N-CSR 1 a2164810zn-csr.txt N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06279 --------------------------------------------- Harris Associates Investment Trust ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Two North La Salle Street, Suite 500 Chicago, Illinois 60602-3790 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) John R. Raitt Cameron S. Avery Harris Associates L.P. Bell, Boyd & Lloyd LLC Two North La Salle Street, #500 Three First National Plaza, #3100 Chicago, Illinois 60602 Chicago, Illinois 60602 ------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (312) 621-0600 ---------------------------- Date of fiscal year end: 09/30/05 -------------------------- Date of reporting period: 09/30/05 ------------------------- ITEM 1. REPORTS TO SHAREHOLDERS. THE OAKMARK FUND THE OAKMARK SELECT FUND THE OAKMARK EQUITY AND INCOME FUND THE OAKMARK GLOBAL FUND THE OAKMARK INTERNATIONAL FUND THE OAKMARK INTERNATIONAL SMALL CAP FUND ANNUAL REPORT SEPTEMBER 30, 2005 [OAKMARK LOGO] ADVISED BY HARRIS ASSOCIATES L.P. THE OAKMARK FUNDS 2005 ANNUAL REPORT PRESIDENT'S LETTER 1 SUMMARY INFORMATION 2 FUND EXPENSES 4 COMMENTARY ON THE OAKMARK AND OAKMARK SELECT FUNDS 6 THE OAKMARK FUND Letter from the Portfolio Managers 8 Schedule of Investments 9 THE OAKMARK SELECT FUND Letter from the Portfolio Managers 13 Schedule of Investments 14 THE OAKMARK EQUITY AND INCOME FUND Letter from the Portfolio Managers 16 Schedule of Investments 18 THE OAKMARK GLOBAL FUND Letter from the Portfolio Managers 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 43 Schedule of Investments 44 FINANCIAL STATEMENTS Statements of Assets and Liabilities 50 Statements of Operations 52 Statements of Changes in Net Assets 54 Notes to Financial Statements 60 TRUSTEES AND OFFICERS 79 OAKMARK PHILOSOPHY AND PROCESS 82 THE OAKMARK GLOSSARY 83
FORWARD-LOOKING STATEMENT DISCLOSURE One of our most important responsibilities as mutual fund managers is to communicate with shareholders in an open and direct manner. Some of our comments in our letters to shareholders are based on current management expectations and are considered "forward-looking statements". Actual future results, however, may prove to be different from our expectations. You can identify forward-looking statements by words such as "estimate", "may", "will", "expect", "believe", "plan" and other similar terms. We cannot promise future returns. Our opinions are a reflection of our best judgment at the time this report is compiled, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise. PRESIDENT'S LETTER [PHOTO OF JOHN R. RAITT] DEAR FELLOW SHAREHOLDERS, The third quarter of 2005 was certainly newsworthy. Hurricanes, refinery outages, surging energy prices, continued tightening at the Federal Reserve, and an expanding budget deficit all captured attention and headlines. These events led to increased market volatility and significant shifts in stock market sector valuations. Even after such a volatile and emotional period, we remain focused on our primary task: generating investment returns that help our shareholders meet their long-term investment goals. While world stock markets advanced in the third quarter, performance was uneven across our Funds and the stock market. Importantly, however, our Funds all posted gains for the fiscal year, which ended this quarter. PATIENCE AND DISCIPLINE A theme that we often repeat in these letters is that the consistent application of our value investing philosophy and a healthy measure of patience are important keys to our long-term investment success. Our process focuses on understanding intrinsic business value and finding growing companies with management intent on increasing shareholder value. We will only purchase these stocks when the business is priced at a substantial discount to value. This discipline limits the influence of emotion on our process and places current events like hurricanes and refinery outages in the proper context of their impact on long-term business value. However, just being smart and getting great ideas into portfolios is not enough. There is an old Dutch proverb: "A handful of patience is worth a bushel of brains." Our process also requires that once stocks are in portfolios, we must wait patiently for the gap between the stock price and value to converge. During the bull market of the late 1990s, traditional ("old-economy") companies frequently sold at very large discounts to value, as investors chased large-cap growth and internet stocks that attracted remarkably rich valuations. The valuation disparity between "hot" and "not-so-hot" stocks continued for a considerable period and even widened over time. The persistence of this disparity somehow gave it credibility with many investors. Its longevity also wore down many other investors whose impatience led them to abandon their discipline and "go with a strategy that is working." Eventually, the bubble burst, and disciplined, patient investors, including Oakmark shareholders, were rewarded. More recently, and as Bill Nygren discusses in his commentary this quarter, we have noted compression in valuations between lower and higher quality companies over the past couple of years. We have purchased the shares of many high quality growth companies at average market valuation levels--bargain prices compared to our estimates of value. We believe that the gap between low and high quality companies will once again widen, and the stock prices of our better quality businesses will go up. The valuation compression has lasted longer than our logic would suggest it should. Rest assured however, we won't lose our patience. MAINTAINING A DISCIPLINED INVESTMENT PLAN We counsel our Fund investors that they should always make their investment decisions in the context of a realistic long-term plan. Developing a solid plan and sticking to it--even during difficult times--requires discipline and patience, and it is just as important for individual investors as it is for professionals. When dramatic changes such as those of the past few months occur, investors often react rashly and emotionally. However, these are the times when discipline and patience are needed the most. 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 FUND--CLASS I SELECT FUND--CLASS I FUND--CLASS I (OAKMX) (OAKLX) (OAKBX) --------------------------------------------------------------------------------------------------------------------------- PERFORMANCE FOR PERIOD ENDED SEPTEMBER 30, 2005(1) 3 MONTHS* -0.46% 0.42% 5.83% ---------------------------------------------------------------------------------------------------------------------------- 1 YEAR 5.79% 7.98% 13.65% ---------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 13.65% 16.00% 15.97% ---------------------------------------------------------------------------------------------------------------------------- 5 YEAR 9.30% 11.08% 12.17% ---------------------------------------------------------------------------------------------------------------------------- 10 YEAR 8.99% N/A N/A ---------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 15.58% 18.78% 14.06% (8/5/91) (11/1/96) (11/1/95) ---------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY Washington Washington Burlington HOLDINGS AS OF Mutual, Inc. 2.9% Mutual, Inc. 14.5% Resources Inc. 5.9% SEPTEMBER 30, 2005(2) McDonald's Yum! Brands, Inc. 7.4% XTO Energy, Inc. 4.9% Corporation 2.7% H&R Block, Inc. 6.6% Nestle SA 2.9% Yum! Brands, Inc. 2.5% First Data Caremark Rx, Inc. 2.7% COMPANY AND % OF TOTAL Viacom Inc., Corporation 5.2% General Dynamics NET ASSETS Class B 2.4% Time Warner Inc. 4.9% Corporation 2.5% Time Warner Inc. 2.4% ---------------------------------------------------------------------------------------------------------------------------- SECTOR Consumer Consumer U.S. Government ALLOCATION AS OF Discretionary 44.4% Discretionary 47.8% Securities 31.2% SEPTEMBER 30, 2005 Financials 14.2% Financials 25.1% Energy 14.8% Consumer Staples 12.3% Information Consumer Information Technology 9.8% Discretionary 11.0% SECTOR AND % Technology 10.8% Health Care 7.9% Consumer Staples 10.6% OF MARKET VALUE Industrials 8.7% Energy 4.7% Industrials 9.5% Health Care 6.1% Industrials 4.7% Health Care 7.3% Energy 3.5% Financials 7.0% Foreign Government Securities 5.9% Information Technology 2.3% Materials 0.4% ----------------------------------------------------------------------------------------------------------------------------
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 or visit www.oakmark.com. * Not annualized 2
THE OAKMARK THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL GLOBAL FUND--CLASS I FUND--CLASS I SMALL CAP FUND--CLASS I (OAKGX) (OAKIX) (OAKEX) ---------------------------------------------------------------------------------------------------------------------------- PERFORMANCE FOR PERIOD ENDED SEPTEMBER 30, 2005(1) 3 MONTHS* 8.29% 9.04% 10.85% ---------------------------------------------------------------------------------------------------------------------------- 1 YEAR 23.88% 25.85% 29.04% ---------------------------------------------------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURN FOR: 3 YEAR 29.42% 25.85% 34.14% ---------------------------------------------------------------------------------------------------------------------------- 5 YEAR 18.62% 11.27% 18.85% ---------------------------------------------------------------------------------------------------------------------------- 10 YEAR N/A 11.62% N/A ---------------------------------------------------------------------------------------------------------------------------- SINCE INCEPTION 16.53% 12.56% 13.58% (8/4/99) (9/30/92) (11/1/95) ---------------------------------------------------------------------------------------------------------------------------- TOP FIVE EQUITY Burlington GlaxoSmithKline plc 3.6% Benfield Group Plc 3.6% HOLDINGS AS OF Resources Inc. 5.4% Bayerische Motoren Carpetright plc 3.2% SEPTEMBER 30, 2005(2) Nestle SA 4.3% Werke (BMW) AG 3.3% Interpump Euronext NV 4.2% SK Telecom Co., Ltd. 3.2% Group S.p.A. 3.1% Diageo plc 4.2% Euronext NV 3.1% Gurit-Heberlein AG 3.1% COMPANY AND % OF TOTAL Takeda Diageo plc 2.9% JJB Sports plc 2.7% NET ASSETS Pharmaceutical Company Limited 4.0% ---------------------------------------------------------------------------------------------------------------------------- SECTOR Consumer Financials 25.6% Industrials 25.0% ALLOCATION AS OF Discretionary 19.0% Consumer Consumer SEPTEMBER 30, 2005 Financials 15.2% Discretionary 20.2% Discretionary 20.7% Health Care 15.0% Consumer Staples 17.6% Information Consumer Staples 14.0% Health Care 10.5% Technology 18.3% SECTOR AND % Information Telecommunication Financials 16.7% OF MARKET VALUE Technology 10.4% Services 8.0% Materials 7.2% Industrials 10.2% Materials 7.8% Health Care 5.3% Telecommunication Industrials 6.8% Consumer Staples 5.1% Services 5.7% Energy 1.9% Telecommunication Energy 5.6% Information Services 1.7% Materials 4.9% Technology 1.6% ----------------------------------------------------------------------------------------------------------------------------
3 FUND EXPENSES A shareholder of each Fund incurs two types of costs: (1) transaction costs, such as redemption fees, and (2) ongoing costs, including investment advisory fees, transfer agent fees, and other fund expenses. The examples below are intended to help shareholders understand the ongoing cost (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds. ACTUAL EXPENSES The following table provides information about actual account values and actual fund expenses for Class I of each Fund. The table shows the expenses a Class I shareholder would have paid on a $1,000 investment in each Fund from April 1, 2005, to September 30, 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 September 30, 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 $ 997.60 $ 1,001.50 $ 1,088.20 $ 1,089.80 $ 1,089.90 $ 1,079.10 EXPENSES PAID DURING PERIOD* $ 5.21 $ 5.02 $ 4.61 $ 6.18 $ 5.71 $ 7.19 Annualized Expense Ratio 1.04% 1.00% 0.88% 1.18% 1.09% 1.38%
* 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 based on actual expense ratios 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, the total 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 $ 1,019.90 $ 1,020.05 $ 1,020.66 $ 1,019.15 $ 1,019.60 $ 1,018.15 EXPENSES PAID DURING PERIOD* $ 5.27 $ 5.06 $ 4.46 $ 5.97 $ 5.52 $ 6.98 ANNUALIZED EXPENSE RATIO 1.04% 1.00% 0.88% 1.18% 1.09% 1.38%
* 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] "An optimist stays up until midnight to see the new year in. A pessimist stays up to make sure the old year leaves." Bill Vaughan We've often said that Oakmark tends to be early. That observation even extends to our New Year's celebration. By having our fiscal year end on September 30 rather than December 31, we beat the rush for audits and save our shareholders a few dollars on fees. We also beat the rush for reflecting on the past year and thinking about how to approach the new one. We look back on fiscal 2005 with mixed feelings. Our primary goal is, over time, to increase the wealth of our shareholders. Measured against that goal, any return that starts with a plus sign can be viewed as a success. We're pleased that both Funds achieved new all-time high prices last quarter. With the S&P 500(3) still priced about 20% below its 2000 peak, most competing funds cannot make that statement, which is an important reason to view our year as a success. Switching to the negatives, a couple of issues will cause us to "stay up to make sure the old year leaves." The S&P 500 increased more than either Fund did, not just in fiscal 2005 but also for the trailing three years. Further, the Funds have also lagged behind their value peers. Why did that happen? We construct our portfolios based on each stock's merits, but two themes affected many of our decisions and hurt our returns. First, a year ago many commodity companies, including energy companies, were trading at low P/E(4) ratios and therefore looked cheap. We rejected most of those stocks because that cheapness vanished after adjusting earnings for our belief that the commodity prices necessary to balance long-term supply with demand were substantially below then-current commodity prices. Using oil as an example, a year ago the price was $50 per barrel, up from under $20 at the beginning of 2002. Typically, an extreme price spike sows the seeds for its own reversal. Consequently, we believed that energy producers and consumers would alter their behavior, eventually resulting in higher supply, lower demand, and a price significantly below $50 per barrel. Based on that assumption, which was reflected in the futures market, we felt that most energy stocks, as well as the stocks of most commodity producers were not selling at large discounts to their values. So we held few of those stocks. Instead of the price of oil declining, consistent with our long-term expectation, the price increased by another third last year, and energy stocks were large gainers. Because we invest based on long-term fundamentals, we continue to focus on the market clearing price, which we believe is significantly below $50 per barrel and we have decreased our holdings of the few energy stocks we own. The second theme that hurt results was our belief that higher quality businesses deserve to sell at meaningfully higher multiples of earnings than lower quality businesses. Back in 1999 many stocks sold at low P/Es despite the overvalued market. In a quarterly letter a little over a year ago, I noted that in mid-1999 nearly 100 stocks in the S&P 500 were priced at less than half the S&P 500 P/E multiple, but in mid-2004 that number had fallen to just 20. In 1999, we believed that the market had generally overpriced high quality businesses. A year ago, we believed that the market had over-reacted by so tightly compressing the P/E dispersion. We found that large growth businesses, finally available at average prices, were the best new opportunities for investment. We anticipated that high quality names would eventually return to significant premiums and low quality names would return to significant discounts, creating a more normal P/E distribution. Instead, over the past year, multiples have compressed further. Now only 13 stocks in the S&P 500 sell at less than half the market multiple. One could argue that identifying superior businesses has become very difficult and, therefore, most stocks should sell at the same multiple. But we believe that some businesses still possess significant competitive advantages and deserve to sell at premiums. We also believe that momentum investors who previously bid up the price of large growth companies and technology stocks have now switched over to the below-average businesses that value investors used to own. In investing, the line between "early" and "wrong" can be very fuzzy. I believe we are just early, but only time will tell on which side of that line we fall. As we begin fiscal 2006, we are clearly optimists excited by our expectations for the New Year. Though neither we nor any other mutual fund can make promises about future investment performance, there are four important promises we can make: 1. WE WILL CONTINUE TO APPLY A HIGH LEVEL OF EFFORT AND TALENT. In many endeavors consistent effort produces consistent results. So, naturally, when returns aren't stellar, investors tend to assume that we need to try harder. One e-mailer even suggested that I need to spend less time on the golf course and more time in the office! (I don't golf.) But in investing, there is no short-term correlation between effort and returns. This 6 isn't to say that long-term investment success is uncorrelated with effort--far from it. We just don't know in what year we will harvest the seeds we plant today. Our Research Department is larger and more experienced than it was five or ten years ago, and its compensation structure continues to provide incentives for finding undervalued stocks. Further, our analysts are best described as "stock nuts"--meaning that the thrill they get from discovering great investment ideas is as important to them as their compensation is. As with our analysts, my passion for investing extends beyond normal office hours. My kids know that on weekends, if I'm at their sporting events or watching the Bears or Badgers football games on TV, I'm usually also reading VALUE LINE, BARRON'S, and now, the new weekend edition of THE WALL STREET JOURNAL. 2. WE WILL CONTINUE TO USE THE SAME INVESTMENT PHILOSOPHY. We invest in companies that we believe will grow and that are managed to maximize long-term per-share business value. We only buy stocks that are selling at large discounts to our estimates of value. Then we patiently wait for the gap between price and value to close. There are two ways this approach can fail. First, we can misjudge business fundamentals. Second, we can lose the patience our approach requires. Our lawyers may balk when I use the word "guarantee," but I can guarantee that we will make our share of mistakes analyzing individual companies. Our successful long-term track record includes more mistakes than I care to remember. Only by acknowledging our failings, eliminating them from our portfolios, and learning from our mistakes, can we limit the damage they cause. And what about the risk that we might lose patience and change investment philosophies? Surely that's a risk worth assessing. Many investment firms have changed their approach at just the wrong time resulting in substantial losses and missed opportunity. Instead of taking my word that we won't change, look at our history. The first Oakmark Fund report to shareholders in 1991 outlined our investment philosophy. Point number one was "Invest in securities selling significantly below their long-term underlying value." And prior to Oakmark, our company Harris Associates L.P., which will celebrate its 30th Anniversary next year, used that same philosophy for managing each of its accounts. Our insistence on investing based on long-term fundamental value may at times frustrate some shareholders, but wondering whether or not we'll stick to our knitting need not be a concern. 3. WE WILL CONTINUE TO COMMUNICATE CANDIDLY WITH YOU. Whether our results are good, bad, or in between, we'll always explain what happened and why we own the stocks we own. When we invest in companies we expect understandable, honest, and timely communication from them. You should expect the same from us. Much has been written about mutual fund investors actually achieving returns far below average because of their tendency to time purchases and sales poorly. We believe that investors who read our commentary will better understand our approach to investing, will have more rational expectations, and therefore will be less likely to have inopportune timing of their sales. 4. WE WILL CONTINUE TO INVEST OUR OWN MONEY SIDE-BY-SIDE WITH YOURS. One of the primary reasons we started The Oakmark Fund fourteen years ago was that we wanted to invest our own money in the same stocks that we were buying for our clients. Since then, every Fund launched by Oakmark was created because our investment professionals believed that potential returns were attractive for their own capital. In John Raitt's President's letter, once a year you will find an update of our total personal Oakmark holdings. You can observe that the dollar amount is both significant and growing. I have also disclosed that my personal investments in The Oakmark Fund and The Oakmark Select Fund account for the majority of my liquid net worth. We're excited about the outlook for the market. We are highly motivated. Our investment philosophy is unchanged, and our economic incentives are aligned with yours. We believe our portfolios are well positioned to capitalize on today's opportunities and to continue growing your capital. And in the Oakmark tradition of being early, please allow me to be the first to wish you a Happy New Year! Best wishes, /s/ Bill Nygren WILLIAM C. NYGREN, CFA PORTFOLIO MANAGER bnygren@oakmark.com 7 THE OAKMARK FUND REPORT FROM BILL NYGREN AND KEVIN GRANT, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. 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 (9/30/05) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(3)
