N-CSRS 1 a2155642zn-csrs.txt N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06279 Harris Associates Investment Trust (Exact name of Registrant as specified in charter) Two North La Salle Street, Suite 500 Chicago, Illinois 60602-3790 (Address of principal executive offices) (Zip Code) John R. Raitt Cameron S. Avery Harris Associates L.P. Bell, Boyd & Lloyd LLC Two North La Salle Street, #500 Three First National Plaza, #3100 Chicago, Illinois 60602 Chicago, Illinois 60602 (Name and address of agents for service) Registrant's telephone number, including area code: (312) 621-0600 Date of fiscal year end: 9/30/05 Date of reporting period: 3/31/05 ITEM 1. REPORTS TO SHAREHOLDERS. [GRAPHIC] THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND SEMI-ANNUAL REPORT MARCH 31, 2005 [OAKMARK LOGO] ADVISED BY HARRIS ASSOCIATES L.P. THE OAKMARK FUNDS 2005 SEMI-ANNUAL REPORT PRESIDENT'S LETTER 1 SUMMARY INFORMATION 2 FUND EXPENSES 4 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 6 THE OAKMARK FUND Letter from the Portfolio Managers 7 Schedule of Investments 9 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 13 Schedule of Investments 14 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 16 Schedule of Investments 18 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 24 Global Diversification Chart 26 Schedule of Investments 27 COMMENTARY ON THE INTERNATIONAL AND INTERNATIONAL SMALL CAP FUNDS 32 THE OAKMARK INTERNATIONAL FUND Letter from the Portfolio Managers 33 International Diversification Chart 34 Schedule of Investments 35 THE OAKMARK INTERNATIONAL SMALL CAP FUND Letter from the Portfolio Managers 41 International Diversification Chart 42 Schedule of Investments 43 FINANCIAL STATEMENTS Statements of Assets and Liabilities 50 Statements of Operations 52 Statements of Changes in Net Assets 54 Notes to Financial Statements 60 DISCLOSURE REGARDING INVESTMENT ADVISORY CONTRACT APPROVAL 77 OAKMARK PHILOSOPHY AND PROCESS 79 THE OAKMARK GLOSSARY 80 TRUSTEES AND OFFICERS 81
FORWARD-LOOKING STATEMENT DISCLOSURE One of our most important responsibilities as mutual fund managers is to communicate with shareholders in an open and direct manner. Some of our comments in our letters to shareholders are based on current management expectations and are considered "forward-looking statements". Actual future results, however, may prove to be different from our expectations. You can identify forward-looking statements by words such as "estimate", "may", "will", "expect", "believe", "plan" and other similar terms. We cannot promise future returns. Our opinions are a reflection of our best judgment at the time this report is compiled, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise. PRESIDENT'S LETTER [PHOTO OF JOHN R. RAITT] DEAR FELLOW SHAREHOLDERS, World stock markets produced mixed results in the first quarter, with most of the broad market indexes showing small single-digit declines. Our Funds also produced mixed returns for the quarter, with some gains and some losses. At the same time, however, every one of our Funds performed in line with or better than their benchmark indexes. As several of our Fund managers highlight in their letters this quarter, worldwide corporate profit growth continues at a robust pace, extending the multi-year world economic expansion. While market levels are higher over the past two years, we believe that economic growth has kept valuations at reasonable levels for disciplined long-term investors. TRADING AND SOFT DOLLAR PRACTICES At The Oakmark Funds, we have always been mindful of how to best serve our shareholders--and how to do so fairly. We have recently given a significant amount of thought and attention to our trading practices, as the equity trading and execution landscape has changed tremendously over the past few years. The traditional institutional stock brokerage arrangement--where trade execution is bundled with research and other services into one commission charge--is beginning to unravel under the pressure of market forces. These trends have caused us to reassess our approach to the use of "soft dollar" commissions to pay for third-party research and services. Our soft dollar practices have always been well within the scope of SEC-sanctioned practices, which explicitly permit the use of brokerage commissions to pay for such services. We believe that we have been small users of third-party research and services compared to most mutual fund managers, and we don't believe that our use of soft dollars has increased trading costs. However, as the brokerage industry moves toward unbundling trading from research and other services, we are less confident that this will be true in the future. For this reason, we have discontinued the use of soft dollars to pay for third-party research and services, effective April 1. In the future, the cost of these services will be paid entirely by the Funds' adviser, Harris Associates L.P. Our primary trading focus, as always, will be to obtain best execution for our shareholders and you can be assured that we will continue to monitor industry developments. PERSONAL INVESTMENT IN THE FUNDS One of the key components of our investment process at The Oakmark Funds has been to invest in companies where management interests are closely aligned with ours. We find that this alignment is most frequently and most effectively created by significant management stock ownership. When management has a meaningful sum invested alongside other shareholders, the focus on performance and shareholder value is intensified. We believe that this same approach is also wise for mutual fund investors. Significant ownership of fund shares--not just by portfolio managers, but by all levels of employees at the fund and its adviser (including analysts, senior management, trustees and others)--reinforces a higher standard of integrity, focus, and commitment to maximizing long-term returns. At The Oakmark Funds, a commitment to the share ownership is an integral part of our business philosophy. We encourage employee ownership of the Funds and are committed to reporting on our ownership on a regular basis. IN THIS REGARD, WE ARE PLEASED TO ANNOUNCE THAT AS OF DECEMBER 31, 2004, THE EMPLOYEES OF THE FUNDS' ADVISER, HARRIS ASSOCIATES L.P., AND THE FUNDS' OFFICERS AND TRUSTEES HAVE OVER $180 MILLION INVESTED IN THE OAKMARK FUNDS. THIS COMPARES TO AN INVESTMENT OF $145 MILLION IN DECEMBER 2003, WHEN WE LAST REPORTED HOLDINGS. This increase represents a combination of price appreciation and additional purchases. 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 MARCH 31, 2005(1) (OAKMX) (OAKLX) (OAKBX) ---------------------------------------------------------------------------------------------------------------------- 3 MONTHS* -2.20% 0.12% -0.64% 1 YEAR 7.72% 7.24% 5.26% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 4.00% 6.55% 8.26% 5 YEAR 11.22% 12.54% 12.35% 10 YEAR 10.56% N/A N/A SINCE INCEPTION 16.21% 19.98% 13.83% (8/5/91) (11/1/96) (11/1/95) TOP FIVE EQUITY Washington Washington Burlington HOLDINGS AS OF Mutual, Inc. 2.8% Mutual, Inc. 14.6% Resources Inc. 4.1% MARCH 31, 2005(2) McDonald's Yum! Brands, Inc. 8.0% XTO Energy, Inc. 3.8% Corporation 2.6% H&R Block, Inc. 7.0% Nestle SA 2.8% Yum! Brands, Inc. 2.5% First Data Diageo plc 2.7% COMPANY AND % OF TOTAL The Walt Disney Corporation 5.2% EchoStar NET ASSETS Company 2.5% Time Warner Inc. 4.8% Communications Viacom Inc., Class B 2.4% Corporation, Class A 2.6% SECTOR Consumer Consumer U.S. Government ALLOCATION AS OF Discretionary 43.9% Discretionary 41.4% Securities 31.2% MARCH 31, 2005 Financials 15.4% Financials 24.1% Consumer Consumer Staples 12.3% Industrials 12.2% Discretionary 13.2% Industrials 10.0% Information Energy 12.3% SECTOR AND % Health Care 7.7% Technology 10.3% Industrials 10.6% OF MARKET VALUE Information Health Care 7.3% Consumer Staples 10.0% Technology 6.5% Energy 4.7% Health Care 7.6% Energy 4.2% Financials 7.0% Foreign Government Securities 5.0% Information Technology 2.6% Materials 0.5%
The performance data quoted represents past performance. The above performance information for the Funds 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 MARCH 31, 2005(1) (OAKGX) (OAKIX) (OAKEX) ----------------------------------------------------------------------------------------------------------------------------------- 3 MONTHS* 0.60% 2.13% 5.44% 1 YEAR 11.97% 17.39% 27.62% AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 15.22% 11.29% 21.27% 5 YEAR 18.53% 10.44% 16.32% 10 YEAR N/A 12.16% N/A SINCE INCEPTION 16.33% 12.32% 13.43% (8/4/99) (9/30/92) (11/1/95) TOP FIVE EQUITY Diageo plc 4.7% GlaxoSmithKline plc 3.5% Saurer AG 3.6% HOLDINGS AS OF Nestle SA 4.0% Bayerische Motoren Neopost SA 3.3% MARCH 31, 2005(2) Euronext NV 3.9% Werke (BMW) AG 3.4% Julius Baer Bank of Ireland 3.9% Euronext NV 3.4% Holding Ltd. 3.1% Burlington Diageo plc 3.2% Interpump COMPANY AND % OF TOTAL Resources Inc. 3.8% Bank of Ireland 3.1% Group S.p.A 3.1% NET ASSETS Carpetright plc 2.9% SECTOR Consumer Financials 26.3% Industrials 29.6% ALLOCATION AS OF Discretionary 18.7% Consumer Information MARCH 31, 2005 Health Care 17.3% Discretionary 18.8% Technology 19.9% Financials 16.4% Consumer Staples 17.8% Consumer Consumer Staples 15.6% Health Care 11.5% Discretionary 15.7% SECTOR AND % Information Materials 8.9% Financials 11.2% OF MARKET VALUE Technology 10.2% Industrials 8.8% Consumer Staples 9.2% Industrials 9.5% Telecommunication Materials 7.5% Materials 6.5% Services 4.5% Health Care 5.3% Energy 3.9% Energy 2.0% Telecommunication Telecommunication Information Services 1.6% Services 1.9% Technology 1.4%
3 FUND EXPENSES A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds. ACTUAL EXPENSES The following table provides information about actual account values and actual fund expenses for Class I of each Fund. The table shows the expenses a Class I shareholder would have paid on a $1,000 investment in each Fund from October 1, 2004 to March 31, 2005 as well as how much a $1,000 investment would be worth at the close of the period, assuming actual fund returns and expenses. A Class I shareholder can estimate expenses incurred for the period by dividing the account value at March 31, 2005 by $1,000 and multiplying the result by the number in the Expenses Paid During Period row as shown below. Certain accounts invested for 90 days or less may be charged a 2% redemption fee. Please consult the Funds' prospectus at www.oakmark.com for more information.
THE THE THE OAKMARK THE THE OAKMARK THE OAKMARK INTERNATIONAL OAKMARK OAKMARK EQUITY AND OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND ------------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT VALUE $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 ENDING ACCOUNT VALUE $ 1,060.50 $ 1,078.20 $ 1,044.40 $ 1,136.70 $ 1,154.70 $ 1,195.80 EXPENSES PAID DURING PERIOD* $ 5.29 $ 5.18 $ 4.64 $ 6.50 $ 6.12 $ 7.83 Annualized Expense Ratio 1.03% 1.00% 0.91% 1.22% 1.14% 1.43%
* Expenses are equal to each Fund's annualized expense ratio for Class I, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 365 (to reflect the one-half year period). 4 HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The following table provides information about hypothetical account values and hypothetical expenses for Class I of each Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses shareholders paid for the period. Shareholders may use this information to compare the ongoing costs of investing in a Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption fees. Therefore, the third line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
THE THE THE OAKMARK THE THE OAKMARK THE OAKMARK INTERNATIONAL OAKMARK OAKMARK EQUITY AND OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND ------------------------------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT VALUE $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 ENDING ACCOUNT VALUE $ 1,019.80 $ 1,019.95 $ 1,020.39 $ 1,018.85 $ 1,019.25 $ 1,017.80 EXPENSES PAID DURING PERIOD* $ 5.19 $ 5.04 $ 4.58 $ 6.14 $ 5.74 $ 7.19 ANNUALIZED EXPENSE RATIO 1.03% 1.00% 0.91% 1.22% 1.14% 1.43%
* Expenses are equal to each Fund's annualized expense ratio for Class I, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 365 (to reflect the one-half year period). 5 THE OAKMARK AND OAKMARK SELECT FUNDS At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close. [PHOTO OF WILLIAM C. NYGREN] Since March marked Kevin's and my five-year anniversary for managing The Oakmark Fund, I'm shortening this report so that we can dedicate more space to a five-year review of that Fund. We will return to our usual format next quarter. A number of shareholders have recently asked for an explanation of why our recent performance has lagged behind other value funds. From the market bottom over two years ago, both The Oakmark Fund and The Oakmark Select Fund have increased in line with the S&P 500(3). Since both Funds showed solid gains from 2000 to 2003 while the S&P 500 dropped sharply, we were quite pleased that we fully participated in the gains when the market recovered. But other funds increased more. I think our biggest mistake was underestimating the magnitude of the recovery in corporate profits. This can be seen using The Oakmark Fund's purchase of Anheuser-Busch as an example. Two years ago, Kevin and I wrote, "We own this great company--now selling below seventeen times next year's earnings--at about a market multiple." Since then, Anheuser-Busch stock is down slightly. Earnings have grown almost as much as we expected, and it now sells at fifteen times next year's earnings. The problem is that because the S&P earnings growth has matched its 50% increase in price, the market P/E(4) ratio has not gone up. So, despite significantly underperforming the market, Anheuser-Busch still sells at about a market multiple. Had we correctly anticipated the magnitude of the corporate profits rebound, we would have realized that the price we paid for Anheuser-Busch was really a significant P/E premium. In hindsight, we actually bought Anheuser-Busch at fifteen times expected 2006 earnings when the S&P was trading at eleven times now expected 2006 earnings. Value managers that bought the lowest P/E stocks in 2003 benefited from having much more exposure to the economic recovery than we did. So, what does that mean for today? If corporate profits continue growing at far above average rates, other funds probably will go up more than we will. We primarily own businesses, such as Anheuser-Busch, that we believe are superior, yet are priced as if they were average. If, as we expect, corporate earnings growth slows to the 5-6% per year we feel is sustainable, then not only should our companies' earnings growth start looking better in comparison, but we would expect to see their P/E multiples expand to beyond the market average. The story last quarter about my son's stock picking contest generated more shareholder e-mail than anything we've ever written! As a recap, despite lengthy discussions of the virtues of value investing, he constructed a highly concentrated phantom portfolio that was heavy in TASER International, a momentum investor favorite that had more than quadrupled in 2004. I commented that I wasn't sure if I hoped he'd win the contest or learn a lesson. Well, he learned a few things! TASER was the focus of several negative news stories, and the stock lost 43% of its value during January. My favorite comment was "Dad, you know what the problem is with buying a stock just because it's been going up? After it falls, you don't really have a reason to keep holding it." Hopefully, that's something he never forgets. As for the contest winner--a future Warren Buffett? Unlikely. Turns out some computer whizzes figured out how to trick the website into accepting additional capital and treating it as investment gains. Another reminder that when the numbers look too good to be true, they probably are! Best wishes, /s/ Bill Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com 6 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN] [PHOTO OF KEVIN GRANT] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (3/31/05) 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 9/30/1991 $ 11,050 $ 10,066 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 3/31/2005 $ 77,913 $ 40,052
AVERAGE ANNUAL TOTAL RETURNS (AS OF 3/31/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (8/5/91) -------------------------------------------------------------------------------------------------------------- OAKMARK FUND (CLASS I) -2.20% 7.72% 11.22% 10.56% 16.21% S&P 500 -2.15% 6.69% -3.16% 10.79% 10.69% Dow Jones Average(5) -1.59% 4.05% 1.31% 11.92% 12.03% Lipper Large Cap Value Index(6) -0.83% 8.45% 1.23% 10.33% 10.51%
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 In a weak, but relatively uneventful quarter, The Oakmark Fund matched the S&P 500 loss of 2%. On the negative side, Sun Microsystems lost a quarter of its value. We continue to believe that Sun's strong cash position and active R&D program make owning the stock worthwhile. On the plus side, two holdings announced they were being acquired--Toys R Us and Sungard Data Systems. We believe the increase in merger and acquisition activity is a positive statement about our portfolio and the market's attractiveness. It's hard to believe that five years have already passed since March of 2000 when we wrote our first letter as managers of The Oakmark Fund. In 1991 when The Oakmark Fund was created, the goal was to have the Oakmark name become synonymous with value investing. By March of 2000 that goal had largely been met. But, be careful what you wish for! We were presented the challenge of taking over a fund whose name implied value investing just when the financial media was proclaiming that value investing was dead! Our assets had fallen sharply not due to investment results, but because most of our shareholders had redeemed. They wanted to increase their investment in those same technology stocks that Oakmark stubbornly termed grossly overvalued. Friends questioned our sanity by asking why in the world we would accept this responsibility. Our answer--that we so strongly believed we inherited an outstanding portfolio of stocks that we were both significantly increasing our personal investment in the Fund--confirmed how out-of-sync we were with the new paradigm. Instead of writing the letter people wanted to see--highlighting everything we expected to change--we wrote a letter extolling the virtues of our five largest holdings, all of which we inherited--Fortune Brands, Washington Mutual, Dun and Bradstreet, Brunswick Corporation, and AC Nielson. (That shareholder letter, along with all the others since 1997, is available on our website by clicking on "literature" then "fund reports.") Anyone who hoped the new managers would shift to an investment approach more in step with the times was quickly disappointed. The Fund's long-term approach was intact, in fact, two of those top five names are still in the portfolio today--Washington Mutual and Fortune Brands. We have written frequently about how well Washington Mutual has performed as a stock, and just as importantly, as a business, so we will use this as an opportunity to highlight Fortune Brands. In March of 2000, Fortune Brands was Oakmark's largest holding, accounting for over 4% of our portfolio. Fortune is a diversified manufacturer of branded products sold primarily to consumers. 7 Familiar brands include Moen faucets, Jim Beam spirits, and Titleist golf balls. Fortune is an example of the kind of stock that missed out on the "irrationally exuberant" market of the late 1990's. At that time, the market (as measured by the S&P 500) sold at twenty-six times expected earnings and had a dividend yield of about 1%. At $25 per share, Fortune commanded a price of only nine times earnings and had a dividend yield of nearly 4%. Over the next five years, Fortune's EPS(7) grew at nearly a 14% compound annual rate. We believe this resulted from good organic growth as well as from intelligent use of the large amount of cash generated by these businesses. That cash was used to repurchase over 10% of the outstanding shares and to make acquisitions that strengthened Fortune's home products division. Further, Fortune management engineered an amazing turnaround of their underperforming office products division. Management explored selling that division, but decided to keep it when purchase offers were judged to be inadequate. Analysts uniformly chastised management for their refusal to sell. In the ensuing four years, about $500 million was extracted from the office products division (which may have equaled the rejected offers), and it was used for acquisitions and share repurchase. Further, better expense management led to operating margins more than doubling. In March of this year, Fortune announced a plan to merge their office products division with General Binding to create the largest branded office products supplier. Management's decision to fix rather than sell that division added about $8 of value per Fortune share. Fortune stock now sells at $81 and at sixteen times our estimated earnings. It has more than tripled in price in a five-year period when the market declined. Though we can't claim Fortune is still as cheap as it was, since business value has also sharply increased, we continue to believe Fortune is undervalued. Most interesting, you probably haven't read much about Norm Wesley. Norm is Fortune's CEO. Somehow when the financial media names top CEOs, they never find Norm. The media may not have noticed the job he has done, but his shareholders sure have. Thanks, Norm! We wish we could tell you that our portfolio today is still populated with Fortunes--grossly undervalued companies that have failed to attract investor attention. Most stocks that were priced like Fortune have increased significantly over the past five years while the stocks that were overvalued have significantly declined. In 2000, many large cap growth stocks sold at fifty times earnings while many typical companies sold at single digit P/Es(4). In 2000 our portfolio, with an average P/E of eleven, was well positioned for a narrowing of the range of P/E multiples. We are most pleased that our shareholders who believed in us in 2000 have enjoyed the returns from that strategy. Today, most stocks are priced at P/E multiples close to the S&P 500 multiple of seventeen times expected earnings. In fact, the range of P/E's has narrowed so much that we believe the better values today are generally the superior businesses where the market isn't demanding significant P/E premiums. The opportunity in 2000 was to identify the best prices; today, we think more of the opportunities are in identifying the best businesses. On the plus side, compared to our first day on the job five years ago, we think the market is now much more reasonably priced, its P/E is about two-thirds of its 2000 level. Offsetting that, valuations across industries and market capitalizations appear much more rational, meaning it will be harder for stock pickers to add as much value over the next five years. We believe that an appropriately valued market, a portfolio of companies that are expected to grow faster than average, and a return to historically typical quality spreads are likely to produce long-term returns that are at least satisfactory. 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 8 THE OAKMARK FUND SCHEDULE OF INVESTMENTS--MARCH 31, 2005 (UNAUDITED)
