 TOTAL SHORT TERM INVESTMENTS (COST: $457,780,274) 457,802,061 Total Investments (Cost $3,695,969,351)--100.0% $ 5,809,894,583 Other Assets In Excess Of Other Liabilities--0.0% 1,870,222 --------------- TOTAL NET ASSETS--100% $ 5,811,764,805 ===============
(a) Non-income producing security. 13 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 (12/31/04) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(10)
THE OAKMARK EQUITY AND INCOME FUND (CLASS I) LIPPER BALANCED FUND INDEX 11/1/1995 $ 10,000 $ 10,000 12/31/1995 $ 10,240 $ 10,473 3/31/1996 $ 10,500 $ 10,707 6/30/1996 $ 11,040 $ 10,925 9/30/1996 $ 11,110 $ 11,213 12/31/1996 $ 11,805 $ 11,840 3/31/1997 $ 12,153 $ 11,895 6/30/1997 $ 13,430 $ 13,178 9/30/1997 $ 14,810 $ 14,024 12/31/1997 $ 14,941 $ 14,243 3/31/1998 $ 16,233 $ 15,370 6/30/1998 $ 16,320 $ 15,599 9/30/1998 $ 15,191 $ 14,701 12/31/1998 $ 16,792 $ 16,392 3/31/1999 $ 16,792 $ 16,655 6/30/1999 $ 18,457 $ 17,402 9/30/1999 $ 17,518 $ 16,682 12/31/1999 $ 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 12/31/2004 $ 34,110 $ 20,661
ANNUAL AVERAGE TOTAL RETURNS (AS OF 12/31/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - ------------------------------------------------------------------------------------------------------------------------ OAKMARK EQUITY & INCOME FUND (CLASS I) 5.11% 10.36% 13.47% 14.31% Lipper Balanced Fund Index 6.40% 8.99% 2.95% 8.23% S&P 500(3) 9.23% 10.88% -2.30% 10.10% Lehman Govt./Corp. Bond(11) 0.80% 4.19% 8.00% 6.83%
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 believer is happy; the doubter is wise." Hungarian Proverb OUR RESULTS The Oakmark Equity and Income Fund increased 5% for the quarter ended December 31, bringing the calendar year gain to 10%. For the calendar year 2004, the Fund trailed the stock market averages while outperforming our primary benchmark, the Lipper Balanced Fund Index, which gained 9% during the year. We are pleased with this result, as we have consistently said that it is absolute positive returns that preserve and grow your capital. We are even more pleased that, looking back over the past three-year and five-year periods, we have grown and compounded the capital of our long-term investors (ourselves included) at a 10% and 13% rate annualized respectively. Please do not think for one moment that those returns are going to make us slack off. We started the year 2004 cautiously pessimistic and remained that way during the year. We have ushered in 2005 feeling similarly but without any great convictions, believing as did Nietzsche that "convictions are more dangerous enemies of truth than lies." Instead, we find much to be thoughtful about in the current environment. The domestic savings rate is at an all-time low and, we would argue, at a low that is unsustainable if we want to continue to be masters of our own destiny. Indeed, over the past several years the largest purchasers of our ongoing issues of U.S. Treasury securities have been the central banks of China and Japan. Despite recent corrections, the price of energy remains substantially higher than it was forecast to be two years ago. (And, we believe that many have not adjusted their forecasts from $18 or $24 a barrel to reflect higher prices, which is more realistic when looking out over several years.) In addition, demand from emerging market countries such as China and India is substantially higher than was forecast. Finally, inflation appears to be making a comeback, and if one follows the logic of Mr. William Gross of PIMCO, government reports are understating the rate of inflation by anywhere from one to one and a half per cent. Our experience makes us justly leery of the cheery consensus (as one finds at Bubblehead Financial Business Network), but it also makes us leery of doomsday scenarios. And while there is much to ponder, we refrain from making predictions, which allows us to do what is often best in such circumstances: nothing. Remember: our goal is to position the Fund for a range of potential outcomes so that we may continue to preserve and grow your capital. PLUS CA CHANGE Particularly strong performers during the quarter were Caremark RX Inc., Diageo PLC, Nestle SA, SAFECO Corporation, and Costco Wholesale Corporation. Over time, we have noted that many 14 recent strong performers were often among the worst performers of the quarter before. This remained true with both Diageo and Nestle, which transitioned again from worst to best. We reiterate this because it underpins our philosophy of keeping a long-term focus, rather than changing strategy with a "flavor of the day" approach. Short-term perceptions rarely if ever have anything to do with the long-term business value of an enterprise. One of the worst performers during the quarter was American-Italian Pasta Company, which continued to see its share price decline dramatically (albeit with a slight recovery towards year-end). Pasta consumption in this country fell off a cliff with the low-carb diet craze. In response, pasta companies developed low-carb products that never caught on. While domestic pasta consumption and demand has recovered somewhat, the sector's overcapacity and lack of pricing power continues. In addition, overseas products seem able to compete at the high end on artisan--like quality and the lower end on price, notwithstanding that most U.S. consumers see pasta as a commodity, rather than a premium product. We thought we had an opportunity to buy a business, albeit at the lower end of the quality spectrum for a consumer food business, after a substantial decline brought on by investor fears of the long-term effects of the low carbohydrate diets with regard to American eating habits. In our initial evaluation, however, we did not sufficiently account for the twin impacts of: (1) having a domestic competitor going through a bankruptcy reorganization and (2) overseas competitors' willingness to cut prices and erode their margins to maintain the marketshare footholds they had gained (notwithstanding an additional hit from currency). We have since reevaluated the importance of these factors and have subsequently eliminated American-Italian Pasta from the portfolio. In addition to American-Italian Pasta, the portfolio experienced an unusual amount of turnover in stocks during the quarter. Alamo Group, Monsanto, Rockwell Automation, SYBASE, and Triarc were all sold after hitting our valuation targets. The balance of our Cox Communications was tendered in response to a take-over offer from the controlling family shareholders. Del Monte Foods and Kraft Foods were sold after a reassessment of their competitive prospects and, consequently, our valuations of them. We also eliminated positions in Amerisource Bergen and Watson Pharmaceuticals to reduce the risk profile of our health care holdings. We initiated new positions in Alliant Techsystems, CONOCO Phillips, Echostar Communications, Fox Entertainment Group, MBIA Insurance, UST Corporation, and VIACOM Inc. Last year, we explained our low turnover as a result of our portfolio holdings not reaching their valuation targets and due to a lack of compelling values worth moving into. This year more of our valuation targets have been reached, but at the same time, we are finding a few truly compelling names, especially in the media area. At this point, continuing our baseball analogy of last year, we had a good year in terms of singles and doubles, which allowed us once again to show consistent returns with controlled risk. And while we are not seeing an abundance of compelling ideas, we still are finding the one or two really good ones over a twelve-month period. GROWTH--REAL OR ILLUSORY? One early lesson for aspiring value investors is to learn through experience (usually bad) what the correct price is for perceived growth, all other things being equal. Investors tend to extend past growth rates into the distant future while ignoring that once a business has matured, growing entails taking on more risk. Since growth in a mature or maturing business often plateaus, a revaluation of both market perceptions and business value usually follows. Studies have shown that only one out of ten companies will actually be able to sustain a growth rate that will lead to an outsized shareholder return over time. Indeed, a study by the Corporate Strategy Board over decades shows that when