THE OAKMARK FUND (CLASS I) S & P 500 8/5/91 $ 10,000 $ 10,000 9/30/91 $ 11,050 $ 10,066 12/31/91 $ 13,020 $ 10,909 3/31/92 $ 14,690 $ 10,634 6/30/92 $ 15,230 $ 10,836 9/30/92 $ 16,800 $ 11,178 12/31/92 $ 19,386 $ 11,741 3/31/93 $ 20,927 $ 12,253 6/30/93 $ 21,494 $ 12,313 9/30/93 $ 23,095 $ 12,631 12/31/93 $ 25,300 $ 12,924 3/31/94 $ 24,242 $ 12,434 6/30/94 $ 24,951 $ 12,486 9/30/94 $ 26,663 $ 13,097 12/31/94 $ 26,138 $ 13,095 3/31/95 $ 28,539 $ 14,370 6/30/95 $ 30,303 $ 15,741 9/30/95 $ 32,841 $ 16,992 12/31/95 $ 35,134 $ 18,015 3/31/96 $ 36,386 $ 18,982 6/30/96 $ 37,661 $ 19,834 9/30/96 $ 37,945 $ 20,447 12/31/96 $ 40,828 $ 22,152 3/31/97 $ 42,456 $ 22,746 6/30/97 $ 48,917 $ 26,716 9/30/97 $ 52,009 $ 28,717 12/31/97 $ 54,132 $ 29,542 3/31/98 $ 59,517 $ 33,663 6/30/98 $ 57,909 $ 34,775 9/30/98 $ 49,899 $ 31,316 12/31/98 $ 56,155 $ 37,985 3/31/99 $ 55,888 $ 39,877 6/30/99 $ 62,332 $ 42,688 9/30/99 $ 53,882 $ 40,023 12/31/99 $ 50,277 $ 45,977 3/31/00 $ 45,767 $ 47,032 6/30/00 $ 46,950 $ 45,783 9/30/00 $ 49,815 $ 45,339 12/31/00 $ 56,201 $ 41,791 3/31/01 $ 60,342 $ 36,837 6/30/01 $ 65,927 $ 38,993 9/30/01 $ 59,986 $ 33,269 12/31/01 $ 66,479 $ 36,824 3/31/02 $ 69,250 $ 36,926 6/30/02 $ 63,463 $ 31,979 9/30/02 $ 52,927 $ 26,454 12/31/02 $ 56,902 $ 28,686 3/31/03 $ 54,576 $ 27,783 6/30/03 $ 63,826 $ 32,059 9/30/03 $ 64,034 $ 32,907 12/31/03 $ 71,301 $ 36,914 3/31/04 $ 72,327 $ 37,539 6/30/04 $ 73,941 $ 38,186 9/30/04 $ 73,467 $ 37,473 12/31/04 $ 79,667 $ 40,931 3/31/05 $ 77,913 $ 40,052 6/30/05 $ 78,084 $ 40,600 9/30/05 $ 77,722 $ 42,064 AVERAGE ANNUAL TOTAL RETURNS (AS OF 09/30/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (8/5/91) ---------------------------------------------------------------------------------------------- OAKMARK FUND (CLASS I) -0.46% 5.79% 9.30% 8.99% 15.58% S&P 500 3.60% 12.25% -1.49% 9.48% 10.67% Dow Jones Average(5) 3.46% 7.49% 1.98% 10.39% 11.70% Lipper Large Cap Value Index(6) 3.80% 13.50% 1.96% 9.14% 10.52%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized The Oakmark Fund had a disappointing quarter, basically unchanged while the S&P 500 gained 4%. Our underweighting in the very strong energy sector continues to penalize our results. We didn't suffer from big fundamental disappointments. In fact, five of our stocks were up by more than 20% (Burlington Resources, McDonalds, ConocoPhillips, Hewlett Packard and Texas Instruments), and none were down by that much. Most of our holdings, however, suffered very small price declines. As mentioned earlier, our portfolio continues to be under-represented in commodities, including energy, and it is heavily populated with high-quality businesses, especially for a value fund. We have positioned the portfolio so that we will do best when, as we expect, energy prices eventually decline and quality spreads return to normal. During the quarter we sold our shares of ACCO Brands (spun-off from Fortune Brands) and eliminated Kraft Foods and Fannie Mae. Fortunately, Fannie was sold early enough in the quarter to avoid the late September decline, but it was still a significant loser for our fiscal year. We continue to believe mortgage guaranty is a very good business for Fannie, but we are no longer comfortable projecting that their biggest profit contributor, their mortgage portfolio, will retain its advantaged regulatory position. New names in the quarter included Discovery Holding, which spun-off from another holding, Liberty Media. Though Discovery is a smaller business than The Oakmark Fund generally buys, we judged that the current price made it too cheap to sell. New purchases included Tyco, InBev, and Intel. Our comments on Tyco and InBev are available on our website, www.oakmark.com. INTEL CORP (INTC--$24) Intel is the world's largest semiconductor chipmaker and one of the only chipmakers that has established consumer brand identity with its campaign, "Intel Inside." In the peak of the technology-driven market, Intel sold at $76, which was 65 times trailing earnings. We admired Intel, but couldn't justify owning the stock at that valuation. Now at one-third of the price, Intel sells at less than 16 times expected forward earnings. Intel's products are purchased primarily by the computing, communications and digital content industries--industries we believe will experience above-average growth. Like many of our recent purchases, we believe Intel is a superior business, deserving a superior P/E(4), but is now priced as if it were merely average. 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--SEPTEMBER 30, 2005
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------ COMMON STOCKS--93.4% APPAREL RETAIL--3.8% The Gap, Inc. 7,066,700 $ 123,172,581 Limited Brands 5,728,047 117,024,000 --------------- 240,196,581 BROADCASTING & CABLE TV--7.9% Liberty Media Corporation, Class A (a) 16,199,400 $ 130,405,170 The DIRECTV Group, Inc. (a) 8,600,000 128,828,000 Comcast Corporation, Special Class A (a) 4,325,000 124,473,500 EchoStar Communications Corporation, Class A 3,275,000 96,841,750 Discovery Holding Company, Class A (a) 1,569,940 22,669,933 --------------- 503,218,353 DEPARTMENT STORES--2.0% Kohl's Corporation (a) 2,500,000 $ 125,450,000 HOME IMPROVEMENT RETAIL--2.1% The Home Depot, Inc. 3,581,500 $ 136,598,410 HOMEBUILDING--2.0% Pulte Homes, Inc. 2,900,000 $ 124,468,000 HOUSEHOLD APPLIANCES--1.9% The Black & Decker Corporation 1,500,000 $ 123,135,000 HOUSEWARES & SPECIALTIES--2.0% Fortune Brands, Inc. 1,600,000 $ 130,128,000 LEISURE PRODUCTS--1.0% Mattel, Inc. 3,874,300 $ 64,623,324 MOTORCYCLE MANUFACTURERS--2.0% Harley-Davidson, Inc. 2,600,000 $ 125,944,000 MOVIES & ENTERTAINMENT--6.9% Viacom, Inc., Class B 4,579,490 $ 151,168,965 Time Warner, Inc. 8,297,700 150,271,347 The Walt Disney Company 5,750,000 138,747,500 --------------- 440,187,812 PUBLISHING--2.5% Gannett Co., Inc. 1,534,500 $ 105,619,635 Knight-Ridder, Inc. 916,000 53,750,880 --------------- 159,370,515 RESTAURANTS--5.2% McDonald's Corporation 5,200,000 $ 174,148,000 Yum! Brands, Inc. 3,274,000 158,494,340 --------------- 332,642,340
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NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------ COMMON STOCKS--93.4% (CONT.) SPECIALIZED CONSUMER SERVICES--2.2% H&R Block, Inc. 5,958,600 $ 142,887,228 BREWERS--3.3% Anheuser-Busch Companies, Inc. 3,100,000 $ 133,424,000 InBev NV (b) 2,000,000 79,122,222 --------------- 212,546,222 DISTILLERS & VINTNERS--1.9% Diageo plc (c) 2,121,000 $ 123,039,210 HYPERMARKETS & SUPER CENTERS--2.0% Wal-Mart Stores, Inc. 2,900,000 $ 127,078,000 PACKAGED FOODS & MEATS--3.1% General Mills, Inc. 2,406,000 $ 115,969,200 H.J. Heinz Company 2,310,000 84,407,400 --------------- 200,376,600 SOFT DRINKS--1.1% Coca-Cola Enterprises, Inc. 3,500,000 $ 68,250,000 INTEGRATED OIL & GAS--1.8% ConocoPhillips 1,670,670 $ 116,796,540 OIL & GAS EXPLORATION & PRODUCTION--1.5% Burlington Resources, Inc. 1,156,200 $ 94,022,184 ASSET MANAGEMENT & CUSTODY BANKS--1.2% The Bank of New York Company, Inc. 2,500,000 $ 73,525,000 DIVERSIFIED BANKS--1.9% U.S. Bancorp 4,200,000 $ 117,936,000 LIFE & HEALTH INSURANCE--1.8% AFLAC Incorporated 2,567,000 $ 116,285,100 OTHER DIVERSIFIED FINANCIAL SERVICES--4.0% Citigroup, Inc. 2,900,000 $ 132,008,000 JP Morgan Chase & Co. 3,600,000 122,148,000 --------------- 254,156,000 THRIFTS & MORTGAGE FINANCE--4.5% Washington Mutual, Inc. 4,737,300 $ 185,796,906 MGIC Investment Corporation 1,590,600 102,116,520 --------------- 287,913,426 HEALTH CARE EQUIPMENT--2.0% Baxter International, Inc. 3,200,000 $ 127,584,000
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SHARES HELD/ NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------ COMMON STOCKS--93.4% (CONT.) PHARMACEUTICALS--3.7% Abbott Laboratories 2,787,300 $ 118,181,520 Bristol-Myers Squibb Company 4,850,000 116,691,000 --------------- 234,872,520 AEROSPACE & DEFENSE--3.4% Raytheon Company 3,000,000 $ 114,060,000 Honeywell International, Inc. 2,650,000 99,375,000 --------------- 213,435,000 BUILDING PRODUCTS--2.1% Masco Corporation 4,433,600 $ 136,022,848 ENVIRONMENTAL & FACILITIES SERVICES--1.5% Waste Management, Inc. 3,374,300 $ 96,538,723 INDUSTRIAL CONGLOMERATES--1.1% Tyco International Ltd. 2,558,000 $ 71,240,300 COMPUTER HARDWARE--3.2% Hewlett-Packard Company 3,875,000 $ 113,150,000 Sun Microsystems, Inc. (a) 23,870,000 93,570,400 --------------- 206,720,400 DATA PROCESSING & OUTSOURCED SERVICES--3.3% First Data Corporation 3,350,000 $ 134,000,000 Automatic Data Processing, Inc. 1,800,000 77,472,000 --------------- 211,472,000 OFFICE ELECTRONICS--1.3% Xerox Corporation (a) 5,972,400 $ 81,523,260 SEMICONDUCTORS--2.2% Intel Corp. 3,000,000 $ 73,950,000 Texas Instruments Incorporated 2,000,000 67,800,000 --------------- 141,750,000 TOTAL COMMON STOCKS (COST: $4,691,869,175) 5,961,932,896 SHORT TERM INVESTMENTS--4.5% U.S. GOVERNMENT AGENCIES--1.6% Federal Home Loan Bank, 3.50% - 3.529% due 10/27/2005 - 11/10/2005 $ 100,000,000 $ 99,678,113 TOTAL U.S. GOVERNMENT AGENCIES (COST: $99,678,113) 99,678,113
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NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS--4.5% (CONT.) U.S. GOVERNMENT BILLS--1.6% United States Treasury Bills, 3.125% - 3.22% due 10/6/2005 - 10/20/2005 $ 100,000,000 $ 99,892,078 TOTAL U.S. GOVERNMENT BILLS (COST: $99,893,327) 99,892,078 REPURCHASE AGREEMENTS--1.3% IBT Repurchase Agreement, 3.51% dated 9/30/2005 due 10/3/2005, repurchase price $83,524,424, collateralized by Small Business Administration Bonds, with rates of 5.625% - 6.30%, with maturities from 11/25/2015 - 8/25/2030, and with an aggregate market value plus accrued interest of $87,675,000 $ 83,500,000 $ 83,500,000 IBT Repurchase Agreement, 2.75% dated 9/30/2005 due 10/3/2005, repurchase price $2,763,755, collateralized by a Small Business Administration Bond, with a rate of 6.875%, with a maturity date of 5/25/2023, and with a market value plus accrued interest of $2,901,278 2,763,122 2,763,122 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $86,263,122) 86,263,122 TOTAL SHORT TERM INVESTMENTS (COST: $285,834,562) 285,833,313 Total Investments (Cost $4,977,703,737)--97.9% $ 6,247,766,209 Other Assets In Excess Of Other Liabilities--2.1% 136,312,315 --------------- TOTAL NET ASSETS--100% $ 6,384,078,524 ===============
(a) Non-income producing security. (b) Represents a foreign domiciled corporation. (c) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 12 THE OAKMARK SELECT FUND REPORT FROM BILL NYGREN AND HENRY BERGHOEF, PORTFOLIO MANAGERS [PHOTO OF WILLIAM C. NYGREN] [PHOTO OF HENRY R. BERGHOEF] [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/05) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX(3)
THE OAKMARK SELECT FUND (CLASS I) S & P 500 11/1/96 $ 10,000 $ 10,000 12/31/96 $ 11,420 $ 10,543 3/31/97 $ 12,140 $ 10,826 6/30/97 $ 14,180 $ 12,715 9/30/97 $ 16,340 $ 13,668 12/31/97 $ 17,704 $ 14,060 3/31/98 $ 20,078 $ 16,021 6/30/98 $ 20,462 $ 16,551 9/30/98 $ 16,936 $ 14,904 12/31/98 $ 20,575 $ 18,078 3/31/99 $ 22,766 $ 18,979 6/30/99 $ 24,482 $ 20,317 9/30/99 $ 22,028 $ 19,048 12/31/99 $ 23,557 $ 21,882 3/31/00 $ 25,667 $ 22,384 6/30/00 $ 24,324 $ 21,790 9/30/00 $ 27,432 $ 21,578 12/31/00 $ 29,637 $ 19,890 3/31/01 $ 32,826 $ 17,532 6/30/01 $ 35,865 $ 18,558 9/30/01 $ 34,496 $ 15,834 12/31/01 $ 37,359 $ 17,526 3/31/02 $ 38,306 $ 17,574 6/30/02 $ 35,206 $ 15,220 9/30/02 $ 29,720 $ 12,590 12/31/02 $ 32,699 $ 13,653 3/31/03 $ 32,535 $ 13,223 6/30/03 $ 37,806 $ 15,258 9/3/03 $ 37,820 $ 15,662 12/31/03 $ 42,181 $ 17,569 3/31/04 $ 43,214 $ 17,866 6/30/04 $ 42,553 $ 18,174 9/30/04 $ 42,980 $ 17,835 12/31/04 $ 46,286 $ 19,481 3/31/05 $ 46,342 $ 19,062 6/30/05 $ 46,217 $ 19,323 9/30/05 $ 46,411 $ 20,020 AVERAGE ANNUAL TOTAL RETURNS (AS OF 09/30/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/96) ---------------------------------------------------------------------------------- OAKMARK SELECT FUND (CLASS I) 0.42% 7.98% 11.08% 18.78% S&P 500 3.60% 12.25% -1.49% 8.09% S&P MidCap 400(7) 4.88% 22.16% 7.04% 14.26% Lipper Mid Cap Value Index(8) 4.25% 19.33% 10.53% 11.09%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. * Not annualized The Oakmark Select Fund was up fractionally in the quarter compared to a 4% gain in the S&P 500. Our only portfolio addition was Discovery Holdings, which we received as a spin-off from Liberty Media. We did not eliminate any holdings. Last quarter we wrote about our biggest gainer, H&R Block. This quarter H&R Block was our biggest loser, giving back the prior quarter's gains. Neither of those price moves appeared to be a response to H&R Block's satisfactory long-term business results. Such short-term moves seem random, and that is one of many reasons why we focus on long-term fundamental value instead. Burlington Resources, our best performer, increased by over 40% during the past quarter. For the full fiscal year, Burlington increased by more than 100%, making it also our top performer for the fiscal year. We bought Burlington four years ago because we thought the market was undervaluing Burlington's long-lived natural gas reserves and was not giving enough credit to a management team that we felt was intelligently investing its cash flow. Had we anticipated natural gas prices quadrupling we'd have owned a lot more! But, we are now unwilling to rely on the sustainability of current gas prices for our long-term Burlington valuation, so we have reduced our position, preventing Burlington from becoming oversized. Our portfolio has recently lagged behind both the market and the funds we compete with, in our view, due to underweighting of cyclical businesses, including energy. We believe that higher quality businesses, which are priced similarly to cyclical businesses, present more opportunity. Typically when our performance lags, it is because we made several large fundamental errors. But, last year we had only one stock that declined by more than 10% (Chiron, which has been sold). We continue to anticipate that above-average growth for cyclical and commodity businesses will come to an end, and when that happens, appropriate quality spreads will be restored. We believe the portfolio is well-positioned for that environment. Best wishes, /s/ Bill C. Nygren /s/ Henry R. Berghoef WILLIAM C. NYGREN, CFA HENRY R. BERGHOEF, CFA Portfolio Manager Portfolio Manager bnygren@oakmark.com berghoef@oakmark.com 13 THE OAKMARK SELECT FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2005
NAME SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS--92.3% APPAREL RETAIL--6.2% Limited Brands 9,580,981 $ 195,739,442 The Gap, Inc. 10,060,000 175,345,800 --------------- 371,085,242 BROADCASTING & CABLE TV--5.0% Liberty Media Corporation, Class A (a) 28,000,000 $ 225,400,000 Discovery Holding Company, Class A (a) 5,300,000 76,532,000 --------------- 301,932,000 LEISURE PRODUCTS--2.7% Mattel, Inc. 9,670,900 $ 161,310,612 MOVIES & ENTERTAINMENT--9.0% Time Warner, Inc. 16,240,000 $ 294,106,400 Viacom, Inc., Class B 7,350,000 242,623,500 --------------- 536,729,900 PUBLISHING--2.6% Knight-Ridder, Inc. 2,606,500 $ 152,949,420 RESTAURANTS--12.1% Yum! Brands, Inc. 9,207,000 $ 445,710,870 McDonald's Corporation 8,300,000 277,967,000 --------------- 723,677,870 SPECIALIZED CONSUMER SERVICES--6.6% H&R Block, Inc. (b) 16,519,600 $ 396,140,008 OIL & GAS EXPLORATION & PRODUCTION--4.4% Burlington Resources, Inc. 3,232,100 $ 262,834,372 OTHER DIVERSIFIED FINANCIAL SERVICES--3.8% JP Morgan Chase & Co. 6,750,000 $ 229,027,500 SPECIALIZED FINANCE--4.8% Moody's Corporation 5,647,200 $ 288,458,976 THRIFTS & MORTGAGE FINANCE--14.5% Washington Mutual, Inc. 22,217,400 $ 871,366,428 HEALTH CARE SERVICES--3.5% IMS Health Incorporated 8,303,441 $ 208,997,610 PHARMACEUTICALS--3.8% Bristol-Myers Squibb Company 9,490,200 $ 228,334,212 DIVERSIFIED COMMERCIAL AND PROFESSIONAL SERVICES--4.3% The Dun & Bradstreet Corporation (a)(b) 3,934,900 $ 259,191,863
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SHARES HELD/ NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS--92.3% (CONT.) DATA PROCESSING & OUTSOURCED SERVICES--5.2% First Data Corporation 7,815,400 $ 312,616,000 OFFICE ELECTRONICS--3.8% Xerox Corporation (a) 16,746,400 $ 228,588,360 TOTAL COMMON STOCKS (COST: $3,765,847,641) 5,533,240,373 SHORT TERM INVESTMENTS--7.9% U.S. GOVERNMENT AGENCIES--1.7% Federal Home Loan Bank, 3.50% - 3.63% due 10/27/2005 - 11/10/2005 $ 100,000,000 $ 99,674,472 TOTAL U.S. GOVERNMENT AGENCIES (COST: $99,674,472) 99,674,472 U.S. GOVERNMENT BILLS--5.0% United States Treasury Bills, 3.125% - 3.45% due 10/6/2005 - 12/8/2005 $ 300,000,000 $ 299,017,150 TOTAL U.S. GOVERNMENT BILLS (COST: $298,901,750) 299,017,150 REPURCHASE AGREEMENTS--1.2% IBT Repurchase Agreement, 3.51% dated 9/30/2005 due 10/3/2005, repurchase price $73,521,499, collateralized by Small Business Administration Bonds, with rates of 6.00% - 6.74%, with maturities from 3/25/2018 - 4/25/2030, and with an aggregate market value plus accrued interest of $77,175,000 $ 73,500,000 $ 73,500,000 IBT Repurchase Agreement, 2.75% dated 9/30/2005 due 10/3/2005, repurchase price $1,536,213, collateralized by a Small Business Administration Bond, with a rate of 6.125%, with a maturity date of 1/25/2027, and with a market value plus accrued interest of $1,612,654 1,535,861 1,535,861 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $75,035,861) 75,035,861 TOTAL SHORT TERM INVESTMENTS (COST: $473,612,083) 473,727,483 Total Investments (Cost $4,239,459,724)--100.2% $ 6,006,967,856 Other Liabilities In Excess Of Other Assets--(0.2)% (13,794,402) --------------- TOTAL NET ASSETS--100% $ 5,993,173,454 ===============
(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 (9/30/05) AS COMPARED TO THE LIPPER BALANCED FUND INDEX(9)
AVERAGE ANNUAL TOTAL RETURNS (AS OF 09/30/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) ------------------------------------------------------------------------------------ OAKMARK EQUITY & INCOME FUND (CLASS I) 5.83% 13.65% 12.17% 14.06% Lipper Balanced Fund Index 2.92% 10.05% 2.89% 7.95% S&P 500(3) 3.60% 12.25% -1.49% 9.60% Lehman Govt./Corp. Bond(10) -0.96% 2.58% 6.89% 6.49%
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 RETROSPECTIVE The Oakmark Equity and Income Fund recorded a return of 6% for the quarter ended September 30. This contrasts with the 3% result for the Lipper Balanced Fund Index, our primary standard of comparison. Positive rates of return always please us, as we know that many of our shareholders depend on earnings from the Fund to sustain their lifestyles. We are especially happy to earn positive returns in the summer quarter, however, as the securities markets have often found this particular period to be challenging. (More than half of the quarters in which the Fund has lost money have been summer quarters.) September 30 also ends the Fund's fiscal year. For the fiscal twelve months the Fund earned approximately 14% while the comparable Lipper Balanced Fund figure increased 10%. Our firm's investment research department has adopted the practice of including a brief retrospective on our investment history with a stock when they review one of their stocks for our investment committee. Since we have found these reports to be a valuable investment tool, we thought that we should do the same for the Equity and Income Fund at the fiscal year-end. And, while the official tenth birthday for the Fund will not occur until the beginning of November, the September quarter was the 40th quarter in the Fund's history, so we will call this a ten-year retrospective. Through September 30, our annualized rate of return since inception has been 14%. Nine of ten fiscal years have produced positive returns, and the only negative outcome (the year ended 9/30/02) was a relatively small loss of 0.5%. This first decade has met our goal of providing equity-like returns (I.E. greater than 10%/year) while experiencing less volatility than an all-equity portfolio. Though the past ten years have been replete with challenges, they have generally been a wonderful time to be a value investor. Your portfolio managers often whine and moan about the prevailing investment environment, but we know that we are blessed to do what we do and to do it at Harris Associates L.P., your Fund's adviser. We truly are honored to have you, the Fund shareholders, invest alongside us in The Oakmark Equity and Income Fund. We hope that we have the privilege of working together with you for many years into the future. IT'S AN ILL WIND.... No doubt many writers have borrowed from Shakespeare's THE TEMPEST to begin an article that references the recent hurricanes in the Gulf of Mexico. Let us say at the outset that we deeply regret the terrible impact these storms have had on millions of lives. Nevertheless, an unusual aspect of investing is that tragic events do affect investment 16 returns. These particular storms have enhanced the current value of several of the Fund's holdings. As value investors, we try to create portfolios with favorable risk/reward characteristics. We attempt to purchase securities at a price that already fully discounts negative possibilities. This means that when unexpected favorable events occur, holdings have considerable upside potential. Our five holdings that are North American exploration and production companies (Burlington Resources, XTO Energy, St. Mary Land & Exploration, Encana, and Cabot Oil & Gas) experienced a price increase as a result of the recent hurricanes. The five companies have limited operations in the Gulf of Mexico; in fact, Encana sold its Gulf properties only six months ago. The disruption and destruction of Gulf production facilities and pipelines helped to drive the price of natural gas up 80% in the summer quarter, and while the five companies had pre-sold some of their next few years' production at lower prices, much of their gas will sell at the current high price level. Our holding in ConocoPhillips has also benefited, but for a different reason. ConocoPhillips is a major refiner of oil and, with many refineries off-line after the storms, unaffected facilities have become more valuable. Over the four years that we have owned stocks of companies in this sector, clients have occasionally asked if we based our ownership on a forecast of rising commodity prices. In fact, our process asks the market to estimate the outlook for commodity prices. We assume that the futures markets for commodities provide a viable basis from which to establish valuations for resource company assets. When we initiated positions in Burlington Resources and XTO Energy in 2001, we used prevailing futures prices to determine that both companies traded at a discount to our estimate of liquidation value of their energy reserves. And, we were paying NOTHING for the operating companies, I.E. the talent and infrastructure that had discovered the gas and oil. Opportunities to obtain something for free always attract us. In this case we also obtained a favorably weighted distribution of surprise outcomes because the prices for gas and oil were low relative to production costs. The situation is obviously different today. The near-term price for natural gas far exceeds the level needed to justify new investment intended to increase supply. The futures market understands this and has priced delivery of natural gas in 2009 at half the price that it assigns to current delivery. The next two winters could be difficult, however. While natural gas is abundant in many parts of the world, the ability to deliver this gas to North America is limited. Many liquefied natural gas (LNG) terminals have been proposed, but few are under construction. And while Canada has plentiful untapped supplies in the McKenzie Delta, the pipelines to deliver this gas have yet to complete the permitting process, and construction is not likely to be finished for several years. As a result, we currently base our valuations of U.S. natural gas producers on a forecast of high profitability for the next two years with a significant drop-off in 2008. We have often written in these letters that we go wherever our understanding of value takes us. The recent hurricanes may have accelerated the process by which price and value come together for our exploration and production company holdings. The hurricanes may also provide new value opportunities for us as we expect many companies to report disappointing earnings in the second half of the year. /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--SEPTEMBER 30, 2005
NAME SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--61.1% COMMON STOCKS--61.1% APPAREL RETAIL--1.5% The TJX Companies, Inc. 7,240,000 $ 148,275,200 BROADCASTING & CABLE TV--5.5% EchoStar Communications Corporation, Class A 8,218,420 $ 243,018,679 The E.W. Scripps Company, Class A 2,500,000 124,925,000 The DIRECTV Group, Inc. (a) 8,026,722 120,240,296 Clear Channel Communications, Inc. 1,500,000 49,335,000 --------------- 537,518,975 HOMEBUILDING--0.1% Pulte Homes, Inc. 200,000 $ 8,584,000 LEISURE PRODUCTS--0.4% Brunswick Corp. 1,000,000 $ 37,730,000 MOVIES & ENTERTAINMENT--1.3% Viacom, Inc., Class B 3,817,300 $ 126,009,073 PUBLISHING--0.8% The Washington Post Company, Class B 100,300 $ 80,490,750 RESTAURANTS--1.0% McDonald's Corporation 3,000,000 $ 100,470,000 BREWERS--0.4% InBev NV 1,000,000 $ 39,561,111 DISTILLERS & VINTNERS--2.4% Diageo plc (b) 4,100,000 $ 237,841,000 HYPERMARKETS & SUPER CENTERS--1.4% Costco Wholesale Corporation 3,200,000 $ 137,888,000 PACKAGED FOODS & MEATS--4.0% Nestle SA (b) 3,900,000 $ 285,511,200 Dean Foods Company (a) 1,950,000 75,777,000 Sanderson Farms, Inc. 550,000 20,438,000 TreeHouse Foods, Inc. (a) 325,000 8,736,000 --------------- 390,462,200 PERSONAL PRODUCTS--0.8% Avon Products, Inc. 3,000,000 $ 81,000,000
