<PAGE>
THE
OAKMARK
FUND
THE OAKMARK FAMILY of FUNDS
THE
THIRD QUARTER OAKMARK
REPORT SMALL CAP
--------------- FUND
July 31, 1996
---------------
THE
OAKMARK
BALANCED
FUND
[LOGO]
THE
No-Load Funds Managed by OAKMARK
HARRIS ASSOCIATES L.P. INTERNATIONAL
FUND
THE
OAKMARK
INT'L EMERGING
VALUE FUND
<PAGE>
[LOGO]
The Oakmark Family of Funds
1996 THIRD QUARTER REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter from the President.............. 1
The Oakmark Funds Summary.............. 2
The Oakmark Fund
Performance Chart................... 4
Letter from the Portfolio Manager... 4
Schedule of Investments............. 8
The Oakmark Small Cap Fund
Performance Information............. 11
Letter from the Portfolio Manager... 11
Schedule of Investments............. 14
The Oakmark Balanced Fund
Performance Information............. 16
Letter from the Portfolio Manager... 16
Schedule of Investments............. 19
The Oakmark International Fund
Performance Chart................... 21
Letter from the Portfolio Managers.. 21
Schedule of Investments............. 25
The Oakmark Int'l Emerging Value Fund
Performance Information............. 31
Letter from the Portfolio Managers.. 31
Schedule of Investments............. 34
Trustees and Officers.................. 39
</TABLE>
FOR MORE INFORMATION:
Please call 1-800-OAKMARK (1-800-625-6275).
24-HOUR NET ASSET VALUE HOTLINE:
To obtain the current net asset value per share of a
Fund, please call 1-800-GROWOAK (1-800-476-9625).
<PAGE>
Letter From the President . . .
Fellow Shareholders:
The third quarter ended July 31, 1996 was one of the most challenging
investment environments we have seen in some time. The Oakmark Balanced Fund had
a small positive return (.3%) in the quarter, but due in large part to the
worldwide market declines in July, each of the other Oakmark Funds has declined
in value (from -2.7 to -3.4). While we expect volatility (and indeed expect to
profit from it) and the possibility of short-term negative results, it is our
focus on long term results that will distinguish our record. In this regard we
note the celebration of the fifth anniversary of the Oakmark Fund - August 5,
1991-1996. We are very proud of our 29.51% average annual total return during
this five year period.
In response to those investors who have asked for a more concentrated, non-
diversified fund, we anticipate launching a new fund soon after our October 31,
1996 fiscal year-end. This fund will be managed by Bill Nygren, our Director of
Research, and will focus on Harris Associates' top 8 to 10 investment ideas or
themes. Call us at (1-800-OAKMARK) to receive a prospectus as soon as it is
available.
We're listening . . . Oakmark shareholders want to receive less paper and less
mail. Therefore, effective November 1, confirmations of shares purchased by
reinvestment of dividends or via an automatic plan will only be confirmed to you
quarterly through Investor Statements.
Thank you for your business and support.
Sincerely,
/s/ Victor A. Morgenstern
VICTOR A. MORGENSTERN
President
<PAGE>
THE OAKMARK FUNDS FAMILY SUMMARY INFORMATION*
PERFORMANCE FOR PERIOD ENDED JULY 31, 1996
OAKMARK SMALL CAP
------- ---------
3 Months -3.4% -2.9%
6 Months -1.5% 16.2%
Performance for:
1 Year 15.1% N/A
3 Years 17.3%** N/A
Since Inception 28.9%** 18.3%
Value of $10,000 $35,559 $11,830
from inception date 08/05/91 11/01/95
TOP FIVE HOLDINGS AS OF JULY 31, 1996
Company and
% of Total Net Philip Morris Co. 7.6% SPX Corp. 6.3%
Assets Mellon Bank Corp. 5.2% Premark International, Inc. 6.0%
First USA Inc. 4.7% US Industries Inc. 5.7%
Dun & Bradstreet 4.6% Catellus Dev Corp. 3.7%
US West Media Group 4.6% Peoples Bank
of Bridgeport CT 3.6%
TOP FIVE INDUSTRIES AS OF JULY 31, 1996
Industries and Food & Beverage 19.5% Other Industrial Goods
% of Total Net Broadcasting & & Services 15.9%
Assets Publishing 16.8% Machinery &
Other Consumer Metal Processing 15.6%
Goods & Services 10.6% Banks 13.8%
Other Financial 8.4% Broadcasting & Publishing 8.5%
Insurance 6.0% Other Consumer Goods
& Services 6.5%
*The Oakmark Fund's average annual total return for the twelve months ended June
30, 1996 and the period August 5, 1991 (inception) through June 30, 1996 was
24.3% and 31.0%, respectively.
The Oakmark Small Cap Fund's total return for November 1, 1995 (inception)
through June 30, 1996 was 24.7%.
The Oakmark Balanced Fund's total return for November 1, 1995 (inception)
through June 30, 1996 was 10.4%.
**Annualized.
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BALANCED INTERNATIONAL INT'L EMERGING VALUE
-------- ------------- --------------------
.3% -2.9% -2.7%
3.6% 8.5% 4.8%
N/A 13.7% N/A
N/A 11.8%** N/A
6.6% 15.9%** 10.4%
$10,660 $17,634 $11,040
11/01/95 09/30/92 11/01/95
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
US Industries Inc. 3.8% AB Volvo 4.7% Solution 6 Holdings
Philip Morris Co. 3.5% Cordiant PLC 4.5% Limited 4.8%
US West Media Group 3.3% National Australia PT Polysindo Eka
Arctco, Inc. 3.3% Bank 4.2% Perkasa 4.1%
Associates First Usiminas 3.7% Yip's Hang Cheung
Cap Corp. 3.3% Telefonos de Mexico, (Holdings) Limited 3.6%
S.A. 3.5% Parbury Limited 3.4%
Cordiant PLC 3.4%
Government & Banks 12.8% Other Industrial Goods
Agency Securities 27.2% Telecommunications 10.1% & Services 13.1%
Other Consumer Goods Food 9.4% Computer Systems 9.8%
& Services 16.5% Steel 8.3% Mining & Building
Broadcasting Transportation 6.3% Materials 8.2%
and Publishing 9.3% Production Equipment 7.7%
Banks and Other Components 6.7%
Financial 9.3%
Food and Beverage 6.4%
</TABLE>
The Oakmark International Fund's average annual total return for the twelve
months ended June 30, 1996 and the period September 30, 1992 (inception) through
June 30, 1996 was 24.6% and 17.6%, respectively.
The Oakmark International Emerging Value Fund's total return for November 1,
1995 (inception) through June 30, 1996 was 15.7%.
The Funds' past performances are no guarantee of future results. Share prices
and investment returns will vary, so you may have a gain or loss when you sell
shares.
3
<PAGE>
Oakmark Fund
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION
(8/5/91) TO PRESENT (7/31/96) AS COMPARED TO THE
STANDARD & POOR'S 500 INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Oakmark Fund S&P 500
8/91 10,000 10,000
10/91 12,100 10,201
13,910 10,719
14,660 10,946
15,910 11,279
10/92 17,110 11,216
19,913 11,857
20,136 11,957
22,052 12,276 [GRAPH APPEARS HERE]
10/93 24,504 12,892
25,648 13,372
24,855 12,593
25,321 12,896
10/94 26,653 13,401
26,480 13,444
28,869 14,803
30,883 16,263
10/95 32,397 16,931
36,091 17,213
36,823 19,239
7/96 35,559 18,933
</TABLE>
<TABLE>
<CAPTION>
7/31/96 NAV $30.11
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 7/31/96
---------------------------------------
TOTAL RETURN TOTAL RETURN FROM FROM FUND INCEPTION
LAST 3 MOS. LAST 6 MOS. 7/31/95 8/5/91
------------ ------------ ------- ----------------------------
<S> <C> <C> <C> <C>
THE OAKMARK FUND -3.4% -1.5% 15.1% 28.9%
Standard & Poor's 500 Stock Index* -1.6% 1.7% 16.5% 13.6%
Dow Jones Industrial Average* -0.1% 3.6% 20.2% 16.0%
Value Line Composite Index* -6.6% -0.7% 2.8% 6.6%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions. Each of the three
indexes or averages is an unmanaged group of stocks whose composition is
different from the Fund. The S&P 500 is a broad market-weighted average
dominated by blue-chip stocks. The Dow Jones Average includes only 30 big
companies. The Value Line Index is an unweighted average of more than 1,000
stocks. Past performance is no guarantee of future results.
THE OAKMARK FUND
REPORT FROM ROBERT J. SANBORN, PORTFOLIO MANAGER
FUND UPDATE
The past three months were the most volatile in your Fund's history.
Undecided about whether the economy is growing too fast or too slow, investors'
chief obsession at the current time is the release of macroeconomic data. We
largely ignore this data and observe with bemusement as market commentators
greet the latest jobs data (which get revised a month or so later) as if they
and they alone hold the answers to market direction, the upcoming election, and
whether the planet is warming or cooling.
4
<PAGE>
Oakmark Fund
For the first prolonged period in your Fund's existence, however, we are
struggling relative to the Standard & Poor's 500. While our holdings are
generally reporting satisfactory to better-than-expected business results, in
total the market is not rewarding us right now for these results.
Frank Layden, ex-coach of the NBA's aptly-named Utah Jazz, had a player who
was performing poorly. He asked him, "Son, is it ignorance or apathy?" The
player responded, "Coach, I don't know and I don't care." Similarly, we ask
ourselves if there is anything deficient in either our philosophy or our effort.
The answer is no.
There are going to be occasions when our holdings will be out of market favor.
They are inevitable, and we will waste no time trying to anticipate market
psychology. Rather, we will continue to spend our time trying to better
understand the businesses of which we are part owners. If the businesses
prosper, so will--sooner or later--their stocks.
I am writing this letter on your Fund's fifth birthday. What an experience
managing your Fund has been! On behalf of everyone at Harris Associates, I want
to thank all of you for your support.
HERE COME THE Q!
The Q ratio is coming, the Q ratio is coming!
Like most fields, the investment profession endures vigorous yet arcane
debates, and I sometimes share them with you in these letters. Some prominent
market seers are claiming that the stock market is over-valued because of
something called the Q ratio. This number compares the market value of stocks
with the current replacement value of underlying assets. The seers estimate the
Q ratio stands at 1.9, implying that the market is grossly over-valued. In a
perfect world, the ratio would always be 1.0. If a manufacturing plant were the
market's sole asset, and it could be built today for $X, then the value of the
market would also be $X.
Alas, the world is not perfect and there is a teensy-weensy problem with the Q
ratio: the data have a very tenuous connection with economic reality. Take the
case of one of our ten largest holdings, Anheuser-Busch Companies (BUD). In
round numbers at year-end 1995, BUD had $0.3B in net current assets (cash,
inventories, receivables less payables); $2.3B in investments (largely foreign
brewers); and $6.8B in depreciated plant and equipment. Thus, the replacement
value of BUD is $9.4B. Since the market value of BUD's equity, plus its debt, is
$21.6B, BUD's Q ratio of 2.3 implies that the stock is grossly overvalued.
5
<PAGE>
Oakmark Fund
However, while your cool $9.4B could replicate all of BUD's tangible assets,
it could not replicate the distribution system, trademarks, and goodwill that
BUD possesses. Most companies, especially many of your Fund's largest holdings,
are worth far more as going concerns than as liquidations. What is relevant is
not the replacement value of a company's assets, but the earnings a set of
assets can generate.
And, what is foolhardy is basing investment decisions on fallacious
philosophies and faulty data.
GOOD NEWS REDUX
It turns out you can have it both ways-or at least the US can.
For years, politicians have lamented the US's low rate of capital investment
compared to Germany and Japan. If we would only invest more, goes the dirge,
we'd produce more and workers would earn more.