companies hit the stall point, they often will lose more than 50% of their market capitalization over the next ten years. Thus, an industry's life cycle becomes understandable. A new industry sees substantial growth followed by an influx of entrants. Shortly thereafter comes the shake-out, followed by an exit of competitors and more stable returns for those left. Growth begins a gentle decline, and in a mature industry, this leads to muted growth and returns close to a competitive balance. Data supports the conclusion that it becomes much harder for very large companies to outperform the market over time, simply because they already are, in effect, the market (or a large percentage of it). GLOBAL TOURISTS? We are on occasion asked why we invest in foreign companies such as Diageo and Nestle. Aren't there more than enough choices in U.S. companies available? First, Diageo and Nestle are multinationals, with a presence around the world. They also share the fact that they have both strong branded product portfolios and a large presence in some of the fastest growing emerging market countries. This has resulted in both companies having considerably stronger organic (internal) growth than many domestic alternatives. Finally, notwithstanding that faster growth, they have been priced on a valuation basis cheaper than the alternatives we have considered. Does it bother us that they report in non-U.S. currencies (pounds sterling and Swiss francs)? Frankly, we think that issue is a canard. Our focus is upon the true economic effects of what is taking place in the underlying business, reflected in the growth in [SIDENOTE] HIGHLIGHTS - - Many recent strong performers were among the worst performers of the quarter before. - - We believe short-term perceptions rarely have anything to do with long-term business values. - - While there is not an abundance of compelling ideas, we continue to find one or two really good ones. 15 business value. We are willing to invest in undervalued, well-run global companies within what we define as our circle of competency, when they meet our criteria and are priced accordingly. In both instances we are not paying for their being positioned for future demand. The best example of future demand one can think of is in Guangdong Province outside of Hong Kong, where there are ninety million middle class consumers waiting to be reached. We can assure you that both Diageo and Nestle are aware of that market's potential. CONSISTENCY Winston Churchill once said, "The only way a man can remain consistent amid changing circumstances is to change with them while preserving the same dominating purpose." Our purpose, which is to make an absolute positive return for you (and ourselves) as shareholders, has not changed. We have to confess that we are entering into our favorite period of the year--when the winter solstice has just passed, the year-end reporting period for most companies is looming, and the weather allows us to take stock of opportunities with a little less of Wall Street's road shows and conferences that lead to a hyping of stock valuations without any attendant increase in business value. In any event, we look forward to every day in this business, as every day represents a new day in the marketplace, with an ever-changing set of opportunities. We are not going to do anything different this coming year than what we have done in the past, which is searching for business values in the market place with the margin of safety discount to intrinsic value that we like to have. We remain grateful to you, our shareholders and partners, for your patience and confidence in entrusting us with your capital to manage. /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 16 THE OAKMARK EQUITY AND INCOME FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2004 (UNAUDITED)
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--59.8% COMMON STOCKS--59.8% APPAREL RETAIL--2.1% The TJX Companies, Inc. 7,240,000 $ 181,941,200 AUTO PARTS & EQUIPMENT--1.5% Delphi Corporation 14,871,300 $ 134,139,126 BROADCASTING & CABLE TV--2.5% The DIRECTV Group, Inc. (a) 8,026,722 $ 134,367,326 EchoStar Communications Corporation, Class A 2,500,000 83,100,000 ---------------- 217,467,326 HOUSEHOLD APPLIANCES--0.5% The Stanley Works 962,100 $ 47,133,279 MOVIES & ENTERTAINMENT--1.1% Fox Entertainment Group, Inc., Class A (a) 1,750,000 $ 54,705,000 Viacom Inc., Class B 1,187,300 43,205,847 ---------------- 97,910,847 PUBLISHING--0.7% Tribune Company 1,500,000 $ 63,210,000 RESTAURANTS--1.7% Darden Restaurants, Inc. 2,850,000 $ 79,059,000 McDonald's Corporation 2,000,000 64,120,000 ---------------- 143,179,000 SPECIALTY STORES--0.4% Office Depot, Inc. (a) 2,230,000 $ 38,712,800 DISTILLERS & VINTNERS--2.7% Diageo plc (b) 4,100,000 $ 237,308,000 HYPERMARKETS & SUPER CENTERS--1.8% Costco Wholesale Corporation 3,200,000 $ 154,912,000 PACKAGED FOODS & MEATS--3.6% Nestle SA (b) 3,500,000 $ 228,333,000 Dean Foods Company (a) 2,500,000 82,375,000 CoolBrands International, Inc. (a)(c) 150,000 1,140,000 ---------------- 311,848,000 TOBACCO--1.1% UST Inc. 2,000,000 $ 96,220,000
17
NAME SHARES HELD MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--59.8% (CONT.) INTEGRATED OIL & GAS--1.5% ConocoPhillips 1,500,000 $ 130,245,000 OIL & GAS EXPLORATION & PRODUCTION--8.0% Burlington Resources Inc. 7,150,000 $ 311,025,000 XTO Energy, Inc. 7,699,416 272,405,338 St. Mary Land & Exploration Company 1,450,000 60,523,000 Cabot Oil & Gas Corporation 1,125,000 49,781,250 ---------------- 693,734,588 OTHER DIVERSIFIED FINANCIAL SERVICES--1.9% Citigroup Inc. 3,400,000 $ 163,812,000 PROPERTY & CASUALTY INSURANCE--3.5% SAFECO Corporation 4,000,000 $ 208,960,000 MBIA Inc. 900,000 56,952,000 The Progressive Corporation 500,000 42,420,000 ---------------- 308,332,000 REAL ESTATE INVESTMENT TRUSTS--1.2% Plum Creek Timber Company, Inc. 2,657,044 $ 102,136,771 REINSURANCE--0.6% RenaissanceRe Holdings Ltd. (c) 1,000,000 $ 52,080,000 BIOTECHNOLOGY--1.9% MedImmune, Inc. (a) 5,000,000 $ 135,550,000 Techne Corporation (a) 750,000 29,175,000 ---------------- 164,725,000 HEALTH CARE EQUIPMENT--2.4% Hospira, Inc. (a) 3,750,000 $ 125,625,000 Varian Inc. (a) 1,649,400 67,641,894 CONMED Corporation (a) 570,100 16,202,243 ---------------- 209,469,137 HEALTH CARE SERVICES--2.4% Caremark Rx, Inc. (a) 5,250,000 $ 207,007,500 PHARMACEUTICALS--2.1% Abbott Laboratories 4,000,000 $ 186,600,000
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SHARES HELD/ NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--59.8% (CONT.) AEROSPACE & DEFENSE--6.5% General Dynamics Corporation 2,060,300 $ 215,507,380 Raytheon Company 3,599,700 139,776,351 Rockwell Collins, Inc. 3,107,900 122,575,576 Honeywell International, Inc. 1,889,500 66,907,195 Alliant Techsystems, Inc. (a) 300,000 19,614,000 ---------------- 564,380,502 COMMERCIAL PRINTING--2.0% R.R. Donnelley & Sons Company 4,909,500 $ 173,256,255 DIVERSIFIED COMMERCIAL SERVICES--0.9% ChoicePoint Inc. (a) 1,500,000 $ 68,985,000 Watson Wyatt & Company Holdings 237,000 6,387,150 ---------------- 75,372,150 APPLICATION SOFTWARE--1.2% Mentor Graphics Corporation (a) 3,640,000 $ 55,655,600 The Reynolds and Reynolds Company, Class A 1,715,100 45,467,301 ---------------- 101,122,901 COMPUTER STORAGE & PERIPHERALS--0.4% Imation Corp. 1,215,000 $ 38,673,450 DATA PROCESSING & OUTSOURCED SERVICES--3.4% First Data Corporation 4,850,000 $ 206,319,000 Ceridian Corporation (a) 4,800,000 87,744,000 ---------------- 294,063,000 PAPER PRODUCTS--0.2% Schweitzer-Mauduit International, Inc. 400,000 $ 13,580,000 TOTAL COMMON STOCKS (COST: $4,055,235,424) 5,202,571,832 TOTAL EQUITY AND EQUIVALENTS (COST: $4,055,235,424) 5,202,571,832 FIXED INCOME--32.7% CORPORATE BONDS--1.6% BROADCASTING & CABLE TV--0.4% Cablevision Systems New York Group, 144A, 8.00% due 4/15/2012 (d) 20,000,000 $ 21,350,000 Liberty Media Corporation, 8.25% due 2/1/2030, Debenture 12,900,000 14,668,087 ---------------- 36,018,087 MOVIES & ENTERTAINMENT--0.6% Time Warner Inc., 5.625% due 5/1/2005 50,000,000 $ 50,460,450
