<PAGE>
ANNUAL REPORT
September 30, 1997 THE OAKMARK
FUND
THE OAKMARK
SELECT FUND
THE OAKMARK
SMALL CAP FUND
THE OAKMARK
EQUITY AND
INCOME FUND
THE OAKMARK
INTERNATIONAL
FUND
THE OAKMARK
INTERNATIONAL
SMALL CAP FUND
MEMBER OF
- ------------
100% NO LOAD
MUTUAL FUND
COUNCIL
- ------------
Managed by
HARRIS
ASSOCIATES L.P.
OAKMARK
<PAGE>
The Oakmark Family of Funds
1997 Annual Report
...........................................................................
<TABLE>
<CAPTION>
<S> <C>
Letter from the Chairman and President.................................. 1
The Oakmark Family of Funds Summary..................................... 2
The Oakmark Fund
Letter from the Portfolio Manager..................................... 4
Schedule of Investments............................................... 6
The Oakmark Select Fund
Letter from the Portfolio Manager..................................... 9
Schedule of Investments............................................... 11
The Oakmark Small Cap Fund
Letter from the Portfolio Manager..................................... 13
Schedule of Investments............................................... 15
The Oakmark Equity and Income Fund
Letter from the Portfolio Manager..................................... 18
Schedule of Investments............................................... 20
The Oakmark International Fund
Letter from the Portfolio Manager..................................... 24
International Diversification Chart................................... 26
Schedule of Investments............................................... 27
The Oakmark Int'l Small Cap Fund
Letter from the Portfolio Manager..................................... 31
International Diversification Chart................................... 33
Schedule of Investments............................................... 34
Financial Statements
Statement of Assets and Liabilities................................... 38
Statement of Operations............................................... 40
Statement of Changes in Net Assets.................................... 44
Notes to Financial Statements......................................... 50
Trustees and Officers................................................... 65
</TABLE>
For More Information:
Access our web site at www.oakmark.com to obtain the current NAV of a fund,
a prospectus, an application or periodic reports, or call 1-800-OAKMARK
(1-800-625-6275).
24-Hour Net Asset Value Hotline and Web Site:
To obtain the current net asset value of a fund, please call 1-800-GROWOAK
(1-800-476-9625) or access our web site at www.oakmark.com
<PAGE>
Letter from the Chairman and President...
................................................................................
Dear Fellow Shareholders:
In my new role as Chairman, I am pleased to share the authorship of this
letter with Bob Levy, the recently elected president of The Oakmark Funds. Bob
is also the president and CEO of Harris Associates, the investment adviser and
management of The Oakmark Family of Funds.
[PHOTO APPEARS HERE]
We are pleased to present the annual report for The Oakmark Family of Funds
for our new fiscal year-end, September 30, 1997. Our fiscal year-to-date numbers
reflect our shortened (11 month) year which resulted from the alignment of our
fiscal quarters with the calendar quarters upon which most other funds report.
For the 3-month period ended September 30, 1997, our four domestic funds,
Oakmark, Equity and Income, Small Cap and Select, enjoyed especially strong
returns. During the same period, our two international funds lagged somewhat
with a strong divergence in the performance of the Oakmark International large
cap holdings (+2.6%) versus the performance of the smaller companies in Oakmark
International Small Cap (-3.9%). We suspect that just as the domestic small cap
stocks have gained attention when their relative values became compelling, so
too will their international counterparts. As long-term value investors, we
have learned the advantage of being contrarian at times. We buy value when we
identify it, as opposed to when others write about it.
The Oakmark International Fund has just celebrated its fifth birthday and
we are pleased and gratified that it has joined its sibling Oakmark Fund in
earning a 5-Star (5 STARS) rating by Morningstar.
For those of you looking ahead to IRA contributions, it is our intention to
offer prototype Roth and Educational IRA accounts under the new 1997 Tax Act.
We appreciate your confidence in investing with us.
Very truly yours,
/s/ Victor Morgenstern
Victor Morgenstern
Chairman
/s/ Robert M. Levy
Robert M. Levy
President
1
<PAGE>
<TABLE>
<CAPTION>
The Oakmark Family of Funds
Summary Information
................................................................................................
The Oakmark
Performance for Period Ended The Oakmark Select
September 30, 1997 Fund Fund
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
3 Months 6.3% 15.2%
....................................................................................................
6 Months 22.5% 34.6%
....................................................................................................
11 Months (fiscal year) 36.0% 63.4%
....................................................................................................
1 Year 37.1% N/A
....................................................................................................
Average Annual Total Return for:
3 Year 24.9% N/A
....................................................................................................
5 Year 25.3% N/A
....................................................................................................
Since inception 30.7% 63.4%*
Value of $10,000 $52,009 $16,340
from inception date (8/5/91) (11/1/96)
- ----------------------------------------------------------------------------------------------------
Top Five Holdings Banc One Tele-Communications,
as of September 30, 1997 Corporation 7.0% Liberty Media
Philip Morris Class A 14.7%
Company and % of Total Net Assets Companies, Inc. 6.5% U.S. Industries, Inc. 14.4%
Mellon Bank USG Corporation 8.2%
Corporation 6.0% PartnerRe Ltd. 7.2%
Tele-Communications, Cablevision Systems
Inc., Class A 4.2% Corporation 4.5%
Columbia/HCA
Healthcare Corp. 4.0%
- ----------------------------------------------------------------------------------------------------
Top Five Industries Other Consumer TV Programming 14.7%
as of September 30, 1997 Goods & Services 17.8% Diversified
Food & Beverage 16.6% Conglomerates 14.4%
Industries and % of Total Net Assets Broadcasting & Other Consumer
Publishing 14.5% Goods & Services 11.6%
Banks 13.0% Broadcasting &
Foreign Securities 5.2% Cable TV 8.9%
Building Materials &
Construction 8.2%
</TABLE>
* Not Annualized
2 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
...............................................................................................................................
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK
SMALL CAP EQUITY AND INTERNATIONAL INTERNATIONAL
FUND INCOME FUND FUND SMALL CAP FUND
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
15.2% 10.3% 2.6% -3.9%
...............................................................................................................................
33.6% 21.9% 11.1% 4.9%
...............................................................................................................................
54.2% 31.2% 27.2% 11.1%
...............................................................................................................................
53.5% 33.3% 26.9% 9.3%
...............................................................................................................................
N/A N/A 15.1% N/A
...............................................................................................................................
N/A N/A 18.4% N/A
...............................................................................................................................
44.8% 22.7% 18.4% 13.1%
$20,340 $14,810 $23,283 $12,672
(11/1/95) (11/1/95) (9/30/92) (11/1/95)
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Industries, Inc. 6.6% Chrysler Corporation 3.3% Tomkins plc 4.9% Lambert Fenchurch
People's Bank of PartnerRe Ltd. 3.2% Quilmes Group plc 5.6%
Bridgeport, CT 6.0% U.S. Industries, Inc. 3.2% Industrial SA 4.9% Recordati 4.7%
Catellus Development Tele-Communications, Cordiant plc 4.6% Vardon plc 4.2%
Corporation 4.6% Liberty Media Sedgwick Group plc 4.0% JCG Holdings Ltd. 3.9%
RenaissanceRe Class A 3.2% AB Volvo 3.8% Daimon 3.9%
Holdings Ltd 4.1% Juno Lighting, Inc. 3.1%
Ralcorp Holdings, Inc. 3.7%
- -------------------------------------------------------------------------------------------------------------------------------
Insurance 13.2% U.S. Government Food & Beverage 21.0% Other Industrial
Other Industrial Goods Bonds 25.4% Telecommunications 9.6% Goods & Services 13.4%
& Services 12.7% Other Consumer Consumer Household Products 10.0%
Other Consumer Goods & Services 10.4% Non-Durables 8.0% Other Financial 9.5%
Goods & Services 8.5% Broadcasting & Banks 7.0% Other Consumer
Banks 8.3% Publishing 9.0% Other Industrial Goods Goods & Services 9.4%
Broadcasting & Banks 8.0% & Services 7.0% Food & Beverage 8.2%
Publishing 7.4% Automotive 8.0%
</TABLE>
THE OAKMARK FAMILY OF FUNDS 3
<PAGE>
The Oakmark Fund
Report from Robert J. Sanborn, Portfolio Manager
................................................................................
[PHOTO APPEARS HERE]
Annual Portfolio Update
A year ago (or, more exactly, eleven months ago), I wrote:
The Oakmark Fund's fiscal year ended October 31, 1996 was eerily
reminiscent of our 1995 fiscal year. As Yogi Berra might say, "It's deja vu
all over again." A very similar macroeconomic environment--slow, steady
growth; continued low inflation, with the price of gold down again; long-
term interest rates down again--provided a good context for equities. As in
fiscal 1995, your Fund generated strong absolute returns but lagged behind
those of the Standard & Poor's 500.
In reviewing the 1997 fiscal year, I can only say, "Play it again, Yogi." For,
yet again, inflation continues to remain subdued, and the price of gold declined
again; long-term interest rates declined again, this time from more than 6.7% to
less than 6.4%. With the continuation of steady growth and with companies
increasingly being run for the benefit of their owners, the context for US
equities was (and remains) favorable. Your Fund generated strong positive
returns of 36.0%, about a half a percentage point less than the Standard &
Poor's 500.
Our patience in our cable investments--Tele-Communications Inc., U.S. West Media
Group, and TCI Liberty Media, Cl A--was well-rewarded. These stocks were among
our best performers, up 71%, 43%, and 74%, respectively. Other standouts among
our larger holdings include Mellon (+71%), Brunswick (+50%), and Knight-Ridder
(+48%). Among our worst performers were Black & Decker (-2%), DeBeers (+2%),
and Nabisco (+15%). Our largest holding, Philip Morris, slightly outperformed
the market despite its ubiquity in the media. 1998 looms as another news-filled
year for that company, but through it all we will continue to keep our eyes on
the long term.
- --------------------------------------------------------------------------------
The value of a $10,000 investment in The Oakmark Fund from its inception
(8/5/91) to present (9/30/97) as compared to the Standard & Poor's 500 Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Average Annual Total Return*
9/30/97 NAV $41.21 Through 9/30/97
Total Return From Fund Inception
Last 2 mos. 8/5/91
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
The Oakmark Fund 0.8% 30.7%
Standard & Poor's 500 Stock Index w/inc** -0.4% 18.7%
Dow Jones Industrial Average w/inc** -3.1% 20.1%
Value Line Composite Index** 4.8% 11.3%
</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 success.
4 The Oakmark Fund
<PAGE>
................................................................................
In general, your portfolio businesses once again performed at least in line with
expectations. I can point to very few disappointments over the year. Part of
this is due to the overall strong economy, part is due to your Fund's current
preference for high-quality businesses, and part is due to our exceptional
research effort. While the "market" is up a lot, I continue to believe that your
portfolio represents very solid value. It will probably perform relatively
better in a less buoyant overall market, but is a good value in any case.
Our portfolio turnover was low during the past year. We have added one new
significant holding, Columbia/HCA Healthcare, the hospital company that remains
in the news. As the stock declined dramatically due to revelations about its
business practices, we have established a large investment based on our
perceptions that the underlying value of the company's assets is worth far more
than the stock price, and that top management (in the form of CEO Tom Frist) is
very incentivised to maximize long-term value. We sold only one large holding,
Torchmark, over the course of the year.