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.5% APPAREL RETAIL--4.3% The Gap, Inc. 7,066,700 $ 154,336,728 Limited Brands 6,000,047 145,801,142 --------------- 300,137,870 BROADCASTING & CABLE TV--8.2% Liberty Media Corporation, Class A (a) 16,199,400 $ 167,987,778 Comcast Corporation, Special Class A (a) 4,725,000 157,815,000 The DIRECTV Group, Inc. (a) 9,700,000 139,874,000 EchoStar Communications Corporation, Class A 3,675,000 107,493,750 --------------- 573,170,528 DEPARTMENT STORES--2.0% Kohl's Corporation (a) 2,650,500 $ 136,845,315 HOME IMPROVEMENT RETAIL--2.1% The Home Depot, Inc. 3,781,500 $ 144,604,560 HOMEBUILDING--1.6% Pulte Homes, Inc. 1,500,000 $ 110,445,000 HOUSEHOLD APPLIANCES--1.9% The Black & Decker Corporation 1,722,200 $ 136,036,578 HOUSEWARES & SPECIALTIES--2.0% Fortune Brands, Inc. 1,745,600 $ 140,747,728 LEISURE PRODUCTS--1.2% Mattel, Inc. 3,874,300 $ 82,716,305 MOTORCYCLE MANUFACTURERS--1.9% Harley-Davidson, Inc. 2,262,500 $ 130,682,000 MOVIES & ENTERTAINMENT--7.2% The Walt Disney Company 5,950,000 $ 170,943,500 Viacom Inc., Class B 4,879,490 169,952,637 Time Warner Inc. (a) 8,997,700 157,909,635 --------------- 498,805,772 PUBLISHING--2.8% Gannett Co., Inc. 1,684,500 $ 133,210,260 Knight-Ridder, Inc. 916,000 61,601,000 --------------- 194,811,260 RESTAURANTS--5.1% McDonald's Corporation 5,700,000 $ 177,498,000 Yum! Brands, Inc. 3,374,000 174,806,940 --------------- 352,304,940
9
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.5% (CONT.) BREWERS--2.1% Anheuser-Busch Companies, Inc. 3,050,000 $ 144,539,500 DISTILLERS & VINTNERS--1.8% Diageo plc (b) 2,221,000 $ 126,374,900 HYPERMARKETS & SUPER CENTERS--2.1% Wal-Mart Stores, Inc. 2,900,000 $ 145,319,000 PACKAGED FOODS & MEATS--4.2% General Mills, Inc. 2,506,000 $ 123,169,900 Kraft Foods Inc., Class A 2,645,000 87,417,250 H.J. Heinz Company 2,310,000 85,100,400 --------------- 295,687,550 SOFT DRINKS--1.0% Coca-Cola Enterprises, Inc. 3,500,000 $ 71,820,000 INTEGRATED OIL & GAS--2.1% ConocoPhillips 1,335,335 $ 144,002,526 OIL & GAS EXPLORATION & PRODUCTION--1.8% Burlington Resources Inc. 2,442,200 $ 122,280,954 ASSET MANAGEMENT & CUSTODY BANKS--1.1% The Bank of New York Company, Inc. 2,700,000 $ 78,435,000 DIVERSIFIED BANKS--1.8% U.S. Bancorp 4,400,000 $ 126,808,000 LIFE & HEALTH INSURANCE--1.5% AFLAC Incorporated 2,767,000 $ 103,098,420 OTHER DIVERSIFIED FINANCIAL SERVICES--3.8% Citigroup Inc. 3,200,000 $ 143,808,000 JP Morgan Chase & Co. 3,600,000 124,560,000 --------------- 268,368,000 THRIFTS & MORTGAGE FINANCE--5.9% Washington Mutual, Inc. 4,887,300 $ 193,048,350 Fannie Mae 2,095,000 114,072,750 MGIC Investment Corporation 1,640,600 101,175,802 --------------- 408,296,902 HEALTH CARE DISTRIBUTORS--1.0% AmerisourceBergen Corp 1,200,000 $ 68,748,000 HEALTH CARE EQUIPMENT--2.1% Baxter International Inc. 4,300,000 $ 146,114,000
10
SHARES HELD/ NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--91.5% (CONT.) PHARMACEUTICALS--3.9% Abbott Laboratories 3,087,300 $ 143,929,926 Bristol-Myers Squibb Company 5,150,000 131,119,000 --------------- 275,048,926 AEROSPACE & DEFENSE--3.3% Raytheon Company 3,000,000 $ 116,100,000 Honeywell International, Inc. 3,050,000 113,490,500 --------------- 229,590,500 BUILDING PRODUCTS--2.2% Masco Corporation 4,433,600 $ 153,712,912 DIVERSIFIED COMMERCIAL SERVICES--2.2% H&R Block, Inc. (c) 3,029,300 $ 153,221,994 ENVIRONMENTAL SERVICES--1.4% Waste Management, Inc. 3,474,300 $ 100,233,555 COMPUTER HARDWARE--1.4% Sun Microsystems, Inc. (a) 24,370,000 $ 98,454,800 DATA PROCESSING & OUTSOURCED SERVICES--3.2% First Data Corporation 3,615,000 $ 142,105,650 Automatic Data Processing, Inc. 1,800,000 80,910,000 --------------- 223,015,650 OFFICE ELECTRONICS--1.3% Xerox Corporation (a) 5,972,400 $ 90,481,860 TOTAL COMMON STOCKS (COST: $4,982,389,142) 6,374,960,805 SHORT TERM INVESTMENTS--7.0% U.S. GOVERNMENT BILLS--5.5% United States Treasury Bills, 2.215% - 2.73% due 4/7/2005 - 6/30/2005 $ 385,000,000 $ 383,559,814 TOTAL U.S. GOVERNMENT BILLS (COST: $383,571,153) 383,559,814 REPURCHASE AGREEMENTS--1.5% IBT Repurchase Agreement, 2.50% dated 3/31/2005 due 4/1/2005, repurchase price $103,507,188 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $108,675,000 $ 103,500,000 $ 103,500,000
11
NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--7.0% (CONT.) REPURCHASE AGREEMENTS--1.5% (CONT.) IBT Repurchase Agreement, 2.02% dated 3/31/2005 due 4/1/2005, repurchase price $2,230,293 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $2,341,676 $ 2,230,168 $ 2,230,168 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $105,730,168) 105,730,168 TOTAL SHORT TERM INVESTMENTS (COST: $489,301,321) 489,289,982 Total Investments (Cost $5,471,690,463)--98.5% $ 6,864,250,787 Other Assets In Excess Of Other Liabilities--1.5% 106,544,085 --------------- TOTAL NET ASSETS--100% $ 6,970,794,872 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF BILL NYGREN] [PHOTO OF HENRY BERGHOEF] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (3/31/05) 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 3/31/2005 $ 46,342 $ 19,062
AVERAGE ANNUAL TOTAL RETURNS (AS OF 3/31/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/96) -------------------------------------------------------------------------------------------------- OAKMARK SELECT FUND (CLASS I) 0.12% 7.24% 12.54% 19.98% S&P 500 -2.15% 6.69% -3.16% 7.96% S&P MidCap 400(8) -0.40% 10.43% 6.87% 13.95% Lipper Mid Cap Value Index(9) -0.22% 12.96% 9.92% 10.90%
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 was flat for the quarter. This compared favorably to the 2% loss for the S&P 500. Strong performance by YUM Brands, Toys R Us, Burlington Resources, and Office Depot, each of which increased by over 10%, was the primary reason our return exceeded the market return. YUM Brands (Taco Bell, Pizza Hut, KFC), our second largest holding, is benefiting from KFC's dominant position in China. Last year, 15% of YUM's income came from China. Since 1998, China income has been growing at over 30% per year compounded. Looking forward, the percentage of YUM income earned in China should continue to increase. Despite the strong performance of YUM stock, we don't believe it has yet become fully valued. During the quarter, we purchased shares in JP Morgan and Viacom. Viacom is a leading provider of cable television programming (MTV, Nickelodeon, Comedy Central, VH1, BET, Showtime, Movie Channel). In addition, Viacom owns Paramount, the CBS network, and the Infinity radio network. Viacom stock has performed poorly for several years as investors have focused on disappointing radio results. We believe most of the value is in the cable television networks, and they have been performing very well. We sold our positions in Office Depot and Toys R Us. Five years ago, we started buying Toys R Us at just over $10 per share. We thought new management would succeed at turning around the toy stores. We were wrong. Fortunately, the value of real estate under the toy stores, combined with the value of their highly successful Babies R Us stores, was enough to justify the acquisition of the company for nearly $27 per share. The success of our investment in Toys R Us, despite our inaccurate assessment of their primary business, demonstrates the importance of our focus on risk. When we first bought Toys R Us we said that even if the turnaround failed, the value of the assets should significantly exceed our entry price. Had the turnaround succeeded, we would have made more money, but we only wish that all our "mistakes" had such a profitable outcome. Best wishes, /s/ Bill Nygren /s/ Henry R. Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com berghoef@oakmark.com 13 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--MARCH 31, 2005 (UNAUDITED)
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.8% APPAREL RETAIL--7.5% Limited Brands 9,480,981 $ 230,387,838 The Gap, Inc. 10,060,000 219,710,400 --------------- 450,098,238 BROADCASTING & CABLE TV--3.7% Liberty Media Corporation, Class A (a) 21,000,000 $ 217,770,000 LEISURE PRODUCTS--3.5% Mattel, Inc. 9,670,900 $ 206,473,715 MOVIES & ENTERTAINMENT--8.7% Time Warner Inc. (a) 16,240,000 $ 285,012,000 Viacom Inc., Class B 6,650,000 231,619,500 --------------- 516,631,500 PUBLISHING--2.9% Knight-Ridder, Inc. 2,606,500 $ 175,287,125 RESTAURANTS--11.4% Yum! Brands, Inc. 9,207,000 $ 477,014,670 McDonald's Corporation 6,500,000 202,410,000 --------------- 679,424,670 OIL & GAS EXPLORATION & PRODUCTION--4.3% Burlington Resources Inc. 5,103,600 $ 255,537,252 ASSET MANAGEMENT & CUSTODY BANKS--1.1% Janus Capital Group, Inc. 4,823,300 $ 67,285,035 OTHER DIVERSIFIED FINANCIAL SERVICES--2.3% JP Morgan Chase & Co. 4,000,000 $ 138,400,000 SPECIALIZED FINANCE--3.8% Moody's Corporation 2,823,600 $ 228,316,296 THRIFTS & MORTGAGE FINANCE--14.6% Washington Mutual, Inc. 22,117,400 $ 873,637,300 HEALTH CARE SERVICES--3.4% IMS Health Incorporated 8,303,441 $ 202,520,926 PHARMACEUTICALS--3.2% Bristol-Myers Squibb Company 7,490,200 $ 190,700,492 DIVERSIFIED COMMERCIAL SERVICES--11.0% H&R Block, Inc. (b) 8,259,800 $ 417,780,684 The Dun & Bradstreet Corporation (a)(b) 3,934,900 241,799,605 --------------- 659,580,289
14
SHARES HELD/ NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--90.8% (CONT.) DATA PROCESSING & OUTSOURCED SERVICES--5.1% First Data Corporation 7,815,400 $ 307,223,374 OFFICE ELECTRONICS--4.3% Xerox Corporation (a) 16,746,400 $ 253,707,960 TOTAL COMMON STOCKS (COST: $3,550,762,422) 5,422,594,172 SHORT TERM INVESTMENTS--9.1% U.S. GOVERNMENT BILLS--6.7% United States Treasury Bills, 2.295% - 2.755% due 4/7/2005 - 6/16/2005 $ 400,000,000 $ 398,863,160 TOTAL U.S. GOVERNMENT BILLS (COST: $398,881,719) 398,863,160 REPURCHASE AGREEMENTS--2.4% IBT Repurchase Agreement, 2.50% dated 3/31/2005 due 4/1/2005, repurchase price $141,509,826 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $148,575,000 $ 141,500,000 $ 141,500,000 IBT Repurchase Agreement, 2.02% dated 3/31/2005 due 4/1/2005, repurchase price $2,162,042 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $2,270,017 2,161,921 2,161,921 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $143,661,921) 143,661,921 TOTAL SHORT TERM INVESTMENTS (COST: $542,543,640) 542,525,081 Total Investments (Cost $4,093,306,062)--99.9% $ 5,965,119,253 Other Assets In Excess Of Other Liabilities--0.1% 5,559,498 --------------- TOTAL NET ASSETS--100% $ 5,970,678,751 ===============
(a) Non-income producing security. (b) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 15 THE OAKMARK EQUITY AND INCOME FUND REPORT FROM CLYDE S. MCGREGOR AND EDWARD A. STUDZINSKI, PORTFOLIO MANAGERS [PHOTO OF CLYDE S. MCGREGOR] [PHOTO OF EDWARD A. STUDZINSKI] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (3/31/05) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(10)
THE OAKMARK EQUITY AND LIPPER INCOME FUND BALANCED (CLASS I) 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 3/31/2005 $ 33,892 $ 20,399
AVERAGE ANNUAL TOTAL RETURNS (AS OF 3/31/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) -------------------------------------------------------------------------------------------------- OAKMARK EQUITY & INCOME FUND (CLASS I) -0.64% 5.26% 12.35% 13.83% Lipper Balanced Fund Index -1.27% 5.10% 2.09% 7.86% S&P 500(3) -2.15% 6.69% -3.16% 9.57% Lehman Govt./Corp. Bond(11) -0.67% 0.40% 7.28% 6.57%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized RESULTS Positive returns were hard to generate in the latest quarter, and your Fund, regrettably, proved no exception in this regard. Oakmark Equity and Income lost 0.6% in the quarter, modestly besting the 1.3% decline that the Fund's standard of comparison, the Lipper Balanced Fund Index, registered. This is the Fund's ninth loss quarter in its 37-quarter history, and every one of them, regardless of the market conditions or the size of the loss, has disappointed your management team. We are not naive enough to expect that the Fund's path will always be upward. Nor do we believe that a calendar quarter is a particularly meaningful measurement period. Nonetheless, we know that beating the comparable indices is at best an entertaining abstraction while earning positive returns can improve our shareholders' lives. The Fund's record over longer time periods is more satisfactory. March saw the five-year anniversary of the all-time highs in stock market indices, such as the S&P 500 and the NASDAQ composite(12). Owning either index for the past five years would have been a painful experience. While the recent quarter for the Fund was not inspiring, we are pleased to be able to report that your Fund has returned 87% (13% annualized) since the peak of the NASDAQ on March 10, 2000. In the late 1990s we often wrote about the extreme valuation divergences that were then manifest. Since that time, markets have worked toward convergence, and we now perceive valuations to be relatively homogenized, which--for value investors like us--makes the current market somewhat less hospitable. Nevertheless, we continue to find interesting opportunities across most industries and capitalization ranges. Given the Fund's current conservative asset allocation, we have the wherewithal to take advantage of the opportunities that the market will present to us. AN ACTIVE QUARTER Securities markets were generally dull and dreary locales in the quarter with index prices confined to fairly tight ranges. Inside the stock market, however, the component parts were far more interesting. High prices for fuels benefited our six holdings in the energy sector. Media stocks languished despite an improving advertising marketplace, and our two satellite television companies (Echostar and DIRECTV) experienced meaningful declines in price. Rising interest rates and increasing regulatory activity placed downward pressure on the prices of our financial industry holdings. Our trading activity was unusually high in the quarter and focused on the portfolio's fixed income side. As fixed income investors, we face two risks: credit (default) risk and interest rate risk. Over the past six months we have concluded that bond prices did not fairly compensate investors for either risk, and we have worked to limit the 16 Fund's exposures. Our first step was to reduce credit risk. We accomplished this with the elimination of seven of the Fund's high yield debt positions. We next addressed interest rate risk by slashing portfolio duration from 4.1 years to 2.4 years. Our only aggressive action was to rebuild the allocation to sovereign (foreign government issued) debt. Many assume that our occasional forays into the sovereign debt markets are based on a forecast for the trading value of the dollar, but we do not make such a forecast. Rather, we use sovereign debt to diversify the portfolio and enhance income at times when the relative valuations across the international debt markets seem attractive. Turning to the equity market we initiated three positions and divested six. One purchase, Jupiter Telecommunications, is quite unusual for the Fund--a foreign initial public offering. Jupiter is a 10-year-old Japanese cable television operator that was founded as a joint venture between Sumitomo and Liberty Media. We perceive an opportunity for cable penetration of Japanese households to increase from levels well below that found in other developed nations. Unfortunately, it would seem that other investors share this thesis, and heavy demand for the IPO shares limited our ability to establish a position in the Fund. We also initiated holdings in Encana, a Canadian exploration and production company, and Scripps, a diversified media company. Our six divestitures included three successful holdings (First Data, Fox Entertainment Group, and Stanley Works), two disappointments (CoolBrands and Delphi) and one neutral outcome (RenaissanceRe Holdings). Fox, a relatively recent purchase, received a takeover offer from parent company News Corp. Having only built a modest position in the company, we elected to sell. Neither CoolBrands nor RenaissanceRe materially affected Fund results. Delphi, however, was the biggest detractor from the Fund's return in the quarter. Spun off from General Motors in 1999, Delphi is the world's largest auto parts company. We based our investing thesis for the company's shares on technology, labor, management, and dividend yield. We also believed that GM, Delphi's largest customer, would experience improving sales as it introduced many new or updated models. Instead, GM's market share declined precipitously. At the same time Delphi also reported problems with its accounting for rebates in 1999 and 2000, resulting in the resignation of its chief financial officer. The CEO expressed his intention to retire. The Board cut the dividend. History teaches us that we should sell whenever our conceptual foundation for an investment idea erodes meaningfully. Having lost management and dividend yield as reasons to own Delphi, we exited the position. Choicepoint is another holding that has generated considerable feedback from Fund shareholders during the quarter. Choicepoint is a multi-faceted database company, but its primary business is providing data and analysis to insurance companies to help in their underwriting and pricing of policies. A relatively unimportant unit of the company maintained a public records database, which, as the name suggests, gathered, organized, and resold data derived from filings individuals make with government agencies. In February management announced that a crime ring posing as a legitimate business had purchased data from Choicepoint's public records database for the purpose of engaging in identity theft. Management has subsequently curtailed this division's activities. The stock has reacted negatively to this news but, as of this writing, still trades above our purchase price. We will be monitoring this situation carefully. As the quarter ended we learned of yet another accounting investigation of one of our holdings, financial guaranty insurer MBIA. The company's basic business is to use its AAA-rated balance sheet to support the debt of lower-rated municipalities as well as certain asset-backed issues. Given recent developments in the insurance industry, it is not surprising that regulators would seek more information from MBIA. So, why would we continue to hold our position given an accounting investigation? The key reasons are valuation and management followed by our belief that this is a business that needs to exist. Again, this is a situation that bears careful monitoring. DISTINGUISHING CHARACTERISTICS The bulk of this letter has been quite tactical and focused on individual portfolio decisions. We will close with a brief review of the characteristics that we think differentiate Oakmark Equity and Income from other balanced funds. The first point of differentiation for any of our Funds derives from our firm's value investing philosophy. While our value orientation both informs and circumscribes our activities, we reject other types of limitations, and it is this rejection that gives the Fund its idiosyncratic nature. We will consider stocks of widely varying market capitalizations and bonds of any quality. We own international securities, both debt and equity. While we like dividends, we do not limit the Fund to dividend payers. We are not averse to concentration. And, as is true for all of The Oakmark Funds, we invest a large portion of our own net worth in the Fund. As always, we welcome your e-mailed questions and comments. /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 17 THE OAKMARK EQUITY AND INCOME FUND SCHEDULE OF INVESTMENTS--MARCH 31, 2005 (UNAUDITED)
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--57.3% COMMON STOCKS--57.3% APPAREL RETAIL--2.0% The TJX Companies, Inc. 7,240,000 $ 178,321,200 BROADCASTING & CABLE TV--4.1% EchoStar Communications Corporation, Class A 7,800,000 $ 228,150,000 The DIRECTV Group, Inc. (a) 8,026,722 115,745,331 The E.W. Scripps Company, Class A 300,000 14,625,000 --------------- 358,520,331 MOVIES & ENTERTAINMENT--2.6% Viacom Inc., Class B 6,500,000 $ 226,395,000 PUBLISHING--0.5% Tribune Company 1,000,000 $ 39,870,000 RESTAURANTS--2.0% Darden Restaurants, Inc. 2,850,000 $ 87,438,000 McDonald's Corporation 2,750,000 85,635,000 --------------- 173,073,000 SPECIALTY STORES--0.0% Office Depot, Inc. (a) 185,000 $ 4,103,300 DISTILLERS & VINTNERS--2.6% Diageo plc (b) 4,100,000 $ 233,290,000 HYPERMARKETS & SUPER CENTERS--1.6% Costco Wholesale Corporation 3,200,000 $ 141,376,000 PACKAGED FOODS & MEATS--3.8% Nestle SA (b) 3,600,000 $ 246,218,400 Dean Foods Company (a) 2,500,000 85,750,000 --------------- 331,968,400 TOBACCO--1.2% UST Inc. 2,000,000 $ 103,400,000 INTEGRATED OIL & GAS--1.2% ConocoPhillips 1,000,000 $ 107,840,000 OIL & GAS EXPLORATION & PRODUCTION--10.1% Burlington Resources Inc. 7,150,000 $ 358,000,500 XTO Energy, Inc. 10,265,888 337,131,762 St. Mary Land & Exploration Company (c) 1,450,000 72,572,500 EnCana Corp. (d) 1,000,000 70,420,000 Cabot Oil & Gas Corporation 950,000 52,392,500 --------------- 890,517,262
18
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--57.3% (CONT.) OTHER DIVERSIFIED FINANCIAL SERVICES--1.7% Citigroup Inc. 3,400,000 $ 152,796,000 PROPERTY & CASUALTY INSURANCE--3.6% SAFECO Corporation 4,000,000 $ 194,840,000 MBIA Inc. 1,500,000 78,420,000 The Progressive Corporation 500,000 45,880,000 --------------- 319,140,000 REAL ESTATE INVESTMENT TRUSTS--1.1% Plum Creek Timber Company, Inc. 2,657,044 $ 94,856,471 BIOTECHNOLOGY--2.0% MedImmune, Inc. (a) 6,000,000 $ 142,860,000 Techne Corporation (a) 750,000 30,135,000 --------------- 172,995,000 HEALTH CARE EQUIPMENT--2.3% Hospira, Inc. (a) 3,750,000 $ 121,012,500 Varian Inc. (a) 1,649,400 62,495,766 CONMED Corporation (a) 570,100 17,171,412 --------------- 200,679,678 HEALTH CARE SERVICES--2.4% Caremark Rx, Inc. (a) 5,250,000 $ 208,845,000 PHARMACEUTICALS--0.1% Abbott Laboratories 250,000 $ 11,655,000 AEROSPACE & DEFENSE--7.1% General Dynamics Corporation 2,060,300 $ 220,555,115 Raytheon Company 3,599,700 139,308,390 Rockwell Collins, Inc. 2,632,000 125,256,880 Alliant Techsystems, Inc. (a) 1,000,000 71,450,000 Honeywell International, Inc. 1,889,500 70,308,295 --------------- 626,878,680 COMMERCIAL PRINTING--1.8% R.R. Donnelley & Sons Company 4,909,500 $ 155,238,390 DIVERSIFIED COMMERCIAL SERVICES--0.9% ChoicePoint Inc. (a) 1,500,000 $ 60,165,000 Watson Wyatt & Company Holdings 600,000 16,320,000 --------------- 76,485,000 APPLICATION SOFTWARE--1.0% Mentor Graphics Corporation (a)(c) 3,640,000 $ 49,868,000 The Reynolds and Reynolds Company, Class A 1,482,100 40,105,626 --------------- 89,973,626
19
SHARES HELD/ NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--57.3% (CONT.) COMPUTER STORAGE & PERIPHERALS--0.5% Imation Corp. 1,215,000 $ 42,221,250 DATA PROCESSING & OUTSOURCED SERVICES--0.9% Ceridian Corporation (a) 4,800,000 $ 81,840,000 INTERNET SOFTWARE & SERVICES--0.0% Jupiter Telecommunications Co., Ltd. (a)(d) 1,300 $ 1,036,992 PAPER PRODUCTS--0.2% Schweitzer-Mauduit International, Inc. 650,400 $ 21,820,920 TOTAL COMMON STOCKS (COST: $3,940,814,162) 5,045,136,500 TOTAL EQUITY AND EQUIVALENTS (COST: $3,940,814,162) 5,045,136,500 FIXED INCOME--34.9% CORPORATE BONDS--1.5% BROADCASTING & CABLE TV--0.4% Cablevision Systems New York Group, 144A, 8.00% due 4/15/2012 (e) $ 20,000,000 $ 20,550,000 Liberty Media Corporation, 8.25% due 2/1/2030, Debenture 12,900,000 13,081,000 --------------- 33,631,000 MOVIES & ENTERTAINMENT--0.6% Time Warner Inc., 5.625% due 5/1/2005 $ 50,000,000 $ 50,076,500 PUBLISHING--0.1% PRIMEDIA Inc., 8.00% due 5/15/2013 $ 10,000,000 $ 10,200,000 HEALTH CARE DISTRIBUTORS--0.2% Omnicare, Inc., 6.125% due 6/1/2013 $ 20,000,000 $ 19,450,000 PAPER PACKAGING--0.2% Sealed Air Corporation, 144A, 5.625% due 7/15/2013 (e) $ 20,000,000 $ 20,228,840 MULTI-UTILITIES & UNREGULATED POWER--0.0% Midland Funding Corporation, 11.75% due 7/23/2005 $ 172,075 $ 175,509 TOTAL CORPORATE BONDS (COST: $132,916,288) 133,761,849 GOVERNMENT AND AGENCY SECURITIES--33.4% CANADIAN GOVERNMENT BONDS--4.1% Canada Government, 3.25% due 12/1/2006 CAD 250,000,000 $ 207,078,768 Canada Government, 3.00% due 12/1/2005 CAD 125,000,000 103,499,070