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NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- FIXED INCOME--32.7% (CONT.) PUBLISHING--0.1% PRIMEDIA Inc., 8.00% due 5/15/2013 10,000,000 $ 10,287,500 HEALTH CARE DISTRIBUTORS--0.2% Omnicare, Inc., 6.125% due 6/1/2013 20,000,000 $ 20,100,000 PAPER PACKAGING--0.3% Sealed Air Corporation, 144A, 5.625% due 7/15/2013 (d) 20,000,000 $ 20,690,360 MULTI-UTILITIES & UNREGULATED POWER--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 172,075 $ 178,669 TOTAL CORPORATE BONDS (COST: $133,386,305) 137,735,066 GOVERNMENT AND AGENCY SECURITIES--31.1% CANADIAN GOVERNMENT BONDS--1.3% Canada Government, 3.00% due 12/1/2005 CAD 125,000,000 $ 104,479,167 Province of Alberta, 7.25% due 10/28/2005 CAD 10,000,000 8,621,700 ---------------- 113,100,867 NORWEGIAN GOVERNMENT BONDS--0.1% Norway Government, 6.75% due 1/15/2007 NOK 25,000,000 $ 4,466,631 SWEDISH GOVERNMENT BONDS--0.1% Kingdom of Sweden, 3.50% due 4/20/2006 SEK 50,000,000 $ 7,637,154 U.S. GOVERNMENT NOTES--27.4% United States Treasury Notes, 3.375% due 11/15/2008 500,000,000 $ 498,652,500 United States Treasury Notes, 3.00% due 11/15/2007 500,000,000 496,914,000 United States Treasury Notes, 5.00% due 8/15/2011 400,000,000 425,828,000 United States Treasury Notes, 4.00% due 2/15/2014 400,000,000 394,484,400 United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed 256,601,100 271,766,738 United States Treasury Notes, 3.50% due 11/15/2009 200,000,000 199,062,400 United States Treasury Notes, 4.00% due 11/15/2012 100,000,000 99,832,000 ---------------- 2,386,540,038 U.S. GOVERNMENT AGENCIES--2.2% Federal Home Loan Bank, 5.00% due 12/20/2011 34,555,000 $ 34,740,837 Federal Home Loan Mortgage Corporation, 2.75% due 9/8/2009 32,490,000 32,492,794 Fannie Mae, 4.25% due 2/19/2010 12,888,000 12,879,275 Fannie Mae, 3.125% due 11/30/2009 12,697,000 12,702,460
20
NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- FIXED INCOME--32.7% (CONT.) U.S. GOVERNMENT AGENCIES--2.2% (CONT.) Federal Home Loan Mortgage Corporation, 3.00% due 8/17/2009 10,000,000 $ 10,017,620 Federal Home Loan Mortgage Corporation, 2.00% due 4/27/2007 10,000,000 9,977,270 Federal Home Loan Mortgage Corporation, 2.375% due 9/27/2007 10,000,000 9,971,690 Federal Home Loan Mortgage Corporation, 3.00% due 11/17/2006 10,000,000 9,958,230 Fannie Mae, 3.00% due 10/6/2009 10,000,000 9,937,390 Federal Home Loan Mortgage Corporation, 3.50% due 9/28/2012 8,660,000 8,585,810 Fannie Mae, 3.50% due 10/14/2010 7,550,000 7,531,268 Fannie Mae, 2.25% due 12/30/2008 6,975,000 6,836,783 Federal Home Loan Bank, 3.00% due 12/30/2009 5,000,000 5,063,685 Federal Home Loan Mortgage Corporation, 3.00% due 1/7/2011 4,900,000 4,899,990 Federal Home Loan Bank, 4.52% due 8/26/2009 4,825,000 4,867,523 Fannie Mae, 5.125% due 5/4/2012 4,013,000 4,034,385 Federal Home Loan Bank, 2.25% due 2/22/2007 4,000,000 3,997,816 Federal Home Loan Bank, 3.125% due 7/10/2009 4,000,000 3,880,252 Fannie Mae, 4.125% due 9/14/2012 2,300,000 2,301,799 ---------------- 194,676,877 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $2,689,766,977) 2,706,421,567 TOTAL FIXED INCOME (COST: $2,823,153,282) 2,844,156,633 SHORT TERM INVESTMENTS--7.4% U.S. GOVERNMENT BILLS--4.0% United States Treasury Bills, 1.84% - 2.04% due 1/6/2005 - 2/17/2005 $ 350,000,000 $ 349,583,292 TOTAL U.S. GOVERNMENT BILLS (COST: $349,583,292) 349,583,292 REPURCHASE AGREEMENTS--3.4% IBT Repurchase Agreement, 1.75% dated 12/31/2004 due 1/3/2005, repurchase price $1,494,214 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,568,696 $ 1,493,996 $ 1,493,996
21
NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--7.4% (CONT.) IBT Repurchase Agreement, 1.55% dated 12/31/2004 due 1/3/2005, repurchase price $293,537,910 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $308,175,000 $ 293,500,000 $ 293,500,000 ---------------- TOTAL REPURCHASE AGREEMENTS (COST: $294,993,996) 294,993,996 TOTAL SHORT TERM INVESTMENTS (COST: $644,577,288) 644,577,288 Total Investments (Cost $7,522,965,994)--99.9% $ 8,691,305,753 Other Assets In Excess Of Other Liabilities--0.1% 12,796,012 ---------------- TOTAL NET ASSETS--100% $ 8,704,101,765 ================
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a foreign domiciled corporation. (d) 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. Key to abbreviations: CAD: Canadian Dollar NOK: Norwegian Krone SEK: Swedish Krona 22 THE OAKMARK GLOBAL FUND REPORT FROM CLYDE S. MCGREGOR AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. MCGREGOR] [PHOTO OF MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (12/31/04) AS COMPARED TO THE MSCI WORLD INDEX(12)
THE OAKMARK GLOBAL FUND MSCI WORLD (CLASS I) INDEX - -------------------------------------- 8/4/99 $ 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 12/31/2004 $ 23,407 $ 10,197
ANNUAL AVERAGE TOTAL RETURNS (AS OF 12/31/04) TOTAL RETURN 1-YEAR 5-YEAR SINCE LAST 3 MONTHS* INCEPTION (8/4/99) - ------------------------------------------------------------------------------------------ OAKMARK GLOBAL FUND (CLASS I) 13.00% 15.63% 18.56% 17.01% MSCI World 11.94% 14.72% -2.45% 0.36% Lipper Global Fund Index(13) 12.07% 14.38% -1.10% 2.68% - ------------------------------------------------------------------------------------------
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 gained 13% for the three-month period ending December 31, 2004, compared with the 12% increases for both the MSCI World Index and the Lipper Global Fund Index. Over the past twelve months, The Oakmark Global Fund has returned 16%, compared to gains of 15% for the MSCI World Index and 14% for the Lipper Global Fund Index. Most importantly, since inception the Fund has achieved a 17% annualized return while the MSCI World Index was flat and the Lipper Global Fund Index had a 3% annualized return. LOOKING BACK In this letter we want to take the opportunity to look back a bit at the significant contributors to the Fund's NAV(4) for calendar year 2004. Fortunately, this year the positive contributors dwarfed the negatives. U.S. energy independent Burlington Resources provided the most significant positive contribution to the Fund's NAV over the past twelve months. The share price reacted favorably to the continued strong pricing for natural gas in North America. Management continues to make intelligent capital allocation decisions, including share repurchases and increasing dividends. Bank of Ireland also contributed significantly to performance, as fears about a slowing Irish economy and increased competition gave way to the recognition of the Bank's undervalued franchise. The Bank continues to face challenges--in addition to the economy and competition, problems include the weakness of their UK branch network, Bristol & West, and their Bank of Ireland Asset Management business. But we believe the current valuation reflects an outlook that is far too pessimistic. Takeda Pharmaceutical also did well over the past twelve months. Despite the closing of a bit of the gap between price and value, Takeda remains very undervalued in our opinion. Management aggressively controls costs, and, in a step that's very rare for Japan, it has instituted a variable compensation scheme for every employee. As Takeda's President 23 Yasuchika Hasegawa told us a few months back, "If you want to be paid well, you have to perform." It may sound elementary, but it's still fairly revolutionary in Japan. With a cash-rich balance sheet and strong profitability, we believe Takeda deserves a valuation far above the single-digit multiple of operating profit reflected by the current share price. French-based mail and services company Neopost had strong performance in 2004, as sales and profits came in better than original estimates. A global player in franking machines and services, Neopost's results were driven by the integration of their recent Hasler acquisition, market share gains, and postal decertification in Europe. Efunds, a leading factor in the U.S. market for payment processing, was another standout performer. The company's software is used to process the majority of debit card transactions in the U.S. In September, the company announced the sale of its automatic teller business at a valuation that the stock market deemed quite favorable. The share price of Grupo Televisa had another very strong run in 2004. This Mexican media conglomerate generated higher than expected growth this year, on top of exceptional election-year earnings in 2003. An impressive hike in the dividend also helped move the share price. Other companies that strongly contributed to the Fund's NAV were Laboratory Corp of