It turns out that-I am shocked, shocked!-they missed a crucial point. The
McKinsey Global Institute has concluded that the US generates 50 percent more
output per unit of capital input than either Germany or Japan. This is very
important-Germany spends 40 percent more on capital investment per worker, yet
its workers are still less productive than Americans. McKinsey estimates that
the return on capital in the US averaged 9 percent between 1974 and 1993,
compared to 7 percent in Germany and Japan.
While the causes for this gap are complex, McKinsey argues that efficient
American capital markets compel managements to invest in the highest-return
projects. Also, the intensity of competition and low entrepreneurial barriers in
the US compare favorably to the regulations in Germany and Japan that coddle
existing firms at the expense of new firms.
Yet another example of the invisible hand of the market producing the best
outcome!
THE OAKMARK BOOK CLUB
Some of you have suggested that I revive The Oakmark Book Club, a list of the
investment/financial/business books that I have read, and which might be of
interest to you. Here goes:
Warren Buffett: The Making of an American Capitalist, by Roger Lowenstein
(Random House, 1995). My number one recommendation, this is a great biography
of the best investor of the century, and a man who has led a nonpareil and
fascinating business career;
6
<PAGE>
Oakmark Fund
Built to Last: Successful Habits of Visionary Companies, by James Collins and
Jerry Porras (Harper Collins, 1994). The authors compare eighteen companies
with their rivals, and attempt to analyze why one company prevailed over the
other;
Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the
Unabashed Triumph of Philip Morris, by Richard Kluger (Knopf, 1996). An
exhaustive and balanced history of the cigarette industry and Philip Morris;
Inside Fidelity, by Diana B. Henriquez (Scribner, 1995). This is a history of
the US mutual fund industry and its (by far) largest player. I especially
enjoyed the scene in which Fidelity's CEO (whose multi-billionaire family
controls the company) bumps into five of his fund managers in a Hong Kong hotel
in 1995. Alas, he fails to recognize any of them, who at that time collectively
managed over $50 billion;
The Late Shift: Letterman, Leno, & the Network Battle for the Night, by Bill
Carter (Hyperion, 1994). A very readable account of Johnny Carson's retirement
and managing the fragile egos of those who put us to bed every night;
Aging and Old Age, by Richard Posner (The University of Chicago Press, 1995).
Judge Posner, a pioneer in integrating free-market economics and the law,
paints a thorough portrait of the largest-growing segment of our society. With
entitlement reform inevitable, this should be required reading for every US
Congressman;
Hit and Run: How Peter Guber and Jon Peters Took Sony for a Ride in Hollywood,
by Nancy Griffin and Kim Masters (Simon and Schuster, 1996). The moral of this
hilarious book is: don't ever, ever invest in a movie studio.
Enjoy!
ROBERT J. SANBORN
Portfolio Manager
[email protected]
August 5, 1996
7
<PAGE>
Oakmark Fund
THE OAKMARK FUND
SCHEDULE OF INVESTMENTS-JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Shares Held Market Value
- ------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS-92.6%
FOOD & BEVERAGE-19.5%
2,670,400 Philip Morris Companies Inc. $279,390,600
1,769,100 Anheuser-Busch Companies Inc. 132,240,225
3,497,250 H.J. Heinz Company 115,846,406
2,422,100 Nabisco Holdings Corp. 81,745,875
685,000 CPC International 45,809,375
1,571,900 Interstate Bakeries 41,655,350
274,600 Ralston Purina Group 17,231,150
200,000 International Dairy Queen, Inc., Class A (a) 4,000,000
------------
717,918,981
APPAREL-0.1%
388,500 K-Swiss Inc., Class A 3,836,438
RETAIL-4.0%
2,102,000 Federated Department Stores, Inc. (a) 63,585,500
954,600 The Kroger Company 36,036,150
1,000,000 Carson Pirie Scott & Co. (a) 22,250,000
780,300 Zale Corporation (a) 13,557,712
560,000 Cole National Corporation (a) 9,380,000
53,800 Rex Stores Corporation (a) 692,675
------------
145,502,037
OTHER CONSUMER GOODS & SERVICES-10.6%
3,810,400 The Black & Decker Corporation 140,032,200
2,032,800 American Brands, Inc. 92,492,400
1,000,000 Polaroid Corporation 42,250,000
940,400 First Brands Corporation 22,452,050
583,800 GC Companies, Inc. (a) 21,527,625
957,500 Whitman Corporation 21,424,062
885,000 JUNO Lighting Inc. 13,275,000
957,500 Arctco, Inc. 10,173,437
601,500 Justin Industries, Inc. 6,691,688
281,500 Rollins, Inc. 5,911,500
257,600 Paragon Trade Brands, Inc. (a) 5,538,400
395,000 Mikasa, Inc. (a) 3,653,750
207,000 Armor All Products Corporation 3,247,313
------------
388,669,425
BANKS-5.3%
3,606,550 Mellon Bank Corporation 190,245,512
340,000 River Bank America (a) 2,890,000
------------
193,135,512
INSURANCE-6.0%
3,296,200 Torchmark Corporation 140,500,525
2,108,620 Old Republic International 44,281,020
684,700 American Financial Group, Inc. 20,198,650
501,300 Acordia, Inc. 15,414,975
------------
220,395,170
</TABLE>
8
<PAGE>
Oakmark Fund
THE OAKMARK FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held Market Value
________________________________________________________________________________
<TABLE>
<CAPTION>
<C> <S> <C>
OTHER FINANCIAL--8.4%
3,548,000 First USA, Inc. $173,408,500
2,194,900 AMBAC Inc. 104,806,475
204,400 Fund American Enterprises Holdings, Inc. 16,939,650
474,500 Federal National Mortgage Association 15,065,375
------------
310,220,000
BROADCASTING & PUBLISHING--16.8%
2,927,800 Dun + Bradstreet Corporation 168,348,500
9,687,300 U.S. West Media Group 167,105,925
2,174,400 Knight-Ridder, Inc. 142,423,200
6,829,179 Tele-Communications, Inc., Class A (a) 97,315,801
1,928,494 TCI Communications, Inc. (a) 42,426,868
------------
617,620,294
PHARMACEUTICAL--3.0%
1,950,000 American Home Products Corporation 110,662,500
MANAGED CARE SERVICES-1.7%
2,000,000 Foundation Health Corporation (a) 49,000,000
420,000 Physicians Health Services, Inc. (a) 7,350,000
500,000 Laboratory Corporation of America Holdings 3,437,500
270,000 Right CHOICE Managed Care, Inc. (a) 3,105,000
------------
62,892,500
MEDICAL PRODUCTS--0.9%
1,297,800 Sybron Corporation (a) 32,445,000
70,900 Spacelabs Medical, Inc. (a) 1,444,588
------------
33,889,588
AEROSPACE & DEFENSE--5.2%
1,371,110 Lockheed Martin Corporation 113,630,741
1,220,000 McDonnell Douglas Corporation 54,595,000
779,600 Logicon, Inc. 21,731,350
------------
189,957,091
BUILDING MATERIALS & CONSTRUCTION--0.4%
590,000 USG Corporation (a) 15,782,500
OTHER INDUSTRIAL GOODS & SERVICES--4.8%
2,839,100 James River Corporation 71,687,275
1,014,300 Bandag Incorporated, Class A 45,897,075
880,400 SPX Corporation 21,899,950
872,000 The Geon Company 21,037,000
170,000 UCAR International Inc. (a) 5,928,750
182,600 Amtrol, Inc. 4,428,050
186,200 Premark International, Inc. 3,351,600
26,300 Bandag Incorporated 1,209,800
------------
175,439,500
</TABLE>
9
<PAGE>
Oakmark Fund
THE OAKMARK FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Shares Held Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL REAL ESTATE--1.0%
2,291,700 Host Marriott Corporation (a) 30,078,563
585,700 Catellus Development Corporation (a) 5,124,875
--------------
35,203,438
RECREATION & ENTERTAINMENT--0.0%
70,000 Brunswick Corporation 1,330,000
FOREIGN SECURITIES--4.9%
3,135,000 DeBeers Consolidated Mines Limited ADR (b) 95,225,625
3,276,500 YPF Sociedad Anonima (b) 68,806,500
547,700 EVC International NV 15,945,025
--------------
179,977,150
TOTAL COMMON STOCKS (COST: $2,809,897,840) 3,402,432,124
SHORT-TERM INVESTMENTS--7.4%
COMMERCIAL PAPER--4.8%
25,000,000 American Express Credit Corporation,
5.27% due 8/5/1996 25,000,000
50,000,000 Ford Motor Credit Corp., 5.35% due 8/1/1996 50,000,000
50,000,000 Ford Motor Credit Corp., 5.60% due 8/1/1996 50,000,000
50,000,000 Ford Motor Credit Corp., 5.38% due 8/9/1996 50,000,000
--------------
TOTAL COMMERCIAL PAPER (Cost: $175,000,000) 175,000,000
REPURCHASE AGREEMENTS--2.6%
96,424,000 State Street Repurchase Agreement
5.55% due 8/1/1996 96,424,000
TOTAL SHORT-TERM INVESTMENTS (COST: $271,424,000) 274,000,000
Total investments (Cost $3,081,321,840)--100% 3,673,856,124
Other assets, less other liabilities--0% 3,653
--------------
TOTAL NET ASSETS--100% $3,673,859,777
==============
</TABLE>
- -----------
Notes:
(a) Non-income producing security.
(b) Represents an American Depository Receipt. For the Fund's fiscal year ended
October 31, 1995, the portfolio turnover was 18% and the Fund's expense
ratio was 1.17%.
10
<PAGE>
Small Cap
THE OAKMARK SMALL CAP FUND
RESULTS FROM NOVEMBER 1, 1995 (INCEPTION) THRU JULY 31, 1996:
7/31/96 NAV $11.83
<TABLE>
<CAPTION>
CALENDAR SINCE
YTD THRU INCEPTION
7/31/96* 11/1/95*
-------- ---------
<S> <C> <C>
THE OAKMARK SMALL CAP FUND...... 14.5% 18.3%
Lipper Small Co. Growth......... 3.1% 7.8%
Russell 2000.................... .0% 6.7%
S&P 600......................... 3.0% 8.6%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions. Each of the three
indexes or averages is an unmanaged group of stocks whose composition is
different from the Fund. The Lipper Small Company Growth Fund Index is
comprised of 30 small cap funds. The Russell 2000 Index measures the
performance of smaller companies, and represents approximately 10% of the total
value of publicly traded companies in the U.S. The S&P 600 Index measures the
performance of selected U.S. stocks with a small market capitalization. Past
performance is no guarantee of future results.
The Oakmark Small Cap Fund
REPORT FROM STEVEN J. REID, PORTFOLIO MANAGER
THE GOOD, THE BAD, AND THE UGLY
THE GOOD: For the nine months ended July 31, 1996, The Oakmark Small Cap Fund
gained 18.3%.
THE BAD: Unfortunately, the Fund declined 2.9% for the three months ended
July 31,1996.
THE UGLY: The small cap investment universe suffered a substantial decline
during the most recent quarter. Your Fund's holdings performed significantly
better, which was our expectation as value investors.
What happened in the small cap investment universe? July was a particularly
difficult month. Technology stock investors were greeted with several pieces of
disappointing news regarding the outlook for their companies. This triggered
lemming-like selling of many of these stocks. Unfortunately, this had a
spillover effect on all stocks, as several market naysayers predicted gloom and
doom for the overall market. Small cap growth stocks were particularly hard hit.
I would like to share two thoughts with you regarding the recent activity in
the stock market. First, we don't follow the herd (too many droppings). We think
independently and frequently act contrary to the rest of Wall Street. For
instance, your Fund has yet to find value in the technology sector. Though we
did not participate in the run-up of these stocks, we did not participate in
their sell-off either. We continue to be
11
<PAGE>
Small Cap
invested in the stocks of companies we find to be fundamentally undervalued.