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NAME SHARES HELD MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--61.1% (CONT.) TOBACCO--1.3% UST, Inc. 3,000,000 $ 125,580,000 INTEGRATED OIL & GAS--1.4% ConocoPhillips 2,000,000 $ 139,820,000 OIL & GAS EXPLORATION & PRODUCTION--13.1% Burlington Resources, Inc. 7,056,000 $ 573,793,920 XTO Energy, Inc. 10,561,338 478,639,838 EnCana Corp. (c) 2,000,000 116,620,000 St. Mary Land & Exploration Company (d) 2,900,000 106,140,000 Cabot Oil & Gas Corporation 125,000 6,313,750 --------------- 1,281,507,508 INVESTMENT BANKING & BROKERAGE--1.8% Morgan Stanley 3,200,000 $ 172,608,000 PROPERTY & CASUALTY INSURANCE--4.4% SAFECO Corporation 4,000,000 $ 213,520,000 MBIA, Inc. 1,850,000 112,147,000 The Progressive Corporation 1,050,000 110,008,500 --------------- 435,675,500 REAL ESTATE INVESTMENT TRUSTS--0.7% Plum Creek Timber Company, Inc. 1,701,444 $ 64,501,742 BIOTECHNOLOGY--2.2% MedImmune, Inc. (a) 6,000,000 $ 201,900,000 Techne Corporation (a) 176,471 10,055,318 --------------- 211,955,318 HEALTH CARE EQUIPMENT--2.3% Hospira, Inc. (a) 3,750,000 $ 153,637,500 Varian, Inc. (a)(d) 1,649,400 56,607,408 CONMED Corporation (a) 570,100 15,894,388 --------------- 226,139,296 HEALTH CARE SERVICES--2.7% Caremark Rx, Inc. (a) 5,301,300 $ 264,693,909 AEROSPACE & DEFENSE--6.7% General Dynamics Corporation 2,060,300 $ 246,308,865 Raytheon Company 3,599,700 136,860,594 Rockwell Collins, Inc. 2,105,700 101,747,424 Alliant Techsystems, Inc. (a) 1,325,000 98,911,250 Honeywell International, Inc. 1,889,500 70,856,250 --------------- 654,684,383
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SHARES HELD/ NAME PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- EQUITY AND EQUIVALENTS--61.1% (CONT.) COMMERCIAL PRINTING--1.8% R.R. Donnelley & Sons Company 4,909,500 $ 181,995,165 HUMAN RESOURCE & EMPLOYMENT SERVICES--0.3% Watson Wyatt & Company Holdings 1,236,100 $ 33,312,895 INDUSTRIAL CONGLOMERATES--0.4% Tyco International Ltd. 1,500,000 $ 41,775,000 APPLICATION SOFTWARE--0.5% Mentor Graphics Corporation (a)(d) 3,640,000 $ 31,304,000 The Reynolds and Reynolds Company, Class A 614,000 16,829,740 --------------- 48,133,740 COMPUTER STORAGE & PERIPHERALS--0.5% Imation Corp. 1,215,000 $ 52,087,050 DATA PROCESSING & OUTSOURCED SERVICES--1.0% Ceridian Corporation (a) 4,800,000 $ 99,600,000 INTERNET SOFTWARE & SERVICES--0.2% Jupiter Telecommunications Co., Ltd. (a)(c) 21,300 $ 18,412,389 PAPER PRODUCTS--0.2% Schweitzer-Mauduit International, Inc. 700,000 $ 15,624,000 TOTAL COMMON STOCKS (COST: $4,272,578,368) 5,993,936,204 TOTAL EQUITY AND EQUIVALENTS (COST: $4,272,578,368) 5,993,936,204 FIXED INCOME--36.6% CORPORATE BONDS--0.3% PUBLISHING--0.1% PRIMEDIA, Inc., 8.00% due 5/15/2013 $ 10,000,000 $ 10,075,000 PAPER PACKAGING--0.2% Sealed Air Corporation, 144A, 5.625% due 7/15/2013 (e) $ 20,000,000 $ 20,054,940 TOTAL CORPORATE BONDS (COST: $30,250,100) 30,129,940 GOVERNMENT AND AGENCY SECURITIES--36.3% CANADIAN GOVERNMENT BONDS--5.6% Canada Government, 3.25% due 12/1/2006 CAD 250,000,000 $ 215,075,712 Canada Government, 3.00% due 6/1/2007 CAD 250,000,000 214,038,975 Canada Government, 3.00% due 12/1/2005 CAD 125,000,000 107,566,893 Province of Alberta, 7.25% due 10/28/2005 CAD 10,000,000 8,625,217 --------------- 545,306,797
20
NAME PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- FIXED INCOME--36.6% (CONT.) GOVERNMENT AND AGENCY SECURITIES--36.3% (CONT.) NORWEGIAN GOVERNMENT BONDS--0.2% Norway Government, 6.75% due 1/15/2007 NOK 100,000,000 $ 16,042,316 SWEDISH GOVERNMENT BONDS--0.1% Kingdom of Sweden, 3.50% due 4/20/2006 SEK 50,000,000 $ 6,514,587 U.S. GOVERNMENT NOTES--22.7% United States Treasury Notes, 4.125% due 8/15/2010 $ 500,000,000 $ 497,754,000 United States Treasury Notes, 4.00% due 4/15/2010 500,000,000 495,449,000 United States Treasury Notes, 3.375% due 1/15/2007, Inflation Indexed 262,654,560 271,632,093 United States Treasury Notes, 6.00% due 8/15/2009 250,000,000 265,869,250 United States Treasury Notes, 4.125% due 8/15/2008 250,000,000 249,629,000 United States Treasury Notes, 4.00% due 6/15/2009 250,000,000 248,281,250 United States Treasury Notes, 4.25% due 8/15/2015 200,000,000 198,750,000 --------------- 2,227,364,593 U.S. GOVERNMENT AGENCIES--7.7% Fannie Mae, 5.25% due 4/15/2007 $ 50,000,000 $ 50,629,500 Federal Home Loan Mortgage Corporation, 4.00% due 8/17/2007 50,000,000 49,697,800 Federal Home Loan Bank, 4.125% due 4/18/2008 50,000,000 49,693,250 Federal Home Loan Mortgage Corporation, 3.75% due 11/15/2006 50,000,000 49,648,600 Fannie Mae, 3.875% due 5/15/2007 50,000,000 49,598,600 Federal Home Loan Bank, 3.625% due 6/20/2007 50,000,000 49,420,700 Federal Home Loan Bank, 3.875% due 8/22/2008 50,000,000 49,233,100 Federal Home Loan Bank, 5.00% due 12/20/2011 34,555,000 34,363,565 Fannie Mae, 4.25% due 7/15/2007 25,000,000 24,936,725 Fannie Mae, 4.25% due 5/15/2009 25,000,000 24,798,675 Federal Home Loan Mortgage Corporation, 3.75% due 4/15/2007 25,000,000 24,776,700 Federal Home Loan Bank, 2.875% due 9/15/2006 25,000,000 24,657,800 Federal Home Loan Bank, 2.625% due 10/16/2006 25,000,000 24,562,075 Federal Home Loan Bank, 2.75% due 12/15/2006 25,000,000 24,528,225 Fannie Mae, 3.25% due 11/15/2007 25,000,000 24,421,725 Fannie Mae, 3.625% due 12/28/2009 24,435,000 24,144,468 Federal Home Loan Mortgage Corporation, 3.625% due 3/24/2008 20,000,000 19,926,000 Federal Home Loan Bank, 2.50% due 4/20/2009 20,000,000 19,817,100 Fannie Mae, 2.60% due 4/28/2009 18,800,000 18,626,138 Fannie Mae, 3.50% due 2/8/2010 15,315,000 15,265,150 Fannie Mae, 4.25% due 2/19/2010 12,888,000 12,666,687
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NAME PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- FIXED INCOME--36.6% (CONT.) GOVERNMENT AND AGENCY SECURITIES--36.3% (CONT.) U.S. GOVERNMENT AGENCIES--7.7% (CONT.) Fannie Mae, 3.125% due 11/30/2009 $ 12,697,000 $ 12,605,886 Federal Home Loan Mortgage Corporation, 3.00% due 11/17/2006 10,000,000 9,851,520 Fannie Mae, 3.00% due 10/6/2009 10,000,000 9,849,340 Fannie Mae, 3.375% due 3/3/2008 9,300,000 9,247,994 Fannie Mae, 3.50% due 10/14/2010 7,550,000 7,477,301 Federal Home Loan Bank, 4.00% due 8/17/2007 7,500,000 7,447,665 Federal Home Loan Bank, 3.00% due 12/30/2009 5,000,000 5,019,260 Federal Home Loan Bank, 4.30% due 8/16/2010 5,000,000 4,993,515 Fannie Mae, 4.00% due 4/13/2009 5,000,000 4,988,660 Federal Home Loan Bank, 4.52% due 8/26/2009 4,825,000 4,792,031 Fannie Mae, 5.125% due 5/4/2012 4,013,000 4,009,071 Federal Home Loan Bank, 3.50% due 2/22/2007 4,000,000 3,976,552 Federal Home Loan Bank, 3.00% due 2/24/2010 3,000,000 2,985,885 Fannie Mae, 3.75% due 6/23/2009 2,820,000 2,801,645 Federal Home Loan Mortgage Corporation, 3.125% due 9/15/2010 2,500,000 2,487,475 Federal Home Loan Bank, 2.40% due 3/9/2009 2,000,000 1,984,048 Federal Home Loan Mortgage Corporation, 3.00% due 1/13/2009 1,000,000 996,776 --------------- 760,927,207 TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $3,536,689,929) 3,556,155,500 TOTAL FIXED INCOME (COST: $3,566,940,029) 3,586,285,440
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NAME PAR VALUE MARKET VALUE --------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--1.9% REPURCHASE AGREEMENTS--1.9% IBT Repurchase Agreement, 3.51% dated 9/30/2005 due 10/3/2005, repurchase price $181,052,943, collateralized by Small Business Administration Bonds, with rates of 6.066% - 7.085%, with maturities from 2/25/2015 - 3/25/2030, and with an aggregate market value plus accrued interest of $190,050,000 $ 181,000,000 $ 181,000,000 IBT Repurchase Agreement, 2.75% dated 9/30/2005 due 10/3/2005, repurchase price $2,367,289, collateralized by a Small Business Administration Bond, with a rate of 6.875%, with a maturity date of 5/25/2016, and with a market value plus accrued interest of $2,485,084 2,366,746 2,366,746 --------------- TOTAL REPURCHASE AGREEMENTS (COST: $183,366,746) 183,366,746 TOTAL SHORT TERM INVESTMENTS (COST: $183,366,746) 183,366,746 Total Investments (Cost $8,022,885,143)--99.6% $ 9,763,588,390 Other Assets In Excess Of Other Liabilities--0.4% 41,631,433 --------------- TOTAL NET ASSETS--100% $ 9,805,219,823 ===============
(a) Non-income producing security. (b) Represents an American Depository Receipt. (c) Represents a foreign domiciled corporation. (d) See footnote number five in the Notes to the Financial Statements regarding investments in affiliated issuers. (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 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 (9/30/05) AS COMPARED TO THE MSCI WORLD INDEX(11)
THE OAKMARK GLOBAL FUND MSCI WORLD (CLASS I) INDEX 8/4/99 $ 10,000 $ 10,000 9/30/99 $ 9,180 $ 9,883 12/31/99 $ 9,981 $ 11,550 3/31/00 $ 10,061 $ 11,668 6/30/00 $ 10,381 $ 11,255 9/30/00 $ 10,922 $ 10,689 12/31/00 $ 11,562 $ 10,028 3/31/01 $ 11,480 $ 8,739 6/30/01 $ 13,289 $ 8,959 9/30/01 $ 11,071 $ 7,676 12/31/01 $ 13,880 $ 8,335 3/31/02 $ 15,387 $ 8,364 6/30/02 $ 14,372 $ 7,601 9/30/02 $ 11,828 $ 6,204 12/31/02 $ 13,587 $ 6,678 3/31/03 $ 12,153 $ 6,340 6/30/03 $ 16,225 $ 7,420 9/30/03 $ 17,774 $ 7,779 12/31/03 $ 20,242 $ 8,889 3/31/04 $ 21,029 $ 9,121 6/30/04 $ 21,323 $ 9,201 9/30/04 $ 20,714 $ 9,109 12/31/04 $ 23,407 $ 10,197 3/31/05 $ 23,546 $ 10,084 6/30/05 $ 23,696 $ 10,126 9/30/05 $ 25,660 $ 10,833 AVERAGE ANNUAL TOTAL RETURNS (AS OF 09/30/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (8/4/99) ---------------------------------------------------------------------------------- OAKMARK GLOBAL FUND (CLASS I) 8.29% 23.88% 18.62% 16.53% MSCI World 6.98% 18.93% 0.27% 1.30% Lipper Global Fund Index(12) 8.04% 20.60% 1.03% 3.58%
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 Global Fund appreciated 8% for the quarter, outperforming the MSCI World Index, which was up 7%. More importantly, over the past five years, The Oakmark Global Fund has returned 19% annualized, compared to an unchanged MSCI World Index and a 1% return for the Lipper Global Fund Index. CHANGE IN CO-PORTFOLIO MANAGER On October 1, 2005, Robert Taylor was named co-portfolio manager of The Oakmark Global Fund, replacing Michael Welsh. Michael is retiring from Harris Associates L.P., the Fund's adviser, in January 2006. We wish to extend our heartfelt thanks to Michael for his tremendous contribution to the Fund's success. We will miss him as a colleague, and we wish him and his family the best success in all future endeavors. All of us at Harris Associates are very excited to have Rob join the Fund. With the firm since 1994, Rob has managed other global accounts since 2002, and serves as the Director of International Research. Rob received his BBA from the University of Wisconsin-Madison (1994) and is a CFA charterholder(R). We will continue to manage The Oakmark Global Fund using the same value philosophy employed since its inception. 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 as owners. We base our investment decisions on our own intensive, fundamental research. Finally, the Fund is constructed stock-by-stock from the bottom-up, meaning industry and geographic weightings are simply a fall out of our stock selection. PORTFOLIO COMPOSITION We added Tyco International Ltd. to the portfolio this quarter. Tyco, with more than a $50 billion market capitalization, is a conglomerate with four major divisions: fire and security, electronics, healthcare, and engineered products. The company may be best known for the corporate governance problems of its previous management team, which left the company in 2002. Over the past three years, the new management team has improved operations, reduced debt, sold some non-core businesses, and made the company's accounting practices conservative and transparent. Many of Tyco's subsidiary 24 companies have market-share-leading positions in growing industries. Our opportunity to purchase the stock developed when management reduced earnings guidance for the second half of 2005. Tyco generates more than $4 billion of free cash flow per year, affording management considerable operating flexibility. We would not be surprised to see management restructure the company over time, because of the minimal synergies between the four major divisions. BMW, which manufactures and sells luxury cars and motorcycles worldwide, was also added to the Fund this quarter. Because of its premium brand and product innovation, the company's growth, operating margins, and returns have been some of the best in the industry. Unlike its U.S. competitors, BMW does not face excessive pension obligations and has a very healthy balance sheet. Given the strength of the brand, management does not have to rely on excessive price discounts to move volume. Through the first half of the year, deliveries were up almost 10%. Operational management has been strong, but now even capital management is improving, as evidenced by a recent 3% share repurchase that is authorized to extend to 10%. Today BMW sells for 10x earnings and less than 6x operating profit. The stock yields 2% and is trading at a significant discount to our estimate of intrinsic value. 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] GLOBAL DIVERSIFICATION--SEPTEMBER 30, 2005
% OF FUND EQUITY MARKET VALUE ----------------------------------------------------------------------------- - EUROPE 43.3% Switzerland 12.8% Great Britain 10.5% * Netherlands 6.8% * France 5.2% * Ireland 3.5% * Germany 3.2% * Italy 1.3% - UNITED STATES 35.2% - PACIFIC RIM 18.9% Japan 11.5% Korea 4.1% Australia 3.3% - OTHER 1.5% Bermuda 1.5% - LATIN AMERICA 1.1% Mexico 1.1%
* Euro currency countries comprise 20.0% of the Fund. 26 THE OAKMARK GLOBAL FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2005
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% APPAREL RETAIL--2.0% The TJX Companies, Inc. (United States) Discount Apparel & Home Fashion Retailer 1,861,000 $ 38,113,280 APPAREL, ACCESSORIES & LUXURY GOODS--0.4% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 740,000 $ 8,314,661 AUTOMOBILE MANUFACTURERS--0.3% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 107,500 $ 5,047,558 BROADCASTING & CABLE TV--2.2% Grupo Televisa S.A. (Mexico) (b) Television Production & Broadcasting 278,700 $ 19,985,577 Liberty Media Corporation, Class A (United States) (a) Broadcast Services & Programming 2,356,000 18,965,800 Discovery Holding Company, Class A (United States) (a) Media Management & Network Services 235,600 3,402,064 ----------------- 42,353,441 HOUSEHOLD APPLIANCES--2.7% Snap-on Incorporated (United States) Tool & Equipment Manufacturer 1,431,000 $ 51,687,720 MOTORCYCLE MANUFACTURERS--2.5% Harley-Davidson, Inc. (United States) Motorcycle Manufacturer 987,000 $ 47,810,280 MOVIES & ENTERTAINMENT--6.3% Viacom, Inc., Class B (United States) Worldwide Entertainment & Publishing Company 1,595,000 $ 52,650,950 Vivendi Universal SA (France) Music, Games, Television, Film, & Telecommunications 1,430,500 46,704,446 Time Warner, Inc. (United States) Filmed Entertainment & Television Networks 1,041,000 18,852,510 ----------------- 118,207,906
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NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% (CONT.) PUBLISHING--1.8% Tribune Company (United States) Publishing & Broadcast Services 1,003,000 $ 33,991,670 DISTILLERS & VINTNERS--4.2% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 5,517,500 $ 79,340,878 HOUSEHOLD PRODUCTS--2.8% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 632,000 $ 53,955,826 PACKAGED FOODS & MEATS--5.6% Nestle SA (Switzerland) Food & Beverage Manufacturer 281,000 $ 82,286,266 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 2,423,000 24,453,808 ----------------- 106,740,074 SOFT DRINKS--0.8% Lotte Chilsung Beverage Co., Ltd. (Korea) Soft Drinks, Juices & Sports Drinks Manufacturer 15,120 $ 14,373,780 OIL & GAS EXPLORATION & PRODUCTION--5.4% Burlington Resources, Inc. (United States) Oil & Natural Gas Exploration & Production 1,260,000 $ 102,463,200 ASSET MANAGEMENT & CUSTODY BANKS--2.7% Julius Baer Holding AG-B (Switzerland) Asset Management 646,500 $ 50,601,082 DIVERSIFIED BANKS--6.3% Bank of Ireland (Ireland) Commercial Bank 4,029,000 $ 63,688,881 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 2,260,000 41,368,848 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 863,600 16,250,943 ----------------- 121,308,672 DIVERSIFIED CAPITAL MARKETS--0.4% Credit Suisse Group (Switzerland) Investment Services & Insurance 190,700 $ 8,442,812
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NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% (CONT.) INVESTMENT BANKING & BROKERAGE--0.8% Daiwa Securities Group, Inc. (Japan) Stock Broker 2,062,000 $ 16,116,615 SPECIALIZED FINANCE--4.2% Euronext NV (Netherlands) Stock Exchange 1,814,000 $ 79,853,916 HEALTH CARE SERVICES--2.4% Laboratory Corporation of America Holdings (United States) (a) Medical Laboratory & Testing Services 920,000 $ 44,813,200 HEALTH CARE SUPPLIES--1.0% Ansell Limited (Australia) Protective Rubber & Plastics Products 2,265,966 $ 19,494,686 PHARMACEUTICALS--11.0% Takeda Pharmaceutical Company Limited (Japan) Pharmaceuticals & Food Supplements 1,281,000 $ 76,305,767 GlaxoSmithKline plc (Great Britain) Pharmaceuticals 2,614,200 66,512,170 Novartis AG (Switzerland) Pharmaceuticals 899,600 45,631,632 Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 781,000 20,232,982 ----------------- 208,682,551 AEROSPACE & DEFENSE--0.9% Alliant Techsystems, Inc. (United States) (a) Propulsion Systems & Munitions 239,087 $ 17,847,845 DIVERSIFIED COMMERCIAL AND PROFESSIONAL SERVICES--3.8% Equifax Inc. (United States) Credit Reporting & Collection 1,367,000 $ 47,762,980 Meitec Corporation (Japan) Software Engineering Services 760,000 24,309,821 ----------------- 72,072,801 ENVIRONMENTAL & FACILITIES SERVICES--2.1% Waste Management, Inc. (United States) Waste Management Services 1,425,000 $ 40,769,250 HUMAN RESOURCE & EMPLOYMENT SERVICES--1.1% Michael Page International plc (Great Britain) Recruitment Consultancy Services 4,815,400 $ 20,900,878
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NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--95.7% (CONT.) INDUSTRIAL CONGLOMERATES--1.4% Tyco International Ltd. (Bermuda) Diversified Manufacturing & Services 975,000 $ 27,153,750 OFFICE SERVICES & SUPPLIES--0.4% United Stationers, Inc. (United States) (a) Business Products Distributor 150,000 $ 7,179,000 DATA PROCESSING & OUTSOURCED SERVICES--6.0% eFunds Corporation (United States) (a) Electronic Debit Payment Services 2,237,100 $ 42,124,593 First Data Corporation (United States) Data Processing & Management 1,004,750 40,190,000 Ceridian Corporation (United States) (a) Data Management Services 1,538,000 31,913,500 ----------------- 114,228,093 OFFICE ELECTRONICS--2.5% Neopost SA (France) Mailroom Equipment Supplier 494,750 $ 47,965,698 SEMICONDUCTORS--1.5% Rohm Company Limited (Japan) Integrated Circuits & Semi-Conductor Devices Manufacturer 321,000 $ 27,861,391 DIVERSIFIED CHEMICALS--2.3% Akzo Nobel N.V. (Netherlands) Chemical Producer 992,300 $ 43,264,446 SPECIALTY CHEMICALS--2.4% Lonza Group AG, Registered Shares (Switzerland) Industrial Organic Chemicals 408,400 $ 24,107,985 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 32,800 21,009,233 ----------------- 45,117,218 WIRELESS TELECOMMUNICATION SERVICES--5.5% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 300,000 $ 58,217,537 NTT DoCoMo, Inc. (Japan) Mobile Telecommunications 24,600 43,787,285 SK Telecom Co., Ltd. (Korea) (b) Mobile Telecommunications 55,000 1,201,200 ----------------- 103,206,022 TOTAL COMMON STOCKS (COST: $1,358,187,848) 1,819,280,200
30
NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--3.4% U.S. GOVERNMENT AGENCIES--1.0% Federal Home Loan Mortgage Corp., 3.64% due 10/18/2005 $ 10,000,000 $ 10,009,100 Federal Home Loan Bank, 3.55% due 10/7/2005 10,000,000 9,994,084 TOTAL U.S. GOVERNMENT AGENCIES (COST: $20,003,184) 20,003,184 REPURCHASE AGREEMENTS--2.4% IBT Repurchase Agreement, 3.51% dated 9/30/2005 due 10/3/2005, repurchase price $44,012,870, collateralized by Small Business Administration Bonds, with rates of 5.875% - 6.375%, with maturities from 12/25/2015 - 11/15/2030, and with an aggregate market value plus accrued interest of $46,200,000 $ 44,000,000 $ 44,000,000 IBT Repurchase Agreement, 2.75% dated 9/30/2005 due 10/3/2005, repurchase price $1,471,493, collateralized by a Small Business Administration Bond, with a rate of 7.375%, with a maturity date of 4/25/2026, and with a market value plus accrued interest of $1,544,713 1,471,155 1,471,155 ----------------- TOTAL REPURCHASE AGREEMENTS (COST: $45,471,155) 45,471,155 TOTAL SHORT TERM INVESTMENTS (COST: $65,474,339) 65,474,339 Total Investments (Cost $1,423,662,187)--99.1% $ 1,884,754,539 Other Assets In Excess Of Other Liabilities--0.9% 16,750,531 ----------------- TOTAL NET ASSETS--100% $ 1,901,505,070 =================
(a) Non-income producing security. (b) Represents an American Depository Receipt. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 31 THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS [PHOTO OF DAVID G. HERRO] FELLOW SHAREHOLDERS, The Oakmark International and Oakmark International Small Cap Funds had an acceptable fourth quarter with returns of 9% and 11% respectively. For the fiscal year, The Oakmark International Fund returned 26% and The Oakmark International Small Cap Fund returned 29%. This compares to the MSCI World ex U.S. Index(13) return of 27%. Most importantly, since the Funds' inceptions, they have posted annualized returns of 13% and 14% respectively. This compares very well to the MSCI World ex U.S. Index, which returned 8% relative to the International Fund and 7% relative to the International Small Cap Fund. EUROPE, JAPAN AND THE BIG PICTURE Last quarter we wrote about Europe's failure to embrace real economic reform. We argued that no country or region could afford to be complacent about competitiveness, especially in a challenging global economy. In September, an important election in Germany pitted a reform candidate against the relatively stale Gerhard Schroeder. Sadly, the results demonstrated that the electorate of Europe's largest economy isn't quite convinced that the status quo is all that bad. It was finally decided that Angela Merkel will be the new German chancellor, but with heavy involvement by outgoing chancellor, Gerhard Schroeder's opposition party. A few weeks after the German elections, Poland held its election with opposite results: it threw out the old communists for a free market government. Is there something Old Europe can learn from New? More damning for Old Europe is that Japan recently faced the same choice, but, with a different result. Prime Minister Koizumi called a snap election because there was opposition to his plan to liberalize the Postal Savings Banks. Though it was quite a gamble, Koizumi and reform won big. Is Japan finally on the brink of fundamental change? This is certainly a possibility. But of course, economic reform is one issue; far more important are the events within corporate Japan itself. Unfortunately, the vast majority of corporate Japan still appears locked into a culture that places shareholder value behind numerous other objectives. The good news is that a select number of Japanese companies are changing. As a result of these changes and low valuations, we have been able to significantly increase our weightings in Japan, though we still remain underweighted there relative to the MSCI World ex U.S. Index. MIKE WELSH Before I end this report, I would like to wish my longtime partner, Mike Welsh, a fond farewell. Mike has chosen to retire from Harris Associates L.P. effective January 2006. Mike was the first person I hired back in September 1992 when The Oakmark International Fund started, and he was made a co-manager a few years later. He has been a solid contributor to the success of the Funds, most notably for his savvy stock recommendations in South Korea during the second half of the 1990s. We wish him well in the next chapter of his life. /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 (9/30/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(13)