America, Euronext N.V. (Europe), Ansell (Australia), and Vivendi Universal (France). Now, the one piece of bad news. Synopsys, a leading player in the electronic design automation industry, was the Fund's only position that significantly hampered performance in 2004. We very much liked the company's position in an oligopolistic market, its strong returns on capital, and the expected long-term secular growth rate. Most attractive for us was its valuation, trading at a single-digit multiple of operating profit. Unfortunately, we overestimated the positives, and as a consequence the value of the business. A succession of disappointments and the clear lack of pricing power caused us to revise our original business value estimates to a substantially lower level. We sold our entire position this past quarter. LOOKING FORWARD We remain excited about the value and quality of the names in the Fund. Thank you for your continued confidence and support, and all the best to you and your family in the New Year. /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 - - In 2004, the positive contributors to the Fund's NAV dwarfed the negatives. - - In general, we are finding more interesting opportunities in overseas markets. - - We believe the portfolio is made up of quality names that represent attractive values. 24 THE OAKMARK GLOBAL FUND GLOBAL DIVERSIFICATION--DECEMBER 31, 2004 (UNAUDITED) [CHART]
% OF FUND EQUITY MARKET VALUE - ----------------------------- EUROPE 48.5% Great Britain 13.0% Switzerland 12.1% * France 6.5% * Netherlands 6.4% * Ireland 4.4% * Italy 3.3% * Germany 2.8% UNITED STATES 34.2% PACIFIC RIM 13.9% Japan 7.6% Australia 3.4% Korea 2.9% LATIN AMERICA 2.8% Mexico 2.8% OTHER 0.6% Israel 0.6%
* Euro currency countries comprise 23.4% of the Fund. 25
NAME DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.2% APPAREL RETAIL--2.4% The TJX Companies, Inc. Discount Apparel & Home Fashion (United States) Retailer 1,501,000 $ 37,720,130 APPAREL, ACCESSORIES & LUXURY GOODS--2.0% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 2,557,100 $ 31,531,701 BROADCASTING & CABLE TV--3.6% Grupo Televisa S.A Television Production & (Mexico) (b) Broadcasting 496,500 $ 30,038,250 Liberty Media Corporation, Class A Broadcast Services & (United States) (a) Programming 2,356,000 25,868,880 ---------------- 55,907,130 HOUSEHOLD APPLIANCES--1.6% Snap-on Incorporated (United States) Tool & Equipment Manufacturer 728,000 $ 25,014,080 MOTORCYCLE MANUFACTURERS--0.1% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 1,790,000 $ 2,133,438 MOVIES & ENTERTAINMENT--3.9% Vivendi Universal SA (France) (a) Multimedia 1,430,500 $ 45,583,397 Time Warner Inc. Motion Picture Production, (United States) (a) Distribution, & Other Services 833,000 16,193,520 ---------------- 61,776,917 PUBLISHING--2.7% Tribune Company (United States) Publishing & Broadcast Services 1,003,000 $ 42,266,420 DISTILLERS & VINTNERS--5.0% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 5,517,500 $ 78,644,856 HOUSEHOLD PRODUCTS--2.7% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 513,800 $ 42,440,049
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NAME DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.2% (CONT.) PACKAGED FOODS & MEATS--6.6% Nestle SA (Switzerland) Food & Beverage Manufacturer 238,500 $ 62,237,402 Cadbury Schweppes plc Beverage & Confectionary (Great Britain) Manufacturer 4,383,000 40,780,484 ---------------- 103,017,886 SOFT DRINKS--0.8% Lotte Chilsung Beverage Soft Drinks, Juices & Co., Ltd. (Korea) Sports Drinks Manufacturer 13,430 $ 12,454,405 OIL & GAS EXPLORATION & PRODUCTION--3.5% Burlington Resources Inc. Oil & Natural Gas Exploration & (United States) Production 1,260,000 $ 54,810,000 ASSET MANAGEMENT & CUSTODY BANKS--2.5% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 129,300 $ 38,816,653 DIVERSIFIED BANKS--7.7% Bank of Ireland (Ireland) Commercial Bank 4,029,000 $ 66,952,864 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 2,260,000 36,407,732 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 863,600 17,525,888 ---------------- 120,886,484 DIVERSIFIED CAPITAL MARKETS--0.5% Credit Suisse Group (Switzerland) (a) Investment Services & Insurance 190,700 $ 7,995,667 INVESTMENT BANKING & BROKERAGE--1.0% Daiwa Securities Group Inc. (Japan) Stock Broker 2,062,000 $ 14,896,808 SPECIALIZED FINANCE--3.5% Euronext NV (Netherlands) Stock Exchange 1,814,000 $ 55,293,765 THRIFTS & MORTGAGE FINANCE--1.1% Washington Mutual, Inc. (United States) Thrift 415,000 $ 17,546,200
27
NAME DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.2% (CONT.) HEALTH CARE DISTRIBUTORS--2.3% Cardinal Health, Inc. (United States) Wholesale Drug Distributor 607,500 $ 35,326,124 HEALTH CARE SERVICES--2.8% Laboratory Corporation of America Holdings Medical Laboratory & (United States) (a) Testing Services 892,000 $ 44,439,440 HEALTH CARE SUPPLIES--1.0% Ansell Limited (Australia) Protective Rubber & Plastics Products 2,265,966 $ 15,831,924 PHARMACEUTICALS--10.8% Takeda Pharmaceutical Company Limited Pharmaceuticals & Food (Japan) Supplements 1,281,000 $ 64,531,485 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 2,614,200 61,284,293 Novartis AG (Switzerland) Pharmaceuticals 394,000 19,802,816 Sanofi-Aventis (France) Pharmaceuticals 187,185 14,930,838 Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 346,800 7,584,028 ---------------- 168,133,460 AIRPORT SERVICES--0.8% Grupo Aeroportuario del Sureste S.A. de C.V (Mexico) (b) Airport Operator 463,000 $ 12,663,050 DIVERSIFIED COMMERCIAL SERVICES--4.2% Equifax Inc. (United States) Credit Reporting & Collection 1,367,000 $ 38,412,700 Meitec Corporation (Japan) Software Engineering Services 760,000 28,343,259 ---------------- 66,755,959 EMPLOYMENT SERVICES--1.1% Michael Page International plc (Great Britain) Recruitment Consultancy Services 4,815,400 $ 17,274,804 ENVIRONMENTAL SERVICES--2.2% Waste Management, Inc. (United States) Waste Management Services 1,175,000 $ 35,179,500
28
NAME DESCRIPTION SHARES HELD MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.2% (CONT.) OFFICE SERVICES & SUPPLIES--0.4% United Stationers Inc. (United States) (a) Business Products Distributor 150,000 $ 6,930,000 DATA PROCESSING & OUTSOURCED SERVICES--9.1% First Data Corporation (United States) Data Processing & Management 1,495,750 $ 63,629,205 eFunds Corporation (United States) (a) Electronic Debit Payment Services 2,239,000 53,758,390 Ceridian Corporation (United States) (a) Data Management Services 1,348,000 24,641,440 ---------------- 142,029,035 ELECTRONIC EQUIPMENT MANUFACTURERS--0.6% Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 412,700 $ 8,736,859 OFFICE ELECTRONICS--2.4% Neopost SA (France) Mailroom Equipment Supplier 494,750 $ 38,389,958 DIVERSIFIED CHEMICALS--2.7% Akzo Nobel N.V (Netherlands) Chemical Producer 992,300 $ 42,240,761 SPECIALTY CHEMICALS--3.6% Lonza Group AG, Registered Shares (Switzerland) Industrial Organic Chemicals 710,400 $ 39,880,356 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 25,300 16,621,815 ---------------- 56,502,171 WIRELESS TELECOMMUNICATION SERVICES--2.0% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 168,000 $ 31,970,634 TOTAL COMMON STOCKS (COST: $1,151,858,660) 1,525,556,268
29
NAME PAR VALUE MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--3.0% REPURCHASE AGREEMENTS--3.0% IBT Repurchase Agreement, 1.75% dated 12/31/2004 due 1/3/2005, repurchase price $1,619,087 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,699,794 $ 1,618,851 $ 1,618,851 IBT Repurchase Agreement, 1.55% dated 12/31/2004 due 1/3/2005, repurchase price $46,005,942 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $48,300,000 46,000,000 46,000,000 ---------------- TOTAL REPURCHASE AGREEMENTS (COST: $47,618,851) 47,618,851 TOTAL SHORT TERM INVESTMENTS (COST: $47,618,851) 47,618,851 Total Investments (Cost $1,199,477,511)--100.2% $ 1,573,175,119 Other Liabilities In Excess Of Other Assets--(0.2)% (3,864,527) ---------------- TOTAL NET ASSETS--100% $ 1,569,310,592 ================