Your Fund--like all of the funds in The Oakmark Family of Funds--remains
concentrated. Your twenty largest holdings comprise three-quarters of our
equities; our top ten comprise more than 50% of our equities. As fund companies
relentlessly attempt to exploit new marketing opportunities, one fad is
concentrated investing. Many firms are launching funds not necessarily because
they believe in concentrated investing, but because they perceive an opportunity
to attract assets. At Harris Associates and The Oakmark Family of Funds, we have
had concentrated portfolios in our separate accounts since 1976, and in each of
our Funds since inception. It is a core investment value firm-wide.
Contrasting our approach with that of other well-known funds is instructive. For
instance, the world's largest mutual fund has over 400 holdings, ten times the
number of holdings in your Fund. Its ten largest holdings constitute less than
15% of its assets, whereas The Oakmark Fund's ten largest holdings approach 50%
of the Fund. During the tenure of this other fund's prior portfolio manager,
annual turnover at that fund reached 155%, meaning the average stock was held
for about eight months. The Oakmark Fund's turnover is around 20%, meaning the
average stock is typically held for about five years. At The Oakmark Fund, we
make our positions large enough to matter, and we use a time horizon that is
consistent with the term "investor".
Sometimes I read an article that reminds me that our approach, which seems so
logical to all of us, is not the industry norm. A recent article in The Wall
Street Journal "Heard on the Street" column on McDonald's quoted a large
institutional investor as saying he had cut his position in MCD from 2% of his
portfolio to 1%, and would not restore it back to 2% until he saw some sign that
results are improving. When we read this, we do not know where to begin with
critiquing this thought process. First, in our view, this investor is taking MCD
from a fairly insignificant position to a very insignificant investment. Why
have trivial investments? Second, by the time this company shows improvements,
its price will undoubtedly rise.
Many ask me what is the recipe for the success of all the funds in The Oakmark
Family of Funds. I think it is fairly simple. First, we have a consistent
investment philosophy throughout the entire firm. We all believe in it, and we
all speak the same language. Second, we continue to maintain, in a business
increasingly resembling the NBA with regard to loyalty, a stable group of
investment professionals. Third, we have an investment culture first and
foremost. I am biased, but I do not believe there is a better investment firm
than Harris Associates, or a better fund family than The Oakmark Family of
Funds.
Personally, I want to thank each of you for the support you have shown The
Oakmark Fund, and all our Funds.
/s/ Robert J. Sanborn
Robert J. Sanborn
Portfolio Manager
[email protected]
October 13, 1997
The Oakmark Fund 5
<PAGE>
The Oakmark Fund
Schedule of Investments--September 30, 1997
................................................................................
<TABLE>
<CAPTION>
Shares Held Market Value
- --------------------------------------------------------------------
<S> <C> <C>
Common Stocks--88.9%
Food & Beverage--16.6%
Philip Morris Companies Inc. 10,260,700 $ 426,460,344
Anheuser-Busch Companies Inc. 5,495,400 247,979,925
H.J. Heinz Company 4,007,250 185,084,860
Nabisco Holdings Corporation 3,572,100 152,037,506
Gallaher Group Plc (a) (b) 3,835,500 73,593,656
CPC International, Inc. 130,000 12,041,250
M & F Worldwide Corp. (a) 300,000 2,850,000
--------------
1,100,047,541
Retail--0.6%
Carson Pirie Scott & Company (a) (c) 1,000,000 $ 39,437,500
Other Consumer Goods & Services--17.8%
Columbia/HCA Healthcare Corporation 9,210,000 $ 264,787,500
The Black & Decker Corporation (c) 7,034,200 262,023,950
Polaroid Corporation (c) 4,332,000 221,744,250
Brunswick Corporation 3,578,800 126,152,700
Mattel, Inc. 3,303,800 109,438,375
Fortune Brands, Inc. 2,560,500 86,256,844
First Brands Corporation 1,070,400 28,633,200
Whitman Corporation 957,500 26,091,875
Juno Lighting, Incorporated (c) 1,085,000 18,580,625
GC Companies, Inc. (a) (c) 397,000 17,071,000
Arctic Cat, Inc. 957,500 11,011,250
Justin Industries 601,500 8,082,656
--------------
1,179,874,225
Banks--13.0%
Banc One Corporation 8,273,226 $ 461,749,426
Mellon Bank Corporation 7,213,100 394,917,225
--------------
856,666,651
Insurance--1.6%
Old Republic International Corporation 2,748,620 $ 107,196,180
Other Financial--5.1%
AMBAC, Inc (c) 4,389,800 $ 178,609,987
Fannie Mae 3,307,500 155,452,500
--------------
334,062,487
</TABLE>
6 The Oakmark Fund
<PAGE>
The Oakmark Fund
Schedule of Investments--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
Shares Held Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks--88.9% (cont.)
Broadcasting & Publishing--14.5%
Tele-Communications, Inc., Class A (a) 13,379,179 $ 274,273,169
Knight-Ridder, Inc. (c) 4,650,000 254,006,250
Dun & Bradstreet Corporation 6,841,300 194,121,888
ACNielsen Corporation (a) (c) 4,764,000 114,336,000
Tele-Communications, Liberty Media, Class A (a) 3,657,741 109,503,621
TCI Satellite Entertainment, Inc., Class A (a) 1,217,917 9,210,497
--------------
955,451,425
Telecommunications--3.4%
U.S. West Media Group (a) 10,085,400 $ 225,030,488
Managed Care Services--1.6%
Foundation Health Systems, Inc. (a) 3,323,510 $ 106,352,320
Medical Products--1.0%
Sybron International Corporation (a) 1,567,800 $ 67,317,413
Aerospace & Defense--4.4%
Lockheed Martin Corporation 1,935,000 $ 206,319,375
The Boeing Company 1,586,000 86,337,875
--------------
292,657,250
Other Industrial Goods & Services--4.1%
Fort James Corporation 2,894,100 $ 132,585,956
Bandag Incorporated, Class A 1,104,100 56,723,138
SPX Corporation (c) 875,200 51,308,600
The Geon Company 971,600 19,917,800
Premark International, Inc. 328,400 10,508,800
--------------
271,044,294
Foreign Securities--5.2%
DeBeers Consolidated Mines Limited ADR (b) 4,071,000 $ 119,840,063
YPF Sociedad Anonima (b) 3,025,600 111,569,000
Unilever NV (b) 476,000 101,209,500
European Vinyls Corporation International N.V. 547,700 12,933,678
--------------
345,552,241
Total Common Stocks (Cost: $3,861,010,117) 5,880,690,015
</TABLE>
See accompanying notes to financial statements. The Oakmark Fund 7
<PAGE>
The Oakmark Fund
Schedule of Investments--September 30, 1997 cont.
<TABLE>
<CAPTION>
Principal Value Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
Short Term Investments--11.4%
U.S. Government Bills--2.2%
United States Treasury Bills, 5.07%-5.40%
due 10/16/1997-1/29/1998 $150,000,000 $ 148,839,664
--------------
Total U.S. Government Bills 148,839,664
Commercial Paper--8.8%
American Express Credit Corp., 5.49%-5.58%
due 10/1/1997-11/4/1997 $175,000,000 175,000,000
Ford Motor Credit Corp., 5.48%-6.15%
due 10/1/1997-10/22/1997 175,000,000 175,000,000
General Electric Capital Corporation,
5.50%-6.38% due 10/1/1997-11/3/1997 230,000,000 230,000,000
--------------
Total Commercial Paper 580,000,000
Repurchase Agreements--0.4%
State Street Repurchase Agreement, 5.95%
due 10/1/97 $ 23,456,000 $ 23,456,000
--------------
Total Repurchase Agreements 23,456,000
Total Short Term
Investments (Cost: $752,289,548) 752,295,664
Total Investments
(Cost $4,613,299,665)--100.3%(d) 6,632,985,679
Other liabilities in excess of
other assets--(0.3)% (18,037,051)
--------------
Total Net Assets--100% $6,614,948,628
==============
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depository Receipt.
(c) See footnote number six in the Notes to Financial Statements regarding
transactions in affiliated issuers.
(d) At September 30, 1997, net unrealized appreciation of $2,019,686,014, for
federal income tax purposes consisted of gross unrealized appreciation of
$2,077,648,280 and gross unrealized depreciation of $57,962,266.
8 The Oakmark Fund See accompanying notes to financial statements.
<PAGE>
The Oakmark Select Fund
Report from Bill Nygren, Portfolio Manager
................................................................................
[PHOTO APPEARS HERE]
The Oakmark Select Fund
The Oakmark Select Fund increased in value by 6.9% for our transitional two
month quarter ending September 30. That gain was slightly above the S&P Midcap's
5.6% gain, and well ahead of the S&P 500's 0.4% loss. In the last two quarters,
your fund has benefited from its large exposure to midcap stocks. Earlier this
year, after several years of outperformance by the largest companies, articles
began appearing about long-term structural advantages possessed by giants like
Coke and Intel. Unfortunately, investors had priced those stocks so high that
even their large earnings gains were viewed as disappointing. The stock market
usually finds a way to defy conventional wisdom!
For its fiscal year (actually eleven months) The Oakmark Select Fund increased
in value by 63.4%. That gain far exceeded gains in the S&P Midcap, 38.7% and the
S&P 500, 36.6%. Again, I want to caution against unreasonable expectations. The
return on the market indices as well as the amount by which your Fund
outperformed those indices are both highly unusual. Although we expect the stock
market and The Oakmark Select Fund to provide good long-term returns, it is
unlikely that their upward paths will be as straight as we have recently become
accustomed.
As you know, we expect The Oakmark Select Fund to typically hold 20 or fewer
stocks and to have half the value in its top five positions. As of September 30,
your Fund held 16 stocks and the five largest accounted for 50% of the assets.
Additionally, we have told you that the Fund would be a long-term investor. On
September 30, only 16% of the fund's assets were invested in stocks the fund did
not own on its first day of operation. I believe this shows we are acting
consistently with our long-term investment philosophy.
- --------------------------------------------------------------------------------
The value of a $10,000 investment in The Oakmark Select Fund from its inception
(11/1/96) to present (9/30/97) as compared to the Standard & Poor's 500 Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Total Return*
9/30/97 NAV $16.34 Through 9/30/97
Total Return From Fund Inception
Last 2 mos. 11/1/96
- -------------------------------------------------------------------------------
<S> <C> <C>
The Oakmark Select Fund 6.9% 63.4%
Standard & Poor's 500 Stock Index w/inc** -0.4% 36.6%
Standard & Poor's MidCap 400 Index w/inc** 5.6% 38.7%
Value Line Composite Index** 4.8% 30.8%
</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 S&P 400 consists of 400 domestic
stocks chosen for market size, liquidity, and industry group representation. The
Value Line Index is an unweighted average of more than 1,000 stocks. Past
performance is no guarantee of future results.
The Oakmark Select Fund 9
<PAGE>
................................................................................