Second, the market's activity and volatility in July was a mixed blessing. In
1787, Thomas Paine said, "Panics, in some cases, have their uses; they produce
as much good as hurt." While the stock prices of the Fund's holdings declined,
the underlying value of these companies did not. Although I never have been a
fan of losing, I whole-heartedly embrace the concept of paying less and getting
more. So when the market provides these temporary "Blue Light Specials," we will
try to take advantage of these opportunities.
TRUE OR FALSE???
Excluding the government, Catellus Development (CDX-$9) is the largest
landowner in the State of California.
True (of course they were virtually gifted all that land from the government).
Catellus Development was once the real estate arm of the Santa Fe Railroad. The
company was created through federal land grants over 100 years ago when the
railroads were feverishly building a national transportation system. In 1990,
Catellus was spun-out from the Santa Fe Railroad with some fanfare. However, the
company very quickly became an orphan due to a weak California economy and
excess capacity in commercial real estate.
Catellus, indeed, went through a difficult period in the early Nineties.
Rental and occupancy rates declined, development activity slowed and land values
depreciated. Coupled with a significant amount of debt and a decline in value of
the company's assets, the price of Catellus' shares fell from a peak $15 to
nearly $5 last year; it is worth noting that in 1989, prior to being publicly
traded, a minority interest in Catellus was sold in a private transaction that
implied a value of over $35 per share. The company remained relatively obscure
for several years, but in 1994, Nelson Rising was named President & CEO to
restructure the company's languishing operations. He was later joined by Steve
Wallace, Vice President & CFO. Both men have extensive real estate experience
and are diligently reshaping the company.
Catellus is one of your Fund's larger holdings for several reasons. First, we
believe the shares are undervalued compared to our assessment of the value of
the underlying real estate. Because of its railroad history, the company has a
unique portfolio of properties that are ideally suited for industrial and
commercial uses due to their proximity to transportation and distribution
systems. Second, we have a
12
<PAGE>
Small Cap
high degree of confidence in management's ability and take comfort in knowing
that their incentives are directly aligned with ours as shareholders. Third,
this stock is an orphan on Wall Street. It is unknown and underfollowed. Fourth,
Catellus is a unique proxy on both the economies of California and the Pacific
Rim. We are pleased with the progress the company is making and wish Nelson,
Steve, and all the employees at Catellus Development good fortune.
WEATHER
In the last quarterly letter, I complained about the weather and predicted
that I would likely do so again. Well, this quarter, I can't complain. Last
year's oppressive heat in Chicago has been noticeably absent, for which we can
all be thankful.
Once again, I would like to thank everyone involved, especially our
shareholders, for your support of The Oakmark Small Cap Fund.
STEVEN J. REID
Portfolio Manager
[email protected]
August 5, 1996
13
<PAGE>
SMALL CAP
THE SMALL CAP FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)
Shares Held Market Value
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
COMMON STOCKS--94.4%
FOOD & BEVERAGE--5.3%
250,000 GoodMark Foods, Inc. $ 3,500,000
100,000 Eskimo Pie Corporation 1,575,000
64,000 Smucker (JM) Class B 1,136,000
-----------
6,211,000
RETAIL--6.2%
200,000 Rex Stores Corporation (a) 2,575,000
150,900 Cole National Corporation (a) 2,527,575
100,000 Carson Pirie Scott & Co. (a) 2,225,000
-----------
7,327,575
OTHER CONSUMER GOODS & SERVICES--6.5%
160,000 First Brands Corporation 3,820,000
207,400 Justin Industries, Inc. 2,307,325
140,000 Triarc Companies, Inc. 1,470,000
-----------
7,597,325
BANKS--13.8%
200,000 Peoples Bank of Bridgeport Connecticut 4,200,000
150,000 Texas Regional Bancshares, Inc. 3,993,750
106,000 Harbor Federal Savings Bank 2,570,500
185,000 Northwest Savings Bank 2,081,250
140,000 Pocahontas Federal Savings & Loan Association 1,995,000
86,500 Savings Bank of Finger Lakes 1,411,031
-----------
16,251,531
INSURANCE--5.3%
140,000 Renaissance Re Holdings Limited 4,112,500
100,000 Chartwell Re Corporation 2,150,000
-----------
6,262,500
OTHER FINANCIAL--5.1%
200,000 Duff & Phelps Credit Rating Company 3,850,000
54,100 First USA Paymentech Inc. 2,211,338
-----------
6,061,338
BROADCASTING & PUBLISHING--8.5%
300,000 Granite Broadcasting Corporation 3,675,000
100,000 Central Newspapers, Class A 3,387,500
125,000 Lee Enterprises, Incorporated 2,484,375
40,000 Jones Intercable, Inc. (a) 490,000
-----------
10,036,875
MANAGED CARE SERVICES--2.8%
355,000 Healthcare Services Group, Inc. 3,328,125
MACHINERY & METAL PROCESSING--15.6%
200,000 Northwest Pipe Company 3,575,000
205,000 The Carbide/Graphite Group 3,280,000
350,000 Sudbury, Inc. 2,975,000
</TABLE>
14
<PAGE>
SMALL CAP
THE SMALL CAP FUND
SCHEDULE OF INVESTMENTS-JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held/Principal Value Market Value
- ------------------------------------------------------------------------------
105,000 Mathews International Corporation 2,913,750
125,000 Kysor Industrial Corporation 2,906,250
105,000 Gardner Denver Machinery, Inc. 2,703,750
------------
18,353,750
OTHER INDUSTRIAL GOODS & SERVICES-15.9%
300,000 SPX Corporation 7,462,500
390,000 Premark International, Inc. 7,020,000
300,000 Magnet Tek, Inc. 2,812,500
60,200 Amtrol, Inc. 1,459,850
------------
18,754,850
COMMERCIAL REAL ESTATE-3.7%
500,000 Catellus Development Corporation (a) 4,375,000
DIVERSIFIED CONGLOMERATES-5.7%
300,000 US Industries, Inc. 6,750,000
TOTAL COMMON STOCKS (COST: $106,879,798) 111,309,869
CORPORATE BONDS-1.3%
RECREATION & ENTERTAINMENT-1.3%
3,000,000 Harrah's Jazz Bonds, 14.25% due 11/15/2001 1,575,000
-------------
TOTAL CORPORATE BONDS (COST: $1,177,787) 1,575,000
SHORT TERM INVESTMENTS-4.3%
REPURCHASE AGREEMENTS-4.3%
5,067,000 State Street Repurchase Agreement,
5.55% due 8/01/96 5,067,000
Total investments (Cost $113,124,585)-100% $117,951,869
Other assets, less other liabilities-0% 42,391
------------
TOTAL NET ASSETS-100% $117,994,260
============
- ----------
NOTES:
(a) Non-income producing security.
15
<PAGE>
THE OAKMARK BALANCED FUND
RESULTS FROM NOVEMBER 1, 1995 (INCEPTION) THRU JULY 31, 1996:
7/31/96 NAV $10.66
<TABLE>
<CAPTION>
CALENDAR
YTD THRU SINCE INCEPTION
7/31/96* 11/1/95*
-------- --------------
<S> <C> <C>
THE OAKMARK BALANCED FUND.................. 4.1% 6.6%
Lipper Balanced Fund Index................. 1.8% 6.6%
Lehman Govt/Corp Bond...................... -1.7% 1.4%
S&P 500.................................... 5.3% 11.9%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions. Each of the three
indexes or averages is an unmanaged group of stocks whose composition is
different from the Fund. The Lipper Balanced Fund Index Composite is comprised
of 30 balanced funds. The Lehman Govt./Corp. Bond Index includes the Lehman
Government and Lehman Corporate indexes. The S&P 500 is a broad market-weighted
average dominated by blue-chip stocks. Past performance is no guarantee of
future results.
THE OAKMARK BALANCED FUND
REPORT FROM CLYDE S. MCGREGOR, PORTFOLIO MANAGER
THE RETURN OF RISK
Will Rogers once commented that when it came to investing he was less
concerned with the return ON his money than with the return OF his money. During
the latest fiscal quarter many stock market investors empathized with his
sentiment.
Whether the July downturn qualifies as a "correction," others will
determine. Correction or not, however, a lot of money was lost. From their highs
to their July lows, indices of large capitalization stocks declined more than
10% and the NASDAQ Composite Index of over-the-counter stocks lost 20%. This was
the first meaningful decline since 1994.
When the stock market suffers a significant loss, it is important to
remember that the underlying enterprise values of businesses themselves are far
less volatile. I once knew a man who had sold his business and began to invest
in stocks for the first time. He was quickly stunned by the volatility of prices
in the stock market. As he put it, "When I owned my company, I knew that day in
and day out we were growing our value. It never occurred to me that had my
company been public, the price would have bounced around so much from day to
day."
Of course, as value investors, we at Harris Associates consider market
volatility our friend. In order for us to have opportunities to exploit,
security prices must frequently get out of alignment with underlying business
value. We do not own stocks based on hope. We are owners of businesses which the
stock market has allowed us the opportunity to purchase for less than fair
value. And, like my
16
<PAGE>
acquaintance above, we know that most days the businesses in which we have
invested are growing their intrinsic business value. This knowledge gives us the
confidence to ride out market downturns.
WHAT'S HAPPENING AT THE HOLDINGS
During July's turbulence in the markets the corporate bond segment of the
portfolio held up well. The Oakmark Balanced Fund will usually hold between 35%
and 45% of its assets in fixed income securities. We invest at least one quarter
of the portfolio in US Treasury notes in order to provide safety, liquidity, and
income. The remainder of the fixed income investments are bonds and preferred
stocks which we estimate to have total return prospects that are competitive
with the stock market but with lower volatility and fundamental risk.
Basically, as fixed income investors we manage credit risk (the risk of
default) and duration (sensitivity to interest rate changes). We use our value-
based research process to discover corporate issues which the market underrates.
We control our portfolio duration with the Treasury note holdings.
As mentioned above, we are pleased with the results that the corporate bond
investments have produced in 1996. Interest rates have risen this year, causing
bond indices to show a loss for the period. Our corporate fixed income holdings,
however, show positive results. Because other funds in The Oakmark Family do not
typically invest in this sector, I will devote the remainder of this report to
describing our fixed income approach.
OUR FIXED INCOME APPROACH
We subject all of the corporate bonds and preferred stocks in The Oakmark
Balanced Fund to the same rigorous research process that we use to analyze
equities. In fact, new fixed income ideas are often a direct outgrowth of our
equity search process. Sometimes we look at a company's common stock and decide
that its debt instruments offer more value. In other cases we find both the
common stock and the fixed income offerings of a company to be undervalued. In
that circumstance, we will buy the debt for our income-oriented portfolios and
the common stock for those portfolios which do not desire current income.
EVEREN CAPITAL PREFERRED is a good illustration of what we are trying to
find. Late last year, our research director Bill Nygren learned that Everen
Securities, the newly spun off brokerage arm of Kemper Financial, had issued
payment-in-kind preferred shares as part of their
17
<PAGE>
initial capitalization. Everen management quickly restructured the company
selling off assets which were not central to its operations. The preferred soon
began to pay cash dividends, and the company recently announced that it would
call the issue at a hefty premium. While we regret that this issue's time in The
Balanced Fund was short, we are pleased that its return to the Fund exceeded
20%.
One factor in which we place great importance in evaluating investments is
the inside (management and directors) ownership. Significant purchasing activity
by insiders is usually indicative of undervaluation. Most investors, however,
only consider inside ownership in terms of common stocks. The Everen securities
demonstrate that this factor can inform fixed income investors as well. When
Bill did his work on this issue, he noted that insiders owned a substantial
percentage of the shares and that insiders continued to make open market
purchases.