THE OAKMARK INTERNATIONAL MSCI WORLD EX FUND (CLASS I) U.S. INDEX 9/30/92 $ 10,000 $ 10,000 12/31/92 $ 10,043 $ 9,628 3/31/93 $ 11,890 $ 10,766 6/30/93 $ 12,300 $ 11,834 9/30/93 $ 13,387 $ 12,562 12/31/93 $ 15,424 $ 12,729 3/31/94 $ 15,257 $ 13,133 6/30/94 $ 14,350 $ 13,748 9/30/94 $ 15,278 $ 13,830 12/31/94 $ 14,026 $ 13,664 3/31/95 $ 13,563 $ 13,924 6/30/95 $ 14,749 $ 14,060 9/30/95 $ 15,507 $ 14,631 12/31/95 $ 15,193 $ 15,222 3/31/96 $ 17,021 $ 15,681 6/30/96 $ 18,383 $ 15,937 9/30/96 $ 18,347 $ 15,950 12/31/96 $ 19,450 $ 16,268 3/31/97 $ 20,963 $ 16,016 6/30/97 $ 22,700 $ 18,094 9/30/97 $ 23,283 $ 18,027 12/31/97 $ 20,097 $ 16,637 3/31/98 $ 22,994 $ 19,083 6/30/98 $ 20,253 $ 19,233 9/30/98 $ 16,322 $ 16,404 12/31/98 $ 18,688 $ 19,759 3/31/99 $ 21,258 $ 20,070 6/30/99 $ 25,728 $ 20,650 9/30/99 $ 23,896 $ 21,535 12/31/99 $ 26,065 $ 25,277 3/31/00 $ 26,012 $ 25,416 6/30/00 $ 27,856 $ 24,530 9/30/00 $ 27,306 $ 22,663 12/31/00 $ 29,324 $ 21,897 3/31/01 $ 26,763 $ 18,825 6/30/01 $ 29,437 $ 18,629 9/30/01 $ 23,728 $ 16,062 12/31/01 $ 27,819 $ 17,212 3/31/02 $ 31,006 $ 17,310 6/30/02 $ 30,315 $ 16,923 9/30/02 $ 23,365 $ 13,603 12/31/02 $ 25,465 $ 14,492 3/31/03 $ 22,481 $ 13,402 6/30/03 $ 28,198 $ 15,978 9/30/03 $ 30,368 $ 17,269 12/31/03 $ 35,152 $ 20,206 3/31/04 $ 36,419 $ 21,063 6/30/04 $ 37,083 $ 21,084 9/30/04 $ 37,024 $ 21,124 12/31/04 $ 41,862 $ 24,324 3/31/05 $ 42,753 $ 24,341 6/30/05 $ 42,733 $ 24,152 9/30/05 $ 46,597 $ 26,789 AVERAGE ANNUAL TOTAL RETURNS (AS OF 09/30/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR 10-YEAR (9/30/92) -------------------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND (CLASS I) 9.04% 25.85% 11.27% 11.62% 12.56% MSCI World ex U.S. 10.92% 26.82% 3.37% 6.23% 7.87% MSCI EAFE(14) 10.38% 25.79% 3.12% 5.83% 7.58% Lipper International Fund Index(15) 11.15% 26.32% 3.51% 7.43% 8.87%
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 performed satisfactorily over the past twelve months, returning 26%. This compares with 27% for the MSCI World ex U.S. Index and 26% for the Lipper International Fund Index. Most importantly, since inception, The Oakmark International Fund has returned annually 13%, as compared to the MSCI World ex U.S. Index, which returned 8%, and the Lipper International Fund Index, which returned 9%. IMPACT PLAYERS European exchange operator Euronext was not only the top contributing stock of the quarter, but also year to date. As you may recall, both Euronext and another holding, Deutsche Boerse, expressed interest in bidding for The London Stock Exchange. When shareholders prevented Deutsche Boerse from bidding, it ended the possibility of a value-destructive bidding war, and shares of Euronext and Deutsche Boerse rose strongly. Corporate activity also propelled the share price of long-term holding Aegis Plc. Aegis is the world's last large, independent media-buying company, and it has been the interest of French businessman Vincent Bollore who, as of this writing, has amassed an 11% stake. One of our Fund's holdings, Publicis, has also expressed interest in the company. On the negative side, UK-based jewelry retailer Signet Plc has been the worst contributing stock of the quarter and second worst year to date. As a result of the extremely weak UK retail environment, the stock is down just under 8% in sterling terms for the year. We remain extremely confident that Signet will continue to build shareholder value over time in both sales and profitability, particularly because it continues to outperform its peers in the U.S. market, which provides two-thirds of its total sales. We have been adding to our holding as a result of the recent price weakness. NEW ADDITIONS During the quarter, we added three new names: global brewer InBev, and media stocks TF1 (Societe Television Francaise 1), a French television station operator, and Johnston Press, a Scottish based owner of regional newspapers. In addition to--and even in spite of--the Fund's relatively healthy annual return, we have been able to identify good new ideas and havE plenty of prospects on our research list. As long-term international equity investors, we are still finding acceptable investment opportunities, and we remain enthused about future prospects. /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 [CHART] INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2005
% OF FUND EQUITY MARKET VALUE ---------------------------------------------------------------- - EUROPE 72.1% Great Britain 25.2% Switzerland 15.1% * France 9.3% * Germany 8.2% * Netherlands 8.2% * Italy 3.1% * Ireland 2.9% * Belgium 0.1% - PACIFIC RIM 26.4% Japan 14.0% Korea 8.0% Australia 2.4% Singapore 1.3% Hong Kong 0.7% - LATIN AMERICA 1.0% Mexico 1.0% - OTHER 0.5% Israel 0.5%
* Euro currency countries comprise 31.8% of the Fund. 34 THE OAKMARK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2005
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.5% ADVERTISING--3.9% Publicis Groupe (France) Advertising & Media Services 3,965,400 $ 126,225,058 Aegis Group plc (Great Britain) Media Services 44,006,600 108,703,343 ----------------- 234,928,401 APPAREL RETAIL--0.7% Giordano International Limited (Hong Kong) Pacific Rim Clothing Retailer & Manufacturer 61,424,300 $ 42,362,405 APPAREL, ACCESSORIES & LUXURY GOODS--1.9% Swatch Group AG, Bearer Shares (Switzerland) Watch Manufacturer 823,000 $ 113,379,100 Swatch Group AG, Registered Shares (Switzerland) Watch Manufacturer 24,700 698,489 ----------------- 114,077,589 AUTOMOBILE MANUFACTURERS--5.2% Bayerische Motoren Werke (BMW) AG (Germany) Luxury Automobile Manufacturer 4,220,700 $ 198,178,858 Honda Motor Co., Ltd. (Japan) Automobile & Motorcycle Manufacturer 2,025,000 114,556,990 ----------------- 312,735,848 BROADCASTING & CABLE TV--2.4% British Sky Broadcasting Group plc (Great Britain) Television Production & Broadcasting 8,813,000 $ 87,155,829 Grupo Televisa S.A. (Mexico) (b) Television Production & Broadcasting 763,000 54,714,730 Societe Television Francaise 1 (France) Television Production & Broadcasting 282,600 7,497,476 ----------------- 149,368,035 CONSUMER ELECTRONICS--0.8% Koninklijke (Royal) Philips Electronics N.V. (Netherlands) Electronics Manufacturer 1,787,000 $ 47,495,656 MOVIES & ENTERTAINMENT--1.5% Vivendi Universal SA (France) Music, Games, Television, Film, & Telecommunications 2,789,300 $ 91,067,956
35
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.5% (CONT.) PUBLISHING--0.3% Johnston Press plc (Great Britain) Newspaper Publisher 1,805,000 $ 15,828,168 SPECIALTY STORES--1.9% Signet Group plc (Great Britain) Jewelry Retailer 63,619,000 $ 115,055,598 TEXTILES--0.3% Chargeurs SA (France) (c) Wool, Textile Production & Trading 790,182 $ 20,802,323 BREWERS--1.7% Heineken Holding NV (Netherlands) Brewer 2,594,600 $ 76,508,301 Heineken NV (Netherlands) Brewer 497,500 15,973,775 InBev NV (Belgium) Brewer 132,000 5,222,067 ----------------- 97,704,143 DISTILLERS & VINTNERS--3.4% Diageo plc (Great Britain) Beverages, Wines, & Spirits Manufacturer 12,023,000 $ 172,889,057 Pernod-Ricard SA (France) Wines, Spirits, & Fruit Juice Manufacturer 157,000 27,724,393 ----------------- 200,613,450 HOUSEHOLD PRODUCTS--3.0% Henkel KGaA (Germany) Consumer Chemical Products Manufacturer 1,228,200 $ 104,855,293 Uni-Charm Corporation (Japan) Toiletry Product Manufacturer 1,550,000 66,925,144 KAO Corp. (Japan) Household & Chemical Products Manufacturer 575,000 14,161,563 ----------------- 185,942,000 PACKAGED FOODS & MEATS--4.9% Nestle SA (Switzerland) Food & Beverage Manufacturer 575,100 $ 168,408,654 Cadbury Schweppes plc (Great Britain) Beverage & Confectionary Manufacturer 12,390,400 125,048,476 ----------------- 293,457,130 PERSONAL PRODUCTS--1.4% L'Oreal SA (France) Health & Beauty Aid Manufacturer 1,077,000 $ 83,440,947
36
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.5% (CONT.) SOFT DRINKS--1.3% Lotte Chilsung Beverage Co., Ltd. (Korea) (c) Soft Drinks, Juices & Sports Drinks Manufacturer 84,327 $ 80,165,198 TOBACCO--0.9% KT&G Corporation (Korea) Tobacco Products Manufacturer 1,242,600 $ 53,824,169 INTEGRATED OIL & GAS--1.8% BP p.l.c. (Great Britain) Oil & Natural Gas Exploration & Production 6,294,100 $ 74,794,263 Total SA (France) Oil & Natural Gas Exploration & Production 126,000 34,397,611 ----------------- 109,191,874 DIVERSIFIED BANKS--14.6% Bank of Ireland (Ireland) Commercial Bank 10,462,900 $ 165,393,495 Australia and New Zealand Banking Group Limited (Australia) Commercial Bank 7,348,800 134,518,314 Kookmin Bank (Korea) Commercial Banking 2,159,700 127,284,667 Lloyds TSB Group plc (Great Britain) Commercial Bank 12,952,600 106,726,160 BNP Paribas SA (France) Commercial Banking 1,156,000 87,893,946 UniCredito Italiano S.p.A. (Italy) Banking Services 13,556,700 76,349,145 United Overseas Bank Limited, Foreign Shares (Singapore) Commercial Banking 8,395,368 69,957,265 Banco Popolare di Verona e Novara Scrl (Italy) Commercial Bank 2,938,400 55,293,852 Sanpaolo IMI S.p.A. (Italy) Banking Services 2,947,000 45,805,672 ----------------- 869,222,516 DIVERSIFIED CAPITAL MARKETS--1.9% Credit Suisse Group (Switzerland) Investment Services & Insurance 2,609,000 $ 115,507,591 INVESTMENT BANKING & BROKERAGE--2.0% Daiwa Securities Group, Inc. (Japan) Stock Broker 15,043,000 $ 117,576,252 REAL ESTATE MANAGEMENT & DEVELOPMENT--0.0% United Overseas Land Limited (Singapore) Real Estate Investor 839,536 $ 1,160,992
37
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.5% (CONT.) REINSURANCE--0.4% Hannover Rueckversicherung AG (Germany) Reinsurance 626,400 $ 21,686,269 SPECIALIZED FINANCE--5.5% Euronext NV (Netherlands) Stock Exchange 4,167,000 $ 183,435,099 Deutsche Boerse AG (Germany) Electronic Trading Systems 1,485,900 142,002,931 ----------------- 325,438,030 PHARMACEUTICALS--9.9% GlaxoSmithKline plc (Great Britain) Pharmaceuticals 8,470,000 $ 215,499,229 Takeda Pharmaceutical Company Limited (Japan) Pharmaceuticals & Food Supplements 2,876,800 171,363,334 Novartis AG (Switzerland) Pharmaceuticals 3,089,000 156,687,541 Sanofi-Aventis (France) Pharmaceuticals 588,508 48,636,876 ----------------- 592,186,980 DIVERSIFIED COMMERCIAL AND PROFESSIONAL SERVICES--1.3% Meitec Corporation (Japan) (c) Software Engineering Services 2,483,800 $ 79,448,332 ENVIRONMENTAL & FACILITIES SERVICES--0.2% Rentokil Initial plc (Great Britain) Global Business Services 3,400,000 $ 9,913,281 HUMAN RESOURCE & EMPLOYMENT SERVICES--1.7% Michael Page International plc (Great Britain) (c) Recruitment Consultancy Services 24,271,000 $ 105,346,431 INDUSTRIAL MACHINERY--1.3% Enodis plc (Great Britain) (a)(c) Food Processing Equipment 33,585,320 $ 76,146,451 MARINE PORTS & SERVICES--1.9% Associated British Ports Holdings plc (Great Britain) Port Operator 12,131,399 $ 112,427,874 ELECTRONIC EQUIPMENT MANUFACTURERS--0.5% Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 1,237,700 $ 30,967,254 SEMICONDUCTORS--1.0% Rohm Company Limited (Japan) Integrated Circuits & Semi- Conductor Devices Manufacturer 705,000 $ 61,190,906
38
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--94.5% (CONT.) DIVERSIFIED CHEMICALS--2.3% Akzo Nobel N.V. (Netherlands) Chemical Producer 3,182,200 $ 138,744,451 FERTILIZERS & AGRICULTURAL CHEMICALS--1.6% Syngenta AG (Switzerland) (a) Crop Protection Products 932,400 $ 97,616,535 SPECIALTY CHEMICALS--3.4% Lonza Group AG, Registered Shares (Switzerland) Industrial Organic Chemicals 1,797,700 $ 106,118,818 Givaudan (Switzerland) Fragrance & Flavor Compound Manufacturer 151,100 96,783,388 ----------------- 202,902,206 WIRELESS TELECOMMUNICATION SERVICES--7.7% SK Telecom Co., Ltd. (Korea) Mobile Telecommunications 981,700 $ 190,507,187 NTT DoCoMo, Inc. (Japan) Mobile Telecommunications 93,050 165,626,294 Vodafone Group Plc (Great Britain) Mobile Telecommunications 32,142,800 83,651,316 Vodafone Group Plc (Great Britain) (b) Mobile Telecommunications 606,000 15,737,820 SK Telecom Co., Ltd. (Korea) (b) Mobile Telecommunications 43,500 950,040 ----------------- 456,472,657 TOTAL COMMON STOCKS (COST: $4,141,768,525) 5,662,015,898
39
NAME PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--4.0% U.S. GOVERNMENT AGENCIES--0.9% Federal Home Loan Bank, 3.55% - 3.62% due 10/7/2005 - 11/2/2005 $ 40,000,000 $ 39,923,811 Federal Home Loan Mortgage Corp., 3.64% due 10/18/2005 20,000,000 19,965,622 ----------------- TOTAL U.S. GOVERNMENT AGENCIES (COST: $59,889,433) 59,889,433 REPURCHASE AGREEMENTS--3.1% IBT Repurchase Agreement, 3.51% dated 9/30/2005 due 10/3/2005, repurchase price $176,551,626, collateralized by Small Business Administration Bonds, with rates of 5.875% - 7.125%, with maturities from 9/25/2015 - 9/25/2030, and with an aggregate market value plus accrued interest of $185,325,000 $ 176,500,000 $ 176,500,000 IBT Repurchase Agreement, 2.75% dated 9/30/2005 due 10/3/2005, repurchase price $2,791,391, collateralized by a Small Business Administration Bond, with a rate of 6.645%, with a maturity date of 6/25/2024, and with a market value plus accrued interest of $2,930,289 2,790,752 2,790,752 ----------------- TOTAL REPURCHASE AGREEMENTS (COST: $179,290,752) 179,290,752 TOTAL SHORT TERM INVESTMENTS (COST: $239,180,185) 239,180,185 Total Investments (Cost $4,380,948,710)--98.5% $ 5,901,196,083 Foreign Currencies (Cost $521,777)--0.0% $ 522,325 Other Assets In Excess Of Other Liabilities--1.5% 88,531,106 ----------------- TOTAL NET ASSETS--100% $ 5,990,249,514 =================
(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 (9/30/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX(13)
THE OAKMARK INTERNATIONAL SMALL CAP MSCI WORLD EX FUND (CLASS I) U.S. INDEX 11/1/95 $ 10,000 $ 10,000 12/31/95 $ 9,630 $ 10,684 3/31/96 $ 10,970 $ 11,006 6/30/96 $ 11,570 $ 11,186 9/30/96 $ 11,590 $ 11,195 12/31/96 $ 12,038 $ 11,418 3/31/97 $ 12,080 $ 11,241 6/30/97 $ 13,181 $ 12,699 9/30/97 $ 12,672 $ 12,652 12/31/97 $ 9,642 $ 11,677 3/31/98 $ 11,429 $ 13,394 6/30/98 $ 9,892 $ 13,499 9/30/98 $ 8,211 $ 11,513 12/31/98 $ 10,529 $ 13,868 3/31/99 $ 13,118 $ 14,086 6/30/99 $ 15,317 $ 14,493 9/30/99 $ 15,439 $ 15,114 12/31/99 $ 16,190 $ 17,741 3/31/00 $ 15,387 $ 17,839 6/30/00 $ 15,529 $ 17,217 9/30/00 $ 14,908 $ 15,906 12/31/00 $ 14,756 $ 15,369 3/31/01 $ 15,232 $ 13,213 6/30/01 $ 15,777 $ 13,075 9/30/01 $ 13,987 $ 11,273 12/31/01 $ 16,671 $ 12,080 3/31/02 $ 18,370 $ 12,149 6/30/02 $ 18,831 $ 11,877 9/30/02 $ 14,641 $ 9,547 12/31/02 $ 15,818 $ 10,172 3/31/03 $ 13,882 $ 9,406 6/30/03 $ 17,933 $ 11,215 9/30/03 $ 20,465 $ 12,121 12/31/03 $ 24,109 $ 14,182 3/31/04 $ 25,685 $ 14,783 6/30/04 $ 26,436 $ 14,798 9/30/04 $ 27,411 $ 14,826 12/31/04 $ 31,087 $ 17,072 3/31/05 $ 32,779 $ 17,084 6/30/05 $ 31,910 $ 16,951 9/30/05 $ 35,371 $ 18,803 AVERAGE ANNUAL TOTAL RETURNS (AS OF 09/30/05) SINCE TOTAL RETURN INCEPTION LAST 3 MONTHS* 1-YEAR 5-YEAR (11/1/95) ----------------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND (CLASS I) 10.85% 29.04% 18.85% 13.58% MSCI World ex U.S. 10.92% 26.82% 3.37% 6.57% Lipper International Small Cap Average(16) 10.12% 29.20% 11.39% 13.42%
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 11% for the quarter, performing in line with the benchmark indices. More importantly, however, for the past twelve months and since inception your Fund is up 29% and 14% respectively, outpacing the MSCI World ex U.S. Index with returns of 27% and 7%. Performance in the quarter was broadly based, with approximately 9 of every 10 positions moving higher. Gurit-Heberlein, a Swiss mini-conglomerate, was the largest contributor. On August 30, the group announced it would split and separately list its healthcare activities, which include a dental supplies operation and a small medical equipment business. We had always employed a blended valuation on this company, incorporating the relative attractiveness of the group's healthcare activities versus its industrial operations. The break-up will help crystallize the value of each division, with the market preemptively driving up the stock in anticipation of the event. Julius Baer was not only the second largest contributor to performance in the quarter, but it was the leading contributor to the Fund for the calendar year. You may recall the March 2005 shareholder letter, which discussed how Baer had adjusted its shareholding structure so that the family and minority shareholders would have equal voting rights. This change, coupled with strong operating performance, propelled the stock in the first half of the year. Recently, Baer announced a transformational acquisition, almost doubling the group's assets under management and fully utilizing all its excess capital. The acquisition price, post-synergies, looks very compelling, and after meeting the new management in Boston in September, we're very comfortable with the strategic direction and leadership of the newly formed group. As at the tail end of 2004, bid activity in our small-cap universe has increased. Allco Equity Partners purchased 17% of Baycorp in July and tendered for 50% of the shares at A$3.50. (The stock had been trading below A$3.00 at the time.) After speaking with the key investment professionals at Allco, we became increasingly concerned that they were not committed to long-term value creation but were more interested in a quick return following some financial re-engineering. Though their approach was unsuccessful, Allco's interest has led 41 Baycorp to become more active in managing its balance sheet. As such, Baycorp announced, along with its first-half results, a large special dividend and share repurchase. The market reacted strongly to these moves, driving the shares some 10% above Allco's bid. Matichon, a Thai newspaper group and long-time Fund holding, also received an acquisition offer in the quarter. Our hedges had a small impact in the quarter, with the U.S. dollar gaining a bit more ground after staging a strong recovery last quarter. As a result of the dollar's recent overall strength and its return to a more normal purchasing power level, we have lowered our British Pound and Swiss Franc hedges to approximately 30% of the underlying position. PORTFOLIO COMPOSITION We sold the last shares of Mexican airport operator Grupo Aeroportuario del Sureste S.A. de C.V. (Asur) during September. Asur appreciated approximately 170% (an annualized return of almost 23%) since we bought the position in September 2000. As you recall, we began buying Asur because of its attractive valuation, under-exploited retail opportunities, and strong management group (led by one of our other positions at the time Copenhagen Airports). When the events of September 11, 2001 caused airline volumes and Asur's share price to plummet, we aggressively built Asur to one of the Fund's largest positions. As the industry and passenger volumes normalized over the past three years, operating profits have more than doubled, and management returned over $3/share in dividends (close to 10% of our sell price) to shareholders. The Asur example epitomizes our investment philosophy. Our disciplined, long-term investment approach allowed us to look beyond the temporary dislocations caused by the tragic events of 9/11, and our fundamental, bottom-up analysis of Asur's competitive position and its management team gave us confidence that the group could effectively navigate the industry's difficult circumstances. Our patience and conviction were handsomely rewarded. As always, we will continue to look for more of these situations for our shareholders. In addition to Asur and Matichon, we divested three other stocks in the quarter, Sopra, DIS and Ducati. We established meaningful positions in Spanish pay-TV provider Sogecable, UK real estate services firm Countrywide, and UK bank-note printer De La Rue. Geographically, our portfolio weightings remain very similar to last quarter with Europe and the UK representing over 70% of investments and the majority of the balance, excluding cash, in the Pacific Rim. Despite the performance of the portfolio over the past three years, there is no dearth of small cap ideas. We remain excited about the opportunities we're finding outside the portfolio, and we continue to like the portfolio's quality and price attractiveness. 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 42 THE OAKMARK INTERNATIONAL SMALL CAP FUND [CHART] INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 2005
% OF FUND EQUITY MARKET VALUE ---------------------------------------------- - EUROPE 70.7% Great Britain 24.1% Switzerland 14.9% * Germany 7.5% * France 6.7% * Spain 5.3% * Italy 4.3% Sweden 2.5% * Finland 2.0% Turkey 1.8% Denmark 1.3% * Greece 0.3% - PACIFIC RIM 27.9% Japan 11.9% Korea 6.7% Australia 4.2% New Zealand 1.9% Hong Kong 1.7% Malaysia 1.0% Philippines 0.4% Singapore 0.1% - OTHER 1.4% Israel 1.4%
* Euro currency countries comprise 26.1% of the Fund. 43 THE OAKMARK INTERNATIONAL SMALL CAP FUND SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 2005
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--93.9% ADVERTISING--1.9% Asatsu-DK, Inc. (Japan) Advertising Services Provider 459,700 $ 14,339,675 G2R, Inc. (Korea) Advertising & Marketing Services 281,770 4,590,407 ----------------- 18,930,082 APPAREL RETAIL--5.3% JJB Sports plc (Great Britain) Sportswear & Sports Equipment Retailer 9,170,000 $ 27,383,885 Matalan plc (Great Britain) Clothing Retailer 8,545,000 26,158,245 ----------------- 53,542,130 APPAREL, ACCESSORIES & LUXURY GOODS--0.9% Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 784,900 $ 8,819,159 BROADCASTING & CABLE TV--3.7% Sogecable SA (Spain) (a) Cable Television Services 529,500 $ 20,673,908 Media Prima Berhad (Malaysia) (a) Film Producer & Sports Promoter 21,748,000 9,232,369 M6 Metropole Television (France) Television Entertainment Channel Owner & Operator 297,700 7,518,747 ----------------- 37,425,024 HOME IMPROVEMENT RETAIL--3.2% Carpetright plc (Great Britain) Carpet Retailer 2,054,000 $ 31,891,883 PHOTOGRAPHIC PRODUCTS--1.5% Vitec Group plc (Great Britain) (b) Photo Equipment & Supplies 2,383,907 $ 14,931,888 PUBLISHING--3.0% Daekyo Co., Ltd. (Korea) Educational Information Service Provider 219,500 $ 16,617,633 Tamedia AG (Switzerland) TV Broadcasting & Publishing 143,661 13,331,030 ----------------- 29,948,663 BREWERS--0.9% Kook Soon Dang Brewery Co., Ltd. (Korea) Wine & Spirits Manufacturer 578,641 $ 8,844,585 DISTILLERS & VINTNERS--1.5% Baron De Ley, S.A. (Spain) (a) Beverages, Wines, & Spirits Manufacturer 305,637 $ 15,026,915
44
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--93.9% (CONT.) PACKAGED FOODS & MEATS--2.5% Lotte Confectionery Co., Ltd. (Korea) Candy & Snacks Manufacturer 15,334 $ 15,723,412 Robert Wiseman Dairies plc (Great Britain) Milk Processor & Distributor 959,000 4,809,679 Alaska Milk Corporation (Philippines) (b) Milk Producer 56,360,000 3,518,102 ----------------- 24,051,193 ASSET MANAGEMENT & CUSTODY BANKS--4.4% Julius Baer Holding AG-B (Switzerland) Asset Management 338,000 $ 26,455,013 MLP AG (Germany) Asset Management 869,500 18,176,479 ----------------- 44,631,492 INSURANCE BROKERS--3.5% Benfield Group Ltd. (Great Britain) Reinsurance Service Provider 6,507,000 $ 35,763,162 MULTI-SECTOR HOLDINGS--2.4% Pargesa Holding AG, Class B (Switzerland) Diversified Operations 290,900 $ 24,589,113 OTHER DIVERSIFIED FINANCIAL SERVICES--2.3% Ichiyoshi Securities Co., Ltd. (Japan) Stock Broker 2,079,700 $ 23,566,940 REAL ESTATE MANAGEMENT & DEVELOPMENT--1.1% Countrywide PLC (Great Britain) Real Estate Service Provider 1,626,000 $ 11,167,249 REGIONAL BANKS--1.6% Pusan Bank (Korea) Commercial Banking 1,033,500 $ 11,241,231 Daegu Bank (Korea) Commercial Banking 386,400 4,702,712 ----------------- 15,943,943 SPECIALIZED FINANCE--0.3% Athens Stock Exchange S.A. (Greece) Exchange Services 293,000 $ 2,712,058 HEALTH CARE SUPPLIES--2.7% Ansell Limited (Australia) Protective Rubber & Plastics Products 1,733,684 $ 14,915,327 Coloplast A/S, Class B (Denmark) Healthcare Products & Services Provider 203,000 12,361,000 ----------------- 27,276,327
45
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--93.9% (CONT.) PHARMACEUTICALS--2.3% Santen Pharmaceutical Co., Ltd. (Japan) Pharmaceuticals 896,000 $ 23,212,231 AIR FREIGHT & LOGISTICS--1.8% Mainfreight Limited (New Zealand) (b) Logistics Services 7,475,285 $ 18,141,769 COMMERCIAL PRINTING--1.1% De La Rue Plc (Great Britain) Commercial Printing 1,566,190 $ 10,611,401 CONSTRUCTION & ENGINEERING--0.2% Tae Young Corp. (Korea) Heavy Construction 58,620 $ 2,134,701 CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS--0.2% Vossloh AG (Germany) Railroad Equipment Manufacturer 29,000 $ 1,525,513 DIVERSIFIED COMMERCIAL AND PROFESSIONAL SERVICES--2.3% Prosegur, Compania de Seguridad SA (Spain) Security & Transportation Services 552,800 $ 14,353,651 Intrum Justitia AB (Sweden) (a) Diversified Financial Services 1,039,243 9,352,825 ----------------- 23,706,476 ELECTRICAL COMPONENTS & EQUIPMENT--2.1% Pfeiffer Vacuum Technology AG (Germany) Vacuum Pump Manufacturer 321,640 $ 16,041,836 Carbone Lorraine SA (France) Electrical Systems Manufacturer 106,245 4,923,495 ----------------- 20,965,331 INDUSTRIAL CONGLOMERATES--3.0% Dogan Sirketler Grubu Holdings A.S (Turkey) (a) Diversified Holding Company 6,258,511 $ 17,476,421 Rheinmetall AG (Germany) Automotive Pump Manufacturer 185,600 12,271,037 Haw Par Corporation Limited (Singapore) Diversified Operations 285,687 877,946 ----------------- 30,625,404