Bet Against the Cover
In August of 1979 with double-digit inflation, double-digit government bond
yields and the US economy declining in worldwide significance, Business Week ran
a cover story proclaiming "The Death of Equities." Over the following eighteen
years, as our economy staged a remarkable turnaround, a $1000 investment in the
stock market (reinvesting dividends) increased in value to $17,000! Like the
Sports Illustrated jinx, "The Death of Equities" story gave Business Week the
dubious reputation of being a contrary indicator. It's not really fair to single
out Business Week. The media reports about what has happened and what is
expected to happen. The stock market moves based on how the actual events differ
from market expectations. By the time a news story is deserving of being placed
on the cover, a turning point has often been reached.
Last October as we were preparing to launch The Oakmark Select Fund, Business
Week ran a cover story titled "Cable TV, The Looming Crisis." In 1996, cable
stocks had very disappointing returns because investors were expecting large
subscriber losses to competing telephone and satellite companies. We disagreed
with the consensus and thought intrinsic value would grow as competing providers
failed to meet their optimistic projections. We also thought most cable stocks
had owner-oriented managements and were selling at large discounts to intrinsic
value. As long-term value investors, we look for those situations where negative
short-term sentiment creates buying opportunities. For these reasons, The
Oakmark Select Fund placed its largest single bet on the cable industry, nearly
25% of your fund was invested in three cable stocks: Liberty Media, Cablevision
Systems and US West Media Group.
A year ago, I told my colleagues that in The Oakmark Select Fund's first annual
report, I would write about cable stocks and the Business Week cover indicator.
From November 1, 1996 through September 30, 1997: US West Media was up 43%,
Liberty Media was up 74% and Cablevision increased by 102%! The Business Week
cover indicator came through again!
What do we think about our cable holdings today? Private transactions are
occurring at cashflow multiples well above where public stocks are trading and
Liberty Media and US West Media are still repurchasing shares. Cablevision just
recently exchanged stock for subscribers from industry leader Tele-
Communications, Inc. Cablevision stock is trading at $63, but that transaction
only makes sense for Tele-Communications, Inc. if Cablevision stock is worth in
excess of $100 per share. To us, that's a pretty strong vote of confidence by a
knowledgable investor in the same industry. We're sticking with our cable
holdings and expect that when we review next year's performance, these stocks
will have again added to our returns.
At the close of this short year, I want to say thank you to all of my colleagues
who have so greatly contributed to our strong results. Most importantly I want
to thank you, our shareholders, for your support and for making this great start
possible. As I wrote in the first quarterly, I'll wait to measure the fund's
success by using its ten-year record, but so far so good!
/s/ Bill Nygren
- ---------------------
Bill Nygren
Portfolio Manager
[email protected]
October 6, 1997
10 The Oakmark Select Fund
<PAGE>
THE OAKMARK SELECT FUND
Schedule of Investments--September 30, 1997
................................................................................
<TABLE>
<CAPTION>
Shares Held Market Value
- ------------------------------------------------------------------------------
Common Stocks--92.5%
<S> <C> <C>
Other Consumer Goods & Services--11.6%
Polaroid Corporation 418,500 $ 21,421,969
Armstrong World Industries, Inc. 310,000 20,789,375
Brunswick Corporation 496,900 17,515,725
------------
59,727,069
Banks--4.4%
People's Bank of Bridgeport, Connecticut 698,500 $ 22,395,656
Insurance--7.2%
PartnerRe Ltd. 862,000 $ 37,119,875
Other Financial--4.3%
Lockheed Martin Corporation 207,600 $ 22,135,350
Broadcasting & Cable TV--8.9%
Cablevision Systems Corporation (a) 371,100 $ 23,286,525
U.S. West Media Group (a) 1,009,000 22,513,313
------------
45,799,838
TV Programming--14.7%
Tele-Communications, Liberty Media, Class A (a) 2,532,200 $ 75,807,737
Publishing--7.9%
ACNielsen Corporation (a) 851,000 $ 20,424,000
Dun & Bradstreet Corporation 704,500 19,990,188
------------
40,414,188
Building Materials & Construction--8.2%
USG Corporation (a) 881,500 $ 42,256,906
Oil & Natural Gas--3.8%
Union Texas Petroleum Holdings, Inc. 825,000 $ 19,387,500
Other Industrial Goods & Services--7.1%
General Signal Corporation 445,000 $ 19,246,250
Premark International, Inc. 535,000 17,120,000
------------
36,366,250
Diversified Conglomerates--14.4%
U.S. Industries, Inc. 2,557,300 $ 74,161,700
Total Common Stocks (Cost: $387,896,611) 475,572,069
</TABLE>
See accompanying notes to financial statements. THE OAKMARK SELECT FUND 11
<PAGE>
THE OAKMARK SELECT FUND
Schedule of Investments--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
Principal Value Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Short Term Investments--9.4%
U.S. Government Bills--2.3%
United States Treasury Bills, 1.00%-5.12%
due 10/9/1997 - 12/11/1997 $12,000,000 $ 11,942,999
------------
Total U.S. Government Bills 11,942,999
Commercial Paper--5.8%
Ford Motor Credit Corp., 5.60%-6.15%
due 10/1/1997-10/6/1997 $10,000,000 $ 10,000,000
American Express Credit Corp., 5.52%-5.56%
due 10/1/1997-10/2/1997 10,000,000 10,000,000
General Electric Capital Corporation,
5.58%-6.38% due 10/1/1997 10,000,000 10,000,000
------------
Total Commercial Paper 30,000,000
Repurchase Agreements--1.3%
State Street Repurchase Agreement,
5.95% due 10/1/1997 $ 6,401,000 $ 6,401,000
------------
Total Repurchase Agreements 6,401,000
Total Short Term Investments (Cost: $48,344,290) 48,343,999
Total Investments (Cost $ 436,240,901)--101.9% (b) 523,916,068
Other liabilities in excess of other assets--(1.9)% (9,741,496)
------------
Total Net Assets--100% $514,174,572
============
</TABLE>
(a) Non-income producing security.
(b) At September 30, 1997, net unrealized appreciation of $87,675,167 for
federal income tax purposes consisted of gross unrealized appreciation of
$87,901,597 and gross unrealized depreciation of $226,430.
12 THE OAKMARK SELECT FUND See accompanying notes to financial statements.
<PAGE>
THE OAKMARK SMALL CAP FUND
Report from Steven J. Reid, Portfolio Manager
................................................................................
[PHOTO APPEARS HERE]
Oakmark Small Cap Fund Has Small Year???
September 30, 1997 marked the end of the shortened 1997 fiscal year. The Oakmark
Small Cap Fund, as well as the entire Oakmark Family of Funds, changed from an
October to a September fiscal year. This aligns your Fund's quarterly reporting
periods with most of the industry. In as much as the duration of the fiscal year
was a little bit on the "small" side, the events that took place this year were
anything but small. For the eleven month fiscal year ended September 30, 1997,
The Oakmark Small Cap Fund gained 54.2%, which was large compared to the
relevant indices. For the two-month fiscal quarter, your Fund slightly lagged
with the relevant indices with a gain of 8.6%, hardly small in absolute terms.
1997 was truly an outstanding year for your Fund and we are happy to be able to
share these results with you.
During the latter part of the fiscal year the shares of small companies
performed better than the shares of large companies. I have been asked numerous
times for an explanation of why this occurred. I have several responses to this.
The first is that as patient long-term investors we are focused on the
individual values of each of our investments and are much less concerned with
overall market trends or events. The second is that the raging equatorial
currents of El Nino washed a little of Alan Greenspan's "irrational exuberance"
onto the shores of the small company investment universe. Last, quite honestly,
the shares of small companies have lagged those of large companies for so long
that it was about time that they finally caught up a little.
Philosophy and People
Looking back at the past year I was pleasantly surprised to see how well so many
of our investments had done. Nine of your Fund's holdings had appreciated over
100% during the past year. Even more pleasing was that we avoided making any
large mistakes. The key to our success lies in a sound investment philosophy,
but it is only effective
- --------------------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS
INCEPTION (11/1/95) TO PRESENT (9/30/97) AS COMPARED TO THE RUSSELL 2000 INDEX
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Average Annual Total Return*
9/30/97 NAV $20.34 Through 9/30/97
Total Return From Fund Inception
Last 2 mos. 11/1/95
- --------------------------------------------------------------------------------
<S> <C> <C>
The Oakmark Small Cap Fund 8.6% 44.8%
Lipper Small Cap Fund Index** 9.0% 21.9%
Russell 2000 w/inc** 9.8% 26.8%
S&P Small Cap 600 w/inc** 9.3% 30.3%
</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 Cap 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 small market capitalization. Past performance is no
guarantee of future results.
The Oakmark Small Cap Fund 13
<PAGE>
................................................................................
when supported by capable professionals. We are very fortunate to have a truly
outstanding group of experienced investment professionals. I want to thank all
of them for their contribution to this past year's investment results. Simply
put Philosophy + People = Performance (of course, a little good luck does not
hurt).
As the new fiscal year begins, we are encouraged by the investment opportunities
we see and continue to be able to invest the Fund's assets in a prudent manner.
Although the Fund is considerably larger than a year ago, our long-term
investment horizon and emphasis on low turnover allows us to manage a larger
asset base. We are not uncomfortable with the current asset size or the flow of
money in (and out) of the Fund, but will continue to monitor this situation. We
are committed to remaining consistent in the implementation of our investment
philosophy.
Last year I referred to a major financial periodical that listed their 100 most
attractive small company investments. I noted that not one of our holdings in
the Fund was a part of that list. I am pleased to see, and take comfort in
knowing, that list was published again recently and not one of our holdings was
included. We continue to seek out the unknown, undiscovered, and underfollowed
investment opportunities.
Once again, I would like to thank everyone involved, especially our
shareholders, for your support of The Oakmark Small Cap Fund.
/s/ Steven J. Reid
- ------------------
Steven. J. Reid
Portfolio Manager
[email protected]
October 10, 1997
14 The Oakmark Small Cap Fund
<PAGE>
The Oakmark Small Cap Fund
Schedule of Investments--September 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Held Market Value
- ----------------------------------------------------------------------------------------------
Common Stocks--91.9%
<S> <C> <C>
Food & Beverage--6.3%
Ralcorp Holdings, Inc. (a) (c) 3,000,000 $56,062,500
International Multifoods Corporation (c) 1,032,000 30,637,500
M & F Worldwide Corp. (a) 917,600 8,717,200
------------
95,417,200
Retail--4.5%
Cole National Corporation (a) (c) 1,000,000 $41,562,500
Carson Pirie Scott & Company (a) 511,500 20,172,281
Ugly Duckling Corporation (a) 375,000 5,718,750
------------
67,453,531
Other Consumer Goods & Services--8.5%
Triarc Companies, Inc. (a) (c) 1,650,500 $33,216,312
Scotsman Industries, Inc. (c) 1,050,000 27,037,500
First Brands Corporation 1,000,000 26,750,000
GC Companies, Inc. (a) 310,000 13,330,000
Standard Motor Products, Inc. 511,400 11,953,975
Barry (R.G.) Corporation (a) (c) 588,700 8,278,594
USA Detergents, Inc. (a) 413,200 5,319,950
Justin Industries 207,400 2,786,938
------------
128,673,269
Banks--8.3%
PeopleOs Bank of Bridgeport, Connecticut 2,840,000 $ 91,057,500
BankAtlantic Bancorp, Inc., Class A 926,700 14,363,850
Northwest Savings Bank 295,000 7,559,375
Harbor Federal Savings Bank 100,000 5,600,000
Pocahontas Federal Savings and Loan Association (c) 140,000 4,620,000
Savings Bank of the Finger Lakes (c) 94,000 2,256,000
------------
125,456,725
Insurance--13.2%
RenaissanceRe Holdings Limited (c) 1,421,800 $ 62,470,337
Financial Security Assurance Holdings Ltd. 871,700 40,534,050
PXRE Corporation (c) 1,186,000 37,433,125
Chartwell Re Corporation (c) 900,000 31,950,000
Highlands Insurance Group, Inc. (a) (c) 1,100,000 26,812,500
------------
199,200,012
Other Financial--0.6%
Duff & Phelps Credit Rating Company (c) 296,800 $ 9,497,600
Broadcasting & Publishing--7.4%
Cablevision Systems Corporation (a) 650,600 $ 40,825,150
TCI Satellite Entertainment, Inc., Class A (a) (c) 3,800,000 28,737,500
Ascent Entertainment Group, Inc. (a) (c) 1,650,000 18,975,000
Lee Enterprises, Inc. 500,000 14,187,500
Granite Broadcasting Corporation (a) 800,000 9,500,000
------------
112,225,150
</TABLE>
See accompaning notes to financial statements.