We believe that the corporate fixed income market offers plentiful
opportunities to purchase mispriced securities. Our job at The Oakmark Balanced
Fund is to determine which issues have the most desirable risk/reward
characteristics. I will have more to say about our fixed income holdings in
future reports.
As always, please feel free to write or E-mail me with your questions or
comments.
CLYDE S. MCGREGOR
Portfolio Manager
[email protected]
August 2, 1996
18
<PAGE>
THE OAKMARK BALANCED FUND
SCHEDULE OF INVESTMENTS -- JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Shares Held Market Value
- ------------------------------------------------------------------------------
EQUITY AND EQUIVALENTS -- 55.6%
RETAIL-2.7%
<S> <C>
8,500 The Kroger Company $ 320,875
OTHER CONSUMER GOODS & SERVICES-15.2%
36,200 Arctco, Inc. 384,625
13,400 Promus Hotel Corporation 365,150
9,900 The Black & Decker Corporation 363,825
6,500 Armstrong World Industries, Inc. 360,750
20,800 JUNO Lighting Inc. 312,000
------------
1,786,350
FOOD & BEVERAGE-6.4%
3,900 Philip Morris Companies Inc. 408,037
10,150 H.J. Heinz Company 336,219
------------
744,256
BANKS & OTHER FINANCIAL-9.3%
10,000 Associates First Capital Corporation, Class A 383,750
7,300 First USA, Inc. 356,788
6,700 Mellon Bank Corporation 353,425
------------
710,213
BROADCASTING & PUBLISHING-9.3%
22,500 US West Media Group 388,125
18,100 Lee Enterprises, Incorporated 359,737
6,000 Dun + Bradstreet Corporation 345,000
------------
1,092,862
AEROSPACE & DEFENSE-3.0%
8,000 McDonnell Douglas Corporation 358,000
OTHER INDUSTRIAL GOODS & SERVICES-3.1%
20,000 Premark International, Inc. 360,000
COMMERCIAL REAL ESTATE-2.8%
6,200 Catellus Development Corporation,
Preferred Convertible Series A, 3.75% 323,175
DIVERSIFIED CONGLOMERATES-3.8%
20,000 U.S. Industries, Inc. 450,000
TOTAL EQUITY AND EQUIVALENTS (COST: $6,346,743) 6,529,481
</TABLE>
19
<PAGE>
THE OAKMARK BALANCED FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Shares Held/Principal Value Market Value
- ------------------------------------------------------------------------------
<S> <C>
FIXED INCOME-40.1%
CORPORATE BONDS-10.9%
RETAIL-0.9%
100,000 The Vons Companies Inc., 9.625% due 4/1/2002 105,250
OTHER CONSUMER GOODS & SERVICES-1.3%
150,000 Samsonite Corporation, 11.125% due 7/15/2005 153,750
FINANCIAL SERVICES-2.4%
250,000 Everen Capital Corporation, 13.50% due 9/15/2007 280,000
AEROSPACE & AUTOMOTIVE-1.3%
150,000 Coltec Industries, Inc., 9.75% due 4/1/2000 153,937
BUILDING MATERIALS & CONSTRUCTION-1.3%
150,000 USG Corporation, Senior Notes Series B,
9.25% due 9/15/2001 153,978
UTILITIES-1.3%
150,000 Midland Funding Corporation, 11.75% due 7/23/2005 157,125
OTHER INDUSTRIAL GOODS & SERVICES-1.5%
150,000 UCAR Global Enterprises Inc., Senior Subordinated
Note, 12.00% due 1/15/2005 170,250
RECREATION & ENTERTAINMENT-0.9%
190,000 Harrah's Jazz Bonds, 14.25% due 11/15/2001 99,750
-----------
TOTAL CORPORATE BONDS (COST: $1,350,396) 1,274,000
PREFERRED STOCKS-2.0%
BROADCASTING & CABLE TV-2.0%
3,900 Tele-Communications, Inc., Pfd Jr. Class B, 6% 232,050
-----------
TOTAL PREFERRED STOCKS (COST: $257,263) 232,050
GOVERNMENT AND AGENCY SECURITIES-27.2%
1,000,000 United States Treasury Notes, 6.00% due 10/15/1999 989,020
750,000 United States Treasury Notes, 5.625% due 11/30/2000 724,200
600,000 United States Treasury Notes, 6.125% due 5/31/1997 601,260
600,000 United States Treasury Notes, 5.25% due 7/31/1998 589,320
300,000 Federal Home Loan Bank, Consolidated Bond,
6.405% due 4/10/2001 295,128
-----------
TOTAL GOVERNMENT AND AGENCY SECURITIES
(COST: $3,254,045) 3,198,928
SHORT TERM INVESTMENTS-4.0%
REPURCHASE AGREEMENTS-4.0%
474,000 State Street Repurchase Agreement, 5.55%
due 08/01/1996 474,000
TOTAL INVESTMENTS (COST $11,682,447)-99.7% $11,708,459
Other Assets, Less Other Liabilities-0.3% 31,267
-----------
TOTAL NET ASSETS-100% $11,739,726
===========
</TABLE>
20
<PAGE>
INTERNATIONAL
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL
FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (7/31/96)
AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
[GRAPH APPEARS HERE]
Oakmark Morgan Stanley
International World ex U.S.
Fund Index
9/92 10,000 10,000
10/92 9,800 9,505
10,833 9,621
12,105 11,764
12,607 12,233
10/93 14,454 12,981
16,487 13,786
15,382 13,664
15,194 13,899
10/94 15,121 14,265
13,698 13,124
14,399 14,437
15,506 14,911
10/95 14,659 14,248
16,248 15,312
18,162 16,144
7/96 17,634 15,471
7/31/96 NAV $14.37
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN THROUGH 7/31/96
------------------------
TOTAL RETURN TOTAL RETURN FROM FROM INCEPTION
LAST 3 MOS. LAST 6 MOS. 7/31/95 9/30/92
------------ ------------ ------- --------------
<S> <C> <C> <C> <C>
OAKMARK INTERNATIONAL -2.9% 8.5% 13.7% 15.9%
Morgan Stanley World ex U.S.* -4.2% 1.0% 3.8% 12.1%
Morgan Stanley EAFE* -4.2% 1.0% 3.5% 12.1%
Lipper Analytical
International Fund Average* -2.8% 2.4% 6.7% 12.5%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions. Each of the three
indexes or averages is an unmanaged group of stocks whose composition is
different from the Fund. The Morgan Stanley World ex U.S. Index includes 19
country sub-indexes. The Morgan Stanley EAFE Free Index refers to Europe, Asia
and the Far East and includes 18 country sub-indexes. The Lipper International
Fund Average includes 106 mutual funds that invest in securities whose primary
markets are outside the United States. Past performance is no guarantee of
future results.
INTERNATIONAL
THE OAKMARK INTERNATIONAL FUND
REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH,
PORTFOLIO MANAGERS
Dear Fellow Shareholders:
Our fiscal 3rd quarter return was a negative 2.9%. More importantly,
however, your Fund, on a year to date basis, is up more than 16%. This compares
favorably with our international fund peer group, represented by the Lipper
average of international funds, which was up slightly less than 5%. The quarter
was highlighted by a sharp global equity market correction in July when your
Fund lost around 4%.
We are certain that despite this correction, opportunities in international
equity markets are abundant. We remain extremely
21
<PAGE>
optimistic about this Fund's long-term prospects. Valuations remain compelling
in most overseas markets, interest rates are down, corporate activity is up in
Europe and Asia, and the emerging markets continue to grow.
WHY THE CONVERGENCE?
Frequently, experts list portfolio diversification as one of the main
reasons to invest internationally. They claim it is one of the few "free
lunches" in investing-a portfolio that includes international stocks should
generate a higher expected return with lower volatility. But it seems whenever
the U.S. market is hit with a bout of downward volatility, overseas markets move
downward in sympathy. This is true IN THE SHORT-TERM, due to the global nature
of the world's capital markets as well as to the herd mentality of some
"investors" and traders.
When traders see something major happening in the world's largest market,
there is a tendency to panic and behave defensively everywhere. BECAUSE WE ARE
LONG-TERM INVESTORS, SHORT-TERM VOLATILITY DOES NOT CONCERN US. We are only
concerned with what is happening to the fundamental economic value of the
companies in which we are invested. As a result of this discipline, we use these
moments of market volatility to increase our holdings in companies whose share
prices have declined due to market conditions, but whose long-term economic
value remains relatively unchanged.
INVESTING VS. TRADING
A few years ago, we wrote about the difference between being an investor
and being a trader. Given the recent bout of market volatility, here are some of
those points again. Traders react instantly to any piece of information (whether
it be fact or rumor, material or insignificant) on the state of the economy or a
particular company. If a trading trend is established, other traders will
quickly follow suit under "the trend is your friend" principle. In contrast, an
investor ascertains whether this news is white noise, or whether it truly does
have an impact on the business fundamentals of a company. Depending on the
accuracy or materiality of any single piece of data, investors can take
advantage of the poor discipline and short-term vision of many traders by buying
the shares of high quality, but temporarily out-of-favor companies.
Traders are concerned with how a company did in a week or a quarter.
Investors are concerned about how it did over a 3, 5 or 10 year period. Traders
will try to "time" getting in and out of markets, while investors buy and hold
companies or dollar cost average. Traders ask
22
<PAGE>
us how we will do this year. Investors ask us to define our investment
philosophy or whether we have been able to find good value.
You can see from the above why a down month or quarter or even year in the
world equity markets is of less concern to us than sticking to our guns in
volatile times. We fully believe it is in our shareholders' best interests to
adopt the same approach. Trading is closer to gambling than to investing-you can
make good money doing it, but the odds aren't good. If gambling is the
intention, there are far more exciting venues than the world equity markets; for
instance, one can bet on the Packers to win the Super Bowl in 1997!
TRAVELERS LOG: JAPAN AND KOREA
Over the past four years many shareholders have asked us, "Do you still not
like Japan?". This is not the question we ask ourselves, but rather "Can we find
any companies in Japan that meet our investment criteria?". Finding these
companies has been a near Sisyphean task.
It is not that we "still don't like Japan." We've spent hundreds of hours
and met with well over one hundred companies in the last four years trying to
find appropriate Japanese investments. And things have gotten better in those
four years. Managements are more willing to talk with investors, financial
disclosure has improved, companies have started to unwind cross-shareholdings,
and, most unbelievably, a handful of pioneering firms have started to buy back
their own stock.
There is so much to admire about the abilities of Japanese companies: the
constant striving for improvement, the ability to deliver high quality, good
value consumer products, the efficiency of production, and the loyalty and work
ethic of employees. However, none of these factors necessarily translate into
attractive equity investments. The meager long-run returns on capital for most
of corporate Japan are ample evidence of this.
Foreigners have been the only buyers of the Japanese market over the past
two years. Most are hoping for a wave of domestic buying in the market driven by
all-time low interest rates. This scenario is all the more plausible given that
Japanese individuals have been net sellers in the market ever since "the bubble"
burst in 1990, and given that Tokyo is the only major market in the world that
is still significantly off its all-time high.
The scenario excludes one important variable-the price an investor is
paying relative to the value of what is received. Our one investment in Japan,
KYOCERA, not only represents excellent value but is clearly run
23
<PAGE>
for the benefit of shareholders. We will continue to seek out companies of this
quality trading at sensible prices.
Korean companies in general have many of the same blemishes as their
Japanese role models, including low investment returns, cross-shareholdings,
empire building mentalities (di-worse-ification), and low regard for minority
shareholders. The biggest difference is price. Korea is unquestionably the
cheapest stock market in Asia. Investors are amply compensated for the less-
than-ideal conditions by paying a substantial discount to the economic value of
the company.
We have taken advantage of the recent raising of the foreign investment
limitation by investing more money in high-quality Korean firms. We believe that
as the country continues to deregulate and decentralize ahead of its entry into
the Organization of Economic Cooperation and Development (OECD), that it will be
a market of great potential.