46
NAME DESCRIPTION SHARES HELD MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--93.9% (CONT.) INDUSTRIAL MACHINERY--12.5% Interpump Group S.p.A. (Italy) (b) Pump & Piston Manufacturer 4,709,000 $ 31,648,912 Halma plc (Great Britain) Electronic Instrument Producer 9,965,000 25,933,813 Schindler Holding AG (Switzerland) Elevator & Escalator Manufacturer 64,200 25,546,069 Saurer AG (Switzerland) (a) Textile Equipment Manufacturer 298,853 20,204,472 Alfa Laval AB (Sweden) Filtration & Separation Equipment 695,500 12,653,123 LISI (France) Industrial Fastener Manufacturer 127,600 8,467,015 Munters AB (Sweden) Cooling & Moisture Control Systems 77,400 1,827,568 ----------------- 126,280,972 OFFICE SERVICES & SUPPLIES--0.2% Domino Printing Sciences plc (Great Britain) Printing Equipment 500,000 $ 2,401,790 COMPUTER HARDWARE--2.2% Wincor Nixdorf AG (Germany) Banking Machine Manufacturer 234,800 $ 22,580,246 COMPUTER STORAGE & PERIPHERALS--1.1% Lectra (France) (b) Manufacturing Process Systems 2,186,404 $ 11,065,043 DATA PROCESSING & OUTSOURCED SERVICES--2.5% Baycorp Advantage Limited (Australia) Credit Reference Services 9,412,800 $ 24,911,625 ELECTRONIC EQUIPMENT MANUFACTURERS--5.1% Mabuchi Motor Co., Ltd. (Japan) Digital Camera Motors Manufacturer 406,000 $ 20,034,366 Vaisala Oyj, Class A (Finland) Atmospheric Observation Equipment 627,000 18,541,431 Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 536,500 13,423,230 ----------------- 51,999,027 HOME ENTERTAINMENT SOFTWARE--1.2% Square Enix Co., Ltd. (Japan) Entertainment Software 447,900 $ 12,392,880 IT CONSULTING & OTHER SERVICES--2.9% Morse plc (Great Britain) (b) Business & Technology Solutions 12,474,000 $ 18,927,848 Alten (France) (a) Systems Consulting & Engineering 319,619 10,327,672 ----------------- 29,255,520 OFFICE ELECTRONICS--2.1% Neopost SA (France) Mailroom Equipment Supplier 220,700 $ 21,396,725 INDUSTRIAL GASES--1.9% Taiyo Ink Mfg. Co., Ltd. (Japan) Manufacturer of Resist Inks 533,700 $ 19,375,636
47
SHARES HELD/ NAME DESCRIPTION PAR VALUE MARKET VALUE ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--93.9% (CONT.) SPECIALTY CHEMICALS--4.9% Gurit-Heberlein AG (Switzerland) (b) Chemical Producer 32,875 $ 31,115,994 Croda International plc (Great Britain) Chemical Producer 2,359,600 17,839,647 ----------------- 48,955,641 ALTERNATIVE CARRIERS--1.6% Asia Satellite Telecommunications Holdings Limited (Hong Kong) Satellite Operator 8,460,000 $ 16,031,505 TOTAL COMMON STOCKS (COST: $718,742,935) 946,631,242 SHORT TERM INVESTMENTS--4.1% U.S. GOVERNMENT AGENCIES--2.0% Federal Home Loan Bank, 3.55% due 10/7/2005 $ 10,000,000 $ 10,021,801 Federal Home Loan Mortgage Corp., 3.64% due 10/18/2005 10,000,000 9,982,811 TOTAL U.S. GOVERNMENT AGENCIES (COST: $20,004,612) 20,004,612 REPURCHASE AGREEMENTS--2.1% IBT Repurchase Agreement, 3.51% dated 9/30/2005 due 10/3/2005, repurchase price $19,005,558, collateralized by Small Business Administration Bonds, with rates of 5.875% - 7.125%, with maturities from 2/25/2016 - 3/25/2029, and with an aggregate market value plus accrued interest of $19,950,000 $ 19,000,000 $ 19,000,000 IBT Repurchase Agreement, 2.75% dated 9/30/2005 due 10/3/2005, repurchase price $1,765,982, collateralized by a Small Business Administration Bond, with a rate of 6.375%, with a maturity date of 7/25/2027, and with a market value plus accrued interest of $1,853,856 1,765,577 1,765,577 ----------------- TOTAL REPURCHASE AGREEMENTS (COST: $20,765,577) 20,765,577 TOTAL SHORT TERM INVESTMENTS (COST: $40,770,189) 40,770,189 Total Investments (Cost $759,513,124)--98.0% $ 987,401,431 Foreign Currencies (Cost $887,565)--0.1% $ 888,059 Other Assets In Excess Of Other Liabilities--1.9% 19,521,947 ----------------- TOTAL NET ASSETS--100% $ 1,007,811,437 =================
(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. 48 [OAKMARK LOGO] (This page has been intentionally left blank.) 49 THE OAKMARK FUNDS STATEMENTS OF ASSETS AND LIABILITIES--SEPTEMBER 30, 2005
THE OAKMARK THE OAKMARK SELECT FUND FUND ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments in unaffiliated securities, at value (a) $ 6,247,766,209 $ 5,351,635,985 Investments in affiliated securities, at value (b) 0 655,331,871 Cash 0 0 Foreign currency, at value (c) 0 0 Receivable for: Securities sold 130,769,653 13,964,665 Fund shares sold 5,808,374 5,257,798 Dividends and interest 9,598,608 3,506,017 Forward foreign currency contracts 0 0 Tax reclaim 0 0 ------------------- ------------------- Total receivables 146,176,635 22,728,480 Other assets 566 502 ------------------- ------------------- Total assets $ 6,393,943,410 $ 6,029,696,838 LIABILITIES AND NET ASSETS Payable for: Securities purchased 0 29,307,691 Fund shares redeemed 7,274,535 5,126,995 Due to Adviser 168,077 171,286 Due to transfer agent 281,133 156,149 Trustee fees 27,792 25,730 Deferred trustee compensation 875,039 780,752 Other 1,238,310 954,781 ------------------- ------------------- Total liabilities 9,864,886 36,523,384 ------------------- ------------------- Net assets applicable to fund shares outstanding $ 6,384,078,524 $ 5,993,173,454 =================== =================== ANALYSIS OF NET ASSETS Paid in capital $ 5,108,749,649 $ 3,854,993,030 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency transactions (45,540,989) 342,905,352 Net unrealized appreciation (depreciation) of investments and foreign currencies 1,270,062,472 1,767,508,132 Net unrealized appreciation (depreciation)--other 0 0 Accumulated undistributed net investment income 50,807,392 27,766,940 ------------------- ------------------- Net assets applicable to Fund shares outstanding $ 6,384,078,524 $ 5,993,173,454 =================== =================== PRICE OF SHARES Net asset value per share: Class I $ 40.75 $ 33.44 =================== =================== Class I--Net assets $ 6,340,390,696 $ 5,907,957,469 Class I--Shares outstanding (Unlimited shares authorized) 155,573,344 176,694,912 Net asset value per share: Class II $ 40.51 $ 33.24 =================== =================== Class II--Net assets $ 43,687,828 $ 85,215,985 Class II--Shares outstanding (Unlimited shares authorized) 1,078,382 2,563,740 (a) Identified cost of investments in unaffiliated securities $ 4,977,703,737 $ 4,008,679,541 (b) Identified cost of investments in affiliated securities 0 230,780,183 (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) $ 9,569,536,982 $ 1,884,754,539 Investments in affiliated securities, at value (b) 194,051,408 0 Cash 29,514 0 Foreign currency, at value (c) 0 0 Receivable for: Securities sold 302,392,708 7,035,389 Fund shares sold 18,440,025 3,801,357 Dividends and interest 48,224,601 4,681,370 Forward foreign currency contracts 0 6,067,634 Tax reclaim 15,000 1,346,065 ------------------- ------------------- Total receivables 369,072,334 22,931,815 Other assets 113,222 301 ------------------- ------------------- Total assets $ 10,132,803,460 $ 1,907,686,655 LIABILITIES AND NET ASSETS Payable for: Securities purchased 320,800,035 5,012,915 Fund shares redeemed 3,670,174 297,149 Due to Adviser 188,830 47,072 Due to transfer agent 184,831 55,616 Trustee fees 32,990 15,654 Deferred trustee compensation 537,845 325,407 Other 2,168,932 427,772 ------------------- ------------------- Total liabilities 327,583,637 6,181,585 ------------------- ------------------- Net assets applicable to fund shares outstanding $ 9,805,219,823 $ 1,901,505,070 =================== =================== ANALYSIS OF NET ASSETS Paid in capital $ 7,870,951,599 $ 1,367,028,529 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency transactions 88,295,438 53,550,204 Net unrealized appreciation (depreciation) of investments and foreign currencies 1,740,760,163 467,157,902 Net unrealized appreciation (depreciation)--other 229,644 (123,769) Accumulated undistributed net investment income 104,982,979 13,892,204 ------------------- ------------------- Net assets applicable to Fund shares outstanding $ 9,805,219,823 $ 1,901,505,070 =================== =================== PRICE OF SHARES Net asset value per share: Class I $ 25.41 $ 23.91 =================== =================== Class I--Net assets $ 9,223,210,742 $ 1,842,901,079 Class I--Shares outstanding (Unlimited shares authorized) 362,970,816 77,063,096 Net asset value per share: Class II $ 25.29 $ 23.63 =================== =================== Class II--Net assets $ 582,009,081 $ 58,603,991 Class II--Shares outstanding (Unlimited shares authorized) 23,013,007 2,479,837 (a) Identified cost of investments in unaffiliated securities $ 7,889,653,765 $ 1,423,662,187 (b) Identified cost of investments in affiliated securities 133,231,378 0 (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) $ 5,539,287,348 $ 858,051,875 Investments in affiliated securities, at value (b) 361,908,735 129,349,556 Cash 0 0 Foreign currency, at value (c) 522,325 888,059 Receivable for: Securities sold 3,791,538 6,505,953 Fund shares sold 12,223,607 1,564,098 Dividends and interest 14,022,703 1,162,423 Forward foreign currency contracts 81,438,357 14,340,909 Tax reclaim 4,505,938 750,033 ------------------- ------------------- Total receivables 115,982,143 24,323,416 Other assets 462 268 ------------------- ------------------- Total assets $ 6,017,701,013 $ 1,012,613,174 LIABILITIES AND NET ASSETS Payable for: Securities purchased 22,917,739 3,831,665 Fund shares redeemed 2,273,904 361,220 Due to Adviser 146,172 31,096 Due to transfer agent 111,757 21,719 Trustee fees 24,174 13,784 Deferred trustee compensation 544,119 325,672 Other 1,433,634 216,581 ------------------- ------------------- Total liabilities 27,451,499 4,801,737 ------------------- ------------------- Net assets applicable to fund shares outstanding $ 5,990,249,514 $ 1,007,811,437 =================== =================== ANALYSIS OF NET ASSETS Paid in capital $ 4,092,102,121 $ 606,405,040 Accumulated undistributed net realized gain (loss) of investments, forward contracts, options, short sales and foreign currency transactions 225,733,166 153,280,590 Net unrealized appreciation (depreciation) of investments and foreign currencies 1,601,657,107 242,240,875 Net unrealized appreciation (depreciation)--other (375,389) (48,701) Accumulated undistributed net investment income 71,132,509 5,933,633 ------------------- ------------------- Net assets applicable to Fund shares outstanding $ 5,990,249,514 $ 1,007,811,437 =================== =================== PRICE OF SHARES Net asset value per share: Class I $ 23.52 $ 22.79 =================== =================== Class I--Net assets $ 5,627,391,248 $ 1,007,212,401 Class I--Shares outstanding (Unlimited shares authorized) 239,302,658 44,187,473 Net asset value per share: Class II $ 23.36 $ 22.77 =================== =================== Class II--Net assets $ 362,858,266 $ 599,036 Class II--Shares outstanding (Unlimited shares authorized) 15,535,254 26,310 (a) Identified cost of investments in unaffiliated securities $ 4,172,204,723 $ 657,325,484 (b) Identified cost of investments in affiliated securities 208,743,987 102,187,640 (c) Identified cost of foreign currency 521,777 887,565
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 THE OAKMARK FUNDS STATEMENTS OF OPERATIONS--YEAR ENDED SEPTEMBER 30, 2005
THE OAKMARK THE OAKMARK SELECT FUND FUND ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 114,096,122 $ 89,979,644 Dividends from affiliated securities 0 7,546,558 Interest income 11,842,334 12,361,275 Securities lending income 0 0 Other income 117,458 26,808 Foreign taxes withheld (36,654) 0 ------------------- ------------------- Total investment income 126,019,260 109,914,285 EXPENSES: Investment advisory fee 59,184,688 49,906,327 Transfer and dividend disbursing agent fees 3,095,228 1,672,303 Other shareholder servicing fees 5,941,799 4,695,005 Service Fee--Class II 133,501 223,839 Reports to shareholders 1,601,023 1,034,680 Custody and accounting fees 729,901 605,255 Registration and blue sky expenses 100,813 84,239 Trustee fees 160,528 146,012 Deferred trustee compensation 100,899 91,365 Legal fees 142,629 127,106 Audit fees 63,161 55,458 Other 350,399 304,249 ------------------- ------------------- Total expenses 71,604,569 58,945,838 Expense offset arrangements (681) 0 ------------------- ------------------- Net expenses 71,603,888 58,945,838 NET INVESTMENT INCOME: 54,415,372 50,968,447 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 215,570,116 235,198,898 Net realized gain on affiliated securities (a) 0 129,874,069 Net realized gain on options written 0 0 Net realized gain on short sales 7,071,050 0 Net realized gain (loss) on foreign currency transactions (8,888) 0 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 106,334,519 19,063,862 Net change in appreciation (depreciation)--other 0 0 Net realized and unrealized gain on investments and foreign currency transactions: 328,966,797 384,136,829 ------------------- ------------------- Net increase in net assets resulting from operations $ 383,382,169 $ 435,105,276 =================== =================== (a) Foreign tax expense -- --
52
THE OAKMARK THE OAKMARK EQUITY AND GLOBAL INCOME FUND FUND ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 71,460,737 $ 34,014,927 Dividends from affiliated securities 217,500 0 Interest income 128,114,707 1,311,539 Securities lending income 113,954 202,031 Other income 37,196 255 Foreign taxes withheld (127,981) (2,591,116) ------------------- ------------------- Total investment income 199,816,113 32,937,636 EXPENSES: Investment advisory fee 63,670,347 16,115,537 Transfer and dividend disbursing agent fees 2,041,484 570,770 Other shareholder servicing fees 9,586,150 1,309,694 Service Fee--Class II 1,430,331 99,174 Reports to shareholders 1,556,305 303,556 Custody and accounting fees 1,032,660 879,136 Registration and blue sky expenses 138,694 86,412 Trustee fees 185,937 88,237 Deferred trustee compensation 115,753 54,695 Legal fees 164,973 77,301 Audit fees 71,513 34,240 Other 412,720 148,511 ------------------- ------------------- Total expenses 80,406,867 19,767,263 Expense offset arrangements (44) (7) ------------------- ------------------- Net expenses 80,406,823 19,767,256 NET INVESTMENT INCOME: 119,409,290 13,170,380 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 113,073,114 55,983,090 Net realized gain on affiliated securities (a) 0 0 Net realized gain on options written 521,987 0 Net realized gain on short sales 0 0 Net realized gain (loss) on foreign currency transactions 349,069 2,655,497 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 912,480,570 268,798,583 Net change in appreciation (depreciation)--other 102,972 (200,695) Net realized and unrealized gain on investments and foreign currency transactions: 1,026,527,712 327,236,475 ------------------- ------------------- Net increase in net assets resulting from operations $ 1,145,937,002 $ 340,406,855 =================== =================== (a) Foreign tax expense -- -- THE OAKMARK THE OAKMARK INTERNATIONAL INTERNATIONAL FUND SMALL CAP FUND ----------------------------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from unaffiliated securities $ 125,912,254 $ 17,997,137 Dividends from affiliated securities 5,027,752 4,059,494 Interest income 5,308,890 1,070,264 Securities lending income 1,884,644 0 Other income 0 370 Foreign taxes withheld (11,731,519) (2,018,294) ------------------- ------------------- Total investment income 126,402,021 21,108,971 EXPENSES: Investment advisory fee 47,254,405 10,432,050 Transfer and dividend disbursing agent fees 1,196,349 237,242 Other shareholder servicing fees 4,197,105 572,875 Service Fee--Class II 788,882 670 Reports to shareholders 763,144 130,580 Custody and accounting fees 3,682,854 770,638 Registration and blue sky expenses 109,735 53,573 Trustee fees 135,739 78,309 Deferred trustee compensation 83,799 48,576 Legal fees 118,981 68,867 Audit fees 53,240 30,314 Other 276,505 122,870 ------------------- ------------------- Total expenses 58,660,738 12,546,564 Expense offset arrangements (26) (32) ------------------- ------------------- Net expenses 58,660,712 12,546,532 NET INVESTMENT INCOME: 67,741,309 8,562,439 NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS: Net realized gain on unaffiliated securities 229,716,380 162,137,095 Net realized gain on affiliated securities (a) 2,232,733 1,484,033 Net realized gain on options written 0 0 Net realized gain on short sales 0 0 Net realized gain (loss) on foreign currency transactions 12,385,971 362,424 Net change in unrealized appreciation (depreciation) of investments and foreign currencies 848,532,506 47,885,993 Net change in appreciation (depreciation)--other (671,292) (85,458) Net realized and unrealized gain on investments and foreign currency transactions: 1,092,196,298 211,784,087 ------------------- ------------------- Net increase in net assets resulting from operations $ 1,159,937,607 $ 220,346,526 =================== =================== (a) Foreign tax expense -- 436,314
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53 THE OAKMARK FUNDS STATEMENTS OF CHANGES IN NET ASSETS--SEPTEMBER 30, 2005
THE OAKMARK FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 54,415,372 $ 27,165,278 Net realized gain on investments 222,641,166 64,812,715 Net realized gain (loss) on foreign currency transactions (8,888) 0 Net change in unrealized appreciation (depreciation) of investments 106,334,519 636,919,637 ------------------ ------------------ NET INCREASE IN NET ASSETS FROM OPERATIONS 383,382,169 728,897,630 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (29,018,121) (20,505,874) Net investment income--Class II (112,443) (37,100) ------------------ ------------------ TOTAL DISTRIBUTIONS TO SHAREHOLDERS (29,130,564) (20,542,974) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,362,078,314 1,919,971,722 Proceeds from shares sold--Class II 24,293,697 36,194,109 Reinvestment of distributions--Class I 26,428,576 18,843,547 Reinvestment of distributions--Class II 63,924 8,676 Payments for shares redeemed, net of fees--Class I (1,874,276,130) (939,233,385) Payments for shares redeemed, net of fees--Class II (34,990,942) (9,099,878) Redemption fees--Class I 334,756 340,142 ------------------ ------------------ NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS (496,067,805) 1,027,024,933 ------------------ ------------------ TOTAL INCREASE (DECREASE) IN NET ASSETS (141,816,200) 1,735,379,589 NET ASSETS: Beginning of period 6,525,894,724 4,790,515,135 ------------------ ------------------ End of period $ 6,384,078,524 $ 6,525,894,724 ================== ================== Undistributed net investment income $ 50,807,392 $ 25,531,472 ================== ================== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 33,399,717 50,926,355 Shares issued in reinvestment of dividends 648,872 534,720 Less shares redeemed (45,831,912) (24,984,586) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING (11,783,323) 26,476,489 ================== ================== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 602,472 968,163 Shares issued in reinvestment of dividends 1,576 247 Less shares redeemed (874,201) (247,309) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING (270,153) 721,101 ================== ==================
54
THE OAKMARK SELECT FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 50,968,447 $ 28,041,071 Net realized gain on investments 365,072,967 156,155,071 Net change in unrealized appreciation (depreciation) of investments 19,063,862 511,522,774 ------------------ ------------------ NET INCREASE IN NET ASSETS FROM OPERATIONS 435,105,276 695,718,916 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (41,681,659) (18,710,631) Net investment income--Class II (456,984) (118,882) ------------------ ------------------ TOTAL DISTRIBUTIONS TO SHAREHOLDERS (42,138,643) (18,829,513) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,213,430,549 807,786,818 Proceeds from shares sold--Class II 25,716,965 33,570,613 Reinvestment of distributions--Class I 39,145,855 17,456,336 Reinvestment of distributions--Class II 205,309 58,212 Payments for shares redeemed, net of fees--Class I (1,193,862,714) (1,019,983,750) Payments for shares redeemed, net of fees--Class II (45,645,335) (40,937,360) Redemption fees--Class I 183,103 105,547 ------------------ ------------------ NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 39,173,732 (201,943,584) ------------------ ------------------ TOTAL INCREASE IN NET ASSETS 432,140,365 474,945,819 NET ASSETS: Beginning of period 5,561,033,089 5,086,087,270 ------------------ ------------------ End of period $ 5,993,173,454 $ 5,561,033,089 ================== ================== Undistributed net investment income $ 27,766,940 $ 18,937,136 ================== ================== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 36,498,372 26,433,387 Shares issued in reinvestment of dividends 1,205,230 595,510 Less shares redeemed (36,106,003) (33,158,816) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 1,597,599 (6,129,919) ================== ================== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 781,192 1,102,241 Shares issued in reinvestment of dividends 6,346 1,944 Less shares redeemed (1,385,275) (1,342,449) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING (597,737) (238,264) ================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55 THE OAKMARK FUNDS STATEMENTS OF CHANGES IN NET ASSETS--SEPTEMBER 30, 2005
THE OAKMARK EQUITY AND INCOME FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 119,409,290 $ 50,126,070 Net realized gain on investments 113,595,101 269,099,021 Net realized gain (loss) on foreign currency transactions 349,069 227,056 Net change in unrealized appreciation (depreciation) of investments 912,480,570 416,194,976 Net change in unrealized appreciation (depreciation)--other 102,972 39,804 ------------------ ------------------ NET INCREASE IN NET ASSETS FROM OPERATIONS 1,145,937,002 735,686,927 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (67,147,479) (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 (280,937,801) (31,939,932) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,820,363,521 3,583,813,621 Proceeds from shares sold--Class II 312,413,005 277,231,468 Reinvestment of distributions--Class I 254,487,605 29,355,530 Reinvestment of distributions--Class II 7,740,318 514,106 Payments for shares redeemed, net of fees--Class I (1,238,425,257) (836,471,290) Payments for shares redeemed, net of fees--Class II (273,110,583) (86,816,396) Redemption fees--Class I 194,331 534,637 ------------------ ------------------ NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 883,662,940 2,968,161,676 ------------------ ------------------ TOTAL INCREASE IN NET ASSETS 1,748,662,141 3,671,908,671 NET ASSETS: Beginning of period 8,056,557,682 4,384,649,011 ------------------ ------------------ End of period $ 9,805,219,823 $ 8,056,557,682 ================== ================== Undistributed net investment income $ 104,982,979 $ 47,199,612 ================== ================== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 76,592,615 159,855,520 Shares issued in reinvestment of dividends 10,997,735 1,399,884 Less shares redeemed (52,314,769) (37,388,817) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 35,275,581 123,866,587 ================== ================== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 13,294,303 12,464,461 Shares issued in reinvestment of dividends 335,369 24,563 Less shares redeemed (11,403,546) (3,887,834) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 2,226,126 8,601,190 ================== ==================
56