The Oakmark Small Cap Fund 15
<PAGE>
The Oakmark Small Cap Fund
Schedule of Investments--September 30, 1997 cont.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Held Market Value
- ----------------------------------------------------------------------------------------------
Common Stocks--91.9% (cont.)
<S> <C> <C>
Telecommunications--0.0%
UNR Industries, Inc. 95,000 $ 475,000
Data Storage--2.9%
Imation Corporation (a) 1,641,300 $ 43,802,194
Aerospace & Defense--2.5%
Tracor, Inc. (a) 1,236,000 $ 38,007,000
Machinery & Metal Processing--6.2%
The Carbide/Graphite Group, Inc. (a) (c) 800,000 $ 27,200,000
Essex International, Inc. (a) 400,000 15,400,000
Atchison Casting Corporation (a) (c) 710,400 15,096,000
Northwest Pipe Company (a) (c) 520,000 14,040,000
Matthews International Corporation, Class A 333,500 13,256,625
DT Industries, Inc. 190,500 6,286,500
Wolverine Tube, Inc. (a) 88,300 2,770,413
--------------
94,049,538
Building Materials & Construction--2.9%
NVR Inc. (a) (c) 1,000,000 $ 26,000,000
Dal-Tile International Inc. (a) 881,600 13,224,000
Triangle Pacific Corporation (a) 146,100 5,076,975
--------------
44,300,975
Oil & Natural Gas--2.4%
Titan Exploration, Inc. (a) (c) 3,000,000 $ 36,000,000
Other Industrial Goods & Services--12.7%
MagneTek, Inc. (a) (c) 2,400,000 $ 53,700,000
SPX Corporation (c) 900,000 52,762,500
Gardner Denver Machinery, Inc. (a) (c) 900,000 30,318,750
Zurn Industries, Inc. (c) 682,000 23,614,250
Columbus McKinnon Corporation (c) 808,400 21,220,500
Binks Sames Corporation (c) 222,000 9,657,000
Binks Sames Corporation, Restricted Shares (c) 28,000 1,071,840
--------------
192,344,840
Commercial Real Estate--6.9%
Catellus Development Corporation (a) 3,383,000 $ 70,197,250
Castle & Cooke, Inc. (a) (c) 1,440,000 28,260,000
Wellsford Real Properties Inc. (a) 397,100 6,353,600
--------------
104,810,850
Diversified Conglomerates--6.6%
U.S. Industries, Inc. 3,432,500 $ 99,542,500
Total Common Stocks (Cost: $1,082,594,870) 1,391,256,384
</TABLE>
16 The Oakmark Small Cap Fund
<PAGE>
THE OAKMARK SMALL CAP FUND
<TABLE>
<CAPTION>
Schedule of Investments--September 30, 1997 cont.
.................................................................................................................
Principal Value Market Value
- -----------------------------------------------------------------------------------------------------------------
Fixed Income--0.2%
Corporate Bonds--0.2%
Recreation & Entertainment--0.2%
<S> <C> <C>
Harrah's Jazz Bonds, 14.25% due 11/15/2001(b) $ 6,700,000 $ 2,604,625
--------------
Total Fixed Income (Cost: $3,304,413) 2,604,625
Short Term Investments--7.8%
U.S. Government Bills--2.0%
United States Treasury Bills, 1.00%-5.34%
due 10/9/1997-3/5/1998 $30,000,000 $ 29,728,421
--------------
Total U.S. Government Bills 29,728,421
Commercial Paper--5.3%
American Express Credit Corp., 5.52%-5.56%
due 10/1/1997-10/3/1997 $30,000,000 $ 30,000,000
Ford Motor Credit Corp., 5.54%-5.60% due
10/6/1997-10/7/1997 20,000,000 20,000,000
General Electric Capital Corporation,
5.56%-5.67% due 10/1/1997-10/3/1997 30,000,000 30,000,000
--------------
Total Commercial Paper 80,000,000
Repurchase Agreements--0.5%
State Street Repurchase Agreement,
5.95% due 10/1/1997 8,212,000 $ 8,212,000
--------------
Total Repurchase Agreements 8,212,000
Total Short Term Investments (Cost: $117,940,192) 117,940,421
Total Investments (Cost $1,203,839,475)-99.9% (d) 1,511,801,430
Other assets in excess of other liabilities-0.1% 1,594,210
--------------
Total Net Assets-100% $1,513,395,640
==============
</TABLE>
(a) Non-income producing security.
(b) This bond is currently in default, and the fund is no longer accruing
interest.
(c) See footnote number six in the Notes of Financial Statements regarding
transactions in affiliated issuers.
(d) At September 30, 1997, net unrealized appreciation of $307,961,955 for
federal income tax purposes consisted of gross unrealized appreciation of
$314,125,673 and gross unrealized depreciation of $6,163,718.
See accompanying notes to financial statements.
THE OAKMARK SMALL CAP FUND 17
<PAGE>
The Oakmark Equity and Income Fund
Report from Clyde S. McGregor, Portfolio Manager
.................................................................
[PHOTO APPEARS HERE]
Fiscal 1997 Results
Welcome to the second annual report for The Oakmark Equity and Income Fund. Our
first fiscal year lasted the usual 12 months, but for reasons explained
elsewhere, fiscal 1997 ended after only eleven. The return of 31.2% in the
period, however, nearly tripled what we had accomplished in 12 months in the
first year. I would like to be able to argue that this outcome derived from our
putting in 12 months of work into an 11-month year, but the real explanation is
that this period has been unusually blessed, particularly for equity investors.
Looking at more conventional measurement periods, your Fund's (and mine--my
family is still by far the largest shareholder) return of 25.5% for the nine
months ended September 30 places it 3rd among the 351 funds of its type. The 12
month result was 33.3%, ranking 5th in the category. I am quite pleased with
this outcome and wish to thank all who have contributed.
- --------------------------------------------------------------------------------
The value of a $10,000 investment in the Oakmark Equity and Income Fund from its
inception (11/1/95) to present (9/30/97) as compared to the Lipper Balanced Fund
Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Average Annual Total Return*
9/30/97 NAV $14.49 Through 9/30/97
Total Return From Fund Inception
Last 2 mos. 11/1/95
- -------------------------------------------------------------------------------------------
<S> <C> <C>
The Oakmark Equity & Income Fund 3.7% 22.7%
Lipper Balanced Fund Index** 0.7% 19.2%
Lehman Govt./Corp. Bond** 0.4% 6.5%
S&P 500 w/inc** -0.4% 31.7%
</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 indices. The S&P 500 is a broad
market-weighted average dominated by blue-chip stocks. Past performance is no
guarantee of future results.
Firms Where Managers Shave Their Heads When the Stock Goes Up
In early August I was riding in an airplane when I noticed that the gentleman
with extremely short hair seated next to me was opening a folder marked
"Catellus." Since Catellus is one of your Fund's important holdings (and a quite
unusual word), I inquired as to whether he worked for the company. The gentleman
turned out to be Ted Antenucci, a vice president of development at Catellus.
Catellus is basically a large pool of real estate assets originally granted to
the Santa Fe Railroad in the mid-1800s as part of the effort to develop the
American West. We own the stock because of both its undervaluation compared to
the company's asset value and our belief that the relatively new management team
will put these assets to good use in an improving real estate environment.
Back to Ted. When Ted discovered that I represented a firm which was one of the
largest shareholders of his company,
18 The Oakmark Equity and Income Fund
<PAGE>
................................................................................
he proceeded to tell me the story of why his haircut made him look as though he
had recently enrolled at a military academy. Ted joined Catellus three years ago
when the stock was trading for $6/share. Nelson Rising, newly installed as CEO
of Catellus, recruited Ted to join the company, and during this process Nelson
repeatedly expressed great confidence in the prospects for Catellus' stock. Ted
accepted the job offer but remarked that should the stock ever actually reach
$20/share, he would shave his head. In early July of this year with the stock at
$18.50 Ted received a package in the mail. It turned out to be a deluxe shaving
set, a gift from Nelson. In August the stock hit $20, and Ted, a man of his
word, shaved his head.
Now "willingness of managers to shave their heads if their stock goes up" is not
one of the criteria which we normally use for stock selection. It probably
should be. We like companies with this kind of team spirit, where having fun
while doing one's job is important. Catellus has been an excellent holding for
your Fund, first in the form of a convertible preferred stock, now as the
common. I salute Ted, Nelson, and the rest of the Catellus management team for
their success and the corporate culture which has helped to make it possible.
Mighty Oaks Awards
Last year I shamelessly copied my partner Robert Sanborn of The Oakmark Fund and
issued awards to each of the analysts who had produced the single most
successful stock and bond ideas for your fund. I will continue that tradition
for fiscal 1997, though given its 11-month time frame, I worry that the results
are not really comparable.
Before announcing the awards, however, I must digress concerning the Mighty
Oaks. Long-time readers may recall that "Mighty Oaks" is the name given to our
firm's various athletic teams. This year's softball team had a season which
resembles the stock market record of some of our investments. For most of the
season the Oaks had a tough time, entering the playoffs with a losing record. In
the playoffs, however, the team came together, eventually losing the
championship game by one run on a perfect throw to home plate. Many of our
stocks have periods like this where they look undistinguished but blossom when
it is most important. Hats (Oakmark hats) off to the Oaks for their playoff run.
Now for the awards. Regrettably, I find that both of my award winners are
repeaters. Many good ideas contributed to the Fund's results for fiscal 1997,
but under the rules I must again recognized two of my fellow fund managers,
Steve Reid (Oakmark Small Cap) for First USA/Banc One common stock, and Bill
Nygren (Oakmark Select) for Telecommunications preferred stock.
I have previously written concerning Banc One's acquisition of First USA. We
continue to hold the Banc One shares which we received in the merger because we
perceive the stock to be undervalued. As well, we are quite optimistic
concerning the impact of First USA's management on Banc One's all-important
consumer banking division.