20
NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- FIXED INCOME--34.9% (CONT.) GOVERNMENT AND AGENCY SECURITIES--33.4% (CONT.) CANADIAN GOVERNMENT BONDS--4.1% (CONT.) Canada Government, 3.00% due 6/1/2007 CAD 50,000,000 $ 41,108,125 Province of Alberta, 7.25% due 10/28/2005 CAD 10,000,000 8,463,527 --------------- 360,149,490 DANISH GOVERNMENT BONDS--0.2% Kingdom of Denmark, 3.00% due 11/15/2006 DKK 100,000,000 $ 17,544,864 NORWEGIAN GOVERNMENT BONDS--0.2% Norway Government, 6.75% due 1/15/2007 NOK 100,000,000 $ 16,895,628 SWEDISH GOVERNMENT BONDS--0.1% Kingdom of Sweden, 3.50% due 4/20/2006 SEK 100,000,000 $ 14,333,993 U.S. GOVERNMENT NOTES--25.4% United States Treasury Notes, 3.375% due 2/28/2007 $ 500,000,000 $ 496,347,500 United States Treasury Notes, 3.00% due 12/31/2006 500,000,000 493,652,500 United States Treasury Notes, 3.00% due 11/15/2007 500,000,000 489,140,500 United States Treasury Notes, 3.375% due 11/15/2008 500,000,000 488,789,000 United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed 256,358,280 269,126,460 --------------- 2,237,055,960 U.S. GOVERNMENT AGENCIES--3.4% Federal Home Loan Bank, 5.00% due 12/20/2011 $ 34,555,000 $ 34,403,822 Federal Home Loan Mortgage Corporation, 2.75% due 9/8/2009 32,490,000 32,369,397 Fannie Mae, 3.125% due 9/21/2007 29,560,000 29,515,453 Fannie Mae, 3.625% due 12/28/2009 24,435,000 24,124,602 Federal Home Loan Bank, 2.50% due 4/20/2009 20,000,000 19,842,620 Fannie Mae, 2.60% due 4/28/2009 15,000,000 14,882,025 Fannie Mae, 4.25% due 2/19/2010 12,888,000 12,664,896 Fannie Mae, 3.125% due 11/30/2009 12,697,000 12,592,669 Fannie Mae, 3.50% due 2/8/2010 10,315,000 10,274,524 Federal Home Loan Mortgage Corporation, 3.625% due 3/24/2008 10,000,000 9,993,630 Federal Home Loan Mortgage Corporation, 2.00% due 4/27/2007 10,000,000 9,991,490 Federal Home Loan Mortgage Corporation, 3.00% due 8/17/2009 10,000,000 9,986,110 Federal Home Loan Mortgage Corporation, 2.375% due 9/27/2007 10,000,000 9,924,850 Federal Home Loan Mortgage Corporation, 3.00% due 11/17/2006 10,000,000 9,859,260 Fannie Mae, 3.00% due 10/6/2009 10,000,000 9,822,530
21
NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------- FIXED INCOME--34.9% (CONT.) GOVERNMENT AND AGENCY SECURITIES--33.4% (CONT.) U.S. GOVERNMENT AGENCIES--3.4% (CONT.) Fannie Mae, 3.375% due 3/3/2008 $ 9,300,000 $ 9,244,907 Fannie Mae, 3.50% due 10/14/2010 7,550,000 7,457,558 Federal Home Loan Bank, 3.00% due 8/17/2007 7,500,000 7,452,607 Federal Home Loan Bank, 3.00% due 12/30/2009 5,000,000 5,049,590 Federal Home Loan Bank, 4.52% due 8/26/2009 4,825,000 4,808,455 Fannie Mae, 5.125% due 5/4/2012 4,013,000 4,005,544 Federal Home Loan Bank, 2.25% due 2/22/2007 4,000,000 3,980,668 Fannie Mae, 3.75% due 6/23/2009 2,820,000 2,805,748 Federal Home Loan Bank, 2.40% due 3/9/2009 2,000,000 1,977,680 --------------- 297,030,635 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $2,945,918,975) 2,943,010,570 TOTAL FIXED INCOME (COST: $3,078,835,263) 3,076,772,419 SHORT TERM INVESTMENTS--7.2% U.S. GOVERNMENT BILLS--4.0% United States Treasury Bills, 2.52% - 2.72% $ 350,000,000 $ 348,960,363 due 4/14/2005 - 6/9/2005 TOTAL U.S. GOVERNMENT BILLS (COST: $348,941,889) 348,960,363 REPURCHASE AGREEMENTS--3.2% IBT Repurchase Agreement, 2.50% dated 3/31/2005 due 4/1/2005, repurchase price $280,019,444 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $294,000,000 $ 280,000,000 $ 280,000,000 IBT Repurchase Agreement, 2.02% dated 3/31/2005 due 4/1/2005, repurchase price $562,768 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $590,874 562,736 562,736 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $280,562,736) 280,562,736 TOTAL SHORT TERM INVESTMENTS (COST: $629,504,625) 629,523,099 Total Investments (Cost $7,649,154,050)--99.4% $ 8,751,432,018 Other Assets In Excess Of Other Liabilities--0.6% 56,183,222 --------------- TOTAL NET ASSETS--100% $ 8,807,615,240 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. 22 (c) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. (d) Represents a foreign domiciled corporation. (e) 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 DKK: Danish Krone NOK: Norwegian Krone SEK: Swedish Krona SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 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 (3/31/05) AS COMPARED TO THE MSCI WORLD INDEX(13)
THE OAKMARK GLOBAL FUND MSCI WORLD (CLASS I) INDEX ----------- ---------- 8/4/1999 $ 10,000 $ 10,000 9/30/1999 $ 9,180 $ 9,883 12/31/1999 $ 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 3/31/2005 $ 23,546 $ 10,084
AVERAGE ANNUAL TOTAL RETURNS (AS OF 3/31/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (8/4/99) -------------------------------------------------------------------------------- OAKMARK GLOBAL FUND (CLASS I) 0.60% 11.97% 18.53% 16.33% MSCI World -1.10% 10.56% -2.86% 0.15% Lipper Global Fund Index(14) -0.88% 9.19% -2.15% 2.40%
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 FELLOW SHAREHOLDERS, The Oakmark Global Fund gained 1% for the three-month period ending March 31, 2005, compared with the 1% declines for the MSCI World Index and the Lipper Global Fund Index. Over the past five years, The Oakmark Global Fund has returned 19% annualized, compared to a 3% loss for the MSCI World Index and a 2% decline for the Lipper Global Fund Index. PORTFOLIO CHANGES The only significant new investment for the Fund during the quarter was Viacom, the U.S. media content giant with leading assets in each of its sectors. Viacom has seen its stock price erode over the past few years despite the company's strong cash flow and improving capital allocation. We believe cable networks (MTV, Nickelodeon, etc.) are the company's most valuable asset, while television (CBS, UPN) and entertainment (Paramount) appear to be on an upswing. It is the difficult operating conditions in the Infinity radio unit that has most concerned the market. While it may be generating the majority of the negative headlines and contributing to the share price decline it's important to note that we think Infinity accounts for less than 20% of Viacom's overall enterprise value. Given the overall quality of Viacom's assets combined with a management team--and ownership base--that is actively trying to boost the share price, we believe that Viacom's long-term investors will be rewarded. The market's general pessimism toward media stocks has given us the opportunity over the past few quarters to continue to add to existing positions at attractive prices. Media companies now comprise roughly 12% of our portfolio. Along with Viacom, the Fund also owns stakes in Grupo Televisa (dominates Mexican media and Spanish-language programming), Vivendi Universal (ownership in NBC-Universal; Universal Music is #1 worldwide), Liberty Media (Discovery Channel, QVC, and Starz cable networks), Time Warner (HBO, Time, CNN, Turner Broadcasting), and Tribune Corp (Chicago Tribune and LA Times newspapers, WGN Television and the Chicago Cubs--oops, never mind the last one!). Clearly, we believe that at current share prices media is one sector where we can find great value opportunities worldwide. 24 BOTTOM-UP INVESTING We often say The Oakmark Global Fund is built stock-by-stock from the bottom-up. What does this mean? It means we focus on individual investment opportunities and don't make top-down, macroeconomic decisions in investing your money. We don't make "calls" on markets--for example, bearish on Japan and bullish on the U.S. or bearish on technology and bullish on steel. We make investment decisions based on the merits of individual businesses and do so only after thorough, independent due diligence. We want to remain agnostic regarding the size or location of a company and focus solely on constructing a portfolio of the most attractive risk-return opportunities. Geographic or industry weightings in the Fund are strictly a fall-out of stock selection. When it comes to broad macroeconomic issues, we've often found that consensus views on particular countries or industries--bullish or bearish--lead to share price imperfections. For example, if everybody loves China, one may do well to tread with extra care: what is one actually buying, and at what price? Similarly, if everybody is bearish on European economies, as they are today, then investors may be ignoring some interesting opportunities. We certainly believe that last statement to be true. Companies like Nestle and Diageo--both big positions in the Fund--are trading at significant discounts to similar companies elsewhere. This is due in part to investors' pessimism about the economic outlook for their home markets, discounting the fact that these are global businesses with profit centers all over the world. In addition the strong Euro and British Pound are also masking the true earnings power of these companies. We understand that Europe still has some problems; high unemployment, barriers to business efficiency, and aging population are all matters of concern. We see some positive signs of reform, such as recent labor concessions in France and Germany, as well as talk of corporate tax cuts. But most importantly one factor that is often lost in all this bearishness is PRICE. In the cases of Nestle and Diageo, we think these negatives are more than fully reflected in their current share prices. In constructing The Oakmark Global Fund we search for companies that are priced at a substantial discount to their true business value and are run by managers who think and act like owners. As long as we remain focused on the long-term worth of a business--and maintain a disciplined approach to the price we are willing to pay--we believe we can find attractive opportunities despite a negative operating environment. LOOKING FORWARD We will continue to manage the portfolio using the same value discipline described above. We remain excited about the value and quality of the names in the Fund. Thank you for your continued confidence and support. /s/ Clyde S. McGregor /s/ Michael J. Welsh CLYDE S. McGREGOR, CFA MICHAEL J. WELSH, CFA, CPA Portfolio Manager Portfolio Manager mcgregor@oakmark.com mwelsh@oakmark.com 25 THE OAKMARK GLOBAL FUND [CHART]
% OF FUND EQUITY MARKET VALUE ------------------------------------------------ - EUROPE 48.3% Switzerland 13.0% Great Britain 12.4% * Netherlands 6.8% * France 6.4% * Ireland 4.0% * Germany 3.1% * Italy 2.6% - UNITED STATES 35.6% - PACIFIC RIM 13.3% Japan 7.3% Australia 3.3% Korea 2.7% - LATIN AMERICA 2.2% Mexico 2.2% - OTHER 0.6% Israel 0.6%
* Euro currency countries comprise 22.9% of the Fund. 26 THE OAKMARK GLOBAL FUND SCHEDULE OF INVESTMENTS--MARCH 31, 2005 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.3% APPAREL RETAIL--2.2% The TJX Companies, Inc. (United States) Discount Apparel & Home Fashion Retailer 1,501,000 $ 36,969,630 APPAREL, ACCESSORIES & LUXURY GOODS--1.4% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 1,947,600 $ 23,143,532 BROADCASTING & CABLE TV--2.8% Liberty Media Corporation, Class A (United States) (a) Broadcast Services & Programming 2,356,000 $ 24,431,720 Grupo Televisa S.A. (Mexico) (b) Television Production & Broadcasting 378,000 22,226,400 --------------- 46,658,120 HOUSEHOLD APPLIANCES--2.8% Snap-on Incorporated (United States) Tool & Equipment Manufacturer 1,431,000 $ 45,491,490 MOTORCYCLE MANUFACTURERS--0.2% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 1,790,000 $ 2,489,476 MOVIES & ENTERTAINMENT--6.4% Viacom Inc., Class B (United States) Worldwide Entertainment & Publishing Company 1,380,000 $ 48,065,400 Vivendi Universal SA (France) (a) Music, Games, Television, Film, & Telecommunications 1,430,500 43,813,389 Time Warner Inc. (United States) (a) Filmed Entertainment & Television Networks 833,000 14,619,150 --------------- 106,497,939 PUBLISHING--2.4% Tribune Company (United States) Publishing & Broadcast Services 1,003,000 $ 39,989,610 DISTILLERS & VINTNERS--4.7% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 5,517,500 $ 77,779,033
27
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.3% (CONT.) HOUSEHOLD PRODUCTS--3.0% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 593,000 $ 50,267,549 PACKAGED FOODS & MEATS--6.6% Nestle SA (Switzerland) Food & Beverage Manufacturer 238,500 $ 65,247,555 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 4,383,000 43,937,792 --------------- 109,185,347 SOFT DRINKS--0.8% Lotte Chilsung Beverage Co., Ltd. (Korea) (c) Soft Drinks, Juices & Sports Drinks Manufacturer 13,430 $ 13,278,211 OIL & GAS EXPLORATION & PRODUCTION--3.8% Burlington Resources Inc. (United States) Oil & Natural Gas Exploration & Production 1,260,000 $ 63,088,200 ASSET MANAGEMENT & CUSTODY BANKS--2.7% Julius Baer Holding Ltd. (Switzerland) Asset Management 129,300 $ 44,831,278 DIVERSIFIED BANKS--7.1% Bank of Ireland (Ireland) Commercial Bank 4,029,000 $ 63,658,476 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 2,260,000 35,994,767 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 863,600 16,132,146 --------------- 115,785,389 DIVERSIFIED CAPITAL MARKETS--0.5% Credit Suisse Group (Switzerland) Investment Services & Insurance 190,700 $ 8,186,294 INVESTMENT BANKING & BROKERAGE--0.8% Daiwa Securities Group Inc. (Japan) Stock Broker 2,062,000 $ 13,581,863 SPECIALIZED FINANCE--3.9% Euronext NV (Netherlands) (c) Stock Exchange 1,814,000 $ 64,540,882
28
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.3% (CONT.) THRIFTS & MORTGAGE FINANCE--1.0% Washington Mutual, Inc. (United States) Thrift 415,000 $ 16,392,500 HEALTH CARE DISTRIBUTORS--2.1% Cardinal Health, Inc. (United States) Wholesale Drug Distributor 607,500 $ 33,898,500 HEALTH CARE SERVICES--2.6% Laboratory Corporation of America Holdings (United States) (a) Medical Laboratory & Testing Services 892,000 $ 42,994,400 HEALTH CARE SUPPLIES--1.0% Ansell Limited (Australia) Protective Rubber & Plastics Products 2,265,966 $ 17,222,284 PHARMACEUTICALS--11.2% Takeda Pharmaceutical Company Limited (Japan) Pharmaceuticals & Food Supplements 1,281,000 $ 61,071,139 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 2,614,200 59,921,266 Novartis AG (Switzerland) Pharmaceuticals 670,000 31,253,971 Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 781,000 16,758,875 Sanofi-Aventis (France) Pharmaceuticals 187,185 15,782,420 --------------- 184,787,671 AEROSPACE & DEFENSE--0.8% Alliant Techsystems, Inc. (United States) (a) Propulsion Systems & Munitions 179,087 $ 12,795,766 AIRPORT SERVICES--0.8% Grupo Aeroportuario del Sureste S.A. de C.V (Mexico) (b)(c) Airport Operator 463,000 $ 12,987,150 DIVERSIFIED COMMERCIAL SERVICES--4.1% Equifax Inc. (United States) Credit Reporting & Collection 1,367,000 $ 41,953,230 Meitec Corporation (Japan) (c) Software Engineering Services 760,000 26,518,636 --------------- 68,471,866
29
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--97.3% (CONT.) EMPLOYMENT SERVICES--1.1% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 4,815,400 $ 17,652,876 ENVIRONMENTAL SERVICES--2.1% Waste Management, Inc. (United States) Waste Management Services 1,175,000 $ 33,898,750 OFFICE SERVICES & SUPPLIES--0.4% United Stationers Inc. (United States) (a) Business Products Distributor 150,000 $ 6,787,500 DATA PROCESSING & OUTSOURCED SERVICES--6.8% eFunds Corporation (United States) (a) Electronic Debit Payment Services 2,237,100 $ 49,932,072 First Data Corporation (United States) Data Processing & Management 1,004,750 39,496,723 Ceridian Corporation (United States) (a) Data Management Services 1,348,000 22,983,400 --------------- 112,412,195 ELECTRONIC EQUIPMENT MANUFACTURERS--0.5% Orbotech, Ltd. (Israel) (a)(c) Optical Inspection Systems 412,700 $ 9,038,130 OFFICE ELECTRONICS--2.6% Neopost SA (France) Mailroom Equipment Supplier 494,750 $ 42,836,850 DIVERSIFIED CHEMICALS--2.7% Akzo Nobel N.V (Netherlands) Chemical Producer 992,300 $ 45,298,895 SPECIALTY CHEMICALS--3.6% Lonza Group AG, Registered Shares (Switzerland) (c) Industrial Organic Chemicals 710,400 $ 43,472,062 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 25,300 16,243,438 --------------- 59,715,500 WIRELESS TELECOMMUNICATION SERVICES--1.8% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 181,000 $ 30,418,673 TOTAL COMMON STOCKS (COST: $1,238,542,076) 1,609,373,349
30
NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--2.5% REPURCHASE AGREEMENTS--2.5% IBT Repurchase Agreement, 2.50% dated 3/31/2005 due 4/1/2005, repurchase price $39,002,708 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $40,950,000 $ 39,000,000 $ 39,000,000 IBT Repurchase Agreement, 2.02% dated 3/31/2005 due 4/1/2005, repurchase price $1,662,028 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,745,032 1,661,935 1,661,935 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $40,661,935) 40,661,935 TOTAL SHORT TERM INVESTMENTS (COST: $40,661,935) 40,661,935 Total Investments (Cost $1,279,204,011)--99.8% $ 1,650,035,284 Other Assets In Excess Of Other Liabilities--0.2% 3,267,760 --------------- TOTAL NET ASSETS--100% $ 1,653,303,044 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 31 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS [PHOTO OF DAVID G. HERRO] FELLOW SHAREHOLDERS, Your Funds have achieved a satisfactory performance for the quarter ending March 31st with The Oakmark International Fund achieving a return of 2% and The Oakmark International Small Cap Fund returning 5%. This compares favorably with the MSCI World ex U.S. Index(15). More importantly, since the Funds' inception, they have strongly outperformed the MSCI World ex U.S. Index. With little imbalance in the global macroeconomic system and subsiding political fears, foreign equity markets, in local market terms, started the year positively. Additionally, a strong global economy and good profitability also helped create an attractive equity environment. We continue to believe that the international equity markets represent good value, as signified by acceptable--and rising--profitability levels and attractive valuations. LOOK OUT BELOW! One potential problem may be a deflation of the commodity bubble. Whether it is metals or energy, prices have risen to record levels. Due to the forces of supply and demand, producers are willing to take advantage of this by looking to increase output. Meanwhile, panicked Chinese industrial companies from steel to shipping are also aggressively adding "supply" by ramping up capacity. Though I am optimistic about the Chinese economy, in the short to medium term some companies in these industries likely will be clobbered by falling prices just as their new capacity comes on stream. Though this would be damaging for steel and other commodity producers, in all likelihood, it would be good for the consumers of these products. CORPORATE GOVERNANCE, CONT'D Lately a couple of our holdings have attracted attention in the media because of corporate governance issues. First, Deutsche Boerse (DB), the German based owner of the German stock exchange, and Euronext, its counterpart in other major European exchanges, have expressed interest in acquiring The London Stock Exchange (LSE). Both deals would represent major transactions for either purchaser. This quarter, DB made a bid for the LSE. However, DB management announced that they would not seek shareholder approval for the purchase, as no formal rule required them to do so. This upset a number of major shareholders, including ourselves, forcing DB to table its bid. I believe, in most cases, that the owners of corporations should have to approve major business-changing deals, and we will continue to watch closely the LSE situation. In the case of Euronext, the other potential bidder, they must, by law, receive approval from their owners. Another company, Nestle, has attracted global attention, as their Board of Directors desires to combine the CEO role with that of Chairman. Though we are extremely pleased with the improving operational management at Nestle, this governance move flies against commonly accepted international corporate governance principles that call for a separation of these two positions. Geneva-based Ethos Foundation and ISS have come out forcefully against this move and I have publicly supported that position. I feel strongly that in order to protect owners' interests, strong, independent corporate boards need to be led by strong, independent chairmen. Though we do not feel it is our role to meddle in the details of how companies are managed, it is our role to help ensure that the board members (who are elected by shareholders) act in the best interests of the shareholders. We are pleased that Nestle's management has recognized the importance of "separation" and has agreed to make this departure from principle temporary. A very important part of our investment philosophy is to invest with management teams that "think, and (more importantly) act, like owners". We will continue to monitor the corporate governance practices of our holdings as well as those of potential investments. /s/ David G. Herro DAVID G. HERRO, CFA PORTFOLIO MANAGER dherro@oakmark.com 32 THE OAKMARK INTERNATIONAL FUND REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO] [PHOTO OF MICHAEL J. WELSH] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (3/31/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(15)
THE OAKMARK INTERNATIONAL FUND MSCI WORLD EX (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 3/31/2005 $ 42,753 $ 24,341
AVERAGE ANNUAL TOTAL RETURNS (AS OF 3/31/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (9/30/92) -------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND (CLASS I) 2.13% 17.39% 10.44% 12.16% 12.32% MSCI World ex U.S. 0.07% 15.56% -0.86% 5.74% 7.37% MSCI EAFE(16) -0.17% 15.06% -1.15% 5.40% 7.14% Lipper International Fund Index(17) -0.05% 12.90% -1.02% 7.46% 8.37%
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 2% for the quarter, compared to the MSCI World ex U.S. Index, which was basically unchanged. Over the past five years, your Fund has gained 10% annualized relative to the 1% annualized decline of the MSCI World ex U.S. Index. PORTFOLIO COMPOSITION During the quarter we sold our position in John Fairfax Holdings in Australia as it hit its sell price, and we added three significant new positions, all in Japan. Historically, it has been very difficult for us to find many companies in Japan that meet our investment criteria. But that has not deterred us from continuing to aggressively search. Remember that for a business to be interesting to us it needs to be both undervalued and managed in a shareholder-oriented way. We believe we have found both criteria in these three new positions. Honda Motor Corporation is familiar to most of you, with quality-for-money models like the Accord, Civic, and the Odyssey. We believe it to be one of the best managed companies in the automotive industry, producing more than three million cars and ten million motorcycles annually with excellent (and consistent) profitability. As well as being strong operationally, Honda's management team has also distinguished itself as sound capital allocators, expanding capacity with discipline and regularly returning excess cash to shareholders. Dividends and share repurchases have steadily increased in recent years, and management has committed to a significant annual payout ratio. Rohm Corp is a company we've monitored for a number of years, and we have admired its market position and economic performance. It is a global leader in integrated chips and electronic components with a terrific record of profitability and return on capital. With the share price down we finally have an opportunity to buy Rohm at a significant discount to our estimate of intrinsic value. Another new position for the Fund is consumer products company Uni-Charm, the Japanese leader in baby diapers and hygiene products. Management has consistently improved profit margins and returns in the business, while maintaining strong market shares for its products. Management has behaved in a very shareholder-oriented way, buying back over 10% of shares outstanding and maintaining a high dividend payout ratio. LOOKING FORWARD Honda, Rohm, and Uni-Charm are representative of the opportunities we are currently finding. We remain optimistic about potential price appreciation, given the quality of the holdings and the attractive valuation 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 33 THE OAKMARK INTERNATIONAL FUND INTERNATIONAL DIVERSIFICATION--MARCH 31, 2005 (UNAUDITED) [CHART]