THE OAKMARK GLOBAL FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 13,170,380 $ 5,884,687 Net realized gain on investments 55,983,090 23,552,579 Net realized gain (loss) on foreign currency transactions 2,655,497 (199,643) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 268,798,583 116,594,459 Net change in unrealized appreciation (depreciation)--other (200,695) 102,037 ------------------ ------------------ NET INCREASE IN NET ASSETS FROM OPERATIONS 340,406,855 145,934,119 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (7,092,334) (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 (32,935,662) (2,931,749) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 414,769,896 782,660,249 Proceeds from shares sold--Class II 29,165,244 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 (238,881,611) (296,067,961) Payments for shares redeemed, net of fees--Class II (3,289,295) (4,061,520) Redemption fees--Class I 81,661 314,014 ------------------ ------------------ NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 233,012,237 507,421,835 ------------------ ------------------ TOTAL INCREASE IN NET ASSETS 540,483,430 650,424,205 NET ASSETS: Beginning of period 1,361,021,640 710,597,435 ------------------ ------------------ End of period $ 1,901,505,070 $ 1,361,021,640 ================== ================== Undistributed net investment income $ 13,892,204 $ 5,262,319 ================== ================== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 18,829,404 41,298,499 Shares issued in reinvestment of dividends 1,443,149 155,616 Less shares redeemed (10,924,262) (15,250,479) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 9,348,291 26,203,636 ================== ================== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 1,339,114 1,131,427 Shares issued in reinvestment of dividends 26,519 1,160 Less shares redeemed (151,324) (211,953) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 1,214,309 920,634 ================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57
THE OAKMARK INTERNATIONAL FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 67,741,309 $ 53,715,892 Net realized gain on investments 231,949,113 217,536,088 Net realized gain (loss) on foreign currency transactions 12,385,971 (603,088) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 848,532,506 401,911,292 Net change in unrealized appreciation (depreciation)--other (671,292) 168,158 ------------------ ------------------ NET INCREASE IN NET ASSETS FROM OPERATIONS 1,159,937,607 672,728,342 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (57,688,379) (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 (73,410,343) (20,655,598) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 1,220,262,175 1,465,810,386 Proceeds from shares sold--Class II 191,988,151 183,258,922 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 (713,216,070) (744,490,290) Payments for shares redeemed, net of fees--Class II (156,918,221) (79,196,627) Redemption fees--Class I 261,391 367,912 ------------------ ------------------ NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 607,611,952 844,192,418 ------------------ ------------------ TOTAL INCREASE IN NET ASSETS 1,694,139,216 1,496,265,162 NET ASSETS: Beginning of period 4,296,110,298 2,799,845,136 ------------------ ------------------ End of period $ 5,990,249,514 $ 4,296,110,298 ================== ================== Undistributed net investment income $ 71,132,509 $ 51,739,373 ================== ================== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 56,890,583 81,784,418 Shares issued in reinvestment of dividends 3,074,952 1,091,501 Less shares redeemed (33,360,212) (40,952,323) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 26,605,323 41,923,596 ================== ================== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 8,978,667 10,166,362 Shares issued in reinvestment of dividends 107,693 16,860 Less shares redeemed (7,296,822) (4,345,978) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 1,789,538 5,837,244 ================== ==================
58
THE OAKMARK INTERNATIONAL SMALL CAP FUND ------------------------------------------------------------------------------------------------------------ YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------------------------ FROM OPERATIONS: Net investment income $ 8,562,439 $ 4,554,775 Net realized gain on investments 163,621,128 43,497,450 Net realized gain (loss) on foreign currency transactions 362,424 (41,546) Net change in unrealized appreciation (depreciation) of investments and foreign currencies 47,885,993 124,228,709 Net change in unrealized appreciation (depreciation)--other (85,458) (23,302) ------------------ ------------------ NET INCREASE IN NET ASSETS FROM OPERATIONS 220,346,526 172,216,086 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income--Class I (11,222,305) (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 (26,778,304) (4,212,177) FROM FUND SHARE TRANSACTIONS: Proceeds from shares sold--Class I 180,090,052 188,831,597 Proceeds from shares sold--Class II 112,795 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 (125,328,062) (104,507,785) Payments for shares redeemed, net of fees--Class II (110,335) (171,984) Redemption fees--Class I 38,178 263,993 ------------------ ------------------ NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS 79,659,390 88,335,487 ------------------ ------------------ TOTAL INCREASE IN NET ASSETS 273,227,612 256,339,396 NET ASSETS: Beginning of period 734,583,825 478,244,429 ------------------ ------------------ End of period $ 1,007,811,437 $ 734,583,825 ================== ================== Undistributed net investment income $ 3,732,145 $ 3,819,316 ================== ================== FUND SHARE TRANSACTIONS--CLASS I: Shares sold 8,779,360 11,434,258 Shares issued in reinvestment of dividends 1,298,823 260,200 Less shares redeemed (6,084,980) (6,274,556) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 3,993,203 5,419,902 ================== ================== FUND SHARE TRANSACTIONS--CLASS II: Shares sold 5,611 3,350 Shares issued in reinvestment of dividends 537 102 Less shares redeemed (5,127) (10,276) ------------------ ------------------ NET INCREASE (DECREASE) IN SHARES OUTSTANDING 1,021 (6,824) ================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59 THE OAKMARK FUNDS NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The following are the significant accounting policies of The Oakmark Fund ("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Equity and Income Fund ("Equity and Income"), The Oakmark Global Fund ("Global"), The Oakmark International Fund ("International"), and The Oakmark International Small Cap Fund ("Int'l Small Cap") collectively referred to as "the Funds", each a series of Harris Associates Investment Trust (the "Trust"), a Massachusetts business trust, organized on February 1, 1991, 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. 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 Class I shareholders of the Fund. The "first-in, first-out" (FIFO) method is used to determine the holding period. SECURITY VALUATION-- The Funds' share prices or net asset values ("NAV") are calculated as of the close of regular session trading (usually 4:00 pm Eastern time) on the New York Stock Exchange ("NYSE") on any day on which the NYSE is open for trading. Domestic equity 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. Foreign equity securities traded on securities exchanges shall be valued at, depending on local convention or regulation, the last sales price, last bid or asked price, the mean between the last bid and asked prices, an official closing price, or shall be based on a pricing composite as of the close of the regular trading hours on the appropriate exchange or other designated time. 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 sales price on the day of valuation, or lacking any reported sales that day, at the mean of the most recent bid and asked quotations, or if the mean is not available, at the most recent bid quotation. Securities for which quotations are not readily available or securities that may have been affected by a significant event occurring between the close of a foreign market and the close of the NYSE are valued at fair values, determined by or under the direction of the pricing committee established by the Board of Trustees. A significant event may include the performance of U.S. markets since the close of foreign markets. The pricing committee will evaluate movements in the U.S markets after the close of foreign markets and may adjust security prices to reflect changes in reaction to U.S. markets as determined by a third party model. At September 30, 2005, the Funds held no securities for which quotations were not readily available, and no securities that were believed to be affected by a significant event prior to the computation of the NAV. FOREIGN CURRENCY TRANSLATIONS-- Values of investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at current exchange rates obtained by a recognized bank, dealer, or independent pricing service on the day of valuation. Purchases and sales of investments and dividend and interest income are converted at the prevailing rate of exchange on the respective dates of such transactions. Forward foreign currency contracts are valued at the current day's interpolated foreign exchange rates. 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 and unrealized gains and losses from securities. Net realized gains and 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 60 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 fiscal year end resulting from changes in exchange rates. At September 30, 2005, net unrealized appreciation (depreciation) - other included the following components:
EQUITY AND INT'L INCOME GLOBAL INTERNATIONAL SMALL CAP ----------------------------------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on dividends and dividend reclaims receivable $ 285,396 $ (139,609) $ (431,911) $ (41,660) Unrealized appreciation (depreciation) on open securities purchases and sales (55,752) 15,840 56,522 (7,041) ------------- ------------- ------------- ------------- Net Unrealized appreciation (depreciation) - Other $ 229,644 $ (123,769) $ (375,389) $ (48,701) ============= ============= ============= =============
FORWARD FOREIGN CURRENCY CONTRACTS-- The Funds' currency transactions are limited to transaction hedging and portfolio hedging. 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 counterparties to meet the terms of their contracts and from movements in currency values. At September 30, 2005, Global, International and Int'l Small Cap held the following outstanding forward foreign currency contracts: THE OAKMARK GLOBAL FUND
NET UNREALIZED CONTRACT SETTLEMENT VALUATION APPRECIATION AMOUNT DATE AT 9/30/2005 (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY SOLD: British Pound Sterling 20,800,000 4/18/06 $ 36,663,793 $ (280,433) Swiss Franc 73,000,000 11/16/05 $ 56,615,535 $ 6,348,067 -------------- ---------------- Total $ 93,279,328 $ 6,067,634 ============== ================
THE OAKMARK INTERNATIONAL FUND
NET UNREALIZED CONTRACT SETTLEMENT VALUATION AT APPRECIATION AMOUNT DATE 9/30/2005 (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY BOUGHT: Swiss Franc 302,000,000 11/16/05 $ 234,217,691 $ (2,747,275) Swiss Franc 91,000,000 11/17/05 70,581,921 (827,032) ---------------- ---------------- $ 304,799,612 $ (3,574,307) ================ ================ FOREIGN CURRENCY SOLD: British Pound Sterling 65,000,000 11/28/05 $ 114,588,786 $ 5,323,214 British Pound Sterling 64,500,000 12/7/05 113,696,644 8,879,156 British Pound Sterling 42,600,000 12/9/05 75,091,758 6,282,762 Swiss Franc 302,000,000 11/16/05 234,217,691 26,261,868 Swiss Franc 174,000,000 11/17/05 134,958,839 15,495,117 Swiss Franc 129,400,000 11/22/05 100,411,412 12,532,640 Swiss Franc 88,700,000 12/7/05 68,923,182 10,237,907 ---------------- ---------------- $ 841,888,312 $ 85,012,664 ================ ================ Total $ 1,146,687,924 $ 81,438,357 ================ ================
THE OAKMARK INTERNATIONAL SMALL CAP FUND
NET UNREALIZED CONTRACT SETTLEMENT VALUATION AT APPRECIATION AMOUNT DATE 9/30/2005 (DEPRECIATION) --------------------------------------------------------------------------------------------------------------------- FOREIGN CURRENCY BOUGHT: Swiss Franc 53,500,000 11/16/05 $ 41,492,207 $ (486,686) Swiss Franc 17,700,000 11/17/05 $ 13,728,572 (160,862) ---------------- ---------------- $ 55,220,779 $ (647,548) ================ ================ FOREIGN CURRENCY SOLD: British Pound Sterling 4,700,000 11/28/05 $ 8,285,651 $ 384,909 British Pound Sterling 4,600,000 12/7/05 $ 8,108,598 633,242 British Pound Sterling 1,100,000 12/9/05 $ 1,938,989 162,231 British Pound Sterling 13,600,000 1/18/06 $ 23,969,333 1,353,867 British Pound Sterling 11,000,000 5/17/06 $ 19,393,433 824,567 Swiss Franc 53,500,000 11/16/05 $ 41,492,207 4,652,351 Swiss Franc 30,800,000 11/17/05 $ 23,889,266 2,742,814 Swiss Franc 23,700,000 11/22/05 $ 18,390,653 2,295,391 Swiss Franc 16,800,000 12/7/05 $ 13,054,222 1,939,085 ---------------- ---------------- $ 158,522,352 $ 14,988,457 ================ ================ Total $ 213,743,131 $ 14,340,909 ================ ================
61 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. 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 certain losses and character of capital loss carryforwards. 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. At September 30, 2005, the Funds had no short sales outstanding. 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 obligation under the contract. At September 30, 2005, the Funds had no outstanding options. COMMITTED LINE OF CREDIT-- The Trust has 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 year ended September 30, 2005. 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. REPURCHASE AGREEMENTS-- Each Fund may invest in repurchase agreements, which are short-term investments whereby the Fund acquires ownership of a debt security and the seller agrees to repurchase the security in the future at a specified price. Each Fund, through IBT, 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. Harris Associates L.P. ("the 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. 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 62 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 September 30, 2005, the Funds had no securities on loan. 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 the debt obligations and money market instruments (as stated in the Security valuation section) since their acquisition dates. These securities are priced using market quotations and there are no unrestricted securities with the same maturity dates and yields for the issuer. At September 30, 2005, the Oakmark Equity & Income Fund held the following restricted securities:
SECURITY ACQUISITION CARRYING MARKET PERCENTAGE OF QUANTITY NAME DATE VALUE COST VALUE NET ASSETS ------------------------------------------------------------------------------------------------------ $ 3,000,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2013 6/27/2003 100.2747 100.68 3,008,241 0.03% 5,000,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2013 8/20/2003 100.2747 96.41 5,013,735 0.05% 300,000 Sealed Air Corporation, 144A, 5.625% due 7/15/2013 8/21/2003 100.2747 96.79 300,824 0.00% 11,700,000 Sealed Air Corporation, 144A 5.625% due 7/15/2013 4/6/2004 100.2747 103.31 11,732,140 0.12% -------------------------- 20,054,940 0.20%
2. TRANSACTIONS WITH AFFILIATES Each Fund has an investment advisory agreement with 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
63
FUND ADVISORY FEES FUND ADVISORY FEES --------------------------------------------------------------------------------------------------------------- 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
The Adviser is contractually obligated 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 year ended September 30, 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 $ 2,551,688 $ 144,892 Select 3,713,661 59,518 Equity and Income 4,903,984 41,253 Global 1,102,771 1,251 International 4,543,752 0 Int'l Small Cap 1,861,293 0
On June 10, 2005, Harris Associates Securities L.P., an affiliate of the Adviser, exited the broker-dealer business. Therefore, the Funds have conducted no further trading with an affiliated broker-dealer since that date. IXIS Asset Management Services Co., an affiliate of the Adviser, provided transfer agent services to the Funds. The fees are based on the number of open accounts and the reimbursement of out-of-pocket expenses. For the year ended September 30, 2005, the Funds incurred the following transfer and dividend disbursing agent expenses:
TRANSFER AND DIVIDEND FUND DISBURSING AGENT FEES ---------------------------------------------------------------------------------------------------------- Oakmark $ 3,095,228 Select 1,672,303 Equity and Income 2,041,484 Global 570,770 International 1,196,349 Int'l Small Cap 237,242
64 Effective October 1, 2005, IXIS Asset Management Services Co. exited the transfer agent business, and the Funds have retained Boston Financial Data Services to serve in that capacity. The Adviser has entered into agreements with financial intermediaries to provide recordkeeping, processing, shareholder communications and other services to the Funds. These services would be provided by the Funds if the shares were held in accounts registered directly with the Funds' transfer agent. Accordingly, the Funds pay a portion of these fees pursuant to a separate agreement with the Adviser. The agreement with the Adviser calls for the Funds to pay a portion of the intermediary fees (which generally are a percentage of total net assets) to represent that portion the Funds would have paid the transfer agent had those shares been registered directly with the transfer agent instead of registered with the intermediary accounts. The Adviser pays the remainder of the charges, representing the portion that is attributed to shareholder servicing and distribution. The fees incurred by the Funds 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. The fees incurred by the Funds are reflected as deferred trustee compensation in the Statement of Operations. 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 substantially 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 $ 4,983,940,183 $ 1,339,316,873 $ (75,490,847) $ 1,263,826,026 Select 4,248,694,655 1,831,570,164 (73,296,963) 1,758,273,201 Equity and Income 8,021,768,906 1,836,557,867 (94,738,383) 1,741,819,484 Global 1,423,828,007 476,015,241 (15,088,709) 460,926,532 International 4,386,853,120 1,522,244,755 (7,901,792) 1,514,342,963 Int'l Small Cap 769,442,408 247,054,073 (29,095,050) 217,959,023
As of September 30, 2005, Oakmark had a net capital loss carryover of $39,304,543 available to offset future realized gains and thereby potentially reduce future taxable gains distributions. This capital loss carryover will expire in 2012 if not utilized. For the year ended September 30, 2005, Oakmark has elected to defer to October 1, 2005, post October 2004 currency losses of $8,888. For the year ended September 30, 2005, the components of distributable earnings on a tax basis (excluding unrealized appreciation (depreciation) disclosed below were as follows:
UNDISTRIBUTED UNDISTRIBUTED LONG- TOTAL DISTRIBUTABLE FUND ORDINARY INCOME TERM GAIN EARNINGS -------------------------------------------------------------------------------------------------- Oakmark $ 51,676,253 $ 0 $ 51,676,253 Select 28,490,162 352,140,283 380,630,445 Equity and Income 104,391,437 88,295,438 192,686,875 Global 26,698,746 47,269,213 73,967,959 International 159,141,708 225,560,651 384,702,359 Int'l Small Cap 40,336,370 143,444,028 183,780,398
65 During the years ended September 30, 2005, and September 30, 2004, the tax character of distributions paid was as follows:
YEAR ENDED YEAR ENDED SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 ----------------------------------------------------------------------------------------- DISTRIBUTIONS PAID DISTRIBUTIONS PAID DISTRIBUTIONS PAID DISTRIBUTIONS PAID FROM ORDINARY FROM LONG-TERM FROM ORDINARY FROM LONG-TERM FUND INCOME CAPITAL GAIN INCOME CAPITAL GAIN ------------------------------------------------------------------------------------------------------------------------- Oakmark $ 29,130,564 $ 0 $ 20,542,974 $ 0 Select 42,138,643 0 18,829,513 0 Equity and Income 70,711,007 210,226,794 31,939,932 0 Global 7,195,992 25,739,670 54,303 2,877,446 International 60,834,949 12,575,394 20,655,598 0 Int'l Small Cap 11,229,304 15,549,000 4,212,177 0
4. INVESTMENT TRANSACTIONS For the year ended September 30, 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 $ 986,049 $ 1,170,876 $ 2,929,493 $ 434,854 $ 1,265,359 $ 443,143 Proceeds from sales 1,391,645 1,131,707 2,086,234 262,870 709,336 394,594
Purchases at cost and proceeds from sales of long-term U.S. Government securities for the year ended September 30, 2005 were $7,348,222 and $7,260,102 respectively for Equity and Income. Transactions in written options during the year ended September 30, 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 September 30, 2005 0 $ 0 ============ ============
5. INVESTMENTS IN AFFILIATED ISSUERS An affiliated issuer, as defined under the Investment Company Act of 1940, is one in which a Fund's holdings of an issuer represents 5% or more of the outstanding voting securities of the issuer. A summary of each Fund's investments in securities of these issuers for the year ended September 30, 2005, is set forth below: SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK SELECT FUND
SHARES HELD MARKET VALUE SEPTEMBER 30, PURCHASES PROCEEDS DIVIDEND SEPTEMBER 30, AFFILIATES 2005 (COST) SALES INCOME 2005 ---------------------------------------------------------------------------------------------------- H&R Block, Inc. 16,519,600 $ 0 $ 9,870,356 $ 7,546,558 $ 396,140,008 The Dun & Bradstreet Corporation + 3,934,900 0 0 0 259,191,863 Toys 'R' Us*+ 0 0 275,921,973 0 0 --------- -------------- -------------- -------------- TOTALS $ 0 $ 285,792,329 $ 7,546,558 $ 655,331,871
66 SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK EQUITY AND INCOME FUND
SHARES HELD MARKET VALUE SEPTEMBER 30, PURCHASES SALES INCOME SEPTEMBER 30, AFFILIATES 2005 (COST) PROCEEDS DIVIDEND 2005 ------------------------------------------------------------------------------------------------------- Mentor Graphics Corporation + 3,640,000 $ 0 $ 0 $ 0 $ 31,304,000 St. Mary Land & Exploration Company** 2,900,000 0 0 217,500 106,140,000 Varian, Inc. + 1,649,400 0 0 0 56,607,408 ------------ -------------- -------------- -------------- TOTALS $ 0 $ 0 $ 217,500 $ 194,051,408
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INTERNATIONAL FUND
SHARES HELD MARKET VALUE SEPTEMBER 30, PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES 2005 (COST) PROCEEDS INCOME 2005 ------------------------------------------------------------------------------------------------------- Chargeurs SA 790,182 $ 0 $ 0 $ 1,161,190 $ 20,802,323 Enodis plc + 33,585,320 0 0 0 76,146,451 Lotte Chilsung Beverage Co., Ltd. 84,327 864,017 0 160,154 80,165,198 Meitec Corporation 2,483,800 14,989,812 0 1,699,742 79,448,332 Michael Page International plc 24,271,000 8,603,467 7,975,624 2,006,666 105,346,431 ------------ -------------- -------------- -------------- TOTALS $ 24,457,296 $ 7,975,624 $ 5,027,752 $ 361,908,735
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES THE OAKMARK INT'L SMALL CAP FUND
SHARES HELD MARKET VALUE SEPTEMBER 30, PURCHASES SALES DIVIDEND SEPTEMBER 30, AFFILIATES 2005 (COST) PROCEEDS INCOME 2005 ------------------------------------------------------------------------------------------------------- Alaska Milk Corporation 56,360,000 $ 363,857 $ 0 $ 295,773 $ 3,518,102 Gurit-Heberlein AG 32,875 0 2,865,773 704,160 31,115,994 Interpump Group S.p.A. 4,709,000 8,215,796 4,022,707 833,650 31,648,912 Lectra 2,186,404 3,134,871 0 303,491 11,065,043 Mainfreight Limited 7,475,285 0 2,647,090 432,893 18,141,769 Matichon Public Company Limited, Foreign Shares* 0 0 5,534,397 154,488 0 Morse plc 12,474,000 5,570,686 0 695,343 18,927,848 Royal Doulton plc * + 0 0 5,020,783 0 0 Vitec Group plc 2,383,907 2,686,298 0 639,696 14,931,888 ------------ -------------- -------------- -------------- TOTALS $ 19,971,508 $ 20,090,750 $ 4,059,494 $ 129,349,556
* Position in issuer liquidated during the 12 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