(a) Non-income producing security. (b) Represents an American Depository Receipt. 30 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS FELLOW SHAREHOLDERS, Your International Funds, Oakmark International and Oakmark International Small Cap, ended 2004 with acceptable returns achieving 19% and 29%, respectively. This compares to the MSCI World ex U.S. Index(14), which returned 20%. More importantly, the longer term results continue to be quite strong with International gaining 10% and International Small Cap increasing 14% over the last five years compared to the MSCI World ex U.S. Index loss of 1%. THE CURRENCY PENDULUM Invariably, as currency movements aggressively sway from one extreme to the next, analysts and commentators clamor to explain such volatility. In particular, they try to predict future trends by extrapolating from the recent past. Both of these approaches are troubling, especially when it comes to currency forecasting. Ultimately, the value of a nation's currency is underpinned by that country's production/economic prowess in an absolute--and more importantly--a relative sense. Today, as the dollar hits five-year lows compared to many European and Asian currencies, some experts conveniently proclaim that the dollar's continued fall is not only likely, but certain. The usual reasons given are the "twins": the U.S. budget and current account deficits. This type of talk is very typical when the dollar declines. Last cycle, we heard the same chatter: "the U.S. dollar has lost its reserve status," "the dollar is in terminal decline," etc. About the time this talk becomes the loudest, the pendulum swings back, and valuations reverse. Recall how the Euro began its life at 1.17 in 1999 and promptly fell to .85 over the next few years. Today, of course, people aren't speaking about a weak Euro; it's at 1.35. Instead, we hear talk of 1.50! People forget that the more something becomes overvalued, the stronger forces become to counteract that movement. Eventually, these forces become strong enough to reverse the direction of the movement. We do not believe that the dollar is fundamentally doomed. Consider: 1. The U.S. is still the largest and most stable economy in the world. 2. The U.S. is extremely competitive when you consider regulation, productivity of labor, unit labor costs, and capital's ability to control its destiny. 3. The U.S. is the biggest consumer market in the world. Foreign companies must have a U.S. presence. 4. The U.S. has the largest and deepest capital markets. To debunk the dollar bears' arguments about the twin deficits, we would remind them: 1. The U.S. debt-to-GDP situation is better than Japan (45% compared to over 100%) and Europe (45% compared to 65% and over). The U.S. fiscal deficit is projected to fall over the next few years, and at 3-3.5% of GDP, it is not much different than the Euro economies or Japan. 2. Yes, the U.S. has a current account deficit. But, by definition, it also has a capital account surplus. This means that though the U.S. runs a trade deficit, this deficit is largely financed by foreign investors' willingness to invest in America. Why do we feel this will continue? See 1, 2, 3, and 4 above. As long as the U.S. maintains global competitiveness, foreign money will remain. Causality is notoriously difficult to prove. Do we buy foreign goods because we have a capital surplus, or do foreigners invest in our capital because they have a trade surplus? The pundits assume the latter, but for no substantive reason. Who knows what will happen in the short term? However, we believe that over time, fundamental forces will re-assert themselves, and the pendulum will change directions. From an investment perspective, a stronger dollar over the long term has important implications. It bodes well, in local currency returns, for those foreign multinationals who are dollar earners. This positive impact should be more than enough to counter the negative currency move felt by U.S.-based investors who hold falling foreign currencies. In our Funds, we have also elected to hedge part of our Swiss franc and Sterling holdings, which should mitigate the later negative. HAPPY ANNIVERSARY! Fifteen years ago, on December 29, 1989, the Japanese Nikkei(15) hit its all time high of 38,916. As of this writing, the market sits at 11,488, down 70% from where the market closed on that December day in 1989. We keep trying to find quality Japanese companies to invest in. Though we have had some success, it is proving difficult to find companies that have management teams that are truly concerned with building shareholder value. We will keep trying! In closing, we would again like to thank all of our shareholders for their continued support and confidence. We will continue to work hard to find suitable investments over the long term. /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 see many reasons that argue against a perpetually weak dollar. - - We selectively hedge currencies where we see significant opportunity or reason for concern. - - It continues to be difficult to find many shareholder-oriented management companies in Japan. 31 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 (12/31/04) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(14)
THE OAKMARK INTERNATIONAL MSCI WORLD EX FUND (CLASS I) U.S. INDEX 9/30/1992 $ 10,000 $ 10,000 12/31/1992 $ 10,043 $ 9,628 3/31/1993 $ 11,890 $ 10,766 6/30/1993 $ 12,300 $ 11,834 9/30/1993 $ 13,387 $ 12,562 12/31/1993 $ 15,424 $ 12,729 3/31/1994 $ 15,257 $ 13,133 6/30/1994 $ 14,350 $ 13,748 9/30/1994 $ 15,278 $ 13,830 12/31/1994 $ 14,026 $ 13,664 3/31/1995 $ 13,563 $ 13,924 6/30/1995 $ 14,749 $ 14,060 9/30/1995 $ 15,507 $ 14,631 12/31/1995 $ 15,193 $ 15,222 3/31/1996 $ 17,021 $ 15,681 6/30/1996 $ 18,383 $ 15,937 9/30/1996 $ 18,347 $ 15,950 12/31/1996 $ 19,450 $ 16,268 3/31/1997 $ 20,963 $ 16,016 6/30/1997 $ 22,700 $ 18,094 9/30/1997 $ 23,283 $ 18,027 12/31/1997 $ 20,097 $ 16,637 3/31/1998 $ 22,994 $ 19,083 6/30/1998 $ 20,253 $ 19,233 9/30/1998 $ 16,322 $ 16,404 12/31/1998 $ 18,688 $ 19,759 3/31/1999 $ 21,258 $ 20,070 6/30/1999 $ 25,728 $ 20,650 9/30/1999 $ 23,896 $ 21,535 12/31/1999 $ 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 12/31/2004 $ 41,862 $ 24,324
ANNUAL AVERAGE TOTAL RETURNS (AS OF 12/31/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (9/30/92) - ---------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND (CLASS I) 13.07% 19.09% 9.93% 11.54% 12.39% MSCI World ex. U.S. 15.15% 20.38% -0.76% 5.93% 7.52% MSCI EAFE(16) 15.32% 20.25% -1.13% 5.61% 7.30% Lipper International Fund Index(17) 14.39% 18.59% -0.89% 7.20% 8.55%
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 gained 13% for the quarter, compared to the MSCI World ex U.S. Index, which gained 15%. For the twelve months ended December 31, 2004, the Fund gained 19%, compared to the 20% return of the MSCI World ex U.S. Index. BIG CONTRIBUTORS 2004 At the end of every year, we like to discuss those stocks that had the most significant impact on your Fund's NAV(4) over the past twelve months. We like to point out the good and the bad. However for the second year in a row, nearly all returns were positive, and none of the Fund's positions had a significant negative contribution. This makes us feel both good and uneasy! The share price of Grupo Televisa has had a terrific run over the past two years, and for the calendar year ended December 31, 2004, it generated the most significant positive contribution to the NAV. Higher than expected profit growth this year, coupled with the market's continued recognition of the company's improved shareholder orientation, helped drive share price performance. Bank of Ireland was another strong contributor to NAV growth. The Bank displayed its resilience and the quality of its franchise in 2004, facing down the challenges of increased competition, a slowing Irish economy, and a change in CEO. Lotte Chilsung Beverage is a stock we have owned since 1995. Adding to a long history of positive surprises, Lotte Chilsung's results in 2004 have held up well despite an awful consumer environment in Korea. A peerless distribution system and robust new product development continue to be the company's major strengths. A couple of our holdings in the pharmaceutical industry provided significant positive contributions over the past twelve months. Takeda Pharmaceutical, Japan's largest pharma company, continues to be a quality franchise at a very attractive price, despite the gap between price and value closing a bit this year. The share price of Aventis soared last January as Sanofi-Synthelabo launched a takeover bid. The share price of Cadbury Schweppes plc performed well as the market rewarded the new management team for its success in integrating the recent Adams acquisition as well as for instituting a broad-reaching restructuring plan, which should substantially increase efficiency and profitability. Other significant winners for the Fund in calendar 2004 included European equity and derivatives exchange Euronext N.V., media and telecom company Vivendi Universal (France), and the flavors and fragrances producer Givaudan S.A. (Switzerland). The stocks with modest declines include Orbotech Ltd. and J. Sainsbury PLC. LOOKING FORWARD It was a good year of performance, but we still see interesting opportunities. Given the quality of the holdings and the attractive valuation of the portfolio, we remain optimistic about potential price appreciation. Thank you for your continued confidence. /s/ David G. Herro /s/ Michael J. Welsh DAVID G. HERRO, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager dherro@oakmark.com mwelsh@oakmark.com 32 THE OAKMARK INTERNATIONAL FUND INTERNATIONAL DIVERSIFICATION--DECEMBER 31, 2004 (UNAUDITED) [CHART]