Our portfolio weightings in Japan and Korea illustrate how unimportant
indices are to our investment decisions. As of the end of the third quarter, our
weighting in Korea (2.7% of assets) was roughly the same as our weighting in
Japan (2.5%), even though Japan represents 40% of Morgan Stanley's widely
followed international benchmark EAFE (Europe, Australia, and the Far East).
Korea is not even in the EAFE index.
In The Oakmark International Fund, geographic portfolio allocation will
always be a fall-out of stock selection. We will have the most money in the
countries where we can find the most value. We realize that having so little
invested in the largest overseas market in the world certainly distinguishes us
from our peer group (especially in good times and bad). But you can be sure we
will never invest in a company just because its home country has a big weighting
in an international market index.
DAVID HERRO
MICHAEL WELSH
Portfolio Managers
[email protected]
[email protected]
August 8, 1996
24
<PAGE>
International
THE OAKMARK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS
COUNTRY DIVERSIFICATION--JULY 31, 1986 (UNAUDITED)
% of Fund
Country Net Assets
- ------------------------------------------------------------------------------
ARGENTINA 5.6%
Alparagatas Sociedad Anonima Industrial Y Comercial
CIADEA S.A.
YPF Sociedad Anonima
AUSTRALIA 6.2%
National Australia Bank Limited
Pioneer International
BRAZIL 3.8%
Iochpe-Maxion SA
Usiminas
CANADA 0.9%
Call Net Enterprises Inc.
FINLAND 1.6%
Kone Corporation
FRANCE 3.0%
Chargeurs International Sa
Groupe Legris Industries
Pathe
Strafor Facom
GREAT BRITAIN 13.8%
British Aerospace Public Limited Company
Cordiant PLC
Guinness PLC
Reckitt & Colman PLC
Rolls-Royce Public Limited Company
The Central European Growth Fund PLC
HONG KONG 6.6%
Chen Hsong Holdings Limited
Giordano Holdings Limited
Hong Kong Aircraft Engineering Company Limited
Lamex Holdings Limited
Varitronix International Holdings Limited
Yue Yuen Industrial (Holdings) Limited
INDONESIA 2.6%
Asia Pulp & Paper Company Ltd
ISRAEL 3.7%
Bezeq
Scitex Corporation Limited
ITALY 1.0%
Parmalat Finanziaria S.p.A.
Parmalat Finanziaria S.p.A. Rights
JAPAN 2.5%
Kyocera Corporation
KOREA 2.7%
BYC Company
Daehan Flour Mills Co., Ltd.
Keumkang
Lotte Chilsung Beverage
Lotte Confectionery
Pacific Corporation
MALAYSIA 1.5%
Leong Hup Holdings Berhad
Technology Resources Industries Berhad
MEXICO 4.7%
Grupo Financiero Bancomer, S.A. De C.V. (GFB)-B
Grupo Financiero Bancomer, S.A. De C.V.- L
Telefonos de Mexico, S.A. de C.V.
NETHERLANDS 7.0%
EVC International NV
Hollandsche Beton Groep nv
Macintosh
Royal Pakhoed N.V.
NEW ZEALAND 2.8%
Lion Nathan Limited
NORWAY 2.3%
Kvaerner
PORTUGAL 3.3%
Banco Espirito Santo E Comercial de Lisboa, S.A.
SPAIN 5.0%
Banco Popular Espanol
Telefonica
Union Electrica Fenosa S.A.
SWEDEN 13.0%
AB Volvo
Avesta Sheffield
Fastighets AB Nackebro
Mo och Domsjo AB
Svenska Handelsbanken
Svenskt Stal AB Series A
Svenskt Stal AB Series B
SWITZERLAND 2.2%
Saurer Ltd.
TAIWAN 0.3%
Tung-Ho Steel Enterprise Corp.
25
<PAGE>
International
THE OAKMARK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Shares Held Description Market Value
- ------------------------------------------------------------------------------
<S>
COMMON STOCKS--96.8%
CONSUMER NON-DURABLES--3.0%
<C> <C> <C>
91,828,000 Yue Yuen Industrial Athletic Footwear
(Holdings) Limited Manufacturing
(Hong Kong) $ 26,123,595
88,233 Chargeurs International Wool Production Holding
Sa (France) Company 3,505,725
24,000 BYC Company (Korea) Textile Manufacturer 3,247,632
35,820 Pacific Corporation Cosmetics and Household
(Korea) Goods Manufacturer 660,967
------------
33,537,919
FOOD & BEVERAGE--9.4%
4,945,000 Guinness PLC Distiller & Brewer
(Great Britain) 35,535,698
12,113,200 Lion Nathan Limited New Zealand Brewer
(New Zealand) 31,907,615
8,700,000 Parmalat Finanziaria Dairy Products
S.p.A. (Italy) 10,989,185
4,939,000 Leong Hup Holdings Major Poultry Operation in
Berhad (Malaysia) Malaysia and KFC Operator 9,538,417
56,000 Lotte Confectionery Confectionary Manufacturer
(Korea) 9,334,481
44,770 Lotte Chilsung Manufacturer of Soft Drinks,
Beverage (Korea) Juices, & Sport Drinks 5,948,038
31,770 Daehan Flour Mills Food Processing
Co., Ltd. (Korea) 2,813,925
8,700,000 Parmalat Finanziaria Dairy Products
S.p.A., Rights (Italy) 377,753
------------
106,445,112
HOUSEHOLD PRODUCTS--1.8%
1,950,853 Reckitt & Colman PLC Household Cleaners and
(Great Britain) Air Fresheners 19,936,389
RETAIL-2.8%
12,403,000 Giordano Holdings East Asian Clothing Retailer
Limited (Hong Kong) & Manufacturer 10,986,325
17,430,294 Alparagatas Sociedad Textiles and Footwear
Anonima Industrial Y
Comercial (Argentina) 10,806,782
451,300 Macintosh (Netherlands) Non-Food Specialty Retailer 10,243,161
------------
32,036,268
TELECOMMUNICATIONS--10.1%
1,295,100 Telefonos de Mexico, Telephone Company in Mexico
S.A. de C.V.
(Mexico) (b) 39,662,438
2,050,500 Telefonica (Spain) Spanish Telecommunications 35,763,111
9,330,000 Bezeq (Israel) Telephone Company 21,377,246
</TABLE>
26
<PAGE>
International
THE OAKMARK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Shares Held Description Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
908,500 Call Net Enterprises Inc., Telecommunications
Common (Canada) $ 10,374,927
2,350,000 Technology Resources Telecommunications
Industries Berhad
(Malaysia) 7,203,101
------------
114,380,823
TRANSPORTATION--6.3%
2,434,600 AB Volvo (Sweden) Automobiles and Trucks 52,650,747
3,197,497 CIADEA S.A. Assembler and Distributor
(Argentina) (a) of Automobiles 18,065,860
------------
70,716,607
OIL & NATURAL GAS--3.0%
1,631,200 YPF Sociedad Anonima Oil Exploration,
(Argentina) (b) Production and
Marketing 34,255,200
ELECTRIC--0.2%
366,968 Union Electrica Fenosa Spanish Electric
S.A. (Spain) Utility 2,226,971
BANKS--2.8%
5,275,000 National Australia Bank Largest Australian
Limited (Australia) Bank 47,898,909
2,275,480 Banco Espirito Santo Portuguese Bank
E Comercial de
Lisboa, S.A.(Portugal) 37,779,687
1,268,850 Svenska Handelsbanken Large Swedish Bank
Series A (Sweden) 26,288,859
108,093 Banco Popular Espanol Large Spanish Bank
(Spain) 18,680,509
26,635,000 Grupo Financiero Large Mexican
Bancomer, S.A. Financial Group
De C.V. (GFB)-B
(Mexico) (a) 11,555,238
6,129,630 Grupo Financiero Large Mexican
Bancomer, S.A. Financial Group
De C.V.- L (Mexico) (a)
2,020,713
------------
144,223,915
INVESTMENT COMPANIES--0.4%
4,200,000 The Central European Diversified,
Growth Fund PLC Closed-End Fund
(Great Britain) Investing in
Central Europe 3,985,068
BROADCASTING & PUBLISHING--1.9%
88,233 Pathe (France) Television & Film 21,087,332
COMPUTER SYSTEMS--1.9%
1,361,500 Scitex Corporation Color Pre-Press
Limited (Israel) (b) Systems 20,933,063
</TABLE>
27
<PAGE>
International
The Oakmark International Fund
Schedule of investments-July 31, 1996 (Unaudited) (continued)
<TABLE>
<CAPTION>
Shares Held Description Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
MARKETING SERVICES-4.5%
30,408,656 Cordiant PLC Global Advertising Agency
(Great Britain) (a) $ 51,083,137
AEROSPACE-5.7%
7,848,737 Rolls-Royce Public Jet Engines
Limited Company
(Great Britain) 26,614,165
7,504,400 Hong Kong Aircraft Commercial Aircraft Overhaul
Engineering Company and Maintenance
Limited (Hong Kong) 19,116,894
1,299,666 British Aerospace Public Defense Products and
Limited Company Civil Aviation
(Great Britain) 18,780,366
------------
64,511,425
CHEMICALS-4.7%
989,165 EVC International NV Western European PVC
(Netherlands) Manufacturer 28,797,262
943,383 Royal Pakhoed N.V. Petroleum Products,
(Netherlands) Chemical Handling 24,552,396
------------
53,349,658
COMPONENTS-3.7%
419,000 Kyocera Corporation Electric Components
(Japan) 28,690,834
7,177,000 Varitronix International Liquid Crystal Displays
Holdings Limited
(Hong Kong) 13,085,707
972,000 Chen Hsong Holdings Plastic Injection Moulding
Limited (Hong Kong) Machines 515,330
------------
42,291,871
MACHINERY & METAL PROCESSING-2.4%
66,000 Saurer Ltd (Switzerland) Textile Machinery 24,530,193
17,323 Strafor Facom (France) Metal Processing, Office
Equipment, Mining Tools 1,230,942
7,880,000 Iochpe-Maxion SA Agricultural Machinery &
(Brazil) Automotive Parts 911,208
------------
26,672,343
FORESTRY PRODUCTS-4.2%
2,785,600 Asia Pulp & Paper Paper & Packaging
Company Ltd Products in Asia
(Indonesia) (a) (b) 29,945,200
694,500 Mo och Domsjo AB Paper, Pulp & Timber
(Sweden) 17,697,546
------------
47,642,746
</TABLE>
28
<PAGE>
THE OAKMARK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held/Principal Value Description Market Value
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MINING AND BUILDING MATERIALS--2.7%
8,180,923 Pioneer International Concrete Products,
(Australia) Aggregates $ 22,399,619
126,980 Keumkang (Korea) Building Materials 8,357,030
--------------
30,756,649
OTHER INDUSTRIAL GOODS & SERVICES--2.7%
161,870 Kone Corporation Elevators
(Finland) 18,036,057
195,097 Groupe Legris Industries Europe's Leading Crane
(France) Manufacturer 7,810,284
14,040,000 Lamex Holdings Limited Hong Kong's Largest
(Hong Kong) Office Furniture Supplier 5,128,858
--------------
30,975,199
SHIP BUILDING--2.3%
723,110 Kvaerner (Norway) Shipbuilding and Engineering 25,831,440
STEEL--8.3%
39,563,700 Usiminas (Brazil) Steel Production 42,230,476
3,575,000 Avesta Sheffield Stainless Steel
(Sweden) 33,520,356
1,090,000 Svenskt Stal AB, Steel
Series A (Sweden) 14,011,554
374,000 Tung-Ho Steel Enterprise Taiwanese Manufacturer of
Corp. (Taiwan) (a) Steel Bars and H-Beams 3,605,996
65,200 Svenskt Stal AB, Steel
Series B (Sweden) 838,122
--------------
94,206,504
DIVERSIFIED CONGLOMERATES--0.5%
378,200 Koors Industries Israeli Holding Company
Limited (United States) 6,003,925
REAL ESTATE CONSTRUCTION--1.5%
88,732 Hollandsche Beton Construction
Groep nv (Netherlands) 15,837,712
121,885 Fastighets AB Nackebro Real Estate
(Sweden) 1,566,787
--------------
17,404,499
TOTAL COMMON STOCKS (COST: $1,064,663,708) 1,094,494,063
SHORT TERM INVESTMENTS--2.7%
REPURCHASE AGREEMENTS--0.0%
459,000 State Street Repurchase Agreement,
5.55% due 8/1/1996 459,000
</TABLE>
29
<PAGE>
THE OAKMARK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held/Principal Value Description Market Value
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMERCIAL PAPER--2.7%
20,000,000 Ford Motor Credit Corp., 5.60% due 8/1/1996 $ 20,000,000
10,000,000 Ford Motor Credit Corp., 5.38% due 8/9/1996 10,000,000
--------------
30,000,000
TOTAL SHORT TERM INVESTMENTS (COST: $30,459,000) $ 30,459,000
Total Investments (Cost $1,095,122,708)--99.5% $1,124,953,063
Foreign currencies (Cost $5,271,053)--0.5% $ 5,722,881
Other assets, less other liabilities--0% (c) 551,909
--------------
TOTAL NET ASSETS-100% $1,131,227,853
==============
</TABLE>
____________
Notes:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Includes portfolio and transaction hedges.