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 38.68 $ 33.85 $ 28.08 $ 32.01 $ 26.95 Income From Investment Operations: Net Investment Income 0.34 0.16 0.13 0.12 0.07 Net Gains or Losses on Investments (both realized and unrealized) 1.90 4.81 5.75 (3.85) 5.38 ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 2.24 4.97 5.88 (3.73) 5.45 Less Distributions: Dividends (from net investment income) (0.17) (0.14) (0.11) (0.20) (0.39) Distributions (from capital gains) 0.00 0.00 0.00 0.00 0.00 ------------- ------------- ------------- ------------- ------------- Total Distributions (0.17) (0.14) (0.11) (0.20) (0.39) ------------- ------------- ------------- ------------- ------------- Redemption Fee Per Share 0.00(a) 0.00(a) -- -- -- Net Asset Value, End of Period $ 40.75 $ 38.68 $ 33.85 $ 28.08 $ 32.01 ============= ============= ============= ============= ============= Total Return 5.79% 14.73% 20.99% (11.77)% 20.42% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 6,340.4 $ 6,474.0 $ 4,769.4 $ 3,300.9 $ 3,109.1 Ratio of Expenses to Average Net Assets 1.03%* 1.05% 1.14% 1.17% 1.15% Ratio of Net Investment Income to Average Net Assets 0.79% 0.47% 0.48% 0.38% 0.73% Portfolio Turnover Rate 16% 19% 21% 44% 57%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
APRIL 5, 2001 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 (b) --------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 38.45 $ 33.68 $ 28.04 $ 31.97 $ 32.09 Income From Investment Operations: Net Investment Income 0.26 0.04(c) 0.05 0.16 0.05 Net Gains or Losses on Investments (both realized and unrealized) 1.87 4.78 5.69 (3.92) (0.17) ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 2.13 4.82 5.74 (3.76) (0.12) Less Distributions: Dividends (from net investment income) (0.07) (0.05) (0.10) (0.17) 0.00 Distributions (from capital gains) 0.00 0.00 0.00 0.00 0.00 ------------- ------------- ------------- ------------- ------------- Total Distributions (0.07) (0.05) (0.10) (0.17) 0.00 ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $ 40.51 $ 38.45 $ 33.68 $ 28.04 $ 31.97 ============= ============= ============= ============= ============= Total Return 5.55% 14.32% 20.52% (11.85)% (0.37)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 43.7 $ 51.9 $ 21.1 $ 7.7 $ 0.1 Ratio of Expenses to Average Net Assets 1.26%* 1.40% 1.53% 1.44% 1.32%** Ratio of Net Investment Income to Average Net Assets 0.58% 0.11% 0.06% 0.35% 0.46%** Portfolio Turnover Rate 16% 19% 21% 44% 57%
* The ratio excludes expense offset arrangement. ** Data has been annualized. (a) Amounts round to less than $0.01 per share. (b) The date on which Class II shares were first sold to the public was April 5, 2001. (c) Computed using average shares outstanding throughout the period. 68 THE OAKMARK SELECT FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 31.20 $ 27.55 $ 21.67 $ 25.20 $ 21.45 Income From Investment Operations: Net Investment Income 0.29 0.15(a) 0.05 0.02 0.03 Net Gains or Losses on Investments (both realized and unrealized) 2.19 3.60 5.85 (3.50) 5.17 ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 2.48 3.75 5.90 (3.48) 5.20 Less Distributions: Dividends (from net investment income) (0.24) (0.10) (0.02) (0.05) (0.09) Distributions (from capital gains) 0.00 0.00 0.00 0.00 (1.36) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.24) (0.10) (0.02) (0.05) (1.45) ------------- ------------- ------------- ------------- ------------- Redemption Fee Per Share 0.00(b) 0.00(b) -- -- -- Net Asset Value, End of Period $ 33.44 $ 31.20 $ 27.55 $ 21.67 $ 25.20 ============= ============= ============= ============= ============= Total Return 7.98% 13.64% 27.25% (13.85)% 25.75% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 5,908.0 $ 5,463.0 $ 4,993.0 $ 3,717.6 $ 4,161.4 Ratio of Expenses to Average Net Assets 1.00% 1.00% 1.02% 1.07% 1.08% Ratio of Net Investment Income to Average Net Assets 0.87% 0.50% 0.23% 0.09% 0.26% Portfolio Turnover Rate 21% 14% 20% 32% 21%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 --------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 31.00 $ 27.37 $ 21.56 $ 25.10 $ 21.40 Income From Investment Operations: Net Investment Income (Loss) 0.21 0.09(a) 0.00(b) (0.04) 0.00(b) Net Gains or Losses on Investments (both realized and unrealized) 2.18 3.58 5.81 (3.50) 5.10 ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 2.39 3.67 5.81 (3.54) 5.10 Less Distributions: Dividends (from net investment income) (0.15) (0.04) 0.00 0.00 (0.06) Distributions (from capital gains) 0.00 0.00 0.00 0.00 (1.34) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.15) (0.04) 0.00 0.00 (1.40) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $ 33.24 $ 31.00 $ 27.37 $ 21.56 $ 25.10 ============= ============= ============= ============= ============= Total Return 7.72% 13.40% 26.95% (14.10)% 25.28% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 85.2 $ 98.0 $ 93.1 $ 64.4 $ 35.4 Ratio of Expenses to Average Net Assets 1.25% 1.21% 1.29% 1.36% 1.40% Ratio of Net Investment Income (Loss) to Average Net Assets 0.65% 0.29% (0.04)% (0.19)% (0.08)% Portfolio Turnover Rate 21% 14% 20% 32% 21%
(a) Computed using average shares outstanding throughout the period. (b) Amounts round to less than $0.01 per share. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 69 THE OAKMARK EQUITY AND INCOME FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 23.12 $ 20.30 $ 17.18 $ 17.45 $ 16.50 Income From Investment Operations: Net Investment Income 0.31 0.15 0.17 0.33(a) 0.08 Net Gains or Losses on Securities (both realized and unrealized) 2.77 2.81 3.19 (0.40) 2.11 ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 3.08 2.96 3.36 (0.07) 2.19 Less Distributions: Dividends (from net investment income) (0.20) (0.14) (0.24) (0.16) (0.24) Distributions (from capital gains) (0.59) 0.00 0.00 (0.04) (1.00) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.79) (0.14) (0.24) (0.20) (1.24) ------------- ------------- ------------- ------------- ------------- Redemption fee per share 0.00(b) 0.00(b) -- -- -- Net Asset Value, End of Period $ 25.41 $ 23.12 $ 20.30 $ 17.18 $ 17.45 ============= ============= ============= ============= ============= Total Return 13.65% 14.64% 19.75% (0.47)% 14.40% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 9,223.2 $ 7,577.9 $ 4,138.0 $ 2,241.9 $ 620.1 Ratio of Expenses to Average Net Assets 0.89%* 0.92% 0.93% 0.96% 0.98% Ratio of Net Investment Income to Average Net Assets 1.36% 0.78% 1.07% 1.71% 2.07% Portfolio Turnover Rate 112% 72% 48% 73% 124%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 23.03 $ 20.24 $ 17.15 $ 17.40 $ 16.49 Income From Investment Operations: Net Investment Income 0.28 0.11 0.16 0.30(a) 0.07 Net Gains or Losses on Securities (both realized and unrealized) 2.72 2.79 3.15 (0.40) 2.08 ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 3.00 2.90 3.31 (0.10) 2.15 Less Distributions: Dividends (from net investment income) (0.15) (0.11) (0.22) (0.11) (0.24) Distributions (from capital gains) (0.59) 0.00 0.00 (0.04) (1.00) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.74) (0.11) (0.22) (0.15) (1.24) ------------- ------------- ------------- ------------- ------------- Net Asset Value, End of Period $ 25.29 $ 23.03 $ 20.24 $ 17.15 $ 17.40 ============= ============= ============= ============= ============= Total Return 13.34% 14.36% 19.46% (0.60)% 14.07% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 582.0 $ 478.7 $ 246.6 $ 118.7 $ 3.3 Ratio of Expenses to Average Net Assets 1.14%* 1.17% 1.17% 1.20% 1.23% Ratio of Net Investment Income to Average Net Assets 1.11% 0.53% 0.84% 1.50% 1.95% Portfolio Turnover Rate 112% 72% 48% 73% 124%
* The ratio excludes expense offset arrangement. (a) Computed using average shares outstanding throughout the period. (b) Amounts round to less than $0.01 per share. 70 THE OAKMARK GLOBAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 19.73 $ 16.98 $ 11.30 $ 10.83 $ 10.91 Income From Investment Operations: Net Investment Income 0.17 0.09 0.01 0.00(a)(b) 0.03 Net Gains or Losses on Investments (both realized and unrealized) 4.48 2.71 5.67 0.76(c) 0.12 ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 4.65 2.80 5.68 0.76 0.15 Less Distributions: Dividends (from net investment income) (0.10) 0.00(a) 0.00 0.00 (0.17) Distributions (from capital gains) (0.37) (0.05) 0.00 (0.29) (0.06) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.47) (0.05) 0.00 (0.29) (0.23) ------------- ------------- ------------- ------------- ------------- Redemption Fee Per Share 0.00(a) 0.00(a) -- -- -- Net Asset Value, End of Period $ 23.91 $ 19.73 $ 16.98 $ 11.30 $ 10.83 ============= ============= ============= ============= ============= Total Return 23.88% 16.54% 50.27% 6.84% 1.37% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 1,842.9 $ 1,336.3 $ 704.8 $ 175.6 $ 48.2 Ratio of Expenses to Average Net Assets 1.20%* 1.26% 1.28% 1.55% 1.75%(e) Ratio of Net Investment Income (Loss) to Average Net Assets 0.81% 0.47% 0.00%(d) (0.01)% 0.00(e) Portfolio Turnover Rate 17% 16% 42% 86% 114%
* The ratio excludes expense offset arrangement. (a) Amounts round to less than $0.01 per share. (b) Computed using average shares outstanding throughout the period. (c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating net asset value per share of the class. (d) Amount rounds to less than 0.01%. (e) If the Fund had paid all of its expenses and there had been no expense reimbursement by the Adviser, ratios would have been as follows:
SEPTEMBER 30, 2001 ------------------------------------------------------------------------------ Ratio of Expenses to Average Net Assets 1.80% Ratio of Net Income (Loss) to Average Net Assets (0.05)%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 71 FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
OCTOBER 10, 2001 YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 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) 0.11 0.05 0.02 (0.03) Net Gains or Losses on Investments (both realized and unrealized) 4.43 2.69 5.58 0.31(b) ------------- ------------- ------------- ---------------- Total From Investment Operations: 4.54 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 $ 23.63 $ 19.53 $ 16.84 $ 11.24 ============= ============= ============= ================ Total Return 23.53% 16.32% 49.82% 2.31% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 58.6 $ 24.7 $ 5.8 $ 0.6 Ratio of Expenses to Average Net Assets 1.45%* 1.50% 1.46% 1.86%** Ratio of Net Investment Income (Loss) to Average Net Assets 0.63% 0.37% (0.01)% (0.26)%** Portfolio Turnover Rate 17% 16% 42% 86%
* The ratio excludes expense offset arrangement. ** Data has been annualized. (a) The date on which Class II shares were first offered for sale to the public was October 10, 2001. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating net asset value per share of the class. 72 THE OAKMARK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.98 $ 15.67 $ 12.17 $ 12.51 $ 15.40 Income From Investment Operations: Net Investment Income 0.27 0.24 0.11 0.14 0.20 Net Gains or Losses on Investments (both realized and unrealized) 4.59 3.18 3.52 (0.31) (2.07) ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 4.86 3.42 3.63 (0.17) (1.87) Less Distributions: Dividends (from net investment income) (0.27) (0.11) (0.13) (0.17) (0.51) Distributions (from capital gains) (0.05) 0.00 0.00 0.00 (0.51) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.32) (0.11) (0.13) (0.17) (1.02) ------------- ------------- ------------- ------------- ------------- Redemption Fee Per Share 0.00(a) 0.00(a) -- -- -- Net Asset Value, End of Period $ 23.52 $ 18.98 $ 15.67 $ 12.17 $ 12.51 ============= ============= ============= ============= ============= Total Return 25.85% 21.92% 29.97% (1.53)% (13.10)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 5,627.4 $ 4,036.9 $ 2,676.6 $ 1,393.8 $ 738.5 Ratio of Expenses to Average Net Assets 1.11%* 1.20% 1.25% 1.31% 1.30% Ratio of Net Investment Income to Average Net Assets 1.32% 1.40% 1.03% 1.34% 1.40% Portfolio Turnover Rate 14% 21% 34% 24% 58%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.86 $ 15.58 $ 12.13 $ 12.47 $ 15.37 Income From Investment Operations: Net Investment Income 0.22 0.18 0.08 0.15 0.17 Net Gains or Losses on Investments (both realized and unrealized) 4.55 3.16 3.48 (0.37) (2.10) ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 4.77 3.34 3.56 (0.22) (1.93) Less Distributions: Dividends (from net investment income) (0.22) (0.06) (0.11) (0.12) (0.49) Distributions (from capital gains) (0.05) 0.00 0.00 0.00 (0.48) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.27) (0.06) (0.11) (0.12) (0.97) Net Asset Value, End of Period $ 23.36 $ 18.86 $ 15.58 $ 12.13 $ 12.47 ============= ============= ============= ============= ============= Total Return 25.50% 21.52% 29.52% (1.76)% (13.44)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 362.9 $ 259.2 $ 123.2 $ 48.5 $ 1.9 Ratio of Expenses to Average Net Assets 1.38%* 1.53% 1.67% 1.58% 1.64% Ratio of Net Investment Income to Average Net Assets 1.08% 1.18% 0.69% 1.33% 0.62% Portfolio Turnover Rate 14% 21% 34% 24% 58%
* The ratio excludes expense offset arrangement. (a) Amounts round to less than $0.01 per share. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 73 THE OAKMARK INTERNATIONAL SMALL CAP FUND FINANCIAL HIGHLIGHTS-CLASS I FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.26 $ 13.74 $ 10.17 $ 10.00 $ 11.51 Income From Investment Operations: Net Investment Income 0.20 0.11 0.11 0.11 0.13 Net Gains or Losses on Securities (both realized and unrealized) 4.98 4.52 3.82 0.36(a) (0.81) ------------- ------------- ------------- ------------- ------------- Total From Investment Operations: 5.18 4.63 3.93 0.47 (0.68) Less Distributions: Dividends (from net investment income) (0.27) (0.12) (0.09) (0.16) (0.34) Distributions (from capital gains) (0.38) 0.00 (0.27) (0.14) (0.49) ------------- ------------- ------------- ------------- ------------- Total Distributions (0.65) (0.12) (0.36) (0.30) (0.83) ------------- ------------- ------------- ------------- ------------- Redemption fee per share 0.00(d) 0.01 -- -- -- Net Asset Value, End of Period $ 22.79 $ 18.26 $ 13.74 $ 10.17 $ 10.00 ============= ============= ============= ============= ============= Total Return 29.04% 33.94% 39.78% 4.68% (6.18)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 1,007.2 $ 734.1 $ 477.8 $ 357.7 $ 118.9 Ratio of Expenses to Average Net Assets 1.41%* 1.49% 1.57% 1.64% 1.74% Ratio of Net Investment Income to Average Net Assets 0.96% 0.72% 0.99% 1.28% 1.83% Portfolio Turnover Rate 47% 29% 30% 42% 49%
FINANCIAL HIGHLIGHTS-CLASS II FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
JANUARY 8, 2001 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2005 2004 2003 2002 2001 (b) --------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $ 18.25 $ 13.69 $ 10.14 $ 9.97 $ 10.73 Income From Investment Operations: Net Investment Income 0.18 0.13 0.08 0.13(c) 0.15 Net Gains or Losses on Securities (both realized and unrealized) 4.98 4.52 3.81 0.30(a) (0.91) ------------- ------------- ------------- ------------- -------------- Total From Investment Operations: 5.16 4.65 3.89 0.43 (0.76) Less Distributions: Dividends (from net investment income) (0.26) (0.09) (0.07) (0.12) 0.00 Distributions (from capital gains) (0.38) 0.00 (0.27) (0.14) 0.00 ------------- ------------- ------------- ------------- -------------- Total Distributions (0.64) (0.09) (0.34) (0.26) 0.00 Net Asset Value, End of Period $ 22.77 $ 18.25 $ 13.69 $ 10.14 $ 9.97 ============= ============= ============= ============= ============== Total Return 28.94% 34.11% 39.39% 4.25% (7.08)% Ratios/Supplemental Data: Net Assets, End of Period ($million) $ 0.6 $ 0.5 $ 0.4 $ 0.3 $ 0.0 Ratio of Expenses to Average Net Assets 1.49%* 1.39% 1.81% 1.87% 1.97%** Ratio of Net Investment Income to Average Net Assets 0.87% 0.75% 0.72% 1.06% 1.76%** Portfolio Turnover Rate 47% 29% 30% 42% 49%
* The ratio excludes expense offset arrangement. ** 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 per share. 74 THE OAKMARK FUNDS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF HARRIS ASSOCIATES INVESTMENT TRUST: WE HAVE AUDITED THE ACCOMPANYING STATEMENTS OF ASSETS AND LIABILITIES, INCLUDING THE SCHEDULES OF INVESTMENTS, OF HARRIS ASSOCIATES INVESTMENT TRUST COMPRISING THE OAKMARK FUND, THE OAKMARK SELECT FUND, THE OAKMARK EQUITY AND INCOME FUND, THE OAKMARK GLOBAL FUND, THE OAKMARK INTERNATIONAL FUND, AND THE OAKMARK INTERNATIONAL SMALL CAP FUND (COLLECTIVELY, THE "FUNDS"), AS OF SEPTEMBER 30, 2005, THE RELATED STATEMENTS OF OPERATIONS FOR THE YEAR THEN ENDED, THE STATEMENTS OF CHANGES IN NET ASSETS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED, AND THE FINANCIAL HIGHLIGHTS FOR EACH OF THE FOUR YEARS IN THE PERIOD THEN ENDED. THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE THE RESPONSIBILITY OF THE FUNDS' MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS BASED ON OUR AUDITS. THE FUNDS' FINANCIAL HIGHLIGHTS FOR THE PERIODS ENDED PRIOR TO SEPTEMBER 30, 2002 WERE AUDITED BY OTHER AUDITORS WHO HAVE CEASED OPERATIONS. THOSE AUDITORS EXPRESSED AN UNQUALIFIED OPINION ON THOSE FINANCIAL HIGHLIGHTS IN THEIR REPORT DATED OCTOBER 26, 2001. WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH STANDARDS OF THE PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD (UNITED STATES). THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDITS TO OBTAIN REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS ARE FREE OF MATERIAL MISSTATEMENT. THE FUNDS ARE NOT REQUIRED TO HAVE, NOR WERE WE ENGAGED TO PERFORM, AN AUDIT OF THEIR INTERNAL CONTROL OVER FINANCIAL REPORTING. OUR AUDITS INCLUDED CONSIDERATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING AS A BASIS FOR DESIGNING AUDIT PROCEDURES THAT ARE APPROPRIATE IN THE CIRCUMSTANCES, BUT NOT FOR THE PURPOSE OF EXPRESSING AN OPINION ON THE EFFECTIVENESS OF THE FUND'S INTERNAL CONTROL OVER FINANCIAL REPORTING. ACCORDINGLY, WE EXPRESS NO SUCH OPINION. AN AUDIT ALSO INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. OUR PROCEDURES INCLUDED CONFIRMATION OF SECURITIES OWNED AS OF SEPTEMBER 30, 2005, BY CORRESPONDENCE WITH THE FUNDS' CUSTODIAN AND BROKERS; WHERE REPLIES WERE NOT RECEIVED FROM BROKERS, WE PERFORMED OTHER AUDITING PROCEDURES. AN AUDIT ALSO INCLUDES ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION. WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION. IN OUR OPINION, THE FINANCIAL STATEMENTS AND FINANCIAL HIGHLIGHTS REFERRED TO ABOVE PRESENT FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF EACH OF THE FUNDS AS OF SEPTEMBER 30, 2005, THE RESULTS OF THEIR OPERATIONS FOR THE YEAR THEN ENDED, THE CHANGES IN THEIR NET ASSETS FOR EACH OF THE TWO YEARS IN THE PERIOD THEN ENDED AND THEIR FINANCIAL HIGHLIGHTS FOR EACH OF THE FOUR YEARS IN THE PERIOD THEN ENDED, IN CONFORMITY WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA. /s/ Deloitte & Touche LLP Chicago, Illinois October 28, 2005 75 FEDERAL TAX INFORMATION (UNAUDITED) Global, International and Int'l Small Cap paid qualifying foreign taxes of $2,209,871, $9,401,715 and $1,636,023 and earned $29,252,069, $130,940,006 and $22,056,631 foreign source income during the year ended September 30, 2005, respectively. Pursuant to Section 853 of the Internal Revenue Code, Global, International and Int'l Small Cap designated $0.03, $0.04 and $0.04 per share as foreign taxes paid and $0.37, $0.51 and $0.50 per share as income earned from foreign sources for the year ended September 30, 2005, respectively. Qualified dividend income ("QDI") received by the Funds through September 30, 2005, that qualified for a reduced tax rate pursuant to the Internal Revenue Code Section 1(h)(11) are as follows:
FUND QDI --------------------------------------------------------------------- Oakmark $ 113,800,323 Select 97,526,202 Equity and Income 71,293,556 Global 31,065,999 International 102,838,696 Int'l Small Cap 21,728,618
For corporate shareholders, a portion of the ordinary dividends paid during the Funds' year ended September 30, 2005, qualified for the dividends received deduction, as follows:
FUND --------------------------------------------------------------------- Oakmark 100% Select 100% Equity and Income 54% Global 34%
76 This material must be preceded or accompanied by a prospectus. To order a prospectus, which explains management fees and expenses and the special risks of investing in the Funds, visit www.oakmark.com or call 1-800-OAKMARK. Please read the prospectus carefully before investing. The discussion of investments and investment strategy of the Funds (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the investments of the Funds and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this report, 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. 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. 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. 77 5. The Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. This index is unmanaged and investors cannot actually make investments in this index. 6. The Lipper Large Cap Value Fund Index is an equally weighted index of the largest 30 funds within the large cap value funds investment objective as defined by Lipper Inc. The index is adjusted for the reinvestment of capital gains and income dividends. This index is unmanaged and investors cannot actually make investments in this index. 7. The 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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. 14. 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 U.S. & 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. 15. 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. 16. The Lipper International Small Cap Average includes 100 mutual funds that invest in securities whose primary markets are outside of the U.S. This index is unmanaged and investors cannot actually make investments in this index. 