% OF FUND EQUITY MARKET VALUE ------------------------------------------ - EUROPE 77.7% Great Britain 25.5% Switzerland 15.6% * France 10.8% * Germany 9.0% * Netherlands 8.2% * Italy 3.8% * Ireland 3.3% * Finland 1.5% - PACIFIC RIM 20.3% Japan 9.8% Korea 6.0% Australia 2.3% Singapore 1.4% Hong Kong 0.8% - LATIN AMERICA 1.4% Mexico 1.4% - OTHER 0.5% Israel 0.5% - NORTH AMERICA 0.1% Canada 0.1%
* Euro currency countries comprise 36.6% of the Fund. 34 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--MARCH 31, 2005 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.9% ADVERTISING--3.8% Publicis Groupe (France) Advertising & Media Services 3,746,200 $ 114,981,487 Aegis Group plc (Great Britain) Media Services 43,844,900 84,508,546 --------------- 199,490,033 APPAREL RETAIL--0.8% Giordano International Limited (Hong Kong) Pacific Rim Clothing Retailer & Manufacturer 61,424,300 $ 41,739,968 APPAREL, ACCESSORIES & LUXURY GOODS--1.7% Swatch Group AG, Bearer Shares (Switzerland) Watch Manufacturer 660,100 $ 90,720,983 Swatch Group AG, Registered Shares (Switzerland) Watch Manufacturer 24,700 687,602 --------------- 91,408,585 AUTOMOBILE MANUFACTURERS--5.0% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 3,985,500 $ 181,061,494 Honda Motor Co., Ltd. (Japan) Automobile & Motorcycle Manufacturer 1,705,400 85,441,041 --------------- 266,502,535 BROADCASTING & CABLE TV--2.0% Grupo Televisa S.A. (Mexico) (b) Television Production & Broadcasting 1,171,200 $ 68,866,559 British Sky Broadcasting Group plc (Great Britain) Television Production & Broadcasting 3,497,700 38,367,734 --------------- 107,234,293 MOVIES & ENTERTAINMENT--1.6% Vivendi Universal SA (France) (a) Music, Games, Television, Film, & Telecommunications 2,789,300 $ 85,430,749 SPECIALTY STORES--2.1% Signet Group plc (Great Britain) Jewelry Retailer 54,248,500 $ 110,198,979
35
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.9% (CONT.) TEXTILES--0.6% Chargeurs SA (France) (c) Wool, Textile Production & Trading 790,182 $ 33,900,835 TIRES & RUBBER--0.2% Compagnie Generale des Etablissements Michelin (France) Tire Manufacturer 186,876 $ 12,280,520 BREWERS--1.8% Heineken Holding NV, Class A (Netherlands) Brewer 2,525,000 $ 77,990,318 Heineken NV (Netherlands) Brewer 497,500 17,236,430 --------------- 95,226,748 DISTILLERS & VINTNERS--4.0% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 12,023,000 $ 169,485,694 Pernod-Ricard SA (France) Manufactures Wines, Spirits, & Fruit Juices 299,000 41,739,011 --------------- 211,224,705 HOUSEHOLD PRODUCTS--2.5% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 1,228,200 $ 104,112,316 Uni-Charm Corporation (Japan) Toiletry Product Manufacturer 581,000 26,072,771 --------------- 130,185,087 PACKAGED FOODS & MEATS--5.7% Nestle SA (Switzerland) Food & Beverage Manufacturer 575,100 $ 157,332,783 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 14,165,200 142,000,368 --------------- 299,333,151 PERSONAL PRODUCTS--1.5% L'Oreal SA (France) Health & Beauty Aid Manufacturer 1,008,800 $ 80,741,590 SOFT DRINKS--1.6% Lotte Chilsung Beverage Co., Ltd. (Korea) (c) Soft Drinks, Juices & Sports Drinks Manufacturer 83,400 $ 82,457,396 INTEGRATED OIL & GAS--1.8% BP p.l.c. (Great Britain) Oil & Natural Gas Exploration & Production 6,294,100 $ 65,236,649
36
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.9% (CONT.) INTEGRATED OIL & GAS--1.8% (CONT.) Total SA (France) Oil & Natural Gas Exploration & Production 126,000 $ 29,478,339 --------------- 94,714,988 OIL & GAS EXPLORATION & PRODUCTION--0.1% EnCana Corp. (Canada) Oil & Natural Gas Exploration & Production 54,400 $ 3,843,202 DIVERSIFIED BANKS--15.7% Bank of Ireland (Ireland) Commercial Bank 10,462,900 $ 165,314,537 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 7,348,800 117,043,515 Lloyds TSB Group plc (Great Britain) Commercial Bank 12,347,600 111,530,030 Kookmin Bank (Korea) Commercial Banking 1,955,068 87,137,429 BNP Paribas SA (France) Commercial Banking 1,156,000 81,884,795 UniCredito Italiano S.p.A (Italy) Banking Services 12,956,700 75,975,272 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 8,395,368 73,215,419 Sanpaolo IMI S.p.A. (Italy) Banking Services 3,933,600 61,585,212 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 2,938,400 54,889,646 --------------- 828,575,855 DIVERSIFIED CAPITAL MARKETS--2.0% Credit Suisse Group (Switzerland) Investment Services & Insurance 2,408,600 $ 103,395,427 INVESTMENT BANKING & BROKERAGE--0.9% Daiwa Securities Group Inc. (Japan) Stock Broker 7,549,000 $ 49,723,320 REINSURANCE--0.3% Hannover Rueckversicherung AG (Germany) Reinsurance 390,800 $ 15,454,396 SPECIALIZED FINANCE--6.3% Euronext NV (Netherlands) (c) Stock Exchange 5,012,500 $ 178,341,329 Deutsche Boerse AG (Germany) Electronic Trading Systems 2,030,500 152,646,289 --------------- 330,987,618
37
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.9% (CONT.) HEALTH CARE EQUIPMENT--1.3% Olympus Corporation (Japan) Optical Equipment Manufacturer 2,824,000 $ 65,867,425 PHARMACEUTICALS--9.8% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 8,029,300 $ 184,043,235 Takeda Pharmaceutical Company Limited (Japan) Pharmaceuticals & Food Supplements 2,816,200 134,261,156 Novartis AG (Switzerland) Pharmaceuticals 2,758,000 128,654,406 Sanofi-Aventis (France) Pharmaceuticals 788,508 66,482,703 --------------- 513,441,500 DIVERSIFIED COMMERCIAL SERVICES--1.9% Meitec Corporation (Japan) (c) Software Engineering Services 2,483,800 $ 86,667,090 Rentokil Initial plc (Great Britain) Global Business Services 3,400,000 10,408,192 --------------- 97,075,282 EMPLOYMENT SERVICES--1.8% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 25,698,900 $ 94,210,137 INDUSTRIAL CONGLOMERATES--0.0% Haw Par Corporation Limited (Singapore) Healthcare & Leisure Products 58,338 $ 185,486 INDUSTRIAL MACHINERY--2.8% Metso Corporation (Finland) Paper & Pulp Machinery 4,147,200 $ 74,287,935 Enodis plc (Great Britain) (a)(c) Food Processing Equipment 33,585,320 71,080,240 --------------- 145,368,175 MARINE PORTS & SERVICES--2.1% Associated British Ports Holdings plc (Great Britain) Port Operator 12,131,399 $ 110,150,292 ELECTRONIC EQUIPMENT MANUFACTURERS--0.5% Orbotech, Ltd. (Israel) (a)(c) Optical Inspection Systems 1,237,700 $ 27,105,630
38
SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.9% (CONT.) SEMICONDUCTORS--0.9% Rohm Company Limited (Japan) Integrated Circuits & Semi-Conductor Devices Manufacturer 464,200 $ 44,824,089 DIVERSIFIED CHEMICALS--2.7% Akzo Nobel N.V. (Netherlands) Chemical Producer 3,107,200 $ 141,844,932 FERTILIZERS & AGRICULTURAL CHEMICALS--1.6% Syngenta AG (Switzerland) (a) Crop Protection Products 805,100 $ 84,063,693 SPECIALTY CHEMICALS--4.2% Lonza Group AG, Registered Shares (Switzerland) (c) Industrial Organic Chemicals 2,057,300 $ 125,893,964 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 151,100 97,011,202 --------------- 222,905,166 WIRELESS TELECOMMUNICATION SERVICES--4.3% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 787,400 $ 132,329,631 Vodafone Group Plc (Great Britain) Mobile Telecommunications 30,110,800 79,942,917 Vodafone Group Plc (Great Britain) (b) Mobile Telecommunications 606,000 16,095,360 --------------- 228,367,908 TOTAL COMMON STOCKS (COST: $3,729,447,362) 5,049,459,695 SHORT TERM INVESTMENTS--4.1% U.S. GOVERNMENT BILLS--0.9% United States Treasury Bills, 2.52% - 2.655% due 4/14/2005 - 4/21/2005 $ 45,000,000 $ 44,944,925 TOTAL U.S. GOVERNMENT BILLS (COST: $44,944,925) 44,944,925
39
NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.1% (CONT.) REPURCHASE AGREEMENTS--3.2% IBT Repurchase Agreement, 2.50% dated 3/31/2005 due 4/1/2005, repurchase price $171,011,875 collateralized by U.S. Government Agency Securities with an aggregate market value plus accrued interest of $179,550,000 $ 171,000,000 $ 171,000,000 IBT Repurchase Agreement, 2.02% dated 3/31/2005 due 4/1/2005, repurchase price $364,814 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $383,033 364,793 364,793 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $171,364,793) 171,364,793 TOTAL SHORT TERM INVESTMENTS (COST: $216,309,718) 216,309,718 Total Investments (Cost $3,945,757,080)--100.0% $ 5,265,769,413 Foreign Currencies (Cost $203,741)--0.0% $ 204,352 Other Liabilities In Excess Of Other Assets--0.0% (505,264) --------------- TOTAL NET ASSETS--100% $ 5,265,468,501 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 40 THE OAKMARK INTERNATIONAL SMALL CAP FUND REPORT FROM DAVID G. HERRO AND CHAD M. CLARK, PORTFOLIO MANAGERS [PHOTO OF DAVID G. HERRO] [PHOTO OF CHAD M. CLARK] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (3/31/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(15)
THE OAKMARK INTERNATIONAL SMALL CAP MSCI WORLD EX FUND (CLASS I) U.S. INDEX -------------- ------------- 11/1/1995 $ 10,000 $ 10,000 12/31/1995 $ 9,630 $ 10,684 3/31/1996 $ 10,970 $ 11,006 6/30/1996 $ 11,570 $ 11,186 9/30/1996 $ 11,590 $ 11,195 12/31/1996 $ 12,038 $ 11,418 3/31/97 $ 12,080 $ 11,241 6/30/1997 $ 13,181 $ 12,699 9/30/1997 $ 12,672 $ 12,652 12/31/1997 $ 9,642 $ 11,677 3/31/1998 $ 11,429 $ 13,394 6/30/1998 $ 9,892 $ 13,499 9/30/1998 $ 8,211 $ 11,513 12/31/1998 $ 10,529 $ 13,868 3/31/1999 $ 13,118 $ 14,086 6/30/1999 $ 15,317 $ 14,493 9/30/1999 $ 15,439 $ 15,114 12/31/1999 $ 16,190 $ 17,741 3/31/2000 $ 15,387 $ 17,839 6/30/2000 $ 15,529 $ 17,217 9/30/2000 $ 14,908 $ 15,906 12/31/2000 $ 14,756 $ 15,369 3/31/2001 $ 15,232 $ 13,213 6/30/2001 $ 15,777 $ 13,075 9/30/2001 $ 13,987 $ 11,273 12/31/2001 $ 16,671 $ 12,080 3/31/2002 $ 18,370 $ 12,149 6/30/2002 $ 18,831 $ 11,877 9/30/2002 $ 14,641 $ 9,547 12/31/2002 $ 15,818 $ 10,172 3/31/2003 $ 13,882 $ 9,406 6/30/2003 $ 17,933 $ 11,215 9/30/2003 $ 20,465 $ 12,121 12/31/2003 $ 24,109 $ 14,182 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 3/31/2005 $ 32,779 $ 17,084
AVERAGE ANNUAL TOTAL RETURNS (AS OF 3/31/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) ------------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND (CLASS I) 5.44% 27.62% 16.32% 13.43% MSCI World ex U.S. 0.07% 15.56% -0.86% 5.85% Lipper International Small Cap Average(18) 2.99% 18.24% 7.17% 11.45%
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 5% for the quarter, outperforming our benchmark indices. More importantly, however, for the past twelve months and past three years your Fund is up 28% and 21% respectively, soundly outpacing the relevant benchmarks. Strong performers for the quarter were our Turkish holding company, Dogan Holding, and our financial services companies, Julius Baer and Ichiyoshi Securities. In addition to solid operating performance within its media arm, Dogan Yayin, Dogan Holding benefited from increased merger and acquisition (M&A) activity in the Turkish banking sector (as it owns 62% of one of the medium-sized banks in Turkey) and general market optimism following the European Union's positive recommendation on Turkish membership. With increased scrutiny on corporate governance issues, we were quite happy to see Julius Baer adjust its shareholding structure during the quarter, lowering the family's voting interest to a level on par with its equity stake. We believe this positive move in governance, coupled with strong operating performance, propelled the stock in the quarter. Ichiyoshi, like many in our portfolio, continues to churn out outstanding operating performance with a management dedicated to building per share value over time. The most significant detractor from quarterly performance was British carpet retailer Carpetright plc. The UK housing market has slowed dramatically following five interest rate increases since late 2003. As a result, Carpetright reported subdued demand during its most recent quarter. We remain convinced that despite some potential cyclicality, this company will continue to deliver high returns and free cash flow, with a management team wholly focused on deploying that free cash flow in a value-accretive manner. We added to our position during the past quarter. PORTFOLIO COMPOSITION We had a very robust quarter of new idea generation, adding seven names to our approved list. Meaningful positions were established in UK retailers JJB Sports and Matalan; Wincor Nixdorf, a German-based banking hardware and software provider; and Mabuchi Motors, a Japanese manufacturer of small electric motors. Your Fund continued to add to positions in securities whose prices declined in the quarter, including Lotte Confectionery, Interpump, and Carpetright. Following the flurry of bid activity we reported in last quarter's commentary, M&A interest was more muted in the small cap arena in the quarter. As always, we believe your Fund invests in high quality companies with shareholder-oriented management teams that trade at a large discount to intrinsic value. We are indifferent as to whether value realization is achieved via a buyout offer or whether it comes from the market recognizing a business' inherent value. We continue to like the quality and price attractiveness of the portfolio. Thank you for your continued confidence. /s/ David G. Herro /s/ Chad M. Clark DAVID G. HERRO, CFA CHAD M. CLARK, CFA Portfolio Manager Portfolio Manager dherro@oakmark.com cclark@oakmark.com 41 THE OAKMARK INTERNATIONAL SMALL CAP FUND INTERNATIONAL DIVERSIFICATION--MARCH 31, 2005 (UNAUDITED) [CHART]
% OF FUND EQUITY MARKET VALUE ------------------------------------------ - EUROPE 72.9% Switzerland 16.8% Great Britain 16.1% * France 10.3% * Italy 8.0% * Germany 6.4% * Spain 4.4% Denmark 4.1% * Finland 2.8% Turkey 1.9% Sweden 1.7% * Greece 0.4% - PACIFIC RIM 24.9% Japan 11.2% Korea 5.6% Australia 4.0% New Zealand 1.7% Hong Kong 1.6% Philippines 0.4% Thailand 0.4% - LATIN AMERICA 1.0% Mexico 1.0% - OTHER 1.2% Israel 1.2%
* Euro currency countries comprise 32.3% of the Fund. 42 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--MARCH 31, 2005 (UNAUDITED)
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.0% ADVERTISING--2.5% Asatsu-DK, Inc. (Japan) Advertising Services Provider 459,700 $ 14,710,743 G2R Inc. (Korea) Advertising & Marketing Services 415,440 8,063,823 --------------- 22,774,566 APPAREL RETAIL--3.8% JJB Sports plc (Great Britain) Sportswear & Sports Equipment Retailer 4,850,400 $ 19,247,673 Matalan plc (Great Britain) Clothing Retailer 3,596,200 16,020,531 --------------- 35,268,204 APPAREL, ACCESSORIES & LUXURY GOODS--2.0% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 1,536,400 $ 18,257,200 BROADCASTING & CABLE TV--0.0% Media Prima Berhad (Malaysia) (a) Film Producer & Sports Promoter 984,000 $ 375,474 HOME IMPROVEMENT RETAIL--2.9% Carpetright plc (Great Britain) Carpet Retailer 1,439,800 $ 26,989,523 MOTORCYCLE MANUFACTURERS--0.5% Ducati Motor Holding S.p.A. (Italy) (a) Motorcycle Manufacturer 3,015,650 $ 4,194,072 PHOTOGRAPHIC PRODUCTS--1.4% Vitec Group plc (Great Britain) Photo Equipment & Supplies 2,008,907 $ 12,849,904 PUBLISHING--1.9% Tamedia AG (Switzerland) (a) TV Broadcasting & Publishing 143,661 $ 14,171,542 Matichon Public Company Limited, Foreign Shares (Thailand) (b) Newspaper Publisher 2,039,500 3,545,143 --------------- 17,716,685 AGRICULTURAL PRODUCTS--2.1% Geest plc (Great Britain) Fresh Produce Distributor 1,562,400 $ 19,367,673
43
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.0% (CONT.) BREWERS--3.5% Davide Campari - Milano S.p.A. (Italy) Soft Drinks, Wines, & Spirits Producer 284,900 $ 19,745,035 Kook Soon Dang Brewery Co., Ltd. (Korea) Wine & Spirits Manufacturer 843,176 13,217,353 --------------- 32,962,388 DISTILLERS & VINTNERS--1.8% Baron de Ley, S.A. (Spain) (a) Wines & Spirits Manufacturer 337,037 $ 16,574,108 PACKAGED FOODS & MEATS--1.3% Robert Wiseman Dairies plc (Great Britain) Milk Processor & Distributor 944,000 $ 4,807,421 Alaska Milk Corporation (Philippines) (b) Milk Producer 56,360,000 3,805,329 Lotte Confectionery Co., Ltd. (Korea) Candy & Snacks Manufacturer 4,884 3,316,800 --------------- 11,929,550 ASSET MANAGEMENT & CUSTODY BANKS--3.1% Julius Baer Holding Ltd. (Switzerland) Asset Management 83,800 $ 29,055,384 DIVERSIFIED BANKS--1.8% Jyske Bank-Registered (Denmark) (a) Commercial Banking 444,800 $ 16,618,238 MULTI-SECTOR HOLDINGS--2.2% Pargesa Holding AG (Switzerland) Diversified Operations 5,254 $ 19,984,702 OTHER DIVERSIFIED FINANCIAL SERVICES--1.7% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 1,495,700 $ 15,740,538 REGIONAL BANKS--1.5% Pusan Bank (Korea) Commercial Banking 1,033,500 $ 8,166,427 Daegu Bank (Korea) Commercial Banking 739,400 5,442,856 --------------- 13,609,283 SPECIALIZED FINANCE--0.3% Athens Stock Exchange S.A. (Greece) (a) Exchange Services 293,000 $ 3,235,657
44
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.0% (CONT.) HEALTH CARE SUPPLIES--2.5% Ansell Limited (Australia) Protective Rubber & Plastics Products 1,733,684 $ 13,176,720 Coloplast A/S, Class B (Denmark) Healthcare Products & Services Provider 203,000 10,559,765 --------------- 23,736,485 PHARMACEUTICALS--2.5% Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 1,077,000 $ 23,110,510 AIR FREIGHT & LOGISTICS--1.6% Mainfreight Limited (New Zealand) (b) Logistics Services 7,816,058 $ 14,738,018 AIRPORT SERVICES--2.0% Kobenhavns Lufthavne A/S (Copenhagen Airports A/S - CPH) (Denmark) Airport Management & Operations 38,300 $ 9,135,309 Grupo Aeroportuario del Sureste S.A. de C.V. (Mexico) (b)(c) Airport Operator 315,000 8,835,750 --------------- 17,971,059 CONSTRUCTION & ENGINEERING--1.2% Tae Young Corp. (Korea) Heavy Construction 284,070 $ 11,446,555 CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS--0.2% Vossloh AG (Germany) Railroad Equipment Manufacturer 29,000 $ 1,478,726 DIVERSIFIED COMMERCIAL SERVICES--2.7% Prosegur, Compania de Seguridad SA (Spain) Security & Transportation Services 1,052,300 $ 22,504,988 Konami Sports Corporation (Japan) Fitness Centers 149,400 2,667,832 --------------- 25,172,820 ELECTRICAL COMPONENTS & EQUIPMENT--3.0% Pfeiffer Vacuum Technology AG (Germany) Vacuum Pump Manufacturer 423,840 $ 21,479,984 Carbone Lorraine SA (France) (a) Electrical Systems Manufacturer 120,545 6,812,256 --------------- 28,292,240
45
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.0% (CONT.) EMPLOYMENT SERVICES--0.8% DIS Deutscher Industrie Service AG (Germany) Recruitment Consultancy Services 173,800 $ 7,377,621 INDUSTRIAL CONGLOMERATES--1.8% Dogan Sirketler Grubu Holdings A.S. (Turkey) (a) Diversified Holding Company 6,258,511 $ 16,288,324 INDUSTRIAL MACHINERY--13.2% Saurer AG (Switzerland) (a) Textile Equipment Manufacturer 502,653 $ 32,986,340 Interpump Group S.p.A. (Italy) (b) Pump & Piston Manufacturer 5,326,600 28,299,794 Schindler Holding AG (Switzerland) Elevator & Escalator Manufacturer 64,200 24,419,829 Alfa Laval AB (Sweden) Filtration & Separation Equipment 807,500 13,245,192 LISI (France) Industrial Fastener Manufacturer 148,244 10,731,380 Kone Oyj, Class B (Finland) (a) Elevators 113,100 8,791,276 Halma plc (Great Britain) Electronic Instrument Producer 719,700 2,189,570 Munters AB (Sweden) Cooling & Moisture Control Systems 77,400 2,079,468 NSC Groupe (France) Textile Equipment Manufacturer 12,316 1,095,886 --------------- 123,838,735 OFFICE SERVICES & SUPPLIES--0.6% Societe BIC SA (France) Consumer & Office Supplies 101,800 $ 5,775,367 Domino Printing Sciences plc (Great Britain) Printing Equipment 70,000 341,932 --------------- 6,117,299 COMPUTER STORAGE & PERIPHERALS--1.3% Lectra (France) Manufacturing Process Systems 1,813,100 $ 11,773,748 DATA PROCESSING & OUTSOURCED SERVICES--2.3% Baycorp Advantage Limited (Australia) Credit Reference Services 9,342,300 $ 21,647,978 ELECTRONIC EQUIPMENT MANUFACTURERS--6.2% Wincor Nixdorf AG (Germany) (a) Banking Machine Manufacturer 222,300 $ 17,720,250 Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 627,000 15,847,378
46
NAME DESCRIPTION SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.0% (CONT.) ELECTRONIC EQUIPMENT MANUFACTURERS--6.2% (CONT.) Mabuchi Motor Co., Ltd. (Japan) Digital Camera Motors Manufacturer 221,000 $ 13,278,351 Orbotech, Ltd. (Israel) (a)(b) Optical Inspection Systems 499,300 10,934,670 --------------- 57,780,649 HOME ENTERTAINMENT SOFTWARE--1.7% Square Enix Co., Ltd. (Japan) Entertainment Software 508,100 $ 15,595,923 IT CONSULTING & OTHER SERVICES--4.2% Morse plc (Great Britain) (b) Business & Technology Solutions 10,548,500 $ 21,427,946 Alten (France) (a) Systems Consulting & Engineering 443,281 10,916,615 Sopra Group (France) Computer Engineering 111,930 6,202,087 --------------- 38,546,648 OFFICE ELECTRONICS--3.3% Neopost SA (France) Mailroom Equipment Supplier 349,174 $ 30,232,470 INDUSTRIAL GASES--1.4% Taiyo Ink Mfg. Co., Ltd. (Japan) Manufacturer of Resist Inks 348,100 $ 13,347,866 SPECIALTY CHEMICALS--5.7% Gurit-Heberlein AG (Switzerland) (b) Chemical Producer 36,075 $ 26,916,015 Croda International plc (Great Britain) Chemical Producer 2,573,600 18,127,590 Financiere Marc de Lacharriere SA (Fimalac) (France) Chemical Storage & Diversified Operations 150,232 7,047,033 Financiere Marc de Lacharriere SA (Fimalac), Warrants (France) (a) Chemical Storage & Diversified Operations 31,866 177,603 --------------- 52,268,241 ALTERNATIVE CARRIERS--1.5% Asia Satellite Telecommunications Holdings Limited (Hong Kong) Satellite Operator 7,305,000 $ 13,955,407 TOTAL COMMON STOCKS (COST: $602,359,514) 872,220,471
47
NAME DESCRIPTION PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------------- FIXED INCOME--0.8% PREFERRED STOCKS--0.8% INDUSTRIAL CONGLOMERATES--0.8% Rheinmetall AG, Preferred, 0.00% Automotive Pump Manufacturer 146,600 $ 7,790,639 TOTAL PREFERRED STOCKS (COST: $8,200,975) 7,790,639 TOTAL FIXED INCOME (COST: $8,200,975) 7,790,639 SHORT TERM INVESTMENTS--4.3% U.S. GOVERNMENT BILLS--2.2% United States Treasury Bills, 2.635% - 2.64% due 4/14/2005 - 4/28/2005 $ 20,000,000 $ 19,970,684 TOTAL U.S. GOVERNMENT BILLS (COST: $19,970,684) 19,970,684 REPURCHASE AGREEMENTS--2.1% IBT Repurchase Agreement, 2.50% dated 3/31/2005 due 4/1/2005, repurchase price $18,001,250 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $18,900,000 $ 18,000,000 $ 18,000,000 IBT Repurchase Agreement, 2.02% dated 3/31/2005 due 4/1/2005, repurchase price $1,583,870 collateralized by a U.S. Government Agency Security with a market value plus accrued interest of $1,662,970 1,583,781 1,583,781 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $19,583,781) 19,583,781 TOTAL SHORT TERM INVESTMENTS (COST: $39,554,465) 39,554,465 Total Investments (Cost $650,114,954)--99.1% $ 919,565,575 Foreign Currencies (Cost $101,721)--0.0% $ 101,726 Other Assets In Excess Of Other Liabilities--0.9% 8,571,321 --------------- TOTAL NET ASSETS--100% $ 928,238,622 ===============
(a) Non-income producing security. (b) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. (c) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 48 [OAKMARK LOGO] (This page has been intentionally left blank.) 49 THE OAKMARK FUNDS STATEMENTS OF ASSETS AND LIABILITIES--MARCH 31, 2005 (UNAUDITED)