The common shares of Telecommunications and its offspring (e.g. Liberty Media)
have been significant holdings for Harris Associates for many years. Bill Nygren
also identified the company's preferred stock as offering above-average
opportunity for a high-yield security. During fiscal 1997 investors regained
their confidence in Telecommunications' financial stability, with the result
that the preferred provided a total return of more than 50% to the Fund.
Since Bill and Steve are repeat winners, I don't know if another Mighty Oaks T-
shirt will be as exciting a prize as it was a year ago. Perhaps softballs
autographed by this year's near-champion Mighty Oaks squad?
Thanks for your support in fiscal 1997. Please feel free to e-mail me with your
comments, questions, or ideas for quarterly reports.
/s/ Clyde S. McGregor
Clyde S. McGregor
Portfolio Manager
[email protected]
October 8, 1997
The Oakmark Equity and Income Fund 19
<PAGE>
The Oakmark Equity and Income Fund
Schedule of Investments--September 30, 1997
................................................................................
<TABLE>
<CAPTION>
Shares Held Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity and Equivalents--61.6%
Food & Beverage--2.0%
Philip Morris Companies Inc. 16,100 $ 669,156
Office Equipment--2.6%
Lexmark International Group, Inc., Class A (a) 26,000 858,000
Other Consumer Goods & Services--9.7%
Juno Lighting, Incorporated 61,300 $ 1,049,762
First Brands Corporation 31,000 829,250
National Presto Industries, Inc. 17,000 715,063
Armstrong World Industries, Inc. 9,600 643,800
-----------
3,237,875
Banks--5.0%
Banc One Corporation 17,022 $ 950,040
Mellon Bank Corporation 13,400 733,650
-----------
1,683,690
Insurance--6.2%
PartnerRe Ltd. 25,000 $ 1,076,563
Old Republic International Corporation 25,500 994,500
-----------
2,071,063
Broadcasting & Publishing--9.0%
Tele-Communications, Liberty Media, Class A (a) 35,200 $ 1,053,800
Dun & Bradstreet Corporation 35,000 993,125
Lee Enterprises, Inc. 33,900 961,912
-----------
3,008,837
Automotive--8.0%
Chrysler Corporation 30,000 $ 1,104,375
Borg-Warner Automotive, Inc. 15,000 853,125
Lear Corporation 15,000 738,750
-----------
2,696,250
Aerospace & Defense--2.3%
The Boeing Company 14,300 $ 778,456
Machinery & Metal Processing--3.0%
General Signal Corporation 23,000 $ 994,750
Other Industrial Goods & Services--3.0%
Premark International, Inc. 31,500 $ 1,008,000
Commercial Real Estate--7.0%
Catellus Development Corporation (a) 48,228 $ 1,000,731
LaSalle Partners, Inc. (a) 20,000 700,000
Equity Office Properties Trust (a) 19,000 644,813
-----------
2,345,544
</TABLE>
20 The Oakmark Equity and Income Fund
<PAGE>
The Oakmark Equity and Income Fund
Schedule of Investments--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
Shares Held/
Principal Value Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Equity and Equivalents--61.6% (cont.)
Diversified Conglomerates--3.2%
U.S. Industries, Inc. 36,750 $ 1,065,750
Total Equity and Equivalents (Cost: $15,285,783) 20,417,371
Convertible Preferred Stock--0.6%
Insurance--0.6%
American Heritage Life Investment Corporation,
Preferred, 8.50% 3,000 $ 186,000
Total Convertible Preferred Stock (Cost: $150,000) 186,000
Fixed Income--35.5%
Preferred Stock--5.9%
Banks--3.0%
BBC Capital Trust Preferred, 9.50% 21,200 $ 551,200
RBI Capital Trust Preferred, 9.10% 42,500 440,938
----------
992,138
Broadcasting & Cable TV--1.5%
Tele-Communications, Inc.,
Preferred Junior Class B, 6.00% 5,800 $ 498,800
Other Industrial Goods & Services--1.4%
James River Corporation of Virginia,
Preferred Series O, 8.25% 20,000 $ 490,000
Total Preferred Stock (Cost: $1,857,125) 1,980,938
Corporate Bonds--3.3%
Other Consumer Goods & Services--0.7%
Samsonite Corporation, 11.125% due 7/15/2005,
Senior Subordinated Notes Series B $200,000 $ 229,000
Aerospace & Automotive--0.6%
Coltec Industries, Inc., 9.75% due 4/1/2000 $150,000 $ 160,500
Coltec Industries, Inc., 9.75% due 11/1/1999 25,000 26,531
----------
187,031
Building Materials & Construction--0.5%
USG Corporation, 9.25% due 9/15/2001,
Senior Notes Series B $150,000 $ 161,625
</TABLE>
See accompanying notes to financial statements.
The Oakmark Equity and Income Fund 21
<PAGE>
The Oakmark Equity and Income Fund
Schedule of Investments--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
Principal Value Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Fixed Income--35.5% (cont.)
Corporate Bonds--3.3% (cont.)
Utilities--0.5%
Midland Funding Corporation, 11.75%
due 7/23/2005 $ 150,000 $ 177,000
Other Industrial Goods & Services--1.0%
UCAR Global Enterprises Inc., 12.00% due
1/15/2005, Senior Subordinated Note $ 300,000 $ 342,750
Total Corporate Bonds (Cost: $1,053,099) 1,097,406
Government and Agency Securities--26.3%
U.S. Government Bonds--25.4%
United States Treasury Notes,
7.125% due 9/30/1999 $3,300,000 $ 3,380,091
United States Treasury Notes,
7.50% due 5/15/2002 2,750,000 2,913,515
United States Treasury Notes,
7.875% due 11/15/2004 2,000,000 2,198,700
-----------
8,492,306
U.S. Government Agencies--0.9%
Federal Home Loan Bank, 6.405%
due 4/10/2001, Consolidated Bond $ 300,000 $ 302,478
Total Government and Agency Securities (Cost: $8,672,256) 8,794,784
Total Fixed Income (Cost: $11,732,480) 12,059,128
</TABLE>
22 The Oakmark Equity and Income Fund
<PAGE>
The Oakmark Equity and Income Fund
Schedule of Investments--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
Principal Value Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Short Term Investments--4.1%
U.S. Government Bills--0.8%
United States Treasury Bills,
5.07% due 10/16/1997 $250,000 $ 249,472
-----------
Total U.S. Government Bills 249,472
Commercial Paper--2.2%
American Express Credit Corp.,
5.58% due 10/6/1997 $250,000 $ 250,000
General Electric Capital Corporation,
5.56%-5.67% due 10/2/1997-10/3/1997 500,000 500,000
-----------
Total Commercial Paper 750,000
Repurchase Agreements--1.1%
State Street Repurchase Agreement,
5.95% due 10/1/1997 $381,000 $ 381,000
-----------
Total Repurchase Agreements 381,000
Total Short Term Investments (Cost: $1,380,472) 1,380,472
Total Investments (Cost $28,398,735)--101.2% (b) $33,856,971
Other liabilities in excess of other assets--(1.2)% (394,458)
-----------
Total Net Assets--100% $33,462,513
===========
</TABLE>
(a) Non-income producing security.
(b) At September 30, 1997, net unrealized appreciation of $5,458,236 for federal
income tax purposes consisted of gross unrealized appreciation of $5,505,006
and gross unrealized depreciation of $46,770.
See accompanying notes to financial statements.
The Oakmark Equity and Income Fund 23
<PAGE>
THE OAKMARK INTERNATIONAL FUND
Report from David G. Herro and Michael J. Welsh, Portfolio Managers
...........................................................................
[PHOTOS APPEAR HERE]
- --------------------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS
INCEPTION (9/30/97) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
[GRAPH APPEARS HERE]
9/30/97 NAV $18.77
<TABLE>
<CAPTION>
Average Annual Total Return*
Through 9/30/97
Total From Fund
Return Inception
Last 2 mos. 9/30/92
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
The Oakmark International Fund 1.4% 18.4%
Morgan Stanley World ex U.S. w/inc** -2.2% 12.5%
Morgan Stanley EAFE w/inc** -2.3% 12.3%
Lipper Analytical International Fund Average** -1.3% 14.8%
</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 or funds
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 30 mutual funds that invest in securities
whose primary markets are outside the United States. Past performance is no
guarantee of future results.
Fellow Shareholders,
We are pleased to be able to present our annual and five-year report with such
positive results. First, The Oakmark International Fund has earned a five-year
average annual rate of return of 18.4% compared to 14.8% for The Lipper
Analytical International Fund Average and 12.5% for The Morgan Stanley World ex
U.S. index. This return puts it in the top 10 percent of all diversified
international funds. Furthermore, for the eleven-month fiscal year ended
September 30, 1997, the fund was up 27.2%, also comparing well to Morgan and
Lipper which were up 13.8% and 22.7%, respectively. Finally, Morningstar has
rated your fund a 5 star fund, their highest rating given to mutual funds.
How We Did It...
During the past five years, international investors have been subjected to all
kinds of volatility: devaluations, revaluations, market surges, market crashes,
etc, etc. For some, this would make the international market place unattractive.
As bona fide long-term investors, however, we view the volatility of the
environment as positive. For it is this volatility which is responsible for
giving us long-term investment opportunity!
As you have heard numerous times, we are disciplined value investors. We search
for companies that are selling at discounts to their underlying economic value
and that have managements that are proven value builders who are committed to
continue adding value. We are successful because we stick to this philosophy
through thick and thin. We do not believe in "stock of the day", "coun-
24 THE OAKMARK INTERNATIONAL FUND
<PAGE>
................................................................................
try of the day" or "currency of the day". We do believe in spending countless
hours analyzing what is analyzable: the value of a business. We are also big
believers in the quality of our research... if we like an idea, it can easily
become 3-5% of our fund. There will be periods during which we will soar and
periods in which we will lag, but over time we remain very confident that our
approach will continue to yield solid, long-term results.
The World We Live In...
Though international equities have under-performed domestic equities recently,
we still believe the environment is positive for higher returns in the future.
The "owner oriented revolution" that hit the American board room in the 80's and
90's is spreading throughout the globe. This is extremely positive for
international investors. In Europe, for example, where the word "profit" was a
four letter word, there is a growing belief in the obvious: that companies are
owned by shareholders and that they should be managed for the owners' benefit.
Simple concept as it is, it took a long time for the industrial titans of Europe
to come to this realization. In fact, sadly, their Japanese counterparts are
becoming believers at a much slower pace.
New Labour,
No Danger?
The clearest example of the nouveau capitalist revolution is what has
happened/is happening in the United Kingdom. It was only 20 years ago that most
of the major industry in Britain was owned by the government. From steel to
airlines to banks to aerospace companies the "British" before their names meant
it was owned by the government. Under Prime Minister Thatcher, it all changed
and today, as a direct result of the free market reforms instituted over the
years, Britain has both the most attractive stock market and economy in Europe.
Even though Thatcher's party lost the last election and is now out of
government, the new Labour government headed by Tony Blair has abandoned its
socialist past and seemingly has embraced the notion that it is the private
sector, not the public, that creates societies' wealth. Blair has courageously
stood up to some of the dinosaurs in his own party to implement a new, free
market type of attitude within the government.