For the Fund's fiscal year ending October 31, 1995 the portfolio turnover was
27% and the Fund's expense ratio was 1.40%.
30
<PAGE>
THE OAKMARK INTERNATIONAL EMERGING VALUE FUND
RESULTS FROM NOVEMBER 1, 1995 (INCEPTION) THRU JULY 31, 1996:
7/31/96 NAV $11.04
<TABLE>
<CAPTION>
CALENDAR
YTD SINCE INCEPTION
THRU 7/31/96* 11/1/95*
------------- --------------
<S> <C> <C>
THE OAKMARK INT'L EMERGING VALUE FUND........... 14.6% 10.4%
Morgan Stanley World ex U.S..................... 1.6% 8.6%
Lipper Analytical International Fund Average.... 4.8% 9.0%
Lipper Emerging Market Fund Index............... 7.3% 8.2%
</TABLE>
*Total return includes change in share prices and in each case included
reinvestment of any dividends and capital gain distributions. Each of the three
indexes or averages is an unmanaged group of stocks whose composition is
different from the Fund. The Morgan Stanley World ex U.S. Index includes 19
country sub-indexes. The Lipper International Fund Average includes 106 mutual
funds that invest in securities whose primary markets are outside the United
States. The Lipper Emerging Market Fund Index is comprised of 10 emerging market
funds. Past performance is no guarantee of future results.
THE OAKMARK INTERNATIONAL EMERGING VALUE FUND
REPORT FROM DAVID G. HERRO AND ADAM D. SCHOR,
PORTFOLIO MANAGERS
Dear Fellow Shareholders:
Your Fund declined by 2.7% during the quarter ended July 31, 1996, which
included July's global equity market correction. The Oakmark International
Emerging Value Fund outperformed its peer group during this quarter and is up
more than 14.5% since the beginning of the calendar year. We continue to be
enthusiastic about this Fund's prospects because of the attractiveness of the
Fund's universe: companies located in emerging markets or small companies
located outside the USA.
MARKETS AND SOAP OPERAS
As we leave the third quarter, the national election draws near and
terrorism remains foremost in our minds, yet the U.S. stock market remains
strong. The U.S. economy and investment community, generally, are mature and can
weather these events. Successful companies will continue to be successful. There
are no sea changes in the United States, just gentle shifts in the tide. Global
markets eventually will behave like this. They don't all yet, but some are
changing.
At the end of the quarter, Argentina's finance minister, Domingo Cavallo,
resigned after an argument with President Carlos Menem. Two years ago, just the
threat of Cavallo's departure sent the market down sharply. Today the market is
holding up. Immediately after Cavallo's resignation we spoke to Alan
Clutterbuck, a director of Alpargatas, an Argentine footwear company we added to
the Fund this quarter. Alan
31
<PAGE>
was initially concerned that the resignation would affect consumer confidence
and hurt sales. But early signs are positive. There has been no rush to trade-in
Argentine pesos for U.S. dollars as there was after the last Mexican crisis and
subsequent public rift between Menem and Cavallo.
As Alan tells us, "After I heard the news I went to a television. Two years
ago, it would have been a breaking story. This time, I still saw soap operas on
television. There was no reason to break in." We don't know his television
tastes generally, but we know Alan was glad to see soaps on this time. "We are a
more mature country now," he says. "We are taking this with a great deal of
maturity. That's good."
Politicians talk, come and go, but they do not change our daily lives. It's
not the national ecomony that's important but our own private economies. The
employment statistics an individual most cares about are his own, not the
country's. There are two important employment rates: 0% and 100%, with a sample
size of one.
Businesses, like individuals, forge ahead. They don't live through
statistics. They don't exist because of government or politicians; indeed, most
thrive despite these entities. Businesses exist because they sell goods and
services that are in demand and can be priced to cover their costs. A successful
business worries more about the next product or next sale than about the next
president or economic data release. And successful investors do the same.
SIMPLE VIEW
In emerging markets, it should be just as simple but it's not. Not all
markets and investors show the restraint that Argentina is now showing. When an
election nears or terrorists strike, investors get nervous. They get concerned
that other investors will get concerned, so they sell before the rest of the
pack sells. It's like a puppy chasing his tail, spinning out of control. This
tail-spinning, however, ignores a fundamental principle--investment rewards
ultimately reflect the successes of the businesses in which one invests.
32
<PAGE>
This basic principle underlies some important questions we consider when
investing:
1. WHO CONTROLS THE COMPANY?
We often become linked to major shareholders who are managers and majority
owners of their businesses. Their competency, honesty and integrity determine
whether we will invest with them. When we buy into a company, we expect to be
with it for many years, so we must choose our partners carefully.
2. CAN IT COMPETE ON ITS OWN?
We look for globally competitive companies not reliant on protective
tariffs or regulations. We know that eventually barriers break down and
competitors rush in. If a company is not globally competitive, it is unwise to
get involved with it.
3. IS IT FINANCIALLY STABLE?
Given the volatility small and emerging market companies face, we look for
companies with the financial strength to weather storms. Good management will
navigate through these storms, but the financial boat can't be too leaky.
We are certain that we can generate excess returns by buying undervalued
companies that meet these three criteria. There may be volatility. Ultimately,
however, the performance of these companies will make the investment worthwhile.
DAVID HERRO
ADAM SCHOR
[email protected]
[email protected]
Portfolio Managers
August 8, 1996
33
<PAGE>
THE OAKMARK INTERNATIONAL EMERGING VALUE FUND
SCHEDULE OF INVESTMENTS
COUNTRY DIVERSIFICATION -- JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
% of Fund
Country Net Assets
- --------------------------------------------------------------------------------
<S> <C>
ARGENTINA 6.1%
Alparagatas Sociedad Anonima
Industrial Y Comercial
CIADEA S.A.
YPF Sociedad Anonima
AUSTRALIA 12.5%
CE Heath International Holdings
Limited
Parbury Limited
Solution 6 Holdings Limited
Wattyl
AUSTRIA 0.4%
Bau Holdings
BRAZIL 1.2%
Banco Nacional S.A.
Cemig
Iochpe-Maxion SA
CANADA 1.8%
Moffat Communications Limited
FRANCE 4.1%
Groupe Fives-Lille
The NSC Group
GERMANY 1.8%
WMF
GREAT BRITAIN 6.3%
Cordiant PLC
Vardon PLC
HONG KONG 5.2%
TechTronic Industries Company
Limited
Yip's Hang Cheung (Holdings)
Limited
HUNGARY 1.7%
Egis Gygogyszergyar
Soproni Sorgy AR RT
INDIA 0.8%
Zee Telefilms
INDONESIA 5.9%
Asia Pulp & Paper Company Ltd
PT Polysindo EKA Perkasa
IRELAND 7.5%
Anglo Irish Bank Corporation plc
Barlo Group PLC
Fyffes
ISRAEL 4.7%
Nice Systems
Tower Semiconductor Limited
ITALY 1.7%
Danieli & Company
JAPAN 1.8%
Fukuda Denshi Co., Ltd.
KOREA 6.4%
Asia Cement Manufacturing Co.
Chosun Brewery
Daehan Flour Mills Co., Ltd.
Woong Jin Publishing Co., Ltd.
MEXICO 5.7%
Grupo Herdez, SA de CV
Telefonos de Mexico,
S.A. de C.V.
NETHERLANDS 5.4%
EVC International NV
N. V. Koninklijke Sphinx
Gustavsberg
NEW ZEALAND 5.1%
Sanford Limited
Steel & Tube Holdings Ltd.