THE OAKMARK THE OAKMARK SELECT FUND FUND --------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 6,711,028,793 $ 5,305,538,964 Investments in affiliated securities, at value (b) 153,221,994 659,580,289 Cash 0 0 Foreign currency, at value (c) 0 0 Receivable for: Securities sold 113,828,102 0 Fund shares sold 10,630,428 14,377,320 Dividends and interest 9,246,482 4,993,159 Forward foreign currency contracts 0 0 Tax reclaim 0 0 ----------------- ----------------- Total receivables 133,705,012 19,370,479 Other assets 103,296 90,971 ----------------- ----------------- Total assets $ 6,998,059,095 $ 5,984,580,703 LIABILITIES AND NET ASSETS Payable for: Securities purchased $ 18,961,200 $ 5,121,639 Fund shares redeemed 5,204,320 6,405,768 Due to Adviser 169,831 151,270 Due to transfer agent 227,820 103,497 Trustees fees 28,910 25,459 Deferred trustee compensation 846,776 754,393 Forward currency exchange contracts 0 0 Foreign tax expense 0 0 Other 1,825,366 1,339,926 ----------------- ----------------- Total liabilities 27,264,223 13,901,952 ----------------- ----------------- Net assets applicable to fund shares outstanding $ 6,970,794,872 $ 5,970,678,751 ================= ================= ANALYSIS OF NET ASSETS Paid in capital $ 5,683,001,286 $ 3,840,870,253 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency exchange transactions (136,360,093) 250,018,114 Net unrealized appreciation (depreciation) of investments and foreign currencies 1,392,560,324 1,871,813,191 Net unrealized appreciation (depreciation)--other 0 0 Accumulated undistributed net investment income (loss) 31,593,355 7,977,193 ----------------- ----------------- Net assets applicable to Fund shares outstanding $ 6,970,794,872 $ 5,970,678,751 ================= ================= PRICE OF SHARES Net asset value per share: Class I $ 40.85 $ 33.39 ================= ================= Class I--Net assets $ 6,904,921,300 $ 5,874,392,572 Class I--Shares outstanding (Unlimited shares authorized) 169,043,919 175,952,739 Net asset value per share: Class II $ 40.65 $ 33.23 ================= ================= Class II--Net assets $ 65,873,572 $ 96,286,179 Class II--Shares outstanding (Unlimited shares authorized) 1,620,496 2,897,691 (a) Identified cost of investments in unaffiliated securities $ 5,393,003,291 $ 3,862,525,879 (b) Identified cost of investments in affiliated securities 78,687,172 230,780,183 (c) Identified cost of foreign currency 0 0
50
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND -------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 8,678,859,518 $ 1,475,534,487 Investments in affiliated securities, at value (b) 72,572,500 174,500,797 Cash 0 0 Foreign currency, at value (c) 0 0 Receivable for: Securities sold 46,705,188 0 Fund shares sold 12,725,885 3,928,435 Dividends and interest 36,800,035 4,175,538 Forward foreign currency contracts 0 0 Tax reclaim 10,000 713,836 ----------------- ---------------- Total receivables 96,241,108 8,817,809 Other assets 116,328 63,019 ----------------- ---------------- Total assets $ 8,847,789,454 $ 1,658,916,112 LIABILITIES AND NET ASSETS Payable for: Securities purchased $ 29,498,061 $ 1,804,154 Fund shares redeemed 6,929,367 383,501 Due to Adviser 173,367 42,990 Due to transfer agent 155,329 37,344 Trustees fees 32,682 15,474 Deferred trustee compensation 504,183 309,324 Forward currency exchange contracts 0 2,474,939 Foreign tax expense 0 0 Other 2,881,225 545,342 ----------------- ---------------- Total liabilities 40,174,214 5,613,068 ----------------- ---------------- Net assets applicable to fund shares outstanding $ 8,807,615,240 $ 1,653,303,044 ================= ================= ANALYSIS OF NET ASSETS Paid in capital $ 7,656,702,318 $ 1,272,447,756 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency exchange transactions 21,118,225 12,582,922 Net unrealized appreciation (depreciation) of investments and foreign currencies 1,102,277,968 368,357,068 Net unrealized appreciation (depreciation)--other 129,165 36,111 Accumulated undistributed net investment income (loss) 27,387,564 (120,813) ----------------- ---------------- Net assets applicable to Fund shares outstanding $ 8,807,615,240 $ 1,653,303,044 ================= ================= PRICE OF SHARES Net asset value per share: Class I $ 23.35 $ 21.94 ================= ================= Class I--Net assets $ 8,187,947,315 $ 1,612,808,759 Class I--Shares outstanding (Unlimited shares authorized) 350,598,213 73,505,816 Net asset value per share: Class II $ 23.27 $ 21.71 ================= ================= Class II--Net assets $ 619,667,925 $ 40,494,285 Class II--Shares outstanding (Unlimited shares authorized) 26,625,343 1,865,052 (a) Identified cost of investments in unaffiliated securities $ 7,566,754,908 $ 1,143,023,346 (b) Identified cost of investments in affiliated securities 82,399,142 136,180,665 (c) Identified cost of foreign currency 0 0 THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND -------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 4,566,112,792 $ 809,898,660 Investments in affiliated securities, at value (b) 699,656,621 109,666,915 Cash 97 0 Foreign currency, at value (c) 204,352 101,726 Receivable for: Securities sold 756,348 6,635,694 Fund shares sold 11,637,610 1,710,686 Dividends and interest 19,687,183 2,862,958 Forward foreign currency contracts 0 710,521 Tax reclaim 2,671,285 709,059 ----------------- ---------------- Total receivables 34,752,426 12,628,918 Other assets 144,979 48,896 ----------------- ---------------- Total assets $ 5,300,871,267 $ 932,345,115 LIABILITIES AND NET ASSETS Payable for: Securities purchased $ 18,097,089 $ 3,020,427 Fund shares redeemed 8,321,338 288,281 Due to Adviser 131,125 29,190 Due to transfer agent 88,817 18,855 Trustees fees 23,781 13,819 Deferred trustee compensation 519,172 311,495 Forward currency exchange contracts 6,399,028 0 Foreign tax expense 0 121,001 Other 1,822,416 303,425 ----------------- ---------------- Total liabilities 35,402,766 4,106,493 ----------------- ---------------- Net assets applicable to fund shares outstanding $ 5,265,468,501 $ 928,238,622 ================= ================= ANALYSIS OF NET ASSETS Paid in capital $ 3,851,862,360 $ 600,401,572 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency exchange transactions 99,846,455 57,889,450 Net unrealized appreciation (depreciation) of investments and foreign currencies 1,313,652,488 270,049,228 Net unrealized appreciation (depreciation)--other 10,723 37,431 Accumulated undistributed net investment income (loss) 96,475 (139,059) ----------------- ---------------- Net assets applicable to Fund shares outstanding $ 5,265,468,501 $ 928,238,622 ================= ================= PRICE OF SHARES Net asset value per share: Class I $ 21.58 $ 21.12 ================= ================= Class I--Net assets $ 4,919,886,277 $ 927,626,247 Class I--Shares outstanding (Unlimited shares authorized) 227,972,703 43,931,937 Net asset value per share: Class II $ 21.47 $ 21.10 ================= ================= Class II--Net assets $ 345,582,224 $ 612,375 Class II--Shares outstanding (Unlimited shares authorized) 16,098,905 29,022 (a) Identified cost of investments in unaffiliated securities $ 3,496,998,430 $ 550,703,171 (b) Identified cost of investments in affiliated securities 448,758,650 99,411,783 (c) Identified cost of foreign currency 203,741 101,721
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 THE OAKMARK FUNDS STATEMENTS OF OPERATIONS--PERIOD ENDED MARCH 31, 2005 (UNAUDITED)
THE OAKMARK THE OAKMARK SELECT FUND FUND -------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 63,861,643 $ 51,484,168 Dividends from affiliated securities 1,332,892 3,664,452 Interest Income 6,321,936 4,759,108 Securities lending income 0 0 Other income 42,113 26,809 Foreign taxes withheld (248,907) 0 ----------------- ---------------- Total investment income 71,309,677 59,934,537 EXPENSES: Investment advisory fee 29,813,473 24,389,760 Transfer and dividend disbursing agent fees 1,537,622 771,131 Other shareholder servicing fees 2,887,149 2,192,109 Service Fee--Class II 77,468 125,185 Reports to shareholders 908,740 594,819 Custody and accounting fees 369,385 294,850 Registration and blue sky expenses 59,927 0 Trustee fees 93,053 82,441 Deferred trustee compensation 72,636 65,007 Legal fees 74,671 65,858 Audit fees 32,089 28,153 Other 191,305 146,742 ----------------- ---------------- Total expenses 36,117,518 28,756,055 Expense offset arrangements 0 0 ----------------- ---------------- Net expenses 36,117,518 28,756,055 NET INVESTMENT INCOME: 35,192,159 31,178,482 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 101,069,170 142,311,659 Net realized gain on affiliated securities 30,752,892 129,874,070 Net realized gain on options written 0 0 Net realized gain (loss) on foreign currency transactions 0 0 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 228,832,371 123,368,921 Net change in appreciation (depreciation)--other 0 0 Net change in deferred foreign taxes 0 0 Net realized and unrealized gain on investments and foreign currency transactions: 360,654,433 395,554,650 ----------------- ---------------- Net increase in net assets resulting from operations $ 395,846,592 $ 426,733,132 ================= =================
52
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND -------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 34,341,914 $ 9,554,679 Dividends from affiliated securities 72,500 262,693 Interest Income 56,332,659 390,234 Securities lending income 0 10,365 Other income 23,581 255 Foreign taxes withheld (474,804) (458,577) ----------------- ---------------- Total investment income 90,295,850 9,759,649 EXPENSES: Investment advisory fee 30,908,138 7,538,210 Transfer and dividend disbursing agent fees 1,020,885 256,847 Other shareholder servicing fees 4,807,665 663,273 Service Fee--Class II 697,613 39,199 Reports to shareholders 875,557 165,681 Custody and accounting fees 492,732 421,102 Registration and blue sky expenses 63,581 36,993 Trustee fees 104,925 49,573 Deferred trustee compensation 82,092 38,612 Legal fees 85,601 39,500 Audit fees 36,390 17,160 Other 221,717 76,510 ----------------- ---------------- Total expenses 39,396,896 9,342,660 Expense offset arrangements (44) 0 ----------------- ---------------- Net expenses 39,396,852 9,342,660 NET INVESTMENT INCOME: 50,898,998 416,989 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 36,779,736 16,133,897 Net realized gain on affiliated securities 0 0 Net realized gain on options written 521,987 0 Net realized gain (loss) on foreign currency transactions 380,150 277,783 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 273,998,375 169,997,749 Net change in appreciation (depreciation)other 2,493 (40,815) Net change in deferred foreign taxes 0 0 Net realized and unrealized gain on investments and foreign currency transactions: 311,682,741 186,368,614 ----------------- =---------------- Net increase in net assets resulting from operations $ 362,581,739 $ 186,785,603 ================= ================= THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND -------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 36,050,654 $ 5,953,867 Dividends from affiliated securities 928,566 992,904 Interest Income 1,901,848 412,004 Securities lending income 74,850 0 Other income 0 0 Foreign taxes withheld (1,770,157) (663,287) ----------------- ---------------- Total investment income 37,185,761 6,695,488 EXPENSES: Investment advisory fee 22,328,496 4,955,885 Transfer and dividend disbursing agent fees 580,755 121,674 Other shareholder servicing fees 2,090,511 306,484 Service Fee--Class II 377,823 330 Reports to shareholders 430,652 69,302 Custody and accounting fees 1,774,900 378,674 Registration and blue sky expenses 42,563 23,382 Trustee fees 75,729 44,322 Deferred trustee compensation 58,852 34,399 Legal fees 60,477 35,165 Audit fees 26,902 15,145 Other 145,907 62,365 ----------------- ---------------- Total expenses 27,993,567 6,047,127 Expense offset arrangements 0 (32) ----------------- ---------------- Net expenses 27,993,567 6,047,095 NET INVESTMENT INCOME: 9,192,194 648,393 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 103,399,641 60,718,801 Net realized gain on affiliated securities 3,144,562 9,939,868 Net realized gain on options written 0 0 Net realized gain (loss) on foreign currency transactions (582,606) (224,902) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 560,527,887 75,575,974 Net change in appreciation (depreciation)other (285,180) 674 Net change in deferred foreign taxes 0 118,372 Net realized and unrealized gain on investments and foreign currency transactions: 666,204,304 146,128,787 ----------------- ---------------- Net increase in net assets resulting from operations $ 675,396,498 $ 146,777,180 ================= =================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED) THE OAKMARK FUND -------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 35,192,159 $ 27,165,278 Net realized gain on investments 131,822,062 64,812,715 Net change in unrealized appreciation (depreciation) of investments 228,832,371 636,919,637 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 395,846,592 728,897,630 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (29,017,833) (20,505,874) Net investment income--Class II (112,443) (37,100) ----------------- ----------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (29,130,276) (20,542,974) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 824,079,800 1,919,971,722 Proceeds from shares sold--Class II 18,718,634 36,194,109 Reinvestment of distributions--Class I 26,428,707 18,843,547 Reinvestment of distributions--Class II 63,924 8,676 Payments for shares redeemed, net of fees--Class I (783,387,446) (939,233,385) Payments for shares redeemed, net of fees--Class II (7,901,058) (9,099,878) Redemption fees--Class I 181,271 340,142 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 78,183,832 1,027,024,933 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS 444,900,148 1,735,379,589 NET ASSETS: Beginning of period 6,525,894,724 4,790,515,135 ----------------- ----------------- End of period $ 6,970,794,872 $ 6,525,894,724 ================= ================= Undistributed net investment income $ 31,593,355 $ 25,531,472 ================= ================= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 20,284,940 50,926,355 Shares issued in reinvestment of dividends 648,876 534,720 Less shares redeemed (19,246,564) (24,984,586) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 1,687,252 26,476,489 ================= ================= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 465,734 968,163 Shares issued in reinvestment of dividends 1,576 247 Less shares redeemed (195,349) (247,309) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 271,961 721,101 ================= =================
54
THE OAKMARK SELECT FUND -------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 31,178,482 $ 28,041,071 Net realized gain on investments 272,185,729 156,155,071 Net change in unrealized appreciation (depreciation) of investments 123,368,921 511,522,774 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 426,733,132 695,718,916 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (41,681,441) (18,710,631) Net investment income--Class II (456,984) (118,882) ----------------- ----------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (42,138,425) (18,829,513) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 555,038,286 807,786,818 Proceeds from shares sold--Class II 13,368,800 33,570,613 Reinvestment of distributions--Class I 39,145,869 17,456,336 Reinvestment of distributions--Class II 205,309 58,212 Payments for shares redeemed, net of fees--Class I (560,635,094) (1,019,983,750) Payments for shares redeemed, net of fees--Class II (22,121,245) (40,937,360) Redemption fees--Class I 49,030 105,547 ----------------- ----------------- NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 25,050,955 (201,943,584) ----------------- ----------------- TOTAL INCREASE IN NET ASSETS 409,645,662 474,945,819 NET ASSETS: Beginning of period 5,561,033,089 5,086,087,270 ----------------- ----------------- End of period $ 5,970,678,751 $ 5,561,033,089 ================= ================= Undistributed net investment income $ 7,977,193 $ 18,937,136 ================= ================= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 16,855,171 26,433,387 Shares issued in reinvestment of dividends 1,205,230 595,510 Less shares redeemed (17,204,975) (33,158,816) ----------------- ----------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING 855,426 (6,129,919) ================= ================= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 410,524 1,102,241 Shares issued in reinvestment of dividends 6,346 1,944 Less shares redeemed (680,656) (1,342,449) ----------------- ----------------- NET DECREASE IN SHARES OUTSTANDING (263,786) (238,264) ================= =================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55
THE OAKMARK EQUITY AND INCOME FUND -------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 50,898,998 $ 50,126,070 Net realized gain on investments 37,301,723 269,099,021 Net realized gain on foreign currency transactions 380,150 227,056 Net change in unrealized appreciation (depreciation) of investments 273,998,375 416,194,976 Net change in unrealized appreciation (depreciation)--other 2,493 39,804 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 362,581,739 735,686,927 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (67,147,518) (30,409,117) Net investment income--Class II (3,563,528) (1,530,815) Net realized gain--Class I (196,511,764) 0 Net realized gain--Class II (13,715,030) 0 ----------------- ----------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (280,937,840) (31,939,932) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 957,091,284 3,583,813,621 Proceeds from shares sold--Class II 192,981,547 277,231,468 Reinvestment of distributions--Class I 254,487,513 29,355,530 Reinvestment of distributions--Class II 7,740,318 514,106 Payments for shares redeemed, net of fees--Class I (677,964,087) (836,471,290) Payments for shares redeemed, net of fees--Class II (65,023,751) (86,816,396) Redemption fees--Class I 100,835 534,637 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 669,413,659 2,968,161,676 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS 751,057,558 3,671,908,671 NET ASSETS: Beginning of period 8,056,557,682 4,384,649,011 ----------------- ----------------- End of period $ 8,807,615,240 $ 8,056,557,682 ================= ================= Undistributed net investment income $ 27,387,564 $ 47,199,612 ================= ================= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 40,880,970 159,855,520 Shares issued in reinvestment of dividends 10,997,731 1,399,884 Less shares redeemed (28,975,723) (37,388,817) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 22,902,978 123,866,587 ================= ================= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 8,293,857 12,464,461 Shares issued in reinvestment of dividends 335,369 24,563 Less shares redeemed (2,790,764) (3,887,834) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 5,838,462 8,601,190 ================= =================
56
THE OAKMARK GLOBAL FUND -------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 416,989 $ 5,884,687 Net realized gain on investments 16,133,897 23,552,579 Net realized gain (loss) on foreign currency transactions 277,783 (199,643) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 169,997,749 116,594,459 Net change in unrealized appreciation (depreciation)--other (40,815) 102,037 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 186,785,603 145,934,119 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (7,092,335) (54,303) Net investment income--Class II (103,658) 0 Net realized gain--Class I (25,218,974) (2,851,872) Net realized gain--Class II (520,696) (25,574) ----------------- ----------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (32,935,663) (2,931,749) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 214,988,192 782,660,249 Proceeds from shares sold--Class II 14,218,092 21,752,122 Reinvestment of distributions--Class I 30,609,171 2,804,200 Reinvestment of distributions--Class II 557,171 20,731 Payments for shares redeemed, net of fees--Class I (119,943,833) (296,067,961) Payments for shares redeemed, net of fees--Class II (2,033,031) (4,061,520) Redemption fees--Class I 35,702 314,014 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 138,431,464 507,421,835 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS 292,281,404 650,424,205 NET ASSETS: Beginning of period 1,361,021,640 710,597,435 ----------------- ----------------- End of period $ 1,653,303,044 $ 1,361,021,640 ================= ================= Undistributed net investment income (loss) $ (1,516,685) $ 5,262,319 ================= ================= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 9,976,807 41,298,499 Shares issued in reinvestment of dividends 1,443,149 155,616 Less shares redeemed (5,628,945) (15,250,479) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 5,791,011 26,203,636 ================= ================= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 668,325 1,131,427 Shares issued in reinvestment of dividends 26,519 1,160 Less shares redeemed (95,320) (211,953) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 599,524 920,634 ================= =================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57
THE OAKMARK INTERNATIONAL FUND -------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 9,192,194 $ 53,715,892 Net realized gain on investments 106,544,203 217,536,088 Net realized loss on foreign currency transactions (582,606) (603,088) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 560,527,887 401,911,292 Net change in unrealized appreciation (depreciation)--other (285,180) 168,158 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 675,396,498 672,728,342 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (57,688,522) (20,084,750) Net investment income--Class II (3,146,570) (570,848) Net realized gain--Class I (11,785,113) 0 Net realized gain--Class II (790,281) 0 ----------------- ----------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (73,410,486) (20,655,598) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 633,583,884 1,465,810,386 Proceeds from shares sold--Class II 93,801,017 183,258,922 Reinvestment of distributions--Class I 63,036,515 18,162,578 Reinvestment of distributions--Class II 2,198,011 279,537 Payments for shares redeemed, net of fees--Class I (378,117,072) (744,490,290) Payments for shares redeemed, net of fees--Class II (47,319,848) (79,196,627) Redemption fees--Class I 189,684 367,912 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 367,372,191 844,192,418 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS 969,358,203 1,496,265,162 NET ASSETS: Beginning of period 4,296,110,298 2,799,845,136 ----------------- ----------------- End of period $ 5,265,468,501 $ 4,296,110,298 ================= ================= Undistributed net investment income $ 96,475 $ 51,739,373 ================= ================= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 30,377,910 81,784,418 Shares issued in reinvestment of dividends 3,074,952 1,091,501 Less shares redeemed (18,177,494) (40,952,323) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 15,275,368 41,923,596 ================= ================= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 4,498,321 10,166,362 Shares issued in reinvestment of dividends 107,693 16,860 Less shares redeemed (2,252,825) (4,345,978) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 2,353,189 5,837,244 ================= =================