Asian Update
Prompted by the recent collapse of share and currency prices, we have spent the
last three weeks in Asia meeting with dozens of companies. As part of our usual
investigations, we were interested in the various managements' views on the
current macroeconomic situation. We came away convinced that although the short-
term will continue to be very volatile, there are significant long-term value
opportunities in the region.
On the ground, it was apparent to us that the difficulties in the various
financial sectors, particularly in Malaysia and Korea, would not significantly
adversely impact the long-term prosperity of many of the companies we met with.
Foreign investor sentiment has turned uniformly bearish: Many so-called market
experts have recently put a "sell" on the region, after being giddily bullish at
much higher prices and valuation levels. Many companies, especially in Hong
Kong, are viewing the current situation as an opportunistic time to purchase
their own shares.
To reiterate what we say constantly (and even earlier in this letter!), short-
term volatility often provides long-term opportunity.
Finally, Thanks!
We would like to end by saying "thank you" to our shareholders by entrusting us
with your hard-earned money. We will continue to work hard to grow it in a
meaningful way and we do believe that current investment values will mean
another 5 good years.
/s/ David Herro
David Herro
Portfolio Manager
[email protected]
/s/ Michael J. Welsh
Michael J. Welsh
Co-Portfolio Manager
[email protected]
October 16, 1997
THE OAKMARK INTERNATIONAL FUND 25
<PAGE>
The Oakmark International Fund
International Diversification--September 30, 1997
.........................................................................
[PIE CHART APPEARS HERE]
% of Fund
Net Assets
- ------------------------------
Europe 51.7%
Great Britain 23.2%
France 8.3%
Sweden 5.9%
Italy 5.8%
Switzerland 4.5%
Netherlands 2.0%
Finland 1.3%
Spain 0.4%
Germany 0.3%
Latin America 14.3%
Brazil 7.9%
Argentina 4.9%
Panama 1.3%
Mexico 0.2%
Pacific Rim 24.9%
Hong Kong 8.8%
New Zealand 5.6%
Japan 4.0%
Korea 2.2%
Australia 1.9%
Malaysia 1.9%
Singapore 0.3%
Thailand 0.2%
Other Countries 3.2%
Israel 3.2%
26 The Oakmark International Fund
<PAGE>
THE OAKMARK INTERNATIONAL FUND
Schedule of Investments--September 30, 1997
................................................................................
<TABLE>
<CAPTION>
Description Shares Held Market Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--94.1%
Consumer Non-Durables--8.0%
Fila Holding S.p.A. Athletic Footwear
(Italy), (b)(e) Manufacturing 1,643,600 $ 50,848,875
Chargeurs International Sa Wool Production Holding
(France), (a)(e) Company 673,084 44,587,497
Yue Yuen Industrial Holdings Athletic Footwear
(Hong Kong) Manufacturing 12,345,600 31,749,475
BYC Co. Ltd. (Korea), (e) Textile Manufacturer 37,070 3,686,743
------------
130,872,590
Food & Beverage--21.0%
Quilmes Industrial SA Brewer
(Argentina), (e) 5,191,700 $ 80,471,350
Nestle SA (Switzerland) Producer of Foods & Drinks 40,900 56,974,285
Guinness plc (Great Britain) Distiller & Brewer 5,785,000 54,523,990
Tate & Lyle PLC Sugar Producer & Distributor
(Great Britain) 7,610,000 54,054,309
Lion Nathan Limited New Zealand Brewer
(New Zealand) 21,462,700 52,525,290
Pernod Ricard (France) Manufactures Wines,
Spirits, & Fruit Juices 652,579 32,559,376
Lotte Confectionery Confection Manufacturer
Company (Korea) 65,270 9,986,667
Lotte Chilsung Beverage Manufacturer of Soft Drinks,
Company (Korea) Juices, & Sport Drinks 44,770 5,333,257
------------
346,428,524
Household Products--2.1%
Amway Japan Limited (Japan) Marketing of Household
Products 1,116,700 $ 32,019,409
Amway Japan Limited Marketing of Household
(Japan), (b) Products 152,400 2,190,750
------------
34,210,159
Retail--1.6%
Giordano International East Asian Clothing Retailer
Limited (Hong Kong), (e) & Manufacturer 41,253,000 $ 26,656,113
Other Consumer Goods & Services--2.2%
Sankyo Company Ltd. (Japan) Pachinko Machine
Manufacturer 1,070,800 $ 22,184,471
Heiwa Corp (Japan) Pachinko Machine
Manufacturer 486,000 9,303,555
Mandarin Oriental Hotel Management
International
Limited (Singapore) 4,400,000 4,444,000
------------
35,932,026
</TABLE>
See accompanying notes to financial statements.
THE OAKMARK INTERNATIONAL FUND 27
<PAGE>
THE OAKMARK INTERNATIONAL FUND
Schedule of Investments--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
Description Shares Held Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--94.1% (cont.)
Telecommunications--9.6%
Telecom Italia SpA (Italy) Telecommunications 6,790,000 $ 45,236,508
Bezeq (Israel) Telephone Company 13,529,271 39,607,678
Technology Resources Telecommunications
Industries Berhad (Malaysia) 26,163,500 31,774,429
Asia Satellite Telecommunications
Telecommunications
Holdings Ltd.
(Hong Kong), (a) 753,000 21,554,625
Telecomunicacoes Telecommunications
Brasileiras S/A (Brazil) 173,100,000 19,987,358
------------
158,160,598
Transportation--3.8%
AB Volvo (Sweden) Automobiles and Trucks 2,207,600 $ 63,282,109
Transportation Services--1.1%
Danzas Holding AG Freight Distributor
(Switzerland), (a) 82,500 $ 17,612,933
Banks--7.0%
Compagnie Financiere de French Financial
Paribas (France) Services Group 446,000 $ 33,077,967
Uniao de Bancos Brasileiros Major Brazilian Bank
S.A. (Brazil), (a) (c) 855,500 31,332,688
Uniao de Bancos Brasileiros Major Brazilian Bank
SA (Brazil) 583,825,000 20,788,657
Banco Latinoamericano de Multinational Bank
Exportaciones, S.A.
Class E (Panama), (b) 461,300 20,643,175
Banco Popular Espanol SA Large Spanish Bank
(Spain) 109,972 7,072,628
Grupo Financiero Bancomer, Large Mexican Financial
S.A. de C.V.-L (Mexico), (a) Group 6,129,630 3,076,648
------------
115,991,763
Other Financial--4.6%
Sedgwick Group plc Insurance Broker,
(Great Britain), (e) Financial Services 32,625,000 $ 65,759,770
Colonial Limited Diversified Financial
(Australia), (a) Services Group 2,791,000 9,212,799
------------
74,972,569
Marketing Services--4.6%
Cordiant plc Global Advertising Agency
(Great Britain), (e) 38,585,156 $ 75,906,653
</TABLE>
28 THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
Schedule of Investments--September 30, 1997 cont.
<TABLE>
<CAPTION>
............................................................................................................
Description Shares Held Market Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--94.1% (cont.)
Broadcasting & Publishing--0.9%
Europe 1 Communication Media
(France) 66,327 $ 14,589,894
Aerospace--3.8%
Rolls-Royce plc (Great Britain) Jet Engines 7,744,085 $ 31,967,585
Hong Kong Aircraft Commercial Aircraft Overhaul
Engineering Company Ltd. & Maintenance
(Hong Kong), (e) 9,521,000 30,883,574
------------
62,851,159
Chemicals--4.4%
Fernz Corporation Ltd. Agricultural & Industrial
(New Zealand), (e) Chemical Producer 11,611,800 $ 40,171,130
European Vinyls Corporation PVC Manufacturer
International N.V.
(Netherlands), (e) 1,395,665 32,957,974
------------
73,129,104
Components--1.8%
Varitronix International Liquid Crystal Displays
Limited (Hong Kong), (e) 15,249,000 $ 29,165,831
Mining & Building Materials--2.6%
Pioneer International Concrete Products, Aggregates
(Australia) 6,585,176 $ 22,439,713
Keumkang Ltd. (Korea), (e) Building Materials 360,000 16,327,869
Siam City Cement Public Cement Producer
Company Limited (Thailand) 1,006,600 3,604,903
------------
42,372,485
Other Industrial Goods & Services--7.0%
Tomkins plc (Great Britain) Industrial Management
Company 14,400,000 $ 81,153,905
Kone Corporation (Finland) Elevators 161,870 20,956,719
Legris Industries Crane Manufacturer
(France) 195,097 7,925,358
Buderus AG (Germany) Industrial Manufacturing Firm 9,000 4,584,171
Tae Young Corporation (Korea) Heavy Construction 20,000 679,781
------------
115,299,934
Steel--5.6%
Usiminas (Brazil) Steel Production 5,363,370 $ 58,600,282
Avesta Sheffield AB (Sweden) Stainless Steel 3,575,000 34,159,802
------------
92,760,084
See accompanying notes to financial statements. THE OAKMARK INTERNATIONAL FUND 29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The Oakmark International Fund
Schedule of Investments--September 30, 1997 cont.
.............................................................................................
Shares Held/
Description Principal Value Market Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--94.1% (cont.)
Diversified Conglomerates--2.4%
Securicor plc (Great Britain) Diversified Consumer Services
Company 4,274,500 $ 18,610,106
Koor Industries Limited
(Israel), (b) Israeli Holding Company 622,100 12,830,812
Lamex Holdings Ltd. Hong Kong's Largest Office
(Hong Kong), (e) Furniture Supplier 14,040,000 4,808,219
Compagnie Generale des Industrial Services
Eaux (France) 25,000 2,941,350
Koor Industries Limited Israeli Holding Company
(Israel) 5,660 588,217
--------------
39,778,704
Total Common Stocks
(Cost: $1,395,926,326) 1,549,973,232
Short Term Investments--5.1%
U.S. Government Bills--0.9%
United States Treasury Bills, 5.34%-5.47%
due 10/16/1997-10/23/1997 $15,000,000 $ 14,955,940
Commercial Paper--3.6%
American Express Credit Corp., 5.48%-5.52%
due 10/3/1997-10/9/1997 $20,000,000 $ 20,000,000
Ford Motor Credit Corp., 5.51%-6.15%
due 10/1/1997-10/3/1997 20,000,000 20,000,000
General Electric Capital Corporation, 5.56%-5.58%
due 10/1/1997-10/3/1997 20,000,000 20,000,000
--------------
60,000,000
Repurchase Agreements--0.6%
State Street Repurchase Agreement, 5.95% due 10/1/1997 $10,002,000 $ 10,002,000
Total Short Term Investments (Cost: $84,957,940) 84,957,940
Total Investments (Cost $1,480,884,266)--99.2% (f) $1,634,931,172
Foreign Currencies (Proceeds $1,618,842)--0.1% 1,622,273
Other assets in excess of other liabilities--0.7% (d) 10,794,086
--------------
Total Net Assets--100% $1,647,347,531
==============
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depository Receipt.
(c) Represents a Global Depository Receipt.
(d) Includes portfolio and transaction hedges.
(e) See footnote number six in the Notes to Financial Statements regarding
transactions in affiliated issuers.
(f) At September 30, 1997, net unrealized appreciation of $154,050,337 for
federal income tax purposes consisted of gross unrealized appreciation of
$221,535,239 and gross unrealized depreciation of $67,484,902.
See accompanying notes to financial statements.