% OF FUND EQUITY MARKET VALUE - ------------------------------------- EUROPE 78.4% Great Britain 25.9% Switzerland 16.0% * France 11.7% * Germany 8.2% * Netherlands 7.7% * Italy 3.9% * Ireland 3.6% * Finland 1.4% PACIFIC RIM 19.3% Japan 7.2% Korea 5.8% Australia 4.0% Singapore 1.5% Hong Kong 0.8% LATIN AMERICA 1.8% Mexico 1.8% OTHER 0.5% Israel 0.5%
* Euro currency countries comprise 36.5% of the Fund. 33 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2004 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.1% ADVERTISING--4.2% Publicis Groupe (France) Advertising & Media Services 3,685,800 $ 119,249,332 Aegis Group plc (Great Britain) Media Services 43,844,900 90,841,020 --------------- 210,090,352 APPAREL RETAIL--0.8% Giordano International Pacific Rim Clothing Retailer & Limited (Hong Kong) Manufacturer 61,424,300 $ 38,524,529 APPAREL, ACCESSORIES & LUXURY GOODS--1.7% Swatch Group AG, Bearer Shares (Switzerland) Watch Manufacturer 570,300 $ 83,490,259 Swatch Group AG, Registered Shares (Switzerland) Watch Manufacturer 24,700 732,301 --------------- 84,222,560 AUTOMOBILE MANUFACTURERS--3.1% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 3,431,500 $ 154,546,044 BROADCASTING & CABLE TV--2.3% Grupo Televisa S.A. Television Production & (Mexico) (b) Broadcasting 1,356,800 $ 82,086,400 British Sky Broadcasting Group plc Television Production & (Great Britain) Broadcasting 3,019,700 32,556,618 --------------- 114,643,018 MOVIES & ENTERTAINMENT--2.1% Vivendi Universal SA (France) (a) Multimedia 3,260,300 $ 103,890,632 PUBLISHING--1.5% John Fairfax Holdings Limited (Australia) Newspaper Publisher 20,630,899 $ 73,444,350 SPECIALTY STORES--2.2% Signet Group plc (Great Britain) Jewelry Retailer 52,812,500 $ 111,447,050 TEXTILES--0.7% Chargeurs SA (France) Wool, Textile Production & Trading 790,182 $ 33,283,159
34
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.1% (CONT.) TIRES & RUBBER--1.1% Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 884,300 $ 56,608,990 BREWERS--1.7% Heineken Holding NV, Class A (Netherlands) Brewer 2,323,500 $ 70,130,752 Heineken NV (Netherlands) Brewer 497,500 16,554,895 --------------- 86,685,647 DISTILLERS & VINTNERS--4.3% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 12,023,000 $ 171,372,379 Pernod-Ricard SA (France) Manufactures Wines, Spirits, & Fruit Juices 299,000 45,712,072 --------------- 217,084,451 HOUSEHOLD PRODUCTS--2.1% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 1,251,000 $ 103,333,012 PACKAGED FOODS & MEATS--5.6% Nestle SA (Switzerland) Food & Beverage Manufacturer 575,100 $ 150,074,339 Cadbury Schweppes plc Beverage & Confectionary (Great Britain) Manufacturer 14,165,200 131,796,421 --------------- 281,870,760 PERSONAL PRODUCTS--0.9% L'Oreal SA (France) Health & Beauty Aid Manufacturer 600,800 $ 45,518,601 SOFT DRINKS--1.6% Lotte Chilsung Beverage Soft Drinks, Juices & Sports Drinks Co., Ltd. (Korea) Manufacturer 83,400 $ 77,341,577 INTEGRATED OIL & GAS--1.6% BP p.l.c. (Great Britain) Oil & Natural Gas Exploration & Production 6,294,100 $ 61,338,975 Total SA (France) Oil & Natural Gas Exploration & Production 100,000 21,799,759 --------------- 83,138,734
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NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.1% (CONT.) DIVERSIFIED BANKS--16.5% Bank of Ireland (Ireland) Commercial Bank 10,462,900 173,869,726 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 7,348,800 118,386,346 Lloyds TSB Group plc (Great Britain) Commercial Bank 12,347,600 112,042,518 BNP Paribas SA (France) Commercial Banking 1,156,000 83,583,557 Kookmin Bank (Korea)(a) Commercial Banking 1,955,068 76,487,881 UniCredito Italiano S.p.A. (Italy) Banking Services 12,956,700 74,348,220 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 8,395,368 70,985,895 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 2,938,400 59,631,854 Sanpaolo IMI S.p.A. (Italy) Banking Services 3,933,600 56,562,926 --------------- 825,898,923 DIVERSIFIED CAPITAL MARKETS--2.0% Credit Suisse Group (Switzerland) (a) Investment Services & Insurance 2,408,600 $ 100,987,746 INVESTMENT BANKING & BROKERAGE--1.0% Daiwa Securities Group Inc. (Japan) Stock Broker 6,799,000 $ 49,119,008 REINSURANCE--0.3% Hannover Rueckversicherung AG (Germany) Reinsurance 390,800 $ 15,241,518 SPECIALIZED FINANCE--5.5% Euronext NV (Netherlands) Stock Exchange 5,012,500 $ 152,789,413 Deutsche Boerse AG (Germany) Electronic Trading Systems 2,030,500 121,968,143 --------------- 274,757,556 HEALTH CARE EQUIPMENT--1.4% Olympus Corporation (Japan) Optical Equipment Manufacturer 3,251,000 $ 69,349,165
36
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.1% (CONT.) PHARMACEUTICALS--10.3% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 7,688,600 $ 180,242,681 Takeda Pharmaceutical Company Limited Pharmaceuticals& Food (Japan) Supplements 2,776,200 139,853,480 Novartis AG (Switzerland) Pharmaceuticals 2,693,900 135,397,983 Sanofi-Aventis (France) Pharmaceuticals 721,008 57,511,304 --------------- 513,005,448 AIRPORT SERVICES--0.1% Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b) Airport Operator 205,700 $ 5,625,895 DIVERSIFIED COMMERCIAL SERVICES--1.8% Meitec Corporation (Japan) Software Engineering Services 2,424,800 $ 90,429,913 EMPLOYMENT SERVICES--1.9% Michael PageInternational plc (Great Britain) Recruitment Consultancy Services 25,698,900 $ 92,192,440 INDUSTRIAL CONGLOMERATES--0.0% Haw Par Corporation Limited (Singapore) Healthcare& Leisure Products 58,338 $ 184,082 INDUSTRIAL MACHINERY--2.8% Enodis plc (Great Britain) (a) Food Processing Equipment 33,585,320 $ 71,195,236 Metso Corporation (Finland) Paper& Pulp Machinery 4,339,200 68,634,745 --------------- 139,829,981 MARINE PORTS& SERVICES--2.2% Associated British Ports Holdings plc (Great Britain) Port Operator 12,131,399 $ 110,546,160 ELECTRONIC EQUIPMENT MANUFACTURERS--0.5% Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 1,237,700 $ 26,202,109 DIVERSIFIED CHEMICALS--2.7% Akzo Nobel N.V. (Netherlands) Chemical Producer 3,107,200 $ 132,268,964 FERTILIZERS& AGRICULTURAL CHEMICALS--1.6% Syngenta AG (Switzerland) (a) Crop Protection Products 738,500 $ 78,251,656
37
SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE - ----------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.1% (CONT.) SPECIALTY CHEMICALS--4.6% Lonza Group AG, Registered Shares (Switzerland) Industrial Organic Chemicals 2,267,700 $ 127,303,890 Givaudan (Switzerland) Fragrance& Flavor Compound Manufacturer 151,100 99,270,997 --------------- 226,574,887 WIRELESS TELECOMMUNICATION SERVICES--4.4% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 672,600 $ 127,996,716 Vodafone Group Plc (Great Britain) Mobile Telecommunications 27,049,500 73,297,112 Vodafone Group Plc (Great Britain) (b) Mobile Telecommunications 606,000 16,592,280 --------------- 217,886,108 TOTAL COMMON STOCKS (COST: $3,510,280,488) 4,844,025,025 SHORT TERM INVESTMENTS--3.6% U.S. GOVERNMENT BILLS--0.6% United States Treasury Bill, 2.04% due 1/6/2005 $ 30,000,000 $ 29,991,500 TOTAL U.S. GOVERNMENT BILLS (COST: $29,991,500) 29,991,500 REPURCHASE AGREEMENTS--3.0% IBT Repurchase Agreement, 1.75% dated 12/31/2004 due 1/3/2005, repurchase price $1,325,953 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,392,048 $ 1,325,760 $ 1,325,760 IBT Repurchase Agreement, 1.55% dated 12/31/2004 due 1/3/2005, repurchase price $149,519,310 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $156,975,000 149,500,000 149,500,000 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $150,825,760) 150,825,760 TOTAL SHORT TERM INVESTMENTS (COST: $180,817,260) 180,817,260 Total Investments (Cost $3,691,097,748)--100.7% $ 5,024,842,285 Other Liabilities In Excess Of Other Assets--(0.7)% (36,753,194) --------------- TOTAL NET ASSETS--100% $ 4,988,089,091 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. 38 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 (12/31/04) 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 11/1/95 $ 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 12/31/2004 $ 31,087 $ 17,072