58
THE OAKMARK INTERNATIONAL SMALL CAP FUND -------------------------------------------------------------------------------------------------------------- PERIOD ENDED YEAR ENDED MARCH 31, 2005 SEPTEMBER 30, 2004 -------------------------------------------------------------------------------------------------------------- FROM OPERATIONS: Net investment income $ 648,393 $ 4,554,775 Net realized gain on investments 70,658,669 43,497,450 Net realized loss on foreign currency transactions (224,902) (41,546) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 75,575,974 124,228,709 Net change in unrealized appreciation (depreciation)--other 674 (23,302) Net change in deferred foreign taxes 118,372 0 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM OPERATIONS 146,777,180 172,216,086 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (11,222,306) (4,209,195) Net investment income--Class II (6,999) (2,982) Net realized gain--Class I (15,538,999) 0 Net realized gain--Class II (10,001) 0 ----------------- ----------------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS (26,778,305) (4,212,177) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 113,706,918 188,831,597 Proceeds from shares sold--Class II 87,470 54,188 Reinvestment of distributions--Class I 24,846,478 3,863,970 Reinvestment of distributions--Class II 10,284 1,508 Payments for shares redeemed, net of fees--Class I (64,988,413) (104,507,785) Payments for shares redeemed, net of fees--Class II (26,244) (171,984) Redemption fees--Class I 19,429 263,993 ----------------- ----------------- NET INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 73,655,922 88,335,487 ----------------- ----------------- TOTAL INCREASE IN NET ASSETS 193,654,797 256,339,396 NET ASSETS: Beginning of period 734,583,825 478,244,429 ----------------- ----------------- End of period $ 928,238,622 $ 734,583,825 ================= ================= Undistributed net investment income (loss) $ (6,761,596) $ 3,819,316 ================= ================= FUND SHARE TRANSACTIONS--CLASS I: Shares sold 5,657,445 11,434,258 Shares issued in reinvestment of dividends 1,298,823 260,200 Less shares redeemed (3,218,601) (6,274,556) ----------------- ----------------- NET INCREASE IN SHARES OUTSTANDING 3,737,667 5,419,902 ================= ================= FUND SHARE TRANSACTIONS--CLASS II: Shares sold 4,448 3,350 Shares issued in reinvestment of dividends 537 102 Less shares redeemed (1,252) (10,276) ----------------- ----------------- NET INCREASE (DECREASE) IN SHARES OUTSTANDING 3,733 (6,824) ================= =================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59 THE OAKMARK FUNDS NOTES TO FINANCIAL STATEMENTS--(UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies of The Oakmark Fund ("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Equity and Income Fund ("Equity and Income"), The Oakmark Global Fund ("Global"), The Oakmark International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap") collectively referred to as "the Funds", each a series of Harris Associates Investment Trust (the "Trust"), a Massachusetts business trust, which is registered as an investment company under the Investment Company Act of 1940. These policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim period presented. All such adjustments are of a normal, recurring nature. CLASS DISCLOSURE-- Each Fund offers two classes of shares: Class I Shares and Class II Shares. Class I Shares are offered to the general public. Class II Shares are offered to certain retirement plans such as 401(k) and profit sharing plans. Class II Shares pay a service fee at the annual rate of 0.25% of average net assets of Class II Shares of the Funds. This service fee is paid to an administrator for performing the services associated with the administration of such retirement plans. Income, realized and unrealized capital gains and losses and expenses of the Funds that are not directly attributable to a specific class of shares are prorated among the classes based on the relative net assets of each class. Expenses directly attributable to a class of shares are recorded to the specific class. REDEMPTION FEES-- Each Fund imposes a short-term trading fee on redemptions of Class I Shares held for 90 days or less to offset two types of costs to the Fund caused by short-term trading: portfolio transaction and market impact costs associated with erratic redemption activity and administrative costs associated with processing redemptions. The fee is 2% of the redemption value and is deducted from the redemption proceeds and retained by the Fund. The "first-in, first-out" (FIFO) method is used to determine the holding period. SECURITY VALUATION-- Securities traded on securities exchanges and over-the-counter securities are valued at the last sales price on the day of valuation, or lacking any reported sales that day, at the most recent bid quotation. Securities traded on the NASDAQ National Market are valued at the NASDAQ Official Closing Price ("NOCP"), or lacking an NOCP, at the most recent bid quotation on the NASDAQ National Market. Debt obligations and money market instruments maturing in more than 60 days from the date of purchase are valued at the latest bid quotation. Debt obligations and money market instruments maturing in less than 61 days from the date of purchase are valued on an amortized cost basis which approximates market value. Options are valued at the last reported sale price on the day of valuation, or lacking any reported sales that day, at the mean of the most recent bid and ask quotations. Securities traded in foreign markets are valued using prices reported by local foreign markets. Securities for which quotations are not readily available, or securities which may have been affected by a significant event after the price was determined, and other assets are valued at a fair value as determined by or under the direction of pricing committees established by the Board of Trustees. The Funds' net asset values are determined at the time of the close of the New York Stock Exchange. The pricing committees will evaluate movements in the U.S. markets after the close of foreign markets and may adjust security prices to reflect changes in reaction to U.S. markets as determined by a third party model. At March 31, 2005, the Funds held no securities for which quotations were not readily available, and no securities which may have been affected by a significant event prior to the computation of NAV. FOREIGN CURRENCY TRANSLATIONS-- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the mean of the bid and offer prices of such currencies at the time net asset value is determined. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. The Funds do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized gain and net realized loss from securities. Net realized gains or losses on foreign currency transactions arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding taxes recorded and the U.S. dollar equivalent of the amounts actually received or paid, and the realized gains or losses resulting from portfolio and transaction hedges. Net unrealized foreign exchange gains and losses arise from changes in the fair value of assets and liabilities, other than investments in securities at the period ending March 31, 2005, resulting from changes in exchange rates. 60 For the period ended March 31, 2005, net unrealized appreciation (depreciation)--other included the following components:
EQUITY AND INT'L INCOME GLOBAL INTERNATIONAL SMALL CAP ------------------------------------------------------------------------------------------------ Unrealized appreciation (depreciation) on interest, dividends and dividend reclaims receivable $ 129,165 $ 39,621 $ 94,648 $ 41,566 Unrealized appreciation (depreciation) on open securities purchases and sales 0 (3,510) (83,925) (4,135) ------------- ------------- ------------- ------------- Net Unrealized appreciation (depreciation)--Other $ 129,165 $ 36,111 $ 10,723 $ 37,431 ============= ============= ============= =============
FORWARD FOREIGN CURRENCY CONTRACTS-- The Funds' currency transactions are limited to transaction hedging and portfolio hedging involving either specific transactions or portfolio positions. The contractual amounts of forward foreign exchange contracts do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in currency values. At March 31, 2005, Global, International and Int'l Small Cap held the following outstanding forward foreign currency contracts: THE OAKMARK GLOBAL FUND
UNREALIZED CONTRACT SETTLEMENT VALUATION APPRECIATION/ AMOUNT DATE AT 03/31/05 DEPRECIATION ------------------------------------------------------------------------------------------------ FOREIGN CURRENCY SOLD: British Pound Sterling 47,900,000 July 2005 $ 90,078,193 $ (3,393,563) Swiss Franc 73,000,000 November 2005 62,044,978 918,624 ------------- ------------- $ 152,123,171 $ (2,474,939) ============= =============
THE OAKMARK INTERNATIONAL FUND
UNREALIZED CONTRACT SETTLEMENT VALUATION APPRECIATION/ AMOUNT DATE AT 03/31/05 DEPRECIATION -------------------------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD: British Pound Sterling 142,000,000 July 2005 $ 267,056,999 $ (11,045,199) British Pound Sterling 140,000,000 July 2005 263,276,556 (9,918,556) British Pound Sterling 65,000,000 November 2005 121,707,235 (1,795,235) British Pound Sterling 64,500,000 December 2005 120,744,206 1,831,594 British Pound Sterling 42,600,000 December 2005 79,743,400 1,631,120 Swiss Franc 302,000,000 November 2005 256,679,225 3,800,334 Swiss Franc 174,000,000 November 2005 147,900,642 2,553,314 Swiss Franc 129,400,000 November 2005 110,037,398 2,906,654 Swiss Franc 88,700,000 December 2005 75,524,143 3,636,946 ---------------- ------------- $ 1,442,669,804 $ (6,399,028) ================ =============
THE OAKMARK INTERNATIONAL SMALL CAP FUND
UNREALIZED CONTRACT SETTLEMENT VALUATION APPRECIATION/ AMOUNT DATE AT 03/31/05 DEPRECIATION -------------------------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD: British Pound Sterling 11,200,000 July 2005 $ 21,063,651 $ (871,172) British Pound Sterling 11,400,000 July 2005 21,438,234 (807,654) British Pound Sterling 4,700,000 November 2005 8,800,369 (129,809) British Pound Sterling 4,600,000 December 2005 8,611,215 130,625 British Pound Sterling 1,100,000 December 2005 2,059,102 42,118 Swiss Franc 53,500,000 November 2005 45,471,320 673,238 Swiss Franc 30,800,000 November 2005 26,180,114 451,966 Swiss Franc 23,700,000 November 2005 20,153,681 532,362 Swiss Franc 16,800,000 December 2005 14,304,460 688,847 ---------------- ------------- $ 168,082,146 $ 710,521 ================ =============
SECURITY TRANSACTIONS AND INVESTMENT INCOME-- Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on an accrual basis. Bond discount is accreted and premium is amortized over the expected life of each applicable security. Withholding taxes on foreign dividends have been provided for in accordance with the Funds' understanding of the applicable country's tax rules and rates. Corporate gains taxes on the appreciation of certain foreign securities have been accrued 61 for in accordance with the Funds' understanding of the applicable country's tax rules and rates, and are recorded as Deferred Foreign Tax Expense on the Statements of Operations. Net realized gains and losses on investments are determined by the specific identification method. DISTRIBUTIONS TO SHAREHOLDERS-- Income, dividends and capital gains distributions are determined in accordance with federal income tax regulations, which may differ from GAAP. Tax and book differences are primarily related to foreign currency transactions, deferral of losses on wash sales, and character of capital loss carryforwards. The Funds also utilize, when appropriate, earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. SHORT SALES-- Each Fund may sell a security it does not own in anticipation of a decline in the fair value of that security. When the Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. A gain, limited to the price at which the Fund sold the security short, or loss, unlimited in size, will be recognized upon the termination of a short sale. For the period ending March 31, 2005, the Funds had no short sales. ACCOUNTING FOR OPTIONS-- When a Fund writes an option, the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current market value of the option written. Premiums received from writing options that expire are recorded by the Fund on the expiration date as realized gains from option transactions. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund has realized a gain or a loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Fund. In writing an option, the Fund bears the market risk of an unfavorable change in the price of the security or currency underlying the written option. Exercise of an option written by the Fund could result in the Fund selling or buying a security or currency at a price different from the current market value. Options written by the Funds do not give rise to counterparty credit risk, as they obligate the Funds, not their counterparties, to perform. When a Fund purchases an option, the premium paid by the Fund is recorded as an asset and is subsequently adjusted to the current market value of the option purchased. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying security to determine the realized gain or loss. The risks associated with purchasing put and call options are potential loss of the premium paid and the failure of the counterparty to honor their portion of the contract. At March 31, 2005, the Funds had no outstanding options. COMMITTED LINE OF CREDIT-- The Funds have an unsecured committed line of credit with Investors Bank & Trust Company ("IBT") in the amount of $450 million. Borrowings under that arrangement bear interest at 0.45% above the Federal Funds Effective Rate. There were no borrowings during the period ended March 31, 2005. REPURCHASE AGREEMENTS-- Each Fund, through its custodian, receives delivery of the underlying securities collateralizing repurchase agreements. It is each Fund's policy that the market value of the collateral be at least equal to 105% of the repurchase price, including interest. The Fund's adviser is responsible for determining that the value of the collateral is at all times at least equal to 105% of the repurchase price, including interest. Repurchase agreements could involve certain risks in the event of default or insolvency of the counterparty including possible delays or restrictions upon a Fund's ability to dispose of the underlying securities. EXPENSE OFFSET ARRANGEMENT-- IBT serves as custodian of the Funds. IBT's fee may be reduced by credits which are an earnings allowance calculated on the average daily cash balances each Fund maintains with IBT. Credit balances used to reduce the Funds' custodian fees, if any, are reported as a reduction of total expenses in the Statements of Operations. SECURITY LENDING-- Each Fund except Oakmark Fund may lend its portfolio securities to broker-dealers and banks. Any such loan must be continuously secured by collateral in cash or cash equivalents maintained on a current basis in an amount at least equal to the fair value of the securities loaned by the Fund. Collateral is marked to market and monitored daily. The Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned, and would also receive an additional return that may be in the form of a fixed fee or a percentage of the earnings on the collateral. The Fund would have the right to call the loan and obtain the securities loaned at any time, and the counterparty shall return the securities within five business days or less. In the event of bankruptcy or other default of the borrower, the Fund could experience delays in liquidating the loan collateral or recovering the loaned securities and incur expenses related to enforcing its rights. In addition, there could be a decline in the value of the collateral or in the fair value of the securities loaned while the Fund seeks to enforce its rights thereto and the Fund could experience subnormal levels of income or lack of access to income during that period. At March 31, 2005, the Fund had no securities on loan. 62 RESTRICTED SECURITIES-- The following investments, the sales of which are restricted to qualified institutional buyers, have been valued according to the security valuation procedures for debt obligations and money market instruments (as stated in the Security valuation section) since their acquisition dates. There are no unrestricted securities with the same maturity dates and yields for these issuers. These securities are priced using market quotations and are not expressed as a discount to the carrying value of a comparable unrestricted security.
ACQUISITION CARRYING MARKET PERCENTAGE QUANTITY SECURITY NAME DATE VALUE COST VALUE OF TNA ----------------------------------------------------------------------------------------------------------------------------- 10,000,000 Cablevision Systems New York Group, 144A, 8.00% due 4/15/2012 3/31/2004 102.75 100.25 $ 10,275,000 0.12% 10,000,000 Cablevision Systems New York Group, 144A, 8.00% due 4/15/2012 4/1/2004 102.75 100.25 10,275,000 0.12% -------------------------- 20,550,000 0.24% 3,000,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2023 6/27/2003 101.1442 100.68 3,034,326 0.03% 5,000,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2023 8/20/2003 101.1442 96.41 5,057,210 0.06% 300,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2023 8/21/2003 101.1442 96.79 303,433 0.00% 11,700,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2023 4/6/2004 101.1442 103.31 11,833,871 0.13% -------------------------- 20,228,840 0.22% Aggregate Totals: $ 40,778,840 0.46%
2. TRANSACTIONS WITH AFFILIATES Each Fund has an investment advisory agreement with Harris Associates L.P. ("the Adviser"). For management services and facilities furnished, the Funds pay the Adviser monthly fees. Each fee is calculated on the total net assets as determined at the end of each preceding calendar month. Annual fee rates are as follows:
FUND ADVISORY FEES FUND ADVISORY FEES --------------------------------------------------------------------------------------------------------- Oakmark 1.00% up to $2 billion; Equity and Income 0.75% up to $5 billion; 0.90% on the next $1 billion; 0.70% on the next $2.5 billion; 0.80% on the next $2 billion; 0.675% on the next $2.5 billion; 0.75% on the next $2.5 billion; 0.65% on the next $2.5 billion; and 0.70% on the next $2.5 billion; and 0.60% over $12.5 billion 0.65% over 10 billion Select 1.00% up to $1 billion; Global 1.00% up to $2 billion; 0.95% on the next $500 million; 0.95% on the next $2 billion; and 0.90% on the next $500 million; 0.90% over $4 billion 0.85% on the next $500 million; 0.80% on the next $2.5 billion; International 1.00% up to $2 billion; 0.75% on the next $5 billion; and 0.95% on the next $1 billion; 0.725% over 10 billion 0.85% on the next $2 billion; 0.825% on the next $2.5 billion; and 0.815% over $7.5 billion; Int'l Small Cap 1.25% up to $500 million; 1.10% on the next $1 billion; and 1.05% over $1.5 billion;
63 The Adviser undertakes to reimburse each Fund Class to the extent, but only to the extent, that its annualized expenses (excluding taxes, interest, all commissions and other normal charges incident to the purchase and sale of portfolio securities, and extraordinary charges such as litigation costs, but including fees paid to the Adviser) exceed the percent set forth below of average daily net assets of the Fund Class through January 31, 2006.
FUND CLASS I CLASS II --------------------------------------------------------------------------- Oakmark 1.50% 1.75% Select 1.50 1.75 Equity & Income 1.00 1.25 Global 1.75 2.00 International 2.00 2.25 Int'l Small Cap 2.00 2.25
For the period ended March 31, 2005, the Funds incurred brokerage commissions, including commissions paid to an affiliate of the Adviser, as follows:
FUND TOTAL COMMISSIONS COMMISSIONS PAID TO AFFILIATES -------------------------------------------------------------------------------------------------- Oakmark $ 1,260,862 $ 144,892 Select 2,997,048 59,518 Equity and Income 3,529,889 38,562 Global 453,496 0 International 2,267,961 0 Int'l Small Cap 760,654 0
IXIS Asset Management Services Co., an affiliate of the Adviser, provides transfer agent services to the Funds. The fees are based on the number of open accounts and the reimbursement of out-of-pocket expenses. For the period ended March 31, 2005, the Funds incurred the following transfer agent expenses:
FUND TRANSFER AGENT FEES ------------------------------------------------------------------------ Oakmark $ 1,537,622 Select 771,131 Equity and Income 1,020,885 Global 256,847 International 580,755 Int'l Small Cap 121,674
The Adviser has entered into agreements financial intermediaries to provide recordkeeping, processing, shareholder communications and other services to the Funds. These services would be provided by the Funds if the shares were held in accounts registered directly with the Funds' transfer agent. Accordingly, the Funds pay a portion of these fees pursuant to a separate agreement with the Adviser. These fees are reflected as other shareholder servicing fees in the Statements of Operations. The non-interested Trustees of the Trust may participate in the Trust's Deferred Compensation Plan for Independent Trustees. Participants in the plan may elect to defer all or a portion of their compensation. Amounts deferred are retained by the Trust and represent an unfunded obligation of the Trust. The value of amounts deferred for a participant is determined by reference to the change in value of Class I shares of one or more of the Funds or a money market fund as specified by the participant. Benefits under the plan are payable upon retirement. The interested trustees are not compensated by the Funds. 64 3. FEDERAL INCOME TAXES It is the policy of each Fund to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required.
COST OF INVESTMENTS NET UNREALIZED FOR FEDERAL INCOME GROSS UNREALIZED GROSS UNREALIZED APPRECIATION FUND TAX PURPOSES APPRECIATION (DEPRECIATION) (DEPRECIATION) ------------------------------------------------------------------------------------------------- Oakmark $ 5,477,926,909 $ 1,457,373,014 $ (71,049,136) $ 1,386,323,878 Select 4,102,540,994 1,877,653,477 (15,075,218) 1,862,578,259 Equity and Income 7,647,420,627 1,183,059,146 (79,047,755) 1,104,011,391 Global 1,281,533,680 375,427,425 (6,925,821) 368,501,604 International 3,951,769,244 1,319,250,039 (5,249,870) 1,314,000,169 Int'l Small Cap 660,478,538 264,167,520 (5,080,483) 259,087,037
As of March 31, 2005, the net capital loss carryovers noted below are available to offset future realized capital gains and thereby reduce future taxable gains distributions.
FUND 2009 2010 2011 2012 TOTAL ------------------------------------------------------------------------------------------ Oakmark $ 31,111,848 $ 2,634,325 $ 27,893,934 $ 68,483,540 $ 130,123,647
For the period ended March 31, 2005, estimates of the components of distributable earnings on a tax basis are disclosed below. Interim tax calculations performed before the end of the fiscal year are not necessarily indicative of the year-end tax position of a Fund, nor are they indicative of distribution requirements. Undistributed income, gains, and losses can increase or decrease as each Fund conducts its operations.