30 The Oakmark International Fund
<PAGE>
The Oakmark International
Small Cap Fund
Report from David G. Herro and Michael J. Welsh, Portfolio Managers
[PHOTOS APPEAR HERE]
The Value of a $10,000 investment in The Oakmark International Small Cap Fund
from its inception (11/1/95) to present (9/30/97) as compared to the Morgan
Stanley World ex U.S. Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
9/30/97 NAV $12.20
Average Annual Total Return*
Through 9/30/97
Total From Fund
Return Inception
Last 2 mos. 11/1/95
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Oakmark International Small Cap Fund -4.4% 13.1%
Morgan Stanley World ex U.S. w/inc** -2.2% 13.1%
Lipper Analytical International Fund Average** -1.3% 18.4%
Micropal International Small Co. Fund Index** -1.7% 14.2%
</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 or funds
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 30 mutual funds that invest in securities whose primary markets are
outside the United States. The Micropal Int'l Small Co. Fund Index sector
average is an unweighted index comprised of all funds within the international
small company fund sector. Past performance is no guarantee of future results.
Fellow Shareholders:
Since inception, The Oakmark International Small Cap Fund has achieved an
average annual return of 13.1%, compared to 13.1% and 14.2% for the Morgan
Stanley World ex US and Micropal Intl Small Co. Fund indices, respectively. For
the eleven-month fiscal year ended September 30, 1997, the Fund achieved a
return of 11.1%, compared with returns of 13.8% and 13.8% for the Morgan Stanley
World ex US and Micropal International Small Cap indices.
Small Caps Continue to Underperform the Big Guys
While The Oakmark International Small Cap Fund has performed in line with
similar international small cap funds this year, it has underperformed the
Oakmark International Fund and the EAFE index. The primary reason is that share
prices of large capitalization companies have continued to outperform those of
small caps around the world. As a result we continue to see tremendous value in
this sector.
One stark example of divergent performance is in the Japanese market. The Nikkei
225 index, the proxy for large cap stocks in Japan, is basically flat in local
currency terms over the past five years. In contrast the smaller market
indicies, the JASDAQ and the OTC, are both down around 30%. Most of this
underperformance has taken place over the last twelve months: the Nikkei 225 is
down 15% in local terms, while the JASDAQ and OTC indicies are down 40%.
The Oakmark International Small Cap Fund 31
<PAGE>
................................................................................
We are seeing this divergence as a common pattern around the globe. As value
investors with a long-term time horizon we can take advantage of the tremendous
opportunities we see in some of these markets.
Our investment process and criteria are the same for The Small Cap Fund as in
Oakmark International; it is simply a different investment universe. The vast
majority of our holdings in The Oakmark International Small Cap Fund have a
market cap below $500 million). And as we've frequently mentioned, the
geographic allocation of the portfolio is simply a function of stock selection,
not a top-down macroeconomic "bet". A good illustration of this point is the
difference in the portfolio weightings of Japanese companies between Oakmark
International with 4.0% of its portfolio in Japanese stocks and Oakmark
International Small Cap with 9.5%. We have found more companies which meet our
criteria in the small cap area than in the large cap area.
Excellent Long-term Opportunities
The size of The Oakmark International Small Cap Fund is significantly smaller
than that of The Oakmark International Fund. One of the advantages of the
current asset size is the concentration we are able to achieve in our favorite
ideas without incurring large trading costs (especially moving the share price
when buying and selling). We are convinced that over a reasonable time horizon
the prices of these companies will converge with their underlying value. We
continue to believe that this fund has great potential to earn excess returns
for shareholders.
Asia Will Be Fine...
Your fund has been adversely impacted by the instability which hit the Asian
markets this summer and fall resulting in weaker Asian currencies and sharply
lower share prices. Profligate credit expansion over the past few years helped
fuel a property glut which has put tremendous strain on the financial sector of
many East Asian markets. Also, the strength of the US dollar hurt the
competitiveness of many countries which try to maintain a stable exchange rate.
Finally, some ill-timed comments made by Dr. Mahathir, leader of Malaysia, have
shaken the confidence of foreign investors in the region. While these comments
are very serious and shocking, his actions to date have been far less
reactionary and have demonstrated an understanding of the importance in
treating foreign investors properly.
From an investment perspective, many opportunities have surfaced in Asia. Any
company that does not have foreign currency debt or foreign costs will be better
able to compete and will eventually have higher profits. More reasonably priced
currencies will benefit those Asian companies that are net exporters and also
will benefit the tourist industry. These industries should then lead Asia to
stronger macroeconomic growth. The "grass-roots" of the Asian economies are
still strong and no major rehabilitation is needed. We believe that over the
medium term there will be a strong recovery which will be reflected in share
prices. Don't forget what happened in Latin America!!!
/s/ David G. Herro
David G. Herro
Portfolio Manager
[email protected]
/s/ Michael J. Welsh
Michael J. Welsh
Co-Portfolio Manager
[email protected]
October 16, 1997
32 The Oakmark International Small Cap Fund
<PAGE>
The Oakmark International Small Cap Fund
International Diversification--September 30, 1997
........................................................................
% of Fund
Net Assets
- --------------------------
Pacific Rim 49.2%
New Zealand 12.1%
Japan 9.4%
Hong Kong 8.9%
Australia 6.8%
Korea 6.1%
Thailand 2.9%
Indonesia 1.6%
Philippines 1.4%
Europe 44.2%
Great Britain 13.9%
Italy 7.0%
France 5.5%
Germany 5.1%
Turkey 5.0%
Ireland 4.3%
Netherlands 3.4%
The Oakmark International Small Cap Fund 33
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
Schedule of Investments--September 30, 1997
<TABLE>
<CAPTION>
....................................................................................................................
Description Shares Held Market Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--93.4%
Consumer Non-Durables--5.4%
Designer Textiles (NZ) Manufactures Knit Fabrics
Limited (New Zealand), (c) 2,960,000 $ 1,498,096
PT Polysindo Eka Perkasa Integrated Textile
(Indonesia) Manufacturer 2,652,000 1,047,903
Altinyildiz Mensucat ve Textile Manufacturer
Konfeksiyon Fabrikalari
A.S. (Turkey) 7,482,000 1,019,843
-----------
3,565,842
Food & Beverage--8.2%
DB Group Ltd. (New Zealand) Producer of Beer, Wine,
& Liquor 1,208,750 $ 1,897,244
Taittinger (France) Producer of Wine & Spirits 3,077 1,633,764
Chosun Brewery Company Korean Brewer
(Korea) 52,010 966,306
Alaska Milk Corporation Milk Producer
(Philippines), (a) 18,188,000 917,308
-----------
5,414,622
Household Products--10.0%
Enix Corporation (Japan) Entertainment Software 124,900 $ 2,484,130
Eczacibasi Yapi Gerecleri Ceramic Sanitary
Sanayi ve Ticaret A.S. Producer
(Turkey), (a) 49,749,200 2,255,617
WMF (Germany) Tableware and Kitchenware 9,561 1,839,747
-----------
6,579,494
Retail--4.2%
Daimon (Japan) Liquor Retailer & Distributor 414,000 $ 2,538,825
Somerfield plc (Great Britain) Food Retailer 77,000 248,946
-----------
2,787,771
Other Consumer Goods & Services--9.4%
Vardon plc (Great Britain) Bingo Clubs 1,450,000 $ 2,735,606
Fyffes plc (Ireland) Distributor of Fresh Fruit,
Flowers and Produce
in Europe 1,370,024 1,995,578
CeWe Color Holding AG Photo Equipment & Supplies
(Germany) 6,300 1,497,496
Innovative International Auto Parts & Equipment
Holdings Warrants
31 Aug 99 (Hong Kong) 353,000 0
-----------
6,228,680
Telecommunications--0.1%
Sk Telecom Co. Ltd. (Korea) Telecommunications 130 $ 61,126
</TABLE>
34 THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
<TABLE>
<CAPTION>
The Oakmark International Small Cap Fund
Schedule of Investments--September 30, 1997 cont.
.............................................................................................
Description Shares Held Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--93.4% (cont.)
Pharmaceutical--4.7%
Recordati (Italy) Pharmaceuticals 386,000 $ 3,083,706
Banks--0.1%
Kookmin Bank (Korea) Korean Commercial Bank 6,795 $ 75,747
Shinhan Bank (Korea) Korean Commercial Bank 490 4,113
-----------
79,860
Investment Companies--1.6%
Direct Capital Partners Investment Fund for Unlisted
Limited (New Zealand) New Zealand Companies 2,237,000 $ 1,031,856
Other Financial--9.5%
Lambert Fenchurch Group plc Insurance Broker
(Great Britain) 1,810,000 $ 3,677,468
JCG Holdings Ltd. Investment Holding Company
(Hong Kong) 3,254,000 2,565,185
-----------
6,242,653
Computer Systems--2.8%
Solution 6 Holdings Ltd. Design Computer Systems/
(Australia), (a) (c) Consultants 3,437,500 $ 1,871,590
Marketing Services--3.8%
Cordiant plc Global Advertising Agency
(Great Britain) 1,275,000 $ 2,508,244
Broadcasting & Publishing--5.3%
Matichon Public Company Newspaper Publisher
Limited Foreign Shares
(Thailand), (c) 1,409,900 $ 1,835,200
Woong Jin Publishing Publisher
Company (Korea) 32,586 1,584,784
Matichon Public Company Newspaper Publisher
Limited (Thailand), (c) 70,400 87,273
-----------
3,507,257
Chemicals--3.4%
European Vinyls Corporation PVC Manufacturer
International N.V.
(Netherlands) 93,600 $ 2,210,320
Components--1.3%
Barlo Group plc Manufacturer of Radiators
(Ireland) and Industrial Plastics 1,085,000 $ 869,226
</TABLE>
See accompanying notes to financial statements.
The Oakmark International Small Cap Fund 35
<PAGE>
<TABLE>
<CAPTION>
The Oakmark International Small Cap Fund
Schedule of Investments--September 30, 1997 cont.
.............................................................................................
Description Shares Held Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks--93.4% (cont.)
Mining & Building Materials--3.0%
Asia Cement Manufacturing Cement Manufacturer
Company Ltd. (Korea) 36,150 $ 1,145,738
Parbury Limited (Australia) Building Products Manufacturer 1,984,032 835,379
-----------
1,981,117
Other Industrial Goods & Services--13.4%
Sanford Ltd. (New Zealand) Fisheries 1,284,040 $ 2,278,657
Yip's Hang Cheung Ltd. Paint Company
(Hong Kong) 16,140,000 2,169,243
Wattyl Limited (Australia) Paint Company 355,138 1,808,297
Fukuda Denshi Medical Products Manufacturer
(Japan) and Distributor 81,000 1,208,254
Techtronic Industries Manufactures Electric
Company (Hong Kong) Hand Tools 4,684,000 1,168,276
Irce SpA (Italy) Wire Manufacturer 37,500 199,432
-----------
8,832,159
Production Equipment--5.1%
NSC Groupe (France) Manufacturer of Textile
Equipment 14,284 $ 2,012,832
Danieli & Company (Italy) Steel Mini-Mills
Equipment 360,300 1,346,311
-----------
3,359,143
Steel--2.1%
Steel & Tube Holdings Ltd. Produces and Distributes Steel
(New Zealand) 257,700 $ 622,410
Steel & Tube Holdings LTD. Produces and Distributes Steel
Deferred (New Zealand) 257,700 622,410
Pohang Iron & Steel Manufactures Steel Products
Company Ltd. (Korea) 2,580 158,465
-----------
1,403,285
Total Common Stocks (Cost: $62,783,913) 61,617,951
</TABLE>
36 The Oakmark International Small Cap Fund
<PAGE>
<TABLE>
<CAPTION>
The Oakmark International Small Cap Fund
Schedule of Investments--September 30, 1997 cont.