ANNUAL AVERAGE TOTAL RETURNS (AS OF 12/31/04) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) - ----------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND (CLASS I) 13.41% 28.95% 13.92% 13.16% MSCI World ex. U.S. 15.15% 20.38% -0.76% 6.00% Lipper International Small Cap Average(18) 14.55% 25.52% 7.76% 11.40%
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 13% for the quarter, underperforming our benchmark indices. More importantly, however, for the past twelve months your Fund is up 29%, solidly outpacing the relevant benchmarks. Strong performers for the quarter were Schindler Holding and our airport operators, Grupo Aeroportuario del Sureste ("Asur") and Kobenhaven Lufthave. Asur continued to enjoy strong passenger volumes and increased retail spending per passenger. Towards the close of the quarter, its shareholder structure further simplified, paving the way for renewed cash disbursements to shareholders in 2005. Kobenhaven also enjoyed strong passenger figures, coupled with the finalization of the bidding process for the Brussels airport. Because Kobenhaven remained very disciplined with its bid, the group did not win the auction. As a result, Kobenhaven began returning excess cash to shareholders via share repurchases. Schindler (an elevator and escalator manufacturer) has continued along its recovery path, with profitability and free cash flow steadily increasing. To management's credit, these improvements have come in the face of a raw materials headwind and have coincided with the roll-out of several new products, including the Eurolift and Schindler 700 series. The most significant detractor from quarterly performance was Lectra, a French software firm focused on developing products for the textile industry. Its core market happened to turn down simultaneously with a meaningful acquisition (Investronica). In addition, with approximately 25% of sales from dollar-based markets, Lectra is suffering from a large currency mismatch and is competitively disadvantaged relative to its U.S. peer, Gerber Scientific. We continue to believe the Investronica deal will be value accretive, because of significant working capital improvements and because an undisciplined price discounter has fallen out of the market. In addition, we expect the textile market and currencies to return to more normal levels, allowing for Lectra to return to historical levels of profitability. PORTFOLIO COMPOSITION New positions initiated during the quarter include Lotte Confectionary, Korea's largest ice cream and candy company, and Orbotech, an Israeli semiconductor equipment company. Your Fund continued to add to the small-cap Korean banks discussed in last quarter's summary, Pusan and Daegu, and positions that had fallen, including Lectra and Morse. Following the bid we saw last quarter for DFS, your Fund experienced quite a bit of merger and acquisition activity in this quarter as well. Waterford Wedgeford, Royal Doulton's largest shareholder, made a cash offer for the group in October. Similarly, Geest's largest shareholder, Bakkavor Group from Iceland, has made a tentative approach to the group. Finally, Recoletos' management has offered to repurchase Pearson's entire 72% stake for 3% more than we estimated the business to be worth. We're excited that independent entities continue to recognize the value we see in our businesses. 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 39 THE OAKMARK INTERNATIONAL SMALL CAP FUND [CHART] INTERNATIONAL DIVERSIFICATION--DECEMBER 31, 2004 (UNAUDITED)
% OF FUND EQUITY MARKET VALUE ------------------------------------------------ - - EUROPE 72.2% Switzerland 17.9% * France 12.4% Great Britain 11.0% * Italy 8.5% Denmark 6.3% * Spain 4.0% * Finland 3.7% * Germany 3.6% Turkey 2.5% Sweden 1.9% * Greece 0.4% - - PACIFIC RIM 25.1% Japan 9.3% Korea 6.0% Australia 4.2% New Zealand 3.2% Hong Kong 1.7% Thailand 0.4% Philippines 0.3% - - LATIN AMERICA 2.6% Mexico 2.6% - - OTHER 0.1% Israel 0.1%
* Euro currency countries comprise 32.6% of the Fund. 40 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--DECEMBER 31, 2004 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% ADVERTISING--2.5% Asatsu-DK, Inc. (Japan) Advertising Services Provider 459,700 $ 12,947,716 G2R Inc. (Korea) Advertising & Marketing Services 485,330 8,321,684 --------------- 21,269,400 APPAREL, ACCESSORIES & LUXURY GOODS--2.3% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 1,615,900 $ 19,925,727 HOME FURNISHINGS--0.5% Royal Doulton plc (Great Britain) (a) Tableware & Giftware 18,373,000 $ 4,097,436 HOME IMPROVEMENT RETAIL--2.5% Carpetright plc (Great Britain) Carpet Retailer 987,400 $ 21,594,201 MOTORCYCLE MANUFACTURERS--0.4% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 3,015,650 $ 3,594,247 PHOTOGRAPHIC PRODUCTS--1.3% Vitec Group plc (Great Britain) Photo Equipment & Supplies 1,956,607 $ 10,735,167 PUBLISHING--1.9% Tamedia AG (Switzerland) (a) Publishing & TV Broadcasting 143,661 $ 13,231,354 Matichon Public Company Limited, Foreign Shares (Thailand) Newspaper Publisher 2,039,500 3,672,506 --------------- 16,903,860 AGRICULTURAL PRODUCTS--2.2% Geest plc (Great Britain) Fresh Produce Distributor 1,562,400 $ 19,122,826 BREWERS--4.1% Davide Campari - Milano Soft Drinks, Wines, & Spirits S.p.A. (Italy) Producer 301,500 $ 19,325,242 Kook Soon Dang Brewery Co., Ltd. (Korea) Wine & Spirits Manufacturer 843,176 10,425,669 Hite Brewery Co., Ltd. (Korea) Brewer 68,000 5,616,306 --------------- 35,367,217
41
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) DISTILLERS & VINTNERS--2.0% Baron de Ley, S.A. (Spain) (a) Wines & Spirits Manufacturer 337,037 $ 17,373,887 PACKAGED FOODS & MEATS--0.5% Alaska Milk Corporation (Philippines) Milk Producer 49,394,000 $ 2,596,210 Lotte Confectionery Co., Ltd. (Korea) Candy & Snacks Manufacturer 1,880 1,440,147 --------------- 4,036,357 ASSET MANAGEMENT & CUSTODY BANKS--3.4% Julius Baer Holding Ltd., Zurich (Switzerland) Asset Management 97,500 $ 29,270,098 DIVERSIFIED BANKS--1.9% Jyske Bank-Registered (Denmark) (a) Commercial Banking 444,800 $ 16,711,283 MULTI-SECTOR HOLDINGS--2.7% Pargesa Holding AG (Switzerland) Diversified Operations 5,754 $ 20,188,588 Eurazeo (France) Investment Company 39,500 3,330,229 --------------- 23,518,817 OTHER DIVERSIFIED FINANCIAL SERVICES--1.5% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 1,428,700 $ 13,292,503 REGIONAL BANKS--1.5% Pusan Bank (Korea) Commercial Banking 1,033,500 $ 7,936,945 Daegu Bank (Korea) Commercial Banking 739,400 5,142,658 --------------- 13,079,603 SPECIALIZED FINANCE--0.4% Athens Stock Exchange S.A. (Greece) (a) Exchange Services 293,000 $ 3,028,715 HEALTH CARE EQUIPMENT--0.0% Golden Meditech Company Limited (China) Medical Instruments & Supplies 296,000 $ 74,640
42
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) HEALTH CARE SUPPLIES--2.7% Ansell Limited (Australia) Protective Rubber & Plastics Products 1,733,684 $ 12,112,959 Coloplast A/S, Class B Healthcare Products & Services (Denmark) Provider 203,000 11,125,468 --------------- 23,238,427 PHARMACEUTICALS--2.7% Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 1,072,400 $ 23,451,879 AIR FREIGHT & LOGISTICS--1.7% Mainfreight Limited (New Zealand) Logistics Services 8,935,381 $ 14,436,113 AIRPORT SERVICES--5.3% Kobenhavns Lufthavne A/S (Copenhagen Airports A/S - CPH) (Denmark) Airport Management & Operations 113,600 $ 24,095,494 Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b) Airport Operator 785,300 21,477,955 --------------- 45,573,449 CONSTRUCTION & ENGINEERING--1.2% Tae Young Corp. (Korea) Heavy Construction 283,560 $ 10,271,928 CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS--0.2% Vossloh AG (Germany) Railroad Equipment Manufacturer 29,000 $ 1,430,007 DIVERSIFIED COMMERCIAL SERVICES--2.2% Prosegur, Compania de Seguridad SA (Spain) Security & Transportation Services 800,700 $ 15,728,025 Konami Sports Corporation (Japan) Fitness Centers 149,400 3,165,069 --------------- 18,893,094 ELECTRICAL COMPONENTS & EQUIPMENT--3.7% Pfeiffer Vacuum Technology AG (Germany) Vacuum Pump Manufacturer 423,840 $ 18,973,685 Carbone Lorraine SA (France) (a) Electrical Systems Manufacturer 236,666 12,520,921 --------------- 31,494,606