UNDISTRIBUTED UNDISTRIBUTED LONG- TOTAL DISTRIBUTABLE FUND ORDINARY INCOME TERM GAIN EARNINGS ----------------------------------------------------------------------------------- Oakmark $ 32,425,065 $ 0 $ 32,425,065 Select 8,674,057 259,253,045 267,927,102 Equity and Income 38,762,611 8,687,115 47,449,726 Global 0 16,929,922 16,929,922 International 630,472 106,333,471 106,963,943 Int'l Small Cap 5,413,799 62,759,705 68,173,504
During the period ended March 31, 2005, the tax character of distributions paid was as follows:
DISTRIBUTIONS PAID DISTRIBUTIONS PAID FROM ORDINARY FROM LONG-TERM FUND INCOME CAPITAL GAIN ------------------------------------------------------------- Oakmark $ 29,130,276 $ 0 Select 42,138,425 0 Equity and Income 70,711,046 210,226,794 Global 7,195,993 25,739,670 International 60,835,092 12,575,394 Int'l Small Cap 11,229,305 15,549,000
65 4. INVESTMENT TRANSACTIONS For the period ended March 31, 2005, transactions in investment securities (excluding short term and U.S. Government securities) were as follows (in thousands):
EQUITY & INT'L OAKMARK SELECT INCOME GLOBAL INTERNATIONAL SMALL CAP ------------------------------------------------------------------------------------------------------------------- Purchases $ 568,648 $ 838,184 $ 1,980,228 $ 198,382 $ 616,871 $ 189,237 Proceeds from sales 592,904 921,213 1,789,007 106,195 347,764 156,233
Purchases at cost and proceeds from sales of long-term U.S. Government securities for the period ended March 31, 2005 were $3,473,744 and $3,463,176 respectively for Equity and Income. Transactions in written options during the period ended March 31, 2005, were as follows:
EQUITY AND INCOME ------------------------ NUMBER OF PREMIUMS CONTRACTS RECEIVED -------------------------------------------------------------------- Options outstanding at September 30, 2004 13,000 $ 948,977 Options expired (6,500) (521,987) Options exercised (6,500) (426,990) ---------- ---------- Options outstanding at March 31, 2005 0 $ 0
5. INVESTMENTS IN AFFILIATED ISSUERS An affiliated issuer, as defined under the Investment Company Act of 1940, is one in which the Trust's holdings of an issuer represent 5% or more of the outstanding voting securities of the issuer. A summary of each Fund's investments in securities of these issuers for the period ended March 31, 2005, is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK FUND
MARKET VALUE PURCHASES SALES DIVIDEND MARCH 31, AFFILIATES SHARES (COST) PROCEEDS INCOME 2005 -------------------------------------------------------------------------------------------------------------- H&R Block, Inc. 3,029,300 $ 0 $ 0 $ 1,332,892 $ 153,221,994 Toys 'R' Us, Inc.**+ 0 0 74,230,258 0 0 ------------- ------------- ------------- ------------- TOTALS $ 0 $ 74,230,258 $ 1,332,892 $ 153,221,994 ============= ============= ============= =============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SELECT FUND
MARKET VALUE PURCHASES SALES DIVIDEND MARCH 31, AFFILIATES SHARES (COST) PROCEEDS INCOME 2005 -------------------------------------------------------------------------------------------------------------- H&R Block, Inc. 8,259,800 $ 0 $ 9,870,355 $ 3,664,452 $ 417,780,684 The Dun & Bradstreet Corporation+ 3,934,900 0 0 0 241,799,605 Toys 'R' Us, Inc.**+ 0 0 275,921,973 0 0 ------------- ------------- ------------- ------------- TOTALS $ 0 $ 285,792,328 $ 3,664,452 $ 659,580,289 ============= ============= ============= =============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK EQUITY AND INCOME FUND
MARKET VALUE PURCHASES SALES DIVIDEND MARCH 31, AFFILIATES SHARES (COST) PROCEEDS INCOME 2005 -------------------------------------------------------------------------------------------------------------- Mentor Graphics Corporation+ * $ 0 $ 0 $ 0 $ * St. Mary Land & Exploration Company*** 1,450,000 0 0 72,500 72,572,500 ------------- ------------- ------------- ------------- TOTALS $ 0 $ 0 $ 72,500 $ 72,572,500 ============= ============= ============= =============
66 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK GLOBAL FUND
MARKET VALUE PURCHASES SALES DIVIDEND MARCH 31, AFFILIATES SHARES (COST) PROCEEDS INCOME 2005 ----------------------------------------------------------------------------------------------------------------- Euronext NV 1,814,000 $ 0 $ 0 $ 0 $ 64,540,882 Grupo Aeroportuario del Sureste S.A. de C.V. * 0 0 0 * Lonza Group AG, Registered Shares 710,400 0 0 0 43,472,062 Lotte Chilsung Beverage Co., Ltd. 13,430 0 0 25,790 13,278,211 Meitec Corporation 760,000 0 0 236,903 26,518,636 Michael Page International plc 4,815,400 0 0 0 17,652,876 Orbotech, Ltd.+ 412,700 0 0 0 9,038,130 ------------- ------------- ------------- ------------- TOTALS $ 0 $ 0 $ 262,693 $ 174,500,797 ============= ============= ============= =============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL FUND
MARKET VALUE PURCHASES SALES DIVIDEND MARCH 31, AFFILIATES SHARES (COST) PROCEEDS INCOME 2005 ----------------------------------------------------------------------------------------------------------------- Chargeurs SA 790,182 $ 0 $ 0 $ 0 $ 33,900,835 Enodis plc + 33,585,320 0 0 0 71,080,240 Euronext NV 5,012,500 2,015,107 0 0 178,341,329 Grupo Aeroportuario del Sureste S.A. de C.V.** 0 0 6,338,193 0 0 Lonza Group AG, Registered Shares 2,057,300 0 12,853,083 0 125,893,964 Lotte Chilsung Beverage Co., Ltd. 83,400 0 0 160,154 82,457,396 Meitec Corporation 2,483,800 14,989,812 0 768,412 86,667,090 Michael Page International plc 25,698,900 6,582,097 0 0 94,210,137 Orbotech, Ltd.+ 1,237,700 0 0 0 27,105,630 ------------- ------------- ------------- ------------- TOTALS $ 23,587,016 $ 19,191,276 $ 928,566 $ 699,656,621 ============= ============= ============= =============
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INT'L SMALL CAP FUND
MARKET VALUE PURCHASES SALES DIVIDEND MARCH 31, AFFILIATES SHARES (COST) PROCEEDS INCOME 2005 ----------------------------------------------------------------------------------------------------------------- Alaska Milk Corporation 56,360,000 $ 363,857 $ 0 $ 143,138 $ 3,805,329 Grupo Aeroportuario del Sureste S.A. de C.V. * 0 27,035,150 0 * Gurit-Heberlein AG 36,075 0 0 0 26,916,015 Interpump Group S.p.A. 5,326,600 8,215,797 0 0 28,299,794 Mainfreight Limited 7,816,058 0 2,011,738 223,957 14,738,018 Matichon Public Company Limited, Foreign Shares 2,039,500 0 0 0 3,545,143 Morse 10,548,500 2,144,859 0 625,809 21,427,946 Orbotech, Ltd.+ 499,300 10,371,360 0 0 10,934,670 Royal Doulton plc** 0 0 5,020,783 0 0 ------------- ------------- ------------- ------------- TOTALS $ 21,095,873 $ 34,067,671 $ 992,904 $ 109,666,915 ============= ============= ============= =============
* Due to transactions during the period, the company is no longer an affiliated security. ** Position in issuer liquidated during the 6 months. *** Due to a decrease in shares outstanding, the company became an affiliated issuer. + Non-income producing security. 67 THE OAKMARK FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 ---------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 38.68 $ 33.85 $ 28.08 Income From Investment Operations: Net Investment Income 0.20 0.16 0.13 Net Gains (Losses) on Investments (both realized and unrealized) 2.14 4.81 5.75 ------------- ------------- ------------- Total From Investment Operations: 2.34 4.97 5.88 Less Distributions: Dividends (from net investment income) (0.17) (0.14) (0.11) Distributions (from capital gains) 0.00 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.17) (0.14) (0.11) ------------- ------------- ------------- Redemption Fee Per Share 0.00(a) 0.00(a) -- Net Asset Value, End of Period $ 40.85 $ 38.68 $ 33.85 ============= ============= ============= Total Return 6.05% 14.73% 20.99% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 6,904.9 $ 6,474.0 $ 4,769.4 Ratio of Expenses to Average Net Assets 1.03%* 1.05% 1.14% Ratio of Net Investment Income to Average Net Assets 1.01%* 0.47% 0.48% Portfolio Turnover Rate 9% 19% 21% YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 32.01 $ 26.95 $ 34.37 Income From Investment Operations: Net Investment Income 0.12 0.07 0.49 Net Gains (Losses) on Investments (both realized and unrealized) (3.85) 5.38 (2.91) ------------- ------------- ------------- Total From Investment Operations: (3.73) 5.45 (2.42) Less Distributions: Dividends (from net investment income) (0.20) (0.39) (0.26) Distributions (from capital gains) 0.00 0.00 (4.74) ------------- ------------- ------------- Total Distributions (0.20) (0.39) (5.00) ------------- ------------- ------------- Redemption Fee Per Share -- -- -- Net Asset Value, End of Period $ 28.08 $ 32.01 $ 26.95 ============= ============= ============= Total Return (11.77)% 20.42% (7.55)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 3,300.9 $ 3,109.1 $ 2,038.7 Ratio of Expenses to Average Net Assets 1.17% 1.15% 1.21% Ratio of Net Investment Income to Average Net Assets 0.38% 0.73% 1.42% Portfolio Turnover Rate 44% 57% 50%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 -------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 38.45 $ 33.68 $ 28.04 Income From Investment Operations: Net Investment Income 0.15 0.04(c) 0.05 Net Gains (Losses) on Investments (both realized and unrealized) 2.12 4.78 5.69 ------------- ------------- ------------- Total From Investment Operations: 2.27 4.82 5.74 Less Distributions: Dividends (from net investment income) (0.07) (0.05) (0.10) Distributions (from capital gains) 0.00 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.07) (0.05) (0.10) Net Asset Value, End of Period $ 40.65 $ 38.45 $ 33.68 ============= ============= ============= Total Return 5.91% 14.32% 20.52% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 65.9 $ 51.9 $ 21.1 Ratio of Expenses to Average Net Assets 1.26%* 1.40% 1.53% Ratio of Net Investment Income to Average Net Assets 0.79%* 0.11% 0.06% Portfolio Turnover Rate 9% 19% 21% APRIL 5, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 2002 2001 (b) ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 31.97 $ 32.09 Income From Investment Operations: Net Investment Income 0.16 0.05 Net Gains (Losses) on Investments (both realized and unrealized) (3.92) (0.17) ------------- ------------- Total From Investment Operations: (3.76) (0.12) Less Distributions: Dividends (from net investment income) (0.17) 0.00 Distributions (from capital gains) 0.00 0.00 ------------- ------------- Total Distributions (0.17) 0.00 Net Asset Value, End of Period $ 28.04 $ 31.97 ============= ============= Total Return (11.85)% (0.37)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 7.7 $ 0.1 Ratio of Expenses to Average Net Assets 1.44% 1.32%* Ratio of Net Investment Income to Average Net Assets 0.35% 0.46%* Portfolio Turnover Rate 44% 57%
* Data has been annualized. (a) Amount rounds to less than $0.01 (b) The date on which Class II shares were first sold to the public was April 5, 2001. (c) Computed using average shares outstanding throughout the period. 68 THE OAKMARK SELECT FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 ---------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 31.20 $ 27.55 $ 21.67 Income From Investment Operations: Net Investment Income 0.18 0.15(a) 0.05 Net Gains (Losses) on Investments (both realized and unrealized) 2.25 3.60 5.85 ------------- ------------- ------------- Total From Investment Operations: 2.43 3.75 5.90 Less Distributions: Dividends (from net investment income) (0.24) (0.10) (0.02) Distributions (from capital gains) 0.00 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.24) (0.10) (0.02) ------------- ------------- ------------- Redemption Fee Per Share 0.00(b) 0.00(b) -- Net Asset Value, End of Period $ 33.39 $ 31.20 $ 27.55 ============= ============= ============= Total Return 7.82% 13.64% 27.25% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 5,874.4 $ 5,463.0 $ 4,993.0 Ratio of Expenses to Average Net Assets 1.00%* 1.00% 1.02% Ratio of Net Investment Income to Average Net Assets 1.10%* 0.50% 0.23% Portfolio Turnover Rate 16% 14% 20% YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 25.20 $ 21.45 $ 20.92 Income From Investment Operations: Net Investment Income 0.02 0.03 0.13 Net Gains (Losses) on Investments (both realized and unrealized) (3.50) 5.17 4.32 ------------- ------------- ------------- Total From Investment Operations: (3.48) 5.20 4.45 Less Distributions: Dividends (from net investment income) (0.05) (0.09) (0.20) Distributions (from capital gains) 0.00 (1.36) (3.72) ------------- ------------- ------------- Total Distributions (0.05) (1.45) (3.92) ------------- ------------- ------------- Redemption Fee Per Share -- -- -- Net Asset Value, End of Period $ 21.67 $ 25.20 $ 21.45 ============= ============= ============= Total Return (13.85)% 25.75% 24.53% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 3,717.6 $ 4,161.4 $ 1,772.0 Ratio of Expenses to Average Net Assets 1.07% 1.08% 1.17% Ratio of Net Investment Income to Average Net Assets 0.09% 0.26% 0.76% Portfolio Turnover Rate 32% 21% 69%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 --------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 31.00 $ 27.37 $ 21.56 Income From Investment Operations: Net Investment Income (Loss) 0.14 0.09(a) 0.00(b) Net Gains (Losses) on Investments (both realized and unrealized) 2.24 3.58 5.81 ------------- ------------- ------------- Total From Investment Operations: 2.38 3.67 5.81 Less Distributions: Dividends (from net investment income) (0.15) (0.04) 0.00 Distributions (from capital gains) 0.00 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.15) (0.04) 0.00 Net Asset Value, End of Period $ 33.23 $ 31.00 $ 27.37 ============= ============= ============= Total Return 7.68% 13.40% 26.95% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 96.3 $ 98.0 $ 93.1 Ratio of Expenses to Average Net Assets 1.26%* 1.21% 1.29% Ratio of Net Investment Income (Loss) to Average Net Assets 0.85%* 0.29% (0.04)% Portfolio Turnover Rate 16% 14% 20% DECEMBER 31, 1999 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 (c) -------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 25.10 $ 21.40 $ 18.42 Income From Investment Operations: Net Investment Income (Loss) (0.04) 0.00(b) 0.10 Net Gains (Losses) on Investments (both realized and unrealized) (3.50) 5.10 2.88 ------------- ------------- ----------------- Total From Investment Operations: (3.54) 5.10 2.98 Less Distributions: Dividends (from net investment income) 0.00 (0.06) 0.00 ------------- (1.34) 0.00 Distributions (from capital gains) 0.00 ------------- ----------------- Total Distributions 0.00 (1.40) 0.00 Net Asset Value, End of Period $ 21.56 $ 25.10 $ 21.40 ============= ============= ================= Total Return (14.10)% 25.28% 16.18% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 64.4 $ 35.4 $ 6.8 Ratio of Expenses to Average Net Assets 1.36% 1.40% 1.41%* Ratio of Net Investment Income (Loss) to Average Net Assets 0.29% (0.08)% 0.59%* Portfolio Turnover Rate 32% 21% 69%
* Data has been annualized. (a) Computed using average shares outstanding throughout the period. (b) Amount rounds to less than $0.01 per share. (c) The date on which Class II shares were first sold to the public was December 31, 1999. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 69 THE OAKMARK EQUITY AND INCOME FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 --------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 23.12 $ 20.30 $ 17.18 Income From Investment Operations: Net Investment Income 0.14 0.15 0.17 Net Gains (Losses) on Investments (both realized and unrealized) 0.88 2.81 3.19 ------------- ------------- ------------- Total From Investment Operations: 1.02 2.96 3.36 Less Distributions: Dividends (from net investment income) (0.20) (0.14) (0.24) Distributions (from capital gains) (0.59) 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.79) (0.14) (0.24) ------------- ------------- ------------- Redemption Fee Per Share 0.00(b) 0.00(b) -- Net Asset Value, End of Period $ 23.35 $ 23.12 $ 20.30 ============= ============= ============= Total Return 4.44% 14.64% 19.75% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 8,187.9 $ 7,577.9 $ 4,138.0 Ratio of Expenses to Average Net Assets 0.91%* 0.92% 0.93% Ratio of Net Investment Income to Average Net Assets 1.21%* 0.78% 1.07% Portfolio Turnover Rate 66% 72% 48% YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 17.45 $ 16.50 $ 15.68 Income From Investment Operations: Net Investment Income 0.33(a) 0.08 0.35 Net Gains (Losses) on Investments (both realized and unrealized) (0.40) 2.11 2.28 ------------- ------------- ------------- Total From Investment Operations: (0.07) 2.19 2.63 Less Distributions: Dividends (from net investment income) (0.16) (0.24) (0.45) Distributions (from capital gains) (0.04) (1.00) (1.36) ------------- ------------- ------------- Total Distributions (0.20) (1.24) (1.81) ------------- ------------- ------------- Redemption Fee Per Share -- -- -- Net Asset Value, End of Period $ 17.18 $ 17.45 $ 16.50 ============= ============= ============= Total Return (0.47)% 14.40% 18.51% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 2,241.9 $ 620.1 $ 54.5 Ratio of Expenses to Average Net Assets 0.96% 0.98% 1.24% Ratio of Net Investment Income to Average Net Assets 1.71% 2.07% 3.04% Portfolio Turnover Rate 73% 124% 87%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 --------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 23.03 $ 20.24 $ 17.15 Income From Investment Operations: Net Investment Income 0.10 0.11 0.16 Net Gains (Losses) on Investments (both realized and unrealized) 0.88 2.79 3.15 ------------- ------------- ------------- Total From Investment Operations: 0.98 2.90 3.31 Less Distributions: Dividends (from net investment income) (0.15) (0.11) (0.22) Distributions (from capital gains) (0.59) 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.74) (0.11) (0.22) Net Asset Value, End of Period $ 23.27 $ 23.03 $ 20.24 ============= ============= ============= Total Return 4.28% 14.36% 19.46% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 619.7 $ 478.7 $ 246.6 Ratio of Expenses to Average Net Assets 1.15%* 1.17% 1.17% Ratio of Net Investment Income to Average Net Assets 0.96%* 0.53% 0.84% Portfolio Turnover Rate 66% 72% 48% JULY 13, 2000 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 (c) ------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 17.40 $ 16.49 $ 15.51 Income From Investment Operations: Net Investment Income 0.30(a) 0.07 0.30 Net Gains (Losses) on Investments (both realized and unrealized) (0.40) 2.08 0.68 ------------- ------------- ------------- Total From Investment Operations: (0.10) 2.15 0.98 Less Distributions: Dividends (from net investment income) (0.11) (0.24) 0.00 Distributions (from capital gains) (0.04) (1.00) 0.00 ------------- ------------- ------------- Total Distributions (0.15) (1.24) 0.00 Net Asset Value, End of Period $ 17.15 $ 17.40 $ 16.49 ============= ============= ============= Total Return (0.60)% 14.07% 6.32% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 118.7 $ 3.3 $ 0.4 Ratio of Expenses to Average Net Assets 1.20% 1.23% 1.32%* Ratio of Net Investment Income to Average Net Assets 1.50% 1.95% 2.59%* Portfolio Turnover Rate 73% 124% 87%
* Data has been annualized. (a) Computed using average shares outstanding throughout the period. (b) Amount rounds to less than $0.01 per share. (c) The date on which Class II shares were first sold to the the public was July 13, 2000. 70 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 -------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 19.73 $ 16.98 $ 11.30 Income From Investment Operations: Net Investment Income 0.00(a) 0.09 0.01 Net Gains (Losses) on Investments (both realized and unrealized) 2.68 2.71 5.67 ------------- ------------- ------------- Total From Investment Operations: 2.68 2.80 5.68 Less Distributions: Dividends (from net investment income) (0.10) 0.00(a) 0.00 Distributions (from capital gains) (0.37) (0.05) 0.00 ------------- ------------- ------------- Total Distributions (0.47) (0.05) 0.00 ------------- ------------- ------------- Redemption Fee Per Share 0.00(a) 0.00(a) -- Net Asset Value, End of Period $ 21.94 $ 19.73 $ 16.98 ============= ============= ============= Total Return 13.67% 16.54% 50.27% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 1,612.8 $ 1,336.3 $ 704.8 Ratio of Expenses to Average Net Assets 1.22%* 1.26% 1.28% Ratio of Net Investment Income (Loss) to Average Net Assets 0.06%* 0.47% 0.00%(d) Portfolio Turnover Rate 7% 16% 42% YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 ------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 10.83 $ 10.91 $ 9.18 Income From Investment Operations: Net Investment Income 0.00(a)(b) 0.03 0.11 Net Gains (Losses) on Investments (both realized and unrealized) 0.76(c) 0.12 1.63 ------------- ------------- ------------- Total From Investment Operations: 0.76 0.15 1.74 Less Distributions: Dividends (from net investment income) 0.00 (0.17) (0.01) Distributions (from capital gains) (0.29) (0.06) 0.00 ------------- ------------- ------------- Total Distributions (0.29) (0.23) (0.01) ------------- ------------- ------------- Redemption Fee Per Share -- -- -- Net Asset Value, End of Period $ 11.30 $ 10.83 $ 10.91 ============= ============= ============= Total Return 6.84% 1.37% 18.97% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 175.6 $ 48.2 $ 27.2 Ratio of Expenses to Average Net Assets 1.55% 1.75%(e) 1.75%(e) Ratio of Net Investment Income (Loss) to Average Net Assets (0.01)% 0.00(e) 0.54%(e) Portfolio Turnover Rate 86% 114% 147%
* Data has been annualized. (a) Amount rounds to less than $0.01 per share. (b) Computed using average shares outstanding throughout the period. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating net asset value per share of the class. (d) Amount rounds to less than 0.01%. (e) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Advisers, ratios would have been as follows:
SEPTEMBER 30, SEPTEMBER 30, 2001 2000 -------------------------------------------------------------------------------- Ratio of Expenses to Average Net Assets 1.80% 1.96% Ratio of Net Income (Loss) to Average Net Assets (0.05)% 0.34%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 71 FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED OCTOBER 10, 2001 MARCH 31, YEAR ENDED YEAR ENDED THROUGH 2005 SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 2002 (a) -------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 19.53 $ 16.84 $ 11.24 $ 11.25 Income From Investment Operations: Net Investment Income (Loss) (0.01) 0.05 0.02 (0.03) Net Gains (Losses) on Investments (both realized and unrealized) 2.63 2.69 5.58 0.31(b) ------------- ------------- ------------- ---------------- Total From Investment Operations: 2.62 2.74 5.60 0.28 Less Distributions: Dividends (from net investment income) (0.07) 0.00 0.00 0.00 Distributions (from capital gains) (0.37) (0.05) 0.00 (0.29) ------------- ------------- ------------- ---------------- Total Distributions (0.44) (0.05) 0.00 (0.29) Net Asset Value, End of Period $ 21.71 $ 19.53 $ 16.84 $ 11.24 ============= ============= ============= ================ Total Return 13.50% 16.32% 49.82% 2.31% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 40.5 $ 24.7 $ 5.8 $ 0.6 Ratio of Expenses to Average Net Assets 1.46%* 1.50% 1.46% 1.86%* Ratio of Net Investment Income (Loss) to Average Net Assets (0.15)%* 0.37% (0.01)% (0.26)%* Portfolio Turnover Rate 7% 16% 42% 86%
* Data has been annualized. (a) The date on which Class II shares were first offered for sale to the public was October 10, 2001. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating net asset value per share of the class. 72 THE OAKMARK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 --------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.98 $ 15.67 $ 12.17 Income From Investment Operations: Net Investment Income 0.04 0.24 0.11 Net Gains (Losses) on Investments (both realized and unrealized) 2.88 3.18 3.52 ------------- ------------- ------------- Total From Investment Operations: 2.92 3.42 3.63 Less Distributions: Dividends (from net investment income) (0.27) (0.11) (0.13) Distributions (from capital gains) (0.05) 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.32) (0.11) (0.13) ------------- ------------- ------------- Redemption Fee Per Share 0.00(a) 0.00(a) -- Net Asset Value, End of Period $ 21.58 $ 18.98 $ 15.67 ============= ============= ============= Total Return 15.47% 21.92% 29.97% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 4,919.9 $ 4,036.9 $ 2,676.6 Ratio of Expenses to Average Net Assets 1.14%* 1.20% 1.25% Ratio of Net Investment Income to Average Net Assets 0.39%* 1.40% 1.03% Portfolio Turnover Rate 7% 21% 34% YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 ----------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 12.51 $ 15.40 $ 13.95 Income From Investment Operations: Net Investment Income 0.14 0.20 1.02 Net Gains (Losses) on Investments (both realized and unrealized) (0.31) (2.07) 0.92 ------------- ------------- ------------- Total From Investment Operations: (0.17) (1.87) 1.94 Less Distributions: Dividends (from net investment income) (0.17) (0.51) (0.49) Distributions (from capital gains) 0.00 (0.51) 0.00 ------------- ------------- ------------- Total Distributions (0.17) (1.02) (0.49) ------------- ------------- ------------- Redemption Fee Per Share -- -- -- Net Asset Value, End of Period $ 12.17 $ 12.51 $ 15.40 ============= ============= ============= Total Return (1.53)% (13.10)% 14.27% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 1,393.8 $ 738.5 $ 782.4 Ratio of Expenses to Average Net Assets 1.31% 1.30% 1.30% Ratio of Net Investment Income to Average Net Assets 1.34% 1.40% 1.87% Portfolio Turnover Rate 24% 58% 64%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 ------------------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period $ 18.86 $ 15.58 $ 12.13 Income From Investment Operations: Net Investment Income 0.02 0.18 0.08 Net Gains (Losses) on Investments (both realized and unrealized) 2.86 3.16 3.48 ------------- ------------- ------------- Total From Investment Operations: 2.88 3.34 3.56 Less Distributions: Dividends (from net investment income) (0.22) (0.06) (0.11) Distributions (from capital gains) (0.05) 0.00 0.00 ------------- ------------- ------------- Total Distributions (0.27) (0.06) (0.11) Net Asset Value, End of Period $ 21.47 $ 18.86 $ 15.58 ============= ============= ============= Total Return 15.35% 21.52% 29.52% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 345.6 $ 259.2 $ 123.2 Ratio of Expenses to Average Net Assets 1.39%* 1.53% 1.67% Ratio of Net Investment Income to Average Net Assets 0.16%* 1.18% 0.69% Portfolio Turnover Rate 7% 21% 34% NOVEMBER 4, 1999 YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 (b) -------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 12.47 $ 15.37 $ 14.36 Income From Investment Operations: Net Investment Income 0.15 0.17 0.96 Net Gains (Losses) on Investments (both realized and unrealized) (0.37) (2.10) 0.54 ------------- ------------- ---------------- Total From Investment Operations: (0.22) (1.93) 1.50 Less Distributions: Dividends (from net investment income) (0.12) (0.49) (0.49) Distributions (from capital gains) 0.00 (0.48) 0.00 ------------- ------------- ---------------- Total Distributions (0.12) (0.97) (0.49) Net Asset Value, End of Period $ 12.13 $ 12.47 $ 15.37 ============= ============= ================ Total Return (1.76)% (13.44)% 10.79% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 48.5 $ 1.9 $ 0.1 Ratio of Expenses to Average Net Assets 1.58% 1.64% 1.50%* Ratio of Net Investment Income to Average Net Assets 1.33% 0.62% 1.98%* Portfolio Turnover Rate 24% 58% 64%