SINGAPORE 4.3%
Aztech
Pentex Schweizer Circuits
Limited
SPAIN 2.4%
Grupo Uralita
SWEDEN 2.7%
BT Industries AB
SWITZERLAND 0.9%
SwissLog Holding AG
</TABLE>
34
<PAGE>
THE OAKMARK INTERNATIONAL EMERGING VALUE FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Shares Held Description Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--96.4%
CONSUMER NON-DURABLES--4.0%
2,652,000 PT Polysindo EKA Integrated Textile
Perkasa (Indonesia) Manufacturer $ 1,381,544
FOOD & BEVERAGE--6.1%
2,934,000 Grupo Herdez, SA de Manufacturer and
CV (Mexico) Distributor of Bottled
and Canned Food 1,044,610
14,410 Chosun Brewery (Korea) Korean Brewer 450,257
4,500 Daehan Flour Mills Food Processing
Co., Ltd. (Korea) 398,573
13,155 Soproni Sorgy AR RT Hungarian Brewer
(Hungary) 203,275
-----------
2,096,715
HOUSEHOLD PRODUCTS--4.2%
47,550 N.V. Koninklijke Bathroom Products
Sphinx Gustavsberg
(Netherlands) 820,224
3,000 WMF (Germany) Tableware and
Kitchenware 613,368
-----------
1,433,592
RETAIL--3.0%
1,625,000 Alparagatas Sociedad Textiles and Footwear
Anonima Industrial Y
Comercial (Argentina) 1,007,500
TELECOMMUNICATIONS--2.7%
29,950 Telefonos de Mexico, Telephone Company
S.A. de C.V. in Mexico
(Mexico) (b) 917,219
TRANSPORTATION--1.3%
77,250 CIADEA S.A. Assembler and Distributor
(Argentina) (a) of Automobiles 436,463
PHARMACEUTICAL--1.1%
7,600 Egis Gygogyszergyar Hungarian Pharmaceutical
(Hungary) Company 376,822
OTHER CONSUMER GOODS & SERVICES--5.4%
585,000 Vardon PLC Bingo Clubs
(Great Britain) 982,734
528,133 Fyffes (Ireland) Distributor of
Fresh Fruit,
Flowers and Produce
in Europe 871,394
-----------
1,854,128
</TABLE>
35
<PAGE>
The Oakmark International Emerging Value Fund
Schedule of Investments--July 31, 1996 (Unaudited) (continued)
<TABLE>
<CAPTION>
Shares Held Description Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
OIL & NATURAL GAS--1.9%
30,500 YPF Sociedad Anonima Oil Exploration, Production
(Argentina) (b) and Marketing $ 640,500
ELECTRIC--1.0%
12,500,000 Cemig (Brazil) Electric Utility 343,447
BANKS--2.2%
750,000 Anglo Irish Bank Irish Bank
Corporation pic
(Ireland) 752,184
8,800,000 Banco Nacional Brazilian Bank
S.A. (Brazil) (c) 0
----------
752,184
OTHER FINANCIAL--2.0%
391,844 CE Health International Insurance and Reinsurance
Holdings Limited Broker
(Australia) 687,977
BROADCASTING & PUBLISHING--4.0%
46,700 Moffat Communications Owner and Operator of
Limited (Canada) Television Stations and
Cable Systems 625,022
8,045 Woong Jin Publishing Publisher
Co., Ltd. (Korea) 473,061
85,900 Zee Telefilms, B Shares Broadcasting and TV
(India) 275,025
----------
1,373,108
COMPUTER SYSTEMS--9.8%
1,382,500 Solution 6 Holdings Design Computer Systems/
Limited (Australia) Consultants 1,625,338
55,000 Nice Systems (Israel) Voice Logging Systems 1,072,500
2,005,000 Aztech (Singapore) Design and Produce Multimedia
Computing Products 638,490
----------
3,336,328
MARKETING SERVICES--3.4%
685,000 Cordiant PLC Global Advertising Agency
(Great Britain) (a) 1,150,723
CHEMICALS--3.0%
34,600 EVC International NV Western European PVC
(Netherlands) Manufacturer 1,007,299
COMPONENTS--6.7%
1,605,000 Barlo Group PLC Manufacturer of Radiators
(Ireland) and Industrial Plastics 934,649
</TABLE>
36
<PAGE>
THE OAKMARK INTERNATIONAL EMERGING VALUE FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED)(CONTINUED)
<TABLE>
<CAPTION>
Shares Held Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
627,000 Pentex Schweizer Manufacturer and Marketer
Circuits Limited of Printed Circuit Boards $ 834,166
(Singapore)
55,900 Tower Semiconductor Semi Conductors 517,075
Limited (Israel) -------------
2,285,890
MACHINERY & METAL PROCESSING--3.3%
150,500 Steel & Tube Holdings Produces and Distributes Steel
Ltd. (New Zealand) 757,585
3,125 Groupe Fives-Lille Builder of Heavy Machinery
(France) 285,735
576,000 Iochpe-Maxion SA Agricultural Machinery &
(Brazil) Automotive Parts 66,606
-------------
1,109,926
FORESTRY PRODUCTS--1.9%
59,000 Asia Pulp & Paper Paper & Packaging
Company Ltd Products in Asia
(Indonesia)(a)(b) 634,250
MINING AND BUILDING MATERIALS--8.2%
3,268,622 Parbury Limited Manufactures Building Products
(Australia) 1,162,940
22,550 Asia Cement Large Cement Manufacturer
Manufacturing Co. 846,076
(Korea)
97,100 Grupo Uralita (Spain) Manufacturers of Building
Products and Chemicals 804,237
-------------
2,813,253
OTHER INDUSTRIAL GOODS & SERVICES--13.1%
10,090,000 Yip's Hang Cheung Paint Company
(Holdings) Limited
(Hong Kong) 1,226,462
586,400 Sanford Limited Owns and Manges Fisheries
(New Zealand) 970,460
212,926 Wattyl (Australia) Paint Company 798,740
25,000 Fukuda Denshi Co., Medical Products Manufacturer
Ltd. (Japan) and Distributor 620,580
3,850,000 TechTronic Industries Manufactures Electric Hand
Company Limited Tools
(Hong Kong) 552,610
1,045 SwissLog Holding Logistics Services
AG (Switzerland) 301,115
-------------
4,469,967
</TABLE>
37
<PAGE>
THE OAKMARK INTERNATIONAL EMERGING VALUE FUND
SCHEDULE OF INVESTMENTS -- JULY 31, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Shares Held/Principal Value Description Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
PRODUCTION EQUIPMENT--7.7%
8,560 The NSC Group Manufacturer of
(France) Textile Equipment $ 1,127,420
65,000 BT Industries AB Fork Lifts &
Transportation
Equipment 933,852
175,300 Danieli & Company Steel Mini-Mills
(Italy) Equipment 565,097
------------
2,626,369
REAL ESTATE CONSTRUCTION--0.4%
2,600 Bau Holdings (Austria) Construction 151,827
TOTAL COMMON STOCKS (COST: $33,007,745) 32,887,031
SHORT-TERM INVESTMENTS--4.7%
REPURCHASE AGREEMENTS--4.7%
1,605,000 State Street Repurchase
Agreement, 5.55% due
8/1/1996 1,605,000
Total Investments (Cost $34,612,745)--101.1% $ 34,492,031
Foreign currencies (Cost $279,518)--0.8% $ 281,487
Other liabilities, less other assets--(1.9%) (d) (649,110)
------------
TOTAL NET ASSETS--100% $ 34,124,408
============
</TABLE>
___________
Notes:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) On November 10, 1995, the Comissao de Valores Mobiliarios suspended trading
in Banco Nacional. The Central Bank of Brazil is in the process of
appraising the assets and liabilities of Banco Nacional to determine the
value, if any, of its equity. To date, this matter has not been resolved.
The shares held by the Fund are valued at zero as determined by the pricing
committee of the Board of Trustees.
(d) Includes transaction hedges.
38
<PAGE>
THE OAKMARK FUNDS'
THIRD QUARTER REPORT
JULY 31, 1996
Trustees and Officers
Trustees
Michael J. Friduss Allan J. Reich
Thomas H. Hayden Marv Rotter
Christine M. Maki Burton W. Ruder
Victor A. Morgenstern Peter S. Voss
Gary Wilner, M.D.
Officers
Victor A. Morgenstern-President
Robert J. Sanborn-Executive Vice President
David G. Herro-Vice President
Clyde S. McGregor-Vice President
Steven J. Reid-Vice President
Adam Schor-Assistant Vice President
Michael J. Welsh-Assistant Vice President
Donald Terao-Treasurer
Anita M. Nagler-Secretary
Ann W. Regan-Vice President-Shareholder Operations and Assistant Secretary
Kristi L. Rowsell-Assistant Treasurer
Other Information
Transfer Agent
State Street Bank and Trust Company
Attention: The Oakmark Family of Funds
P.O. Box 8510
Boston, Massachusetts 02266-8510
Investment Adviser
Harris Associates L.P.
Legal Counsel
Bell, Boyd & Lloyd
Chicago, Illinois
Independent Public Accountants
Arthur Andersen LLP
Chicago, Illinois
Address of Fund and Adviser
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602
1-800-OAKMARK (1-800-625-6275)
24-HOUR NAV HOTLINE
1-800-GROWOAK(1-800-476-9625)
This report, including the unaudited financial statements contained herein, 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.
<PAGE>
[LOGO]
HARRIS ASSOCIATES L.P.
2 North LaSalle Street
Chicago, IL 60602
1-800-OAKMARK
<PAGE>
[LOGO OF THE OAKMARK FUND]
THIRD
QUARTER
REPORT
--------------
July 31, 1996
--------------
member of
==================
NO LOAD
100% MUTUAL FUND
COUNCIL
==================
No-Load Funds Managed by
HARRIS ASSOCIATES L.P.
<PAGE>
[LOGO]
The Oakmark Family of Funds
1996 THIRD QUARTER REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
The Oakmark Fund
Performance Chart................... 1
Letter from the Portfolio Manager... 1
Schedule of Investments............. 5
Trustees and Officers.................. 9
Other Important Information............ 9
</TABLE>
FOR MORE INFORMATION:
Please call 1-800-OAKMARK (1-800-625-6275).
24-HOUR NET ASSET VALUE HOTLINE:
To obtain the current net asset value per share of a
Fund, please call 1-800-GROWOAK (1-800-476-9625).
<PAGE>
Oakmark Fund
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION
(8/5/91) TO PRESENT (7/31/96) AS COMPARED TO THE
STANDARD & POOR'S 500 INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Oakmark Fund S&P 500
8/91 10,000 10,000
10/91 12,100 10,201
13,910 10,719
14,660 10,946
15,910 11,279
10/92 17,110 11,216
19,913 11,857
20,136 11,957
22,052 12,276 [GRAPH APPEARS HERE]
10/93 24,504 12,892
25,648 13,372
24,855 12,593
25,321 12,896
10/94 26,653 13,401
26,480 13,444
28,869 14,803
30,883 16,263
10/95 32,397 16,931
36,091 17,213
36,823 19,239
7/96 35,559 18,933
</TABLE>
<TABLE>
<CAPTION>
7/31/96 NAV $30.11
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 7/31/96
---------------------------------------
TOTAL RETURN TOTAL RETURN FROM FROM FUND INCEPTION
LAST 3 MOS. LAST 6 MOS. 7/31/95 8/5/91
------------ ------------ ------- ----------------------------
<S> <C> <C> <C> <C>
THE OAKMARK FUND -3.4% -1.5% 15.1% 28.9%
Standard & Poor's 500 Stock Index* -1.6% 1.7% 16.5% 13.6%
Dow Jones Industrial Average* -0.1% 3.6% 20.2% 16.0%
Value Line Composite Index* -6.6% -0.7% 2.8% 6.6%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions. Each of the three
indexes or averages is an unmanaged group of stocks whose composition is
different from the Fund. The S&P 500 is a broad market-weighted average
dominated by blue-chip stocks. The Dow Jones Average includes only 30 big
companies. The Value Line Index is an unweighted average of more than 1,000
stocks. Past performance is no guarantee of future results.
THE OAKMARK FUND
REPORT FROM ROBERT J. SANBORN, PORTFOLIO MANAGER
FUND UPDATE
The past three months were the most volatile in your Fund's history.
Undecided about whether the economy is growing too fast or too slow, investors'
chief obsession at the current time is the release of macroeconomic data. We
largely ignore this data and observe with bemusement as market commentators
greet the latest jobs data (which get revised a month or so later) as if they
and they alone hold the answers to market direction, the upcoming election, and
whether the planet is warming or cooling.
1
<PAGE>
For the first prolonged period in your Fund's existence, however, we are
struggling relative to the Standard & Poor's 500. While our holdings are
generally reporting satisfactory to better-than-expected business results, in
total the market is not rewarding us right now for these results.
Frank Layden, ex-coach of the NBA's aptly-named Utah Jazz, had a player who
was performing poorly. He asked him, "Son, is it ignorance or apathy?" The
player responded, "Coach, I don't know and I don't care." Similarly, we ask
ourselves if there is anything deficient in either our philosophy or our effort.
The answer is no.
There are going to be occasions when our holdings will be out of market favor.
They are inevitable, and we will waste no time trying to anticipate market
psychology. Rather, we will continue to spend our time trying to better
understand the businesses of which we are part owners. If the businesses
prosper, so will--sooner or later--their stocks.
I am writing this letter on your Fund's fifth birthday. What an experience
managing your Fund has been! On behalf of everyone at Harris Associates, I want
to thank all of you for your support.
HERE COME THE Q!
The Q ratio is coming, the Q ratio is coming!
Like most fields, the investment profession endures vigorous yet arcane
debates, and I sometimes share them with you in these letters. Some prominent
market seers are claiming that the stock market is over-valued because of
something called the Q ratio. This number compares the market value of stocks
with the current replacement value of underlying assets. The seers estimate the
Q ratio stands at 1.9, implying that the market is grossly over-valued. In a
perfect world, the ratio would always be 1.0. If a manufacturing plant were the
market's sole asset, and it could be built today for $X, then the value of the
market would also be $X.
Alas, the world is not perfect and there is a teensy-weensy problem with the Q
ratio: the data have a very tenuous connection with economic reality. Take the
case of one of our ten largest holdings, Anheuser-Busch Companies (BUD). In
round numbers at year-end 1995, BUD had $0.3B in net current assets (cash,
inventories, receivables less payables); $2.3B in investments (largely foreign
brewers); and $6.8B in depreciated plant and equipment. Thus, the replacement
value of BUD is $9.4B. Since the market value of BUD's equity, plus its debt, is
$21.6B, BUD's Q ratio of 2.3 implies that the stock is grossly overvalued.