43
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) EMPLOYMENT SERVICES--1.0% DIS Deutscher Industrie Service AG (Germany) Recruitment Consultancy Services 227,000 $ 8,899,375 INDUSTRIAL CONGLOMERATES--2.4% Dogan Sirketler Grubu Holding A.S. (Turkey) (a)(c) Diversified Holding Company 9,859,711,000 $ 20,911,264 INDUSTRIAL MACHINERY--14.2% Saurer AG (Switzerland) (a) Textile Equipment Manufacturer 478,400 $ 28,115,258 Interpump Group S.p.A. (Italy) Pump & Piston Manufacturer 4,700,000 27,116,214 Schindler Holding AG (Switzerland) Elevator & Escalator Manufacturer 64,200 26,748,827 Kone Oyj, Class B (Finland) Elevators 187,800 14,544,254 Alfa Laval AB (Sweden) Filtration & Separation Equipment 807,500 13,061,821 LISI (France) Industrial Fastener Manufacturer 162,413 9,553,134 Munters AB (Sweden) Cooling & Moisture Control Systems 77,400 2,329,291 NSC Groupe (France) Textile Equipment Manufacturer 12,316 1,004,942 --------------- 122,473,741 OFFICE SERVICES & SUPPLIES--0.6% Societe BIC SA (France) Consumer & Office Supplies 101,800 $ 5,109,581 Domino Printing Sciences plc (Great Britain) Printing Equipment 70,000 344,449 --------------- 5,454,030 COMPUTER STORAGE & PERIPHERALS--1.4% Lectra (France) Manufacturing Process Systems 1,813,100 $ 12,297,804 DATA PROCESSING & OUTSOURCED SERVICES--2.6% Baycorp Advantage Limited (Australia) (a) Credit Reference Services 9,342,300 $ 22,513,000 ELECTRONIC EQUIPMENT MANUFACTURERS--1.9% Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 627,000 $ 15,480,135 Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 29,000 613,930 --------------- 16,094,065
44
NAME DESCRIPTION SHARES HELD MARKET VALUE - ----------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.2% (CONT.) HOME ENTERTAINMENT SOFTWARE--1.5% Square Enix Co., Ltd. (Japan) Entertainment Software 436,800 $ 12,921,058 IT CONSULTING & OTHER SERVICES--4.1% Morse plc (Great Britain) Business & Technology Solutions 10,026,500 $ 18,465,444 Alten (France) (a) Systems Consulting & Engineering 456,041 10,145,736 Sopra Group (France) Computer Engineering 111,930 6,714,305 --------------- 35,325,485 OFFICE ELECTRONICS--3.3% Neopost SA (France) Mailroom Equipment Supplier 366,200 $ 28,415,164 CONSTRUCTION MATERIALS--1.3% Fletcher Building Limited (New Zealand) Building Materials Manufacturer 2,414,400 $ 11,476,829 INDUSTRIAL GASES--1.3% Taiyo Ink Mfg. Co., Ltd. (Japan) Manufacturer of Resist Inks 291,300 $ 10,806,795 SPECIALTY CHEMICALS--6.7% Gurit-Heberlein AG (Switzerland) Chemical Producer 36,075 $ 29,396,671 Croda International plc (Great Britain) Chemical Producer 2,573,600 15,848,394 Financiere Marc de Lacharriere SA Chemical Storage & Diversified (Fimalac) (France) Operations 266,932 12,746,152 Financiere Marc de Lacharriere SA (Fimalac), Chemical Storage & Diversified Warrants (France) (a) Operations 31,866 148,271 --------------- 58,139,488 ALTERNATIVE CARRIERS--1.6% Asia Satellite Telecommunications Holdings Limited (Hong Kong) Satellite Operator 7,305,000 $ 13,909,273 TOTAL COMMON STOCKS (COST: $541,803,259) 821,422,858
45
NAME PAR VALUE MARKET VALUE - ---------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--5.4% U.S. GOVERNMENT BILLS--2.3% United States Treasury Bills, 1.64% - 1.69% due 1/20/2005 - 1/27/2005 $ 20,000,000 $ 19,979,139 TOTAL U.S. GOVERNMENT BILLS (COST: $19,979,139) 19,979,139 REPURCHASE AGREEMENTS--3.1% IBT Repurchase Agreement, 1.75% dated 12/31/2004 due 1/3/2005, repurchase price $1,489,554 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,563,804 $ 1,489,337 $ 1,489,337 IBT Repurchase Agreement, 1.55% dated 12/31/2004 due 1/3/2005, repurchase price $25,003,229 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $26,250,000 25,000,000 25,000,000 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $26,489,337) 26,489,337 TOTAL SHORT TERM INVESTMENTS (COST: $46,468,476) 46,468,476 Total Investments (Cost $588,271,735)--100.6% $ 867,891,334 Foreign Currencies (Cost $258,837)--0.0% $ 257,769 Other Liabilities In Excess Of Other Assets--(0.6)% (5,260,372) --------------- TOTAL NET ASSETS--100% $ 862,888,731 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Effective January 1, 2005, the Republic of Turkey converted to the new Turkish Lira (currency code TRY). TRY is the equivalent to 1,000,000 of the former Turkish Lira (TRL). For Oakmark International Small Cap, its holdings in Dogan Sirketler Grubu Holding A.S. (currently stated in TRL) became equivalent to 9,859,711 shares under the TRY. The currency re-denomination had no impact on the cost and market value of this security. 46 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 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. The performance information for Class I shares of The Oakmark Fund, The Oakmark Select Fund, The Oakmark Equity & Income Fund, The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap Fund does not reflect the imposition of a 2% redemption fee on shares held by an investor for 90 days or less. The purpose of this redemption fee is to deter market timers. 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 IS OPEN TO EXISTING SHAREHOLDERS AND INVESTORS WHO PURCHASE DIRECTLY FROM OAKMARK. 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 RETURNS MORE VOLATILE THAN A MORE DIVERSIFIED FUND. THE OAKMARK EQUITY AND 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. 47 3. 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. 4. NAV stands for Net Asset Value. NAV is the dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities divided by the number of shares outstanding. 5. 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. 6. 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. 7. The Price-Earnings Ratio ("P/E") is the most common measure of the expensiveness of a stock. 8. The S&P Mid Cap 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 Japanese Nikkei Index is an Index of 225 leading stocks traded on the Tokyo Stock Exchange. This index is unmanaged and investors cannot actually make investments in this index. 16. 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. 17. The Lipper International Fund Index reflects the net asset value weighted total return of the 30 largest international equity funds. This index is unmanaged and investors cannot actually make investments in this index. 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. 48 THE OAKMARK 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. 49 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. 50 [OAKMARK LOGO] (This page has been intentionally left blank.) 51 [OAKMARK LOGO] (This page has been intentionally left blank.) 52 THE OAKMARK FUNDS TRUSTEES AND OFFICERS TRUSTEES Gary N. Wilner, M.D.--CHAIRMAN Michael J. Friduss Thomas H. Hayden Christine M. Maki Victor A. Morgenstern John R. Raitt Allan J. Reich Marv R. Rotter Burton W. Ruder Peter S. Voss OFFICERS John R. Raitt--PRESIDENT Robert M. Levy--EXECUTIVE VICE PRESIDENT Henry R. Berghoef--VICE PRESIDENT Kevin G. Grant--VICE PRESIDENT David G. Herro--VICE PRESIDENT Clyde S. McGregor--VICE PRESIDENT William C. Nygren--VICE PRESIDENT Vineeta D. Raketich--VICE PRESIDENT Janet L. Reali--VICE PRESIDENT AND SECRETARY Ann W. Regan--VICE PRESIDENT AND ASSISTANT SECRETARY Edward A. Studzinski--VICE PRESIDENT Michael J. Welsh--VICE PRESIDENT Kristi L. Rowsell--TREASURER John J. Kane--ASSISTANT TREASURER OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT 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. [OAKMARK LOGO] 1-800-OAKMARK The Oakmark Funds are distributed by Harris www.oakmark.com Associates Securities L.P., member NASD. Date of first use: January 2005. -----END PRIVACY-ENHANCED MESSAGE-----