78 THE OAKMARK FUNDS TRUSTEES AND OFFICERS The board of trustees has overall responsibility for the conduct of the affairs of Harris Associates Investment Trust ("Trust"), and its six series, The Oakmark Funds. Each trustee serves until the next annual meeting of shareholders and until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. Each trustee must retire at the end of the calendar year in which the trustee attains the age of 72. The board of trustees may fill any vacancy on the board provided that after such appointment, at least two-thirds of the trustees have been elected by the shareholders. No person shall be appointed or elected to serve as a trustee after attaining the age of 65. The shareholders may remove a trustee by a vote of two-thirds of the outstanding shares of the Trust at any meeting of shareholders called for the purpose of removing such trustee. The board of trustees elects or appoints the officers of the Trust. The president, any vice president, treasurer and secretary serves until the election and qualification of his or her successor, or until he or she dies, resigns, or is removed or disqualified. Each other officer shall serve at the pleasure of the board of trustees. The board of trustees may remove any officer at any time, with or without cause, by the vote of a majority of the trustees then in office. The names and ages of the trustees and officers, the position each holds with the Trust, the date each was first elected to office, their principal business occupations during the last five years and other directorships held are shown below. NAME AND AGE AT SEPTEMBER 30, 2005, POSITIONS HELD WITH THE TRUST, DATE FIRST ELECTED OR APPOINTED TO OFFICE, PRINCIPAL OCCUPATIONS DURING THE PAST 5 YEARS. OTHER DIRECTORSHIPS HELD. TRUSTEES WHO ARE "INTERESTED PERSONS"* Peter S. Voss, 58, Trustee, 1995 Chairman and Chief Executive Officer, IXIS Asset Management Group; President and Chief Executive Officer, IXIS Asset Management North America, L.P., formerly named CDC IXIS Asset Management North America, L.P. (investment management); Chairman of the Management Board, IXIS Asset Management; Director, Harris Associates, Inc. ("HAI"). Chairman, AEW Real Estate Income Fund (closed-end investment company); Chairman and Chief Executive Officer, CDC Nvest Funds (open-end investment company--14 portfolios). John R. Raitt, 50, Trustee and President, 2003 President and Chief Executive Officer, HAI, Harris Associates L.P. ("HALP") and Harris Associates Securities L.P. ("HASLP") since 2003; Chief Operating Officer, HALP 2001-2002; Director of Research, HALP, prior thereto. None. TRUSTEES WHO ARE NOT "INTERESTED PERSONS" Gary N. Wilner, M.D., 64, Trustee and Chairman of the Board of Trustees, 1993 Retired, since 2004; Senior Attending Physician, Evanston Hospital; Medical Director--Cardiopulmonary Wellness Program, Evanston Hospital Corporation, prior thereto. Director, North American Scientific, Inc. (developer of radioisotopic products for the treatment and diagnosis of disease). Michael J. Friduss, 63, Trustee, 1995 Principal, MJ Friduss & Associates, Inc. (telecommunications consultants). None. 79 Thomas H. Hayden, 54, Trustee, 1995 President, Greenhouse Communications (advertising agency), since 2004; Executive Vice President, Campbell Mithun, (advertising and marketing communication agency), prior thereto. None. Christine M. Maki, 44, Trustee, 1995 Vice President--Tax, Hyatt Corporation (hotel management). None. Allan J. Reich, 57, Trustee, 1993 Partner, Seyfarth Shaw LLP (law firm), since 2003; Vice Chairman of the law firm D'Ancona & Pflaum LLC, prior thereto. None. Marv R. Rotter, 59, Trustee, 1995 Retired since 2004; Senior Advisor to Chief Executive Officer, AXA Advisors, LLC (formerly named Rotter & Associates) prior thereto. None. Burton W. Ruder, 61, Trustee, 1995 President, The Academy Financial Group (venture capital investment and transaction financing firm); Manager, Cedar Green Associates (real estate management firm). None. OFFICERS OF THE TRUST Henry R. Berghoef, 56, Vice President and Portfolio Manager (The Oakmark Select Fund), 2000 Director of Domestic Research, HALP, since 2003; Associate Director of Research, 2001-2002; Portfolio Manager and Analyst, HALP. None. Chad M. Clark, 33, Vice President and Portfolio Manager (The Oakmark International Small Cap Fund), 2005 Portfolio Manager, HALP, since 2001; International Analyst, HALP. None. Kevin G. Grant, 41, Vice President and Portfolio Manager (The Oakmark Fund), 2000 Portfolio Manager and Analyst, HALP. None. David G. Herro, 44, Vice President and Portfolio Manager (The Oakmark International Fund and The Oakmark International Small Cap Fund), 1992 Chief Investment Officer of International Equity, since 2003; Portfolio Manager and Analyst, HALP. None. John J. Kane, 34, Treasurer, 2005 Assistant Treasurer, 1999-2005; Manager--Mutual Fund and Institutional Services, HALP. None. Robert M. Levy, 55, Executive Vice President, 2004 Chairman, HAI; Chief Investment Officer, HALP, since 2001; President and Chief Executive Officer, HAI, HALP and HASLP, 1997-2002; Portfolio Manager, HALP. None. Clyde S. McGregor, 52, Vice President and Portfolio Manager (The Oakmark Equity and Income Fund and The Oakmark Global Fund), 1995 Portfolio Manager, HALP. None. William C. Nygren, 46, Vice President and Portfolio Manager (The Oakmark Fund and The Oakmark Select Fund), 1996 Portfolio Manager and Analyst, HALP. None. 80 Vineeta D. Raketich, 34, Vice President, 2003 Manager, International Operations and Client Relations, HALP, since 2003; Supervisor, Mutual Fund and Institutional Services, HALP, prior thereto. None. Janet L. Reali, 54, Vice President and Secretary, 2001 Vice President, General Counsel and Secretary, HAI, HALP and HASLP, since 2001; Senior Executive Vice President, General Counsel and Secretary, Everen Capital Corp. and Everen Securities, Inc. (broker/dealer), 1995-1999. None. Ann W. Regan, 57, Vice President and Assistant Secretary, 1996, Chief Compliance Officer of the Trust and Director of Mutual Fund Compliance, HALP, since 2004 Director of Mutual Fund Operations, HALP, prior thereto. None. Kristi L. Rowsell, 39, Vice President, 2005 Treasurer, 1997-2005; Director, Chief Financial Officer and Treasurer, HAI; Chief Financial Officer, HALP and HASLP, since 1999. None. Edward A. Studzinski, 56, Vice President and Portfolio Manager (The Oakmark Equity and Income Fund), 2000 Portfolio Manager and Analyst, HALP. None. Michael J. Welsh, 42, Vice President and Portfolio Manager (The Oakmark Global Fund and The Oakmark International Fund), 1997 Director of International Research, since 2003; Portfolio Manager and Analyst, HALP. None. Christopher P. Wright, 31, Vice President, 2005 Director of Mutual Fund Operations, HALP, since 2004; Assistant Director of Mutual Fund Operations, HALP, prior thereto. None. * Mr. Voss is a trustee who is an "interested person" of the Funds as defined in the Investment Company of 1940, because he is a director of HAI, the general partner and manager of HALP, the investment adviser to the Funds. Mr. Voss is also the Chairman, President and Chief Executive Officer of IXIS Asset Management North America, L.P., formerly CDC IXIS Asset Management North America, L.P., the parent company of HALP. Mr. Raitt is a trustee who is an "interested person" of the Funds because he is the President and Chief Executive Officer of HAI, HASLP and HALP. The business address of the officers and trustees is Two North LaSalle Street, #500, Chicago, Illinois 60602. The Statement of Additional Information (SAI) contains further information about the trustees and is available without charge upon your request by calling 1-800-625-6275. 81 THE OAKMARK FUNDS INVESTMENT PHILOSOPHY All Oakmark managers follow a consistent investment philosophy--to invest in companies they believe are trading at a substantial discount to underlying business value. Critical to this philosophy is to invest with management teams who are committed to maximizing the company's business value. THREE KEY TENETS OF OUR INVESTMENT PHILOSOPHY: 1 Buy businesses trading at a significant discount to our estimate of true business value. 2 Invest in companies expected to grow shareholder value over time. 3 Invest with management teams who think and act as owners. INVESTMENT PROCESS We seek to identify undervalued companies through an intensive, in-house research process. This process is not based on macro-economic factors, such as the performance of the economy or the direction of interest rates. Nor is it based on technical factors, such as the performance of the stock market itself. And, while some value managers might use only one summary statistic--such as price-earnings ratio--our investment professionals take a more in-depth approach using a range of valuation measures appropriate for a specific company or industry. From the universe of thousands of equity securities, our team generates investment ideas through a variety of methods. If a security appears attractive, detailed quantitative and qualitative research follows. This careful process of identifying undervalued stocks results in an "approved list." THE RESULT: a unified effort aimed at identifying the best values in the marketplace. From the list of approved stocks, each fund manager constructs a relatively focused portfolio, built on a stock-by-stock basis from the bottom up. WHO SHOULD INVEST Any investor who is seeking a disciplined value manager for the purposes of growing and diversifying a portfolio should consider one of The Oakmark Funds, keeping in mind that all equity investments should be considered long-term investments. As value investors, we recognize that patience is a virtue and believe that, over the long term, investors are rewarded for their patience. We generally hold the companies in which we invest for three to five years, a time horizon that we encourage our shareholders to consider as well. HOW TO USE VALUE FUNDS IN AN OVERALL PORTFOLIO Investment styles tend to move in cycles. One style may be in favor for a few years while the other is out of favor, and vice versa. Diversifying the stock portion of your portfolio may help reduce overall volatility--and potentially provide more consistent returns over time. INVEST Managers select stocks from the approved list for their specific funds | | APPROVED LIST Securities available for investment | | QUANTITATIVE AND QUALITATIVE RESEARCH Rigorous analysis is performed to ensure that the stock meets our strict value standards | | CRITERIA SCREENS Managers and research team screen for stocks that are worth further consideration | | UNIVERSE OF THOUSANDS OF EQUITY SECURITIES All stocks available for investment | | BOTTOM-UP INVESTMENT PROCESS 82 THE OAKMARK GLOSSARY BOOK VALUE - A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. A company's book value often differs substantially from economic value, especially in industries such as media. BUSINESS VALUE/INTRINSIC VALUE - The perceived or estimated actual value of a security, as opposed to its current market price or book value. Business value can be evaluated based on what a knowledgeable buyer would pay for a business if the company were sold in its entirety. GROWTH INVESTING - Investors who look for companies based on whether the stock of a company is growing earnings and/or revenue faster than the industry as a whole or the overall market. Growth investors generally expect high rates of growth to persist, and the stock, in turn, to deliver returns exceeding the market's. A growth mutual fund is generally one that emphasizes stocks believed to offer above-average growth prospects, with little to no emphasis on the stock's current price. M & A (MERGERS & ACQUISITIONS) - Merger: the combining of two or more entities into one, through a purchase acquisition or a pooling of interests. Acquisition: can also be called a takeover, and is defined as acquiring control of a corporation, called a target, by stock purchase or exchange, either hostile or friendly. MARKET CAPITALIZATION (MARKET CAP OR CAP) - The market price of an entire company on any given day, calculated by multiplying the number of shares outstanding by the price per share. MOMENTUM INVESTING - Approach to investing based on the belief that stock price trends are likely to continue. Momentum investors tend to buy stocks that have been outperforming the market and to sell those stocks when their relative performance deteriorates. Momentum investors do not consider a company's underlying value or fundamentals in their investment decisions. MULTIPLE - A ratio used to measure a stock's valuation, usually greater than 1. Sometimes used to mean price/earnings ratio. P/B OR PRICE-TO-BOOK RATIO - A stock's capitalization divided by its book value. The value is the same whether the calculation is done for the whole company or on a per-share basis. P/E OR PRICE-TO-EARNINGS RATIO - The most common measure of a stock's valuation. It is equal to a stock's capitalization divided by its after-tax earnings over a 12-month period. The value is the same whether the calculation is done for the whole company or on a per-share basis. Equivalently, the cost an investor in a given stock must pay per dollar of current annual earnings. Also called earnings multiple. SHARE REPURCHASE - Program through which a corporation buys back its own shares in the open market, typically an indication that the corporation's management believes the stock price is undervalued. VALUE INVESTING - Investors who utilize valuation measures such as business value (including growth rate), price/earnings ratio, price/book ratio, and yield to gauge the attractiveness of a company. Managers who employ a value investment style believe that the true, underlying value of a company is not reflected in its current share price, and, over time, the price has potential to increase as the market recognizes the overall value of the business. Value stocks sell at relatively low prices in relation to their underlying business value, earnings, or book value. Stocks become undervalued for a variety of reasons, including an overall market decline, or when a specific industry falls into disfavor and investors view all companies in that industry in the same light. Consequently, an individual company's stock price may fall, even though it may be only temporarily affected by the industry's problems and its underlying value has remained unchanged. "X TIMES EARNINGS" ("12 TIMES EARNINGS") - Another way to express a stock's price-to-earnings (P/E) ratio. A stock with a P/E ratio of 12 sells at 12 times earnings. 83 [GRAPHIC] (This page has been intentionally left blank.) 84 THE OAKMARK FUNDS OTHER INFORMATION INVESTMENT ADVISER Harris Associates L.P. Two North LaSalle Street Chicago, Illinois 60602-3790 TRANSFER AGENT Boston Financial Data Services, Inc. Quincy, 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 617-483-3250 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) 483-3250. 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 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 The Oakmark Funds are distributed by Harris www.oakmark.com Associates Securities L.P., member NASD. Date of first use: November 2005. THE OAKMARK FUND CLASS II [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (4/5/01) TO PRESENT (9/30/05) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
THE OAKMARK FUND (CLASS II) S & P 500 4/5/2001 $ 10,000 $ 10,000 6/30/2001 $ 10,954 $ 10,665 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 6/30/2005 $ 12,837 $ 11,104 9/30/2005 $ 12,771 $ 11,505
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/05)
SINCE INCEPTION 1-YEAR (4/5/01) --------------------------------------------------------------------------------- OAKMARK FUND (CLASS II) 5.55% 5.60% S&P 500 12.25% 3.17%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2005 THE OAKMARK SELECT FUND CLASS II [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (12/31/99) TO PRESENT (9/30/05) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
THE OAKMARK SELECT FUND (CLASS II) S & P 500 12/31/99 $ 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 6/30/2005 $ 19,315 $ 8,830 9/30/2005 $ 19,385 $ 9,149
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/05)
SINCE INCEPTION 1-YEAR 5-YEAR (12/31/99) ----------------------------------------------------------------------------- OAKMARK SELECT FUND (CLASS II) 7.72% 10.78% 12.19% S&P 500 12.25% -1.49% -1.53%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2005 THE OAKMARK EQUITY AND INCOME FUND CLASS II [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (7/13/00) TO PRESENT (9/30/05) AS COMPARED TO THE LIPPER BALANCED FUND INDEX
THE OAKMARK EQUITY AND INCOME FUND (CLASS II) LIPPER BALANCED 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 6/30/2005 $ 17,646 $ 11,181 9/30/2005 $ 18,665 $ 11,508
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/05)
SINCE INCEPTION 1-YEAR 5-YEAR (7/13/00) ------------------------------------------------------------------------- OAKMARK EQUITY & INCOME FUND (CLASS II) 13.34% 11.91% 12.70% Lipper Balanced Fund Index 10.05% 2.89% 2.73%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2005 THE OAKMARK GLOBAL FUND CLASS II [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (10/10/01) TO PRESENT (9/30/05) AS COMPARED TO THE MSCI WORLD INDEX
THE OAKMARK GLOBAL FUND (CLASS II) MSCI WORLD INDEX 10/10/2001 $ 10,000 $ 10,000 12/31/2001 $ 12,060 $ 10,501 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 6/30/2005 $ 20,355 $ 12,757 9/30/2005 $ 22,024 $ 13,648
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/05)
SINCE INCEPTION 1-YEAR (10/10/01) ----------------------------------------------------------------- OAKMARK GLOBAL FUND (CLASS II) 23.53% 21.97% MSCI World 18.93% 8.14%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2005 THE OAKMARK INTERNATIONAL FUND CLASS II [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (11/4/99) TO PRESENT (9/30/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX
THE OAKMARK INTERNATIONAL FUND (CLASS II) MSCI WORLD EX U.S. INDEX 11/4/99 $ 10,000 $ 10,000 12/31/99 $ 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 6/30/2005 $ 17,065 $ 10,680 9/30/2005 $ 18,593 $ 11,847
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/05)
SINCE INCEPTION 1-YEAR 5-YEAR (11/4/99) ------------------------------------------------------------------------------- OAKMARK INTERNATIONAL FUND (CLASS II) 25.50% 10.90% 11.07% MSCI World ex U.S. Index 26.82% 3.37% 2.91%
The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The performance data quoted represents past performance. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 2005 THE OAKMARK INTERNATIONAL SMALL CAP FUND CLASS II [CHART] THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (1/8/01) TO PRESENT (9/30/05) AS COMPARED TO THE MSCI WORLD EX U.S. INDEX
THE OAKMARK INTERNATIONAL MSCI WORLD SMALL CAP FUND (CLASS II) EX U.S. INDEX 1/8/2001 $ 10,000 $ 10,000 3/31/2001 $ 10,140 $ 8,638 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 6/30/2005 $ 21,061 $ 11,079 9/30/2005 $ 23,348 $ 12,289
AVERAGE ANNUAL TOTAL RETURNS (as of 9/30/05)
SINCE INCEPTION 1-YEAR (1/8/01) --------------------------------------------------------------------------- OAKMARK INTERNATIONAL SMALL CAP FUND (CLASS II) 28.94% 19.64% MSCI World ex U.S. Index 26.82% 4.45%
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. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data, call 1-800-OAKMARK or visit www.oakmark.com. Harris Associates Securities L.P., member NASD, November 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 April 1, 2005, to September 30, 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 September 30, 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 $ 996.60 $ 1,000.30 $ 1,086.80 $ 1088.40 $ 1,088.00 $ 1,079.10 Expenses Paid During Period* $ 6.31 $ 6.17 $ 5.91 $ 7.59 $ 7.22 $ 7.66 Annualized Expense Ratio 1.26% 1.23% 1.13% 1.45% 1.38% 1.47%
* 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 based on actual expense ratios 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, the total 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 $ 1,018.75 $ 1,018.90 $ 1,019.40 $ 1,017.80 $ 1,018.15 $ 1,017.70 Expenses Paid During Period* $ 6.38 $ 6.23 $ 5.72 $ 7.33 $ 6.98 $ 7.44 Annualized Expense Ratio 1.26% 1.23% 1.13% 1.45% 1.38% 1.47%
* 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. (a) Registrant has adopted a code of ethics (the "Code") that applies to its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. (b) No disclosures are required by this Item 2(b). (c) During the period covered by the report, no amendments were made to the provisions of the Code. (d) During the period covered by the report, Registrant did not grant any waivers, including implicit waivers, from the provisions of the Code. (e) Not applicable. (f) A copy of the Code is filed as Exhibit (a)(1) to this Form N-CSR. Copies of the Code will also be made available free of charge upon request, by writing or calling The Oakmark Funds, P.O. Box 8510, Boston, MA 02266-8510, 1-800-OAKMARK, (1-800-625-6275). ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Registrant's board of trustees has determined that each of the following five members of the Registrant's audit committee qualifies as an "audit committee financial expert," as such term is defined in Instruction 2(b) to Item 3 of Form N-CSR: Michael J. Friduss, Thomas H. Hayden, Christine M. Maki, Allan J. Reich and Gary N. Wilner, M.D. Each of those members of Registrant's audit committee is "independent" as such term is defined in paragraph (a)(2) of Item 3 of Form N-CSR. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Aggregate fees billed to the Registrant for professional services rendered by the Registrant's accountant were as follows:
FISCAL YEAR FISCAL YEAR ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 2005 2004 ---------------------------------------------------------- Audit Fees(1) $ 170,900 $ 178,550 Audit-Related Fees(2) $ 48,600 $ 49,000 Tax Fees(3) $ 20,700 $ 22,600 All Other Fees(4) $ 0 $ 0
During its regularly scheduled periodic meetings, the Registrant's audit committee will pre-approve all audit, audit-related, tax and other services to be provided by the principal accountants of the Registrant. The audit committee has authorized its chairman to exercise that authority in the intervals between meetings; and the chairman presents any such pre-approvals to the audit committee at its next regularly scheduled meeting. Under paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, pre-approval of non-audit services may be waived provided that: 1) the aggregate amount of fees for all such services provided constitutes no more than five percent of the total amount of fees paid by the Registrant to its principal accountant during the fiscal year in which such services are provided 2) such services were not recognized by management at the time of engagement as non-audit services and 3) such services are promptly brought to the attention of the Registrant's audit committee by management and approved prior to the completion of the audit. ---------- 1 "Audit Fees" include amounts for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. 2 "Audit-Related Fees" include amounts for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant's financial statements, specifically the semi-annual reviews of the Funds in fiscal year 2005. 3 "Tax Fees" include amounts for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning. In the fiscal year 2004, the tax fees attributable to liquidation of The Oakmark Small Cap Fund were $5,350 and were borne by the investment adviser, Harris Associates L.P. (and are not included in this chart). 4 "All Other Fees" include amounts for products and services provided by the principal accountant. No such products and services were provided. No audit-related, tax or non-audit services were approved by waiver pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. Less than 50 percent of the hours expended on the principal accountant's engagement to audit the Registrant's financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. The aggregate fees billed for the fiscal years ended September 30, 2005 and September 30, 2004 by the Registrant's principal accountant for non-audit services rendered to the Registrant, its investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Registrant were $26,287 and $0, respectively. The audit committee of Registrant's board of trustees has considered whether the provision of non-audit services that were rendered by Registrant's principal accountant to Registrant's investment adviser, and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal account's independence. No such services were rendered. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The Schedule of Investments in securities of unaffiliated issuers is included as part of the annual report to shareholders filed under Item 1 of this Form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. 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. During the period covered by this report, no amendments were made to the procedures that were adopted in fiscal year 2005. ITEM 11. CONTROLS AND PROCEDURES. Based on an evaluation of the disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure Controls"), the Disclosure Controls are effectively designed to ensure that information required to be disclosed by the Registrant in this report is recorded, processed, summarized and reported within 90 days prior to the filing of this report, including ensuring that information required to be disclosed in this report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant's most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of Ethics for Principal Executive Officer and Senior Financial Officers (as referenced in Item 2 above), attached hereto as Exhibit (a)(1). (2) Certifications of John R. Raitt, Principal Executive Officer, and Kristi L. Rowsell, Principal Financial Officer, pursuant to Rule 30a-2 under the Investment Company Act of 1940 (17 CFR 270.30a-2), attached hereto as Exhibits (a)(2)(i) and (a)(2)(ii). (b) Certification of John R. Raitt, Principal Executive Officer and Kristi L. Rowsell, Principal Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, attached hereto as Exhibit (b). SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Harris Associates Investment Trust By: /s/ John R. Raitt ------------------------------------ John R. Raitt Principal Executive Officer Date: November 17, 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: November 17, 2005 ------------------------------------ By: /s/ Kristi L. Rowsell ------------------------------------ Kristi L. Rowsell Principal Financial Officer Date: November 17, 2005 ------------------------------------