2
<PAGE>
However, while your cool $9.4B could replicate all of BUD's tangible assets,
it could not replicate the distribution system, trademarks, and goodwill that
BUD possesses. Most companies, especially many of your Fund's largest holdings,
are worth far more as going concerns than as liquidations. What is relevant is
not the replacement value of a company's assets, but the earnings a set of
assets can generate.
And, what is foolhardy is basing investment decisions on fallacious
philosophies and faulty data.
GOOD NEWS REDUX
It turns out you can have it both ways-or at least the US can.
For years, politicians have lamented the US's low rate of capital investment
compared to Germany and Japan. If we would only invest more, goes the dirge,
we'd produce more and workers would earn more.
It turns out that-I am shocked, shocked!-they missed a crucial point. The
McKinsey Global Institute has concluded that the US generates 50 percent more
output per unit of capital input than either Germany or Japan. This is very
important-Germany spends 40 percent more on capital investment per worker, yet
its workers are still less productive than Americans. McKinsey estimates that
the return on capital in the US averaged 9 percent between 1974 and 1993,
compared to 7 percent in Germany and Japan.
While the causes for this gap are complex, McKinsey argues that efficient
American capital markets compel managements to invest in the highest-return
projects. Also, the intensity of competition and low entrepreneurial barriers in
the US compare favorably to the regulations in Germany and Japan that coddle
existing firms at the expense of new firms.
Yet another example of the invisible hand of the market producing the best
outcome!
THE OAKMARK BOOK CLUB
Some of you have suggested that I revive The Oakmark Book Club, a list of the
investment/financial/business books that I have read, and which might be of
interest to you. Here goes:
Warren Buffett: The Making of an American Capitalist, by Roger Lowenstein
(Random House, 1995). My number one recommendation, this is a great biography
of the best investor of the century, and a man who has led a nonpareil and
fascinating business career;
3
<PAGE>
Built to Last: Successful Habits of Visionary Companies, by James Collins and
Jerry Porras (Harper Collins, 1994). The authors compare eighteen companies
with their rivals, and attempt to analyze why one company prevailed over the
other;
Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the
Unabashed Triumph of Philip Morris, by Richard Kluger (Knopf, 1996). An
exhaustive and balanced history of the cigarette industry and Philip Morris;
Inside Fidelity, by Diana B. Henriquez (Scribner, 1995). This is a history of
the US mutual fund industry and its (by far) largest player. I especially
enjoyed the scene in which Fidelity's CEO (whose multi-billionaire family
controls the company) bumps into five of his fund managers in a Hong Kong hotel
in 1995. Alas, he fails to recognize any of them, who at that time collectively
managed over $50 billion;
The Late Shift: Letterman, Leno, & the Network Battle for the Night, by Bill
Carter (Hyperion, 1994). A very readable account of Johnny Carson's retirement
and managing the fragile egos of those who put us to bed every night;
Aging and Old Age, by Richard Posner (The University of Chicago Press, 1995).
Judge Posner, a pioneer in integrating free-market economics and the law,
paints a thorough portrait of the largest-growing segment of our society. With
entitlement reform inevitable, this should be required reading for every US
Congressman;
Hit and Run: How Peter Guber and Jon Peters Took Sony for a Ride in Hollywood,
by Nancy Griffin and Kim Masters (Simon and Schuster, 1996). The moral of this
hilarious book is: don't ever, ever invest in a movie studio.
Enjoy!
ROBERT J. SANBORN
Portfolio Manager
[email protected]
August 5, 1996
4
<PAGE>
THE OAKMARK FUND
SCHEDULE OF INVESTMENTS-JULY 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Shares Held Market Value
- ------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS-92.6%
FOOD & BEVERAGE-19.5%
2,670,400 Philip Morris Companies Inc. $279,390,600
1,769,100 Anheuser-Busch Companies Inc. 132,240,225
3,497,250 H.J. Heinz Company 115,846,406
2,422,100 Nabisco Holdings Corp. 81,745,875
685,000 CPC International 45,809,375
1,571,900 Interstate Bakeries 41,655,350
274,600 Ralston Purina Group 17,231,150
200,000 International Dairy Queen, Inc., Class A (a) 4,000,000
------------
717,918,981
APPAREL-0.1%
388,500 K-Swiss Inc., Class A 3,836,438
RETAIL-4.0%
2,102,000 Federated Department Stores, Inc. (a) 63,585,500
954,600 The Kroger Company 36,036,150
1,000,000 Carson Pirie Scott & Co. (a) 22,250,000
780,300 Zale Corporation (a) 13,557,712
560,000 Cole National Corporation (a) 9,380,000
53,800 Rex Stores Corporation (a) 692,675
------------
145,502,037
OTHER CONSUMER GOODS & SERVICES-10.6%
3,810,400 The Black & Decker Corporation 140,032,200
2,032,800 American Brands, Inc. 92,492,400
1,000,000 Polaroid Corporation 42,250,000
940,400 First Brands Corporation 22,452,050
583,800 GC Companies, Inc. (a) 21,527,625
957,500 Whitman Corporation 21,424,062
885,000 JUNO Lighting Inc. 13,275,000
957,500 Arctco, Inc. 10,173,437
601,500 Justin Industries, Inc. 6,691,688
281,500 Rollins, Inc. 5,911,500
257,600 Paragon Trade Brands, Inc. (a) 5,538,400
395,000 Mikasa, Inc. (a) 3,653,750
207,000 Armor All Products Corporation 3,247,313
------------
388,669,425
BANKS-5.3%
3,606,550 Mellon Bank Corporation 190,245,512
340,000 River Bank America (a) 2,890,000
------------
193,135,512
INSURANCE-6.0%
3,296,200 Torchmark Corporation 140,500,525
2,108,620 Old Republic International 44,281,020
684,700 American Financial Group, Inc. 20,198,650
501,300 Acordia, Inc. 15,414,975
------------
220,395,170
</TABLE>
5
<PAGE>
THE OAKMARK FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
Shares Held Market Value
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
OTHER FINANCIAL--8.4%
3,548,000 First USA, Inc. $173,408,500
2,194,900 AMBAC Inc. 104,806,475
204,400 Fund American Enterprises Holdings, Inc. 16,939,650
474,500 Federal National Mortgage Association 15,065,375
------------
310,220,000
BROADCASTING & PUBLISHING--16.8%
2,927,800 Dun + Bradstreet Corporation 168,348,500
9,687,300 U.S. West Media Group 167,105,925
2,174,400 Knight-Ridder, Inc. 142,423,200
6,829,179 Tele-Communications, Inc., Class A (a) 97,315,801
1,928,494 TCI Communications, Inc. (a) 42,426,868
------------
617,620,294
PHARMACEUTICAL--3.0%
1,950,000 American Home Products Corporation 110,662,500
MANAGED CARE SERVICES-1.7%
2,000,000 Foundation Health Corporation (a) 49,000,000
420,000 Physicians Health Services, Inc. (a) 7,350,000
500,000 Laboratory Corporation of America Holdings 3,437,500
270,000 Right CHOICE Managed Care, Inc. (a) 3,105,000
------------
62,892,500
MEDICAL PRODUCTS--0.9%
1,297,800 Sybron Corporation (a) 32,445,000
70,900 Spacelabs Medical, Inc. (a) 1,444,588
------------
33,889,588
AEROSPACE & DEFENSE--5.2%
1,371,110 Lockheed Martin Corporation 113,630,741
1,220,000 McDonnell Douglas Corporation 54,595,000
779,600 Logicon, Inc. 21,731,350
------------
189,957,091
BUILDING MATERIALS & CONSTRUCTION--0.4%
590,000 USG Corporation (a) 15,782,500
OTHER INDUSTRIAL GOODS & SERVICES--4.8%
2,839,100 James River Corporation 71,687,275
1,014,300 Bandag Incorporated, Class A 45,897,075
880,400 SPX Corporation 21,899,950
872,000 The Geon Company 21,037,000
170,000 UCAR International Inc. (a) 5,928,750
182,600 Amtrol, Inc. 4,428,050
186,200 Premark International, Inc. 3,351,600
26,300 Bandag Incorporated 1,209,800
------------
175,439,500
</TABLE>
6
<PAGE>
THE OAKMARK FUND
SCHEDULE OF INVESTMENTS--JULY 31, 1996 (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Shares Held Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL REAL ESTATE--1.0%
2,291,700 Host Marriott Corporation (a) 30,078,563
585,700 Catellus Development Corporation (a) 5,124,875
--------------
35,203,438
RECREATION & ENTERTAINMENT--0.0%
70,000 Brunswick Corporation 1,330,000
FOREIGN SECURITIES--4.9%
3,135,000 DeBeers Consolidated Mines Limited ADR (b) 95,225,625
3,276,500 YPF Sociedad Anonima (b) 68,806,500
547,700 EVC International NV 15,945,025
--------------
179,977,150
TOTAL COMMON STOCKS (COST: $2,809,897,840) 3,402,432,124
SHORT-TERM INVESTMENTS--7.4%
COMMERCIAL PAPER--4.8%
25,000,000 American Express Credit Corporation,
5.27% due 8/5/1996 25,000,000
50,000,000 Ford Motor Credit Corp., 5.35% due 8/1/1996 50,000,000
50,000,000 Ford Motor Credit Corp., 5.60% due 8/1/1996 50,000,000
50,000,000 Ford Motor Credit Corp., 5.38% due 8/9/1996 50,000,000
--------------
TOTAL COMMERCIAL PAPER (Cost: $175,000,000) 175,000,000
REPURCHASE AGREEMENTS--2.6%
96,424,000 State Street Repurchase Agreement
5.55% due 8/1/1996 96,424,000
TOTAL SHORT-TERM INVESTMENTS (COST: $271,424,000) 274,000,000
Total investments (Cost $3,081,321,840)--100% 3,673,856,124
Other assets, less other liabilities--0% 3,653
--------------
TOTAL NET ASSETS--100% $3,673,859,777
==============
</TABLE>
- -----------
Notes:
(a) Non-income producing security.
(b) Represents an American Depository Receipt. For the Fund's fiscal year ended
October 31, 1995, the portfolio turnover was 18% and the Fund's expense
ratio was 1.17%.
7
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
8
<PAGE>
THE OAKMARK FUNDS'
THIRD QUARTER REPORT
JULY 31, 1996
Trustees and Officers
Trustees
Michael J. Friduss Allan J. Reich
Thomas H. Hayden Marv Rotter
Christine M. Maki Burton W. Ruder
Victor A. Morgenstern Peter S. Voss
Gary Wilner, M.D.
Officers
Victor A. Morgenstern-President
Robert J. Sanborn-Executive Vice President
David G. Herro-Vice President
Clyde S. McGregor-Vice President
Steven J. Reid-Vice President
Adam Schor-Assistant Vice President
Michael J. Welsh-Assistant Vice President
Donald Terao-Treasurer
Anita M. Nagler-Secretary
Ann W. Regan-Vice President-Shareholder Operations and Assistant Secretary
Kristi L. Rowsell-Assistant Treasurer
Other Information
Transfer Agent
State Street Bank and Trust Company
Attention: The Oakmark Family of Funds
P.O. Box 8510
Boston, Massachusetts 02266-8510
Investment Adviser
Harris Associates L.P.
Legal Counsel
Bell, Boyd & Lloyd
Chicago, Illinois
Independent Public Accountants
Arthur Andersen LLP
Chicago, Illinois
Address of Fund and Adviser
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602
1-800-OAKMARK (1-800-625-6275)
24-HOUR NAV HOTLINE
1-800-GROWOAK(1-800-476-9625)
This report, including the unaudited financial statements contained herein, 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.
<PAGE>
[LOGO THE OAKMARK FUND]
HARRIS ASSOCIATES L.P.
2 North LaSalle Street
Chicago, IL 60602
1-800-OAKMARK