* Data has been annualized. (a) Amount rounds to less than $0.01 per share. (b) The date on which Class II shares were first sold to the public was November 4, 1999. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 73 THE OAKMARK INTERNATIONAL SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 --------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.26 $ 13.74 $ 10.17 Income From Investment Operations: Net Investment Income 0.02 0.11 0.11 Net Gains (Losses) on Investments (both realized and unrealized) 3.49 4.52 3.82 ------------- ------------- --------------- Total From Investment Operations: 3.51 4.63 3.93 Less Distributions: Dividends (from net investment income) (0.27) (0.12) (0.09) Distributions (from capital gains) (0.38) 0.00 (0.27) ------------- ------------- --------------- Total Distributions (0.65) (0.12) (0.36) ------------- ------------- --------------- Redemption Fee Per Share 0.00(d) 0.01 -- Net Asset Value, End of Period $ 21.12 $ 18.26 $ 13.74 ============= ============= =============== Total Return 19.58% 33.94% 39.78% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 927.6 $ 734.1 $ 477.8 Ratio of Expenses to Average Net Assets 1.43%* 1.49% 1.57% Ratio of Net Investment Income to Average Net Assets 0.15%* 0.72% 0.99% Portfolio Turnover Rate 19% 29% 30% YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2002 2001 2000 ------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 10.00 $ 11.51 $ 12.64 Income From Investment Operations: Net Investment Income 0.11 0.13 0.23 Net Gains (Losses) on Investments (both realized and unrealized) 0.36(a) (0.81) (0.66) ------------- ------------- ------------- Total From Investment Operations: 0.47 (0.68) (0.43) Less Distributions: Dividends (from net investment income) (0.16) (0.34) (0.11) Distributions (from capital gains) (0.14) (0.49) (0.59) ------------- ------------- ------------- Total Distributions (0.30) (0.83) (0.70) ------------- ------------- ------------- Redemption Fee Per Share -- -- -- Net Asset Value, End of Period $ 10.17 $ 10.00 $ 11.51 ============= ============= ============= Total Return 4.68% (6.18)% (3.44)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 357.7 $ 118.9 $ 90.3 Ratio of Expenses to Average Net Assets 1.64% 1.74% 1.77% Ratio of Net Investment Income to Average Net Assets 1.28% 1.83% 1.99% Portfolio Turnover Rate 42% 49% 40%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
PERIOD ENDED MARCH 31, YEAR ENDED YEAR ENDED 2005 SEPTEMBER 30, SEPTEMBER 30, (UNAUDITED) 2004 2003 ------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.25 $ 13.69 $ 10.14 Income From Investment Operations: Net Investment Income 0.01 0.13 0.08 Net Gains (Losses) on Investments (both realized and unrealized) 3.48 4.52 3.81 ------------- ------------- -------------- Total From Investment Operations: 3.49 4.65 3.89 Less Distributions: Dividends (from net investment income) (0.26) (0.09) (0.07) Distributions (from capital gains) (0.38) 0.00 (0.27) ------------- ------------- -------------- Total Distributions (0.64) (0.09) (0.34) Net Asset Value, End of Period $ 21.10 $ 18.25 $ 13.69 ============= ============= ============== Total Return 19.49% 34.11% 39.39% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.6 $ 0.5 $ 0.4 Ratio of Expenses to Average Net Assets 1.51%* 1.39% 1.81% Ratio of Net Investment Income to Average Net Assets 0.09%* 0.75% 0.72% Portfolio Turnover Rate 19% 29% 30% JANUARY 8, 2001 YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, 2002 2001 (b) --------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 9.97 $ 10.73 Income From Investment Operations: Net Investment Income 0.13(c) 0.15 Net Gains (Losses) on Investments (both realized and unrealized) 0.30(a) (0.91) ------------- --------------- Total From Investment Operations: 0.43 (0.76) Less Distributions: Dividends (from net investment income) (0.12) 0.00 Distributions (from capital gains) (0.14) 0.00 ------------- --------------- Total Distributions (0.26) 0.00 Net Asset Value, End of Period $ 10.14 $ 9.97 ============= =============== Total Return 4.25% (7.08)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.3 $ 0.0 Ratio of Expenses to Average Net Assets 1.87% 1.97%* Ratio of Net Investment Income to Average Net Assets 1.06% 1.76%* Portfolio Turnover Rate 42% 49%
* Data has been annualized. (a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemption of Fund shares in relation to the fluctuating net asset value per share of the class. (b) The date on which Class II shares were first sold to the public was January 8, 2001. (c) Computed using average shares outstanding throughout the period. (d) Amount rounds to less than $0.01. 74 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. 75 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. The Price-Earnings Ratio ("P/E") is the most common measure of the expensiveness of a stock. 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. EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding. 8. The S&P MidCap 400 is an unmanaged broad market-weighted index of 400 stocks that are in the next tier down from the S&P 500 and that are chosen for market size, liquidity, and industry group representation. This index is unmanaged and investors cannot actually make investments in this index. 9. The Lipper Mid Cap Value Fund Index measures the performance of the 30 largest U.S. mid-cap value funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 10. The Lipper Balanced Fund Index measures the performance of the 30 largest U.S. balanced funds tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index. 11. Lehman Brothers Government/Corporate Bond Index is a benchmark index made up of the Lehman Brothers Government and Corporate Bond indexes, including U.S. government Treasury and agency securities as well as corporate and Yankee bonds. This index is unmanaged and investors cannot actually make investments in this index. 12. The NASDAQ Composite Index is a market value weighted index of all common stocks listed on NASDAQ. This index is unmanaged and investors cannot actually make investments in this index. 13. 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. 14. 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. 15. 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. 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. 76 DISCLOSURE REGARDING THE BOARD OF TRUSTEES' APPROVAL OF THE INVESTMENT ADVISORY CONTRACT FOR EACH OF THE OAKMARK FUNDS Members of the board of trustees of The Oakmark Funds (the "Board"), over seventy-five percent of whom are not affiliated with the Funds' adviser ("Independent Trustees"), and the Board's committee on management contracts (the "Committee"), which is comprised solely of Independent Trustees, met numerous times over the course of nine months to consider each Fund's investment advisory contract. At each of those meetings, the Committee was advised by, and met in executive session with, independent legal counsel. The Committee and the other Independent Trustees received and reviewed a substantial amount of information provided by the Funds' adviser (the "Adviser") and third parties in response to the Committee's requests. Based on its evaluation of that information and other information, the Board, including a majority of the Independent Trustees, at a meeting held on October 28, 2004, approved continuation of the investment advisory agreement for each Fund for a period through October 31, 2005. In considering the contracts and reaching its conclusions, the Board reviewed and analyzed various factors that it determined were relevant, including each of the factors described below. 1. NATURE, EXTENT AND QUALITY OF SERVICES The Board's analysis of the nature, extent and quality of the Adviser's services to the Funds took into account the knowledge gained from the Board's regular meetings with management throughout the prior year. In addition, the Board reviewed the Adviser's resources and key personnel involved in providing investment management services to the Funds, including the time that investment personnel devote to each Fund and the breadth and quality of their in-house research. The Board also considered the Adviser's performance of other services for each Fund, such as selecting broker-dealers for executing portfolio transactions, serving as the Fund's administrator, monitoring adherence to the Fund's investment restrictions, producing shareholder reports, providing support services for the Board and Board committees and overseeing the activities of other service providers, including monitoring compliance with various Fund policies and procedures and with applicable securities laws and regulations. The Board concluded that the nature, extent and quality of the services provided by the Adviser to each Fund were appropriate and that each Fund was likely to continue to benefit from services provided under its contract with the Adviser. 2. INVESTMENT PERFORMANCE OF THE ADVISER AND THE FUND In considering the performance of each Fund and the Adviser, the Board reviewed information provided by Lipper Inc. ("Lipper"), an independent data service provider. Lipper was commissioned by the Board to prepare a study comparing each Fund's performance and expenses with those of the Fund's peers and of the Lipper universe of similar funds. A representative from Lipper attended a meeting of the Committee to present the information and respond to questions from the Committee members. Regarding Fund performance, Lipper ranked four of the six Oakmark Funds in the top quintile versus their respective peers for total return for the one-, three- and five-year periods ended March 31, 2004, as applicable. Of the two remaining Funds, the Select Fund was in the top quintile for each of the periods except the one-year period, and the Oakmark Fund was at or above the middle quintile for each period except the one-year period. The Board considered the Adviser's representation that the relative performance of those two Funds reflected the Adviser's strict "value" investment philosophy, which also was responsible for the Funds' stronger relative long-term performance. In addition to comparing each Fund's performance to that of its peers, the Board also considered the performance of other funds advised or sub-advised by the Adviser. After considering all of the information, the Board concluded that, although past performance cannot be a guarantee of future performance, the Funds and their shareholders were benefiting from the Adviser's investment management of each Fund. 3. COSTS OF SERVICES PROVIDED AND PROFITS REALIZED BY THE ADVISER The Board examined the fee and expense information for each Fund as compared to that of other comparable funds and noted that the information provided by Lipper indicated that the Adviser's management fees, as a percentage of average net assets, varied from the second to the fifth quintile of management fees (the first quintile reflecting the lowest fees) within a group of mutual funds of similar size, character and investment strategy. The Board also evaluated the expense ratios for comparable funds and determined that five of the six Funds' expense ratios were at or near the median and the Oakmark Fund was in the fifth quintile of 77 expense ratios. Although the management fees and expense ratio of the Oakmark Fund were somewhat higher than the median figures for its peer group, the Board noted that the Fund's management fee as a percentage of average net assets and its total expense ratio were at their lowest points since the inception of the Fund in 1991. The Board also reviewed the Adviser's management fees for its institutional separate accounts and for its subadvised funds (funds for which the Adviser provides portfolio management services only). In most instances sub-advisory and institutional separate account fees are lower than each Fund's management fee. However, the Board noted that the Adviser performs significant additional services for the Funds that it does not provide to those other clients, including administrative services, oversight of the Funds' other service providers, trustee support, risk management, regulatory compliance and numerous other services. In addition, the Board reviewed Lipper's report on the mutual fund industry's subadvisory arrangements. That report compared the fees paid for subadvisory portfolio management services to the total management fees paid by mutual fund shareholders to an adviser. The Board also considered the Adviser's costs in serving as the Fund's investment adviser and manager, including costs associated with the personnel and systems necessary to manage the Funds. Finally, the Board considered the pre-tax profits realized by the Adviser and its affiliates from their relationship with each Fund, as well as the financial condition of the Adviser. The Board concluded that the management fee, as well as the total expenses paid by each Fund to the Adviser and its affiliates, were reasonable in light of the services provided and the performance of each Fund achieved by the Adviser over various time periods, and that the other expenses of each Fund were also reasonable. 4. ECONOMIES OF SCALE AND FEE LEVELS REFLECTING THOSE ECONOMIES The Board considered the extent to which each Fund's management fee reflected economies of scale for the benefit of Fund shareholders. The Board reviewed each Fund's advisory arrangement, which includes breakpoints that decrease the management fee rate as the Fund's assets increase. In October 2003, in view of the increasing assets of Equity and Income Fund and Global Fund and the resulting economies of scale, the Board negotiated breakpoints to the advisory contracts for those Funds. In 2004, the Independent Trustees negotiated additional breakpoints to the advisory contracts for Oakmark Fund, Select Fund, Equity and Income Fund, International Fund and International Small Cap Fund. Based on its review and negotiations, the Board concluded that each Fund's management fee structure allowed shareholders to benefit from economies of scale as Fund assets increase. 5. BENEFITS DERIVED FROM THE RELATIONSHIP WITH THE FUNDS The Board also considered benefits that accrue to the Adviser and its affiliates from their relationship with the Funds. The Board recognized that two affiliates of the Adviser serve the Funds as transfer agent and distributor and that the transfer agent receives compensation from the Funds for its services to the Funds. The Board considered that those services have been provided to the Funds pursuant to written agreements with the affiliates and that the Board evaluated and approved each agreement annually or biennially. The Board also considered the Adviser's use of commissions paid by the Funds on their portfolio brokerage transactions to obtain research products and services benefiting the Funds and/or other clients of the Adviser. The Board concluded that the Adviser's use of "soft" commission dollars to obtain research products and services were consistent with regulatory requirements and benefited the Funds. The Board also considered the brokerage commissions paid by the Funds to Harris Associates Securities L.P., the Adviser's affiliated broker-dealer. The Board concluded, based on its quarterly review of affiliated brokerage and on additional information it received from the Adviser, that the Adviser's use of an affiliated broker to execute portfolio transactions for the Funds was appropriate and consistent with the procedures for affiliated brokerage adopted by the Board and consistent with regulatory requirements. After full consideration of the above factors as well as other factors, the Board, including a majority of the Independent Trustees, concluded that approval of each Fund's agreement was in the best interest of the Fund and its shareholders. 78 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. [CHART] 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. 79 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. 80 THE OAKMARK FUNDS TRUSTEES AND OFFICERS TRUSTEES Gary N. Wilner, M.D.--CHAIRMAN Michael J. Friduss Thomas H. Hayden Christine M. Maki 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 Commission's 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 www.oakmark.com The Oakmark Funds are distributed by Harris Associates Securities L.P., member NASD. Date of first use: May 2005. THE OAKMARK FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (4/5/01) TO PRESENT (3/31/05) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX [CHART]
THE OAKMARK FUND CLASS II S & P 500 4/5/2001 $ 10,000 $ 10,000 6/30/2001 $ 10,954 $ 10,665 9/30/2001 $ 9,963 $ 9,099 12/31/2001 $ 11,040 $ 10,072 3/31/2002 $ 11,497 $ 10,099 6/30/2002 $ 10,533 $ 8,746 9/30/2002 $ 8,782 $ 7,235 12/31/2002 $ 9,434 $ 7,846 3/31/2003 $ 9,041 $ 7,599 6/30/2003 $ 10,562 $ 8,768 9/30/2003 $ 10,584 $ 9,000 12/31/2003 $ 11,773 $ 10,096 3/31/2004 $ 11,933 $ 10,267 6/30/2004 $ 12,188 $ 10,444 9/30/2004 $ 12,100 $ 10,249 12/31/2004 $ 13,115 $ 11,195 3/31/2005 $ 12,815 $ 10,954
AVERAGE ANNUAL TOTAL RETURNS (as of 3/31/05)
SINCE INCEPTION 1-YEAR (4/5/01) ------------------------------------------------------------ OAKMARK FUND (CLASS II) 7.39% 6.42% S&P 500 6.69% 2.31%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, May 2005 THE OAKMARK SELECT FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (12/31/99) TO PRESENT (3/31/05) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX [CHART]
THE OAKMARK SELECT FUND CLASS II S & P 500 12/31/1999 $ 10,000 $ 10,000 3/31/2000 $ 10,885 $ 10,229 6/30/2000 $ 10,309 $ 9,958 9/30/2000 $ 11,618 $ 9,861 12/31/2000 $ 12,542 $ 9,090 3/31/2001 $ 13,876 $ 8,012 6/30/2001 $ 15,146 $ 8,481 9/30/2001 $ 14,554 $ 7,236 12/31/2001 $ 15,755 $ 8,009 3/31/2002 $ 16,137 $ 8,031 6/30/2002 $ 14,821 $ 6,955 9/30/2002 $ 12,502 $ 5,754 12/31/2002 $ 13,748 $ 6,239 3/31/2003 $ 13,673 $ 6,043 6/30/2003 $ 15,871 $ 6,973 9/30/2003 $ 15,871 $ 7,157 12/31/2003 $ 17,689 $ 8,029 3/31/2004 $ 18,113 $ 8,165 6/30/2004 $ 17,822 $ 8,305 9/30/2004 $ 17,996 $ 8,150 12/31/2004 $ 19,368 $ 8,902 3/31/2005 $ 19,379 $ 8,711
AVERAGE ANNUAL TOTAL RETURNS (as of 3/31/05)
SINCE INCEPTION 1-YEAR 5-YEAR (12/31/99) ----------------------------------------------------------------------- OAKMARK SELECT FUND (CLASS II) 6.99% 12.22% 13.43% S&P 500 6.69% -3.16% -2.59%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, May 2005 THE OAKMARK EQUITY AND INCOME FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (7/13/00) TO PRESENT (3/31/05) AS COMPARED TO THE LIPPER BALANCED FUND INDEX [CHART]
THE OAKMARK EQUITY AND LIPPER BALANCED INCOME FUND CLASS II FUND INDEX 7/13/2000 $ 10,000 $ 10,000 9/30/2000 $ 10,632 $ 9,980 12/31/2000 $ 11,117 $ 9,848 3/31/2001 $ 11,563 $ 9,355 6/30/2001 $ 12,497 $ 9,684 9/30/2001 $ 12,128 $ 8,949 12/31/2001 $ 13,089 $ 9,530 3/31/2002 $ 13,637 $ 9,587 6/30/2002 $ 13,187 $ 8,954 9/30/2002 $ 12,056 $ 8,070 12/31/2002 $ 12,786 $ 8,511 3/31/2003 $ 12,487 $ 8,355 6/30/2003 $ 14,123 $ 9,266 9/30/2003 $ 14,401 $ 9,456 12/31/2003 $ 15,710 $ 10,208 3/31/2004 $ 16,354 $ 10,451 6/30/2004 $ 16,654 $ 10,438 9/30/2004 $ 16,468 $ 10,457 12/31/2004 $ 17,292 $ 11,125 3/31/2005 $ 17,174 $ 10,984
AVERAGE ANNUAL TOTAL RETURNS (as of 3/31/05)
SINCE INCEPTION 1-YEAR (7/13/00) ---------------------------------------------------------------------- OAKMARK EQUITY & INCOME FUND (CLASS II) 5.01% 12.15% Lipper Balanced Fund Index 5.10% 2.01%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, May 2005 THE OAKMARK GLOBAL FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (10/10/01) TO PRESENT (3/31/05) AS COMPARED TO THE MSCI WORLD INDEX [CHART]
THE OAKMARK GLOBAL FUND CLASS II MSCI WORLD INDEX 10/10/2001 $ 10,000 $ 10,000 12/31/2001 $ 12,060 $ 10,501 3/31/2002 $ 13,362 $ 10,537 6/30/2002 $ 12,451 $ 9,576 9/30/2002 $ 10,231 $ 7,816 12/31/2002 $ 11,760 $ 8,413 3/31/2003 $ 10,494 $ 7,988 6/30/2003 $ 14,008 $ 9,348 9/30/2003 $ 15,328 $ 9,801 12/31/2003 $ 17,454 $ 11,198 3/31/2004 $ 18,111 $ 11,492 6/30/2004 $ 18,358 $ 11,592 9/30/2004 $ 17,828 $ 11,476 12/31/2004 $ 20,132 $ 12,847 3/31/2005 $ 20,234 $ 12,705
AVERAGE ANNUAL TOTAL RETURNS (as of 3/31/05)
SINCE INCEPTION 1-YEAR (10/10/01) --------------------------------------------------------------------- OAKMARK GLOBAL FUND (CLASS II) 11.72% 22.49% MSCI World 10.56% 7.13%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, May 2005 THE OAKMARK INTERNATIONAL FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (11/4/99) TO PRESENT (3/31/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD FUND CLASS II EX U.S. INDEX 11/4/1999 $ 10,000 $ 10,000 12/31/1999 $ 10,596 $ 11,178 3/31/2000 $ 10,567 $ 11,239 6/30/2000 $ 11,303 $ 10,866 9/30/2000 $ 11,079 $ 10,037 12/31/2000 $ 11,890 $ 9,683 3/31/2001 $ 10,836 $ 8,327 6/30/2001 $ 11,905 $ 8,262 9/30/2001 $ 9,590 $ 7,103 12/31/2001 $ 11,245 $ 7,611 3/31/2002 $ 12,525 $ 7,655 6/30/2002 $ 12,230 $ 7,483 9/30/2002 $ 9,413 $ 6,015 12/31/2002 $ 10,259 $ 6,409 3/31/2003 $ 9,046 $ 5,927 6/30/2003 $ 11,331 $ 7,066 9/30/2003 $ 12,192 $ 7,637 12/31/2003 $ 14,093 $ 8,935 3/31/2004 $ 14,595 $ 9,314 6/30/2004 $ 14,854 $ 9,323 9/30/2004 $ 14,815 $ 9,341 12/31/2004 $ 16,739 $ 10,756 3/31/2005 $ 17,089 $ 10,764
AVERAGE ANNUAL TOTAL RETURNS (as of 3/31/05)
SINCE INCEPTION 1-YEAR 5-YEAR (11/4/99) ------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND (CLASS II) 17.09% 10.08% 10.42% MSCI World ex U.S. 15.56% -0.86% 1.37%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, May 2005 THE OAKMARK INTERNATIONAL SMALL CAP FUND CLASS II THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (1/8/01) TO PRESENT (3/31/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX [CHART]
THE OAKMARK INTERNATIONAL MSCI WORLD SMALL CAP FUND CLASS II EX U.S. INDEX 1/8/2001 $ 10,000 $ 10,000 3/31/2001 $ 10,140 $ 8,638 6/30/2001 $ 10,494 $ 8,570 9/30/2001 $ 9,292 $ 7,368 12/31/2001 $ 11,062 $ 7,895 3/31/2002 $ 12,180 $ 7,940 6/30/2002 $ 12,466 $ 7,763 9/30/2002 $ 9,686 $ 6,240 12/31/2002 $ 10,454 $ 6,648 3/31/2003 $ 9,172 $ 6,148 6/30/2003 $ 11,845 $ 7,329 9/30/2003 $ 13,501 $ 7,922 12/31/2003 $ 15,915 $ 9,269 3/31/2004 $ 16,946 $ 9,662 6/30/2004 $ 17,433 $ 9,671 9/30/2004 $ 18,107 $ 9,690 12/31/2004 $ 20,528 $ 11,158 3/31/2005 $ 21,636 $ 11,165
AVERAGE ANNUAL TOTAL RETURNS (as of 3/31/05)
SINCE INCEPTION 1-YEAR (1/8/01) ---------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND (CLASS II) 27.67% 20.03% MSCI World ex U.S. 15.56% 2.64%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, May 2005 FUND EXPENSES A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds. ACTUAL EXPENSES The following table provides information about actual account values and actual fund expenses for Class II of each Fund. The table shows the expenses a Class II shareholder would have paid on a $1,000 investment in each Fund from October 1, 2004 to March 31, 2005 as well as how much a $1,000 investment would be worth at the close of the period, assuming actual fund returns and expenses. A Class II shareholder can estimate expenses incurred for the period by dividing the account value at March 31, 2005 by $1,000 and multiplying the result by the number in the Expenses Paid During the Period row as shown below.
THE OAKMARK THE OAKMARK THE OAKMARK INTERNATIONAL THE OAKMARK THE OAKMARK EQUITY AND THE OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND --------------------------------------------------------------------------------------------------------------------------- Beginning Account Value $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value $ 1,059.10 $ 1,076.80 $ 1,042.80 $ 1,135.00 $ 1,153.50 $ 1,194.90 Expenses Paid During Period* $ 6.47 $ 6.52 $ 5.86 $ 7.77 $ 7.46 $ 8.26 Annualized Expense Ratio 1.26% 1.26% 1.15% 1.46% 1.39% 1.51%
* Expenses are equal to each Fund's annualized expense ratio for Class II, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 365 (to reflect the one-half year period). HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The following table provides information about hypothetical account values and hypothetical expenses for Class II of each Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the Funds' actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses shareholders paid for the period. Shareholders may use this information to compare the ongoing costs of investing in a Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as redemption fees. Therefore, the third line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
THE OAKMARK THE OAKMARK THE OAKMARK INTERNATIONAL THE OAKMARK THE OAKMARK EQUITY AND THE OAKMARK INTERNATIONAL SMALL CAP FUND SELECT FUND INCOME FUND GLOBAL FUND FUND FUND --------------------------------------------------------------------------------------------------------------------------- Beginning Account Value $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 Ending Account Value $ 1,018.65 $ 1,018.65 $ 1,019.20 $ 1,017.65 $ 1,018.00 $ 1,017.40 Expenses Paid During Period* $ 6.34 $ 6.34 $ 5.79 $ 7.34 $ 6.99 $ 7.59 Annualized Expense Ratio 1.26% 1.26% 1.15% 1.46% 1.39% 1.51%
* Expenses are equal to each Fund's annualized expense ratio for Class II, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year divided by 365 (to reflect the one-half year period). ITEM 2. CODE OF ETHICS. Not required in this filing. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not required in this filing. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not required in this filing. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not required in this filing. ITEM 6. SCHEDULE OF INVESTMENTS. Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on an evaluation of the disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure Controls"), the Disclosure Controls are effectively designed to ensure that information required to be disclosed by the Registrant in this report is recorded, processed, summarized and reported within 90 days prior to the filing of this report, including ensuring that information required to be disclosed in this report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) There were no changes in the Registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant's second fiscal quarter of the time period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) (1) Not required in this filing (2) Certifications of John R. Raitt, Principal Executive Officer, and Kristi L. Rowsell, Principal Financial Officer, pursuant to Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)), attached hereto as Exhibits (a)(2)(i) and (a)(2)(ii) (3) Not applicable (b) Certification of John R. Raitt, Principal Executive Officer and Kristi L. Rowsell, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto as Exhibit (b) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Harris Associates Investment Trust By: /s/ John R. Raitt ------------------------------------------- John R. Raitt Principal Executive Officer Date: May 18, 2005 ------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ John R. Raitt ------------------------------------------- John R. Raitt Principal Executive Officer Date: May 18, 2005 ------------------------------------------- By: /s/ Kristi L. Rowsell ------------------------------------------- Kristi L. Rowsell Principal Financial Officer Date: May 18, 2005 -------------------------------------------