......................................................................................
Principal Value Market Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Short Term Investments--7.1%
Commercial Paper--5.3%
American Express Credit Corporation,
5.56%-5.58% due 10/1/1997-10/6/1997 $1,000,000 $ 1,000,000
Ford Motor Credit Corp., 5.75%-6.15%
due 10/1/1997-10/2/1997 1,000,000 1,000,000
General Electric Capital Corporation, 5.58%-6.38%
due 10/1/1997-10/3/1997 1,500,000 1,500,000
-----------
Total Commercial Paper 3,500,000
Repurchase Agreements--1.8%
State Street Repurchase Agreement,
5.95% due 10/1/1997 $1,177,000 $ 1,177,000
-----------
Total Repurchase Agreements 1,177,000
Total Short Term Investments (Cost: $4,677,000) 4,677,000
Total Investments (Cost $67,460,913)--100.5% (d) $66,294,951
Foreign Currencies (Proceeds $ (601,764))--(0.9)% (603,955)
Other assets in excess of other liabilities--0.4% (b) 281,804
-----------
Total Net Assets--100% $65,972,800
===========
</TABLE>
(a) Non-income producing security.
(b) Includes portfolio and transaction hedges.
(c) See footnote number six in the Notes to Financial Statements regarding
transactions in affiliated issuers.
(d) At September 30, 1997, net unrealized depreciation of ($1,168,153) for
federal income tax purposes consisted of gross unrealized appreciation of
$4,684,962 and gross unrealized depreciation of $5,853,115.
See accompanying notes to financial statements.
The Oakmark International Small Cap Fund 37
<PAGE>
The Oakmark Family of Funds
Statement of Assets and Liabilities--September 30, 1997
....................................................................
<TABLE>
<CAPTION>
The Oakmark The Oakmark
Fund Select Fund
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments, at value $6,632,985,679 $523,916,068
(cost: $4,613,299,665) (cost: $436,240,901)
Cash 886 91
Foreign currency, at value 0 0
Collateral for securities loaned, at value 0 0
Receivable for:
Forward foreign currency contracts 0 0
Securities sold 24,858,028 0
Fund shares sold 19,285,029 8,833,204
Dividends and interest 9,034,583 184,529
-------------- ------------
Total receivables 53,177,640 9,017,733
Other assets 24,090 4,026
-------------- ------------
Total assets $6,686,188,295 $532,937,918
============== ============
....................................................................................................................................
Liabilities and Net Assets
Payable for:
Cash overdraft $ 0 $ 0
Securities purchased 60,337,236 17,905,077
Collateral upon return of securities loaned, at value 0 0
Fund shares redeemed 4,725,323 251,084
Due to adviser 4,930,728 338,136
Forward foreign currency contracts 0 0
Other 1,246,380 269,049
-------------- ------------
Total liabilities 71,239,667 18,763,346
-------------- ------------
Net assets applicable to fund shares outstanding $6,614,948,628 $514,174,572
============== ============
Fund shares outstanding 160,525,019 31,466,003
============== ============
....................................................................................................................................
Price of Shares
Net asset value per share $ 41.21 $ 16.34
============== ============
....................................................................................................................................
Analysis of Net Assets
Paid in capital $4,305,752,545 $421,675,856
Accumulated undistributed net realized gain
on sale of investments, forward contracts and
foreign currency exchange transactions 239,815,188 5,070,435
Net unrealized appreciation/depreciation of investments 2,019,686,014 87,675,167
Net unrealized appreciation of foreign currency
portfolio hedges 0 0
Net unrealized appreciation -- other 0 0
Accumulated undistributed net investment
income (loss) 49,694,881 (246,886)
-------------- ------------
Net assets applicable to Fund shares outstanding $6,614,948,628 $514,174,572
============== ============
</TABLE>
38 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
.................................................................................................................
THE OAKMARK THE OAKMARK THE OAKMARK
THE OAKMARK EQUITY AND INTERNATIONAL INTERNATIONAL
SMALL CAP FUND INCOME FUND FUND SMALL CAP FUND
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1,511,801,430 $33,856,971 $1,634,931,172 $66,294,951
(cost: $1,203,839,475) (cost: $28,398,735) (cost: $1,480,884,266) (cost: $67,460,913)
4,507,199 630 1,116,846 978
0 0 1,622,273 0
120,819,723 2,835,700 209,792,398 2,600,582
0 0 530,357 1,091
5,695,342 13,701 3,264,314 1,076,346
8,852,777 220,059 10,427,851 271,466
698,583 215,539 5,937,148 268,971
-------------- ----------- -------------- -----------
15,246,702 449,299 20,159,670 1,617,874
8,260 4,570 7,260 4,789
-------------- ----------- -------------- -----------
$1,652,383,314 $37,147,170 $1,867,629,619 $70,519,174
============== =========== ============== ===========
.................................................................................................................
$ 0 $ 0 $ 0 $ 603,955
5,112,148 782,504 5,919,962 740,826
120,819,723 2,835,504 209,792,398 2,600,582
1,206,105 0 2,632,699 420,404
1,335,110 19,021 1,304,768 69,594
0 0 13,505 3,447
514,588 47,432 618,756 107,566
-------------- ----------- -------------- -----------
138,987,674 3,684,657 220,282,088 4,546,374
-------------- ----------- -------------- -----------
$1,513,395,640 $33,462,513 $1,647,347,531 $65,972,800
============== =========== ============== ===========
74,417,566 2,309,368 87,742,360 5,408,654
============== =========== ============== ===========
.................................................................................................................
$ 20.34 $ 14.49 $ 18.77 $ 12.20
============== =========== ============== ===========
.................................................................................................................
$1,161,135,817 $26,650,896 $1,230,460,601 $60,623,224
46,258,507 904,575 200,912,998 5,992,327
307,961,955 5,458,236 154,050,337 (1,168,153)
0 0 530,186 0
0 0 3,400 3,469
(1,960,639) 448,806 61,390,009 521,933
-------------- ----------- -------------- -----------
$1,513,395,640 $33,462,513 $1,647,347,531 $65,972,800
============== =========== ============== ===========
</TABLE>
See accompanying notes to financial statements.
THE OAKMARK FAMILY OF FUNDS 39
<PAGE>
<TABLE>
<CAPTION>
The Oakmark Family of Funds
Statement of Operations--September 30, 1997
.........................................................................................................................
The Oakmark Fund The Oakmark
Select Fund
Eleven Months Ended Year Ended Eleven Months Ended
September 30, 1997 October 31, 1996 September 30, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Income:
Dividends $ 77,106,315 $ 69,419,537 $ 1,339,457
Interest Income 29,568,476 15,845,858 807,368
Securities lending income 0 0 24,860
Foreign taxes withheld (437,022) (284,360) 0
-------------- ------------- -----------
Total investment income 106,237,769 84,981,035 2,171,685
.........................................................................................................................
Expenses:
Investment advisory fee 43,705,462 36,082,925 1,731,599
Transfer and dividend disbursing agent fees 2,928,155 4,398,544 199,956
Other shareholder servicing fees 1,330,861 726,744 92,245
Custodian and accounting fees 539,126 439,430 52,436
Reports to shareholders 986,143 836,558 32,350
Registration and blue sky expenses 560,527 573,243 246,615
Trustees fees 97,930 69,705 21,354
Legal fees 41,590 46,842 11,888
Audit fees 21,527 17,176 18,988
Amortization of organization cost 0 23,768 649
Other 182,088 213,020 13,185
-------------- ------------- -----------
Total expenses 50,393,409 43,427,955 2,421,265
Expense reimbursement 0 0 0
Expense offset arrangements (13,986) (15,263) (2,694)
-------------- ------------- -----------
Net expenses 50,379,423 43,412,692 2,418,571
-------------- ------------- -----------
.........................................................................................................................
Net Investment Income (loss): 55,858,346 41,568,343 (246,886)
.........................................................................................................................
Net realized and unrealized gain (loss) on
investments and foreign currency transactions:
Net realized gain on investments 239,442,987 226,166,113 5,070,435
Net realized gain (loss) on foreign
currency transactions (2,673) (12,777) 0
Net change in unrealized appreciation (depreciation)
of investments and foreign currencies 1,231,138,352 290,431,755 87,675,167
Net change in appreciation of forward currency
exchange contracts 0 0 0
Net change in appreciation (depreciation)--other 0 0 0
-------------- ------------- -----------
.........................................................................................................................
Net realized and unrealized gain on investments
and foreign currency transactions: 1,470,578,666 516,585,091 92,745,602
-------------- ------------- -----------
.........................................................................................................................
Net increase in net assets resulting
from operations $1,526,437,012 $ 558,153,434 $92,498,716
============== ============= ===========
.........................................................................................................................
</TABLE>
40 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
................................................................................................................................
The Oakmark
The Oakmark Equity and
Small Cap Fund Income Fund
Eleven Months Ended Year Ended Eleven Months Ended Year Ended
September 30, 1997 October 31, 1996 September 30, 1997 October 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $ 4,339,208 $ 930,817 $ 273,805 $ 118,500
Interest Income 3,154,500 302,068 488,081 261,357
Securities lending income 129,169 19,400 5,782 3,897
Foreign taxes withheld 0 0 0 0
------------ ----------- --------- ---------
Total investment income 7,622,877 1,252,285 767,668 383,754
................................................................................................................................
Expenses:
Investment advisory fee 7,705,828 956,809 140,973 69,005
Transfer and dividend disbursing agent fees 548,450 250,126 53,123 45,412
Other shareholder servicing fees 333,788 23,906 2,999 807
Custodian and accounting fees 125,794 36,616 38,753 23,552
Reports to shareholders 140,375 26,164 5,572 3,694
Registration and blue sky expenses 371,079 181,799 42,393 83,142
Trustees fees 32,359 13,688 21,778 12,749
Legal fees 16,048 10,970 8,595 10,285
Audit fees 16,733 21,034 17,477 20,075
Amortization of organization cost 1,333 1,457 1,333 0
Other 33,819 6,234 3,208 3,975
------------ ----------- --------- ---------
Total expenses 9,325,606 1,528,803 336,204 272,696
Expense reimbursement 0 0 (39,450) (14,245)
Expense offset arrangements (18,290) (318) (830) (225)
------------ ----------- --------- ---------
Net expenses 9,307,316 1,528,485 295,924 258,226
------------ ----------- --------- ---------
................................................................................................................................
Net Investment Income (loss): (1,684,439) (276,200) 471,744 125,528
................................................................................................................................
Net realized and unrealized gain (loss) on
investments and foreign currency transactions:
Net realized gain (loss) on investments 46,501,798 (243,291) 904,824 161,939
Net realized gain (loss) on foreign
currency transactions 0 0 0 0
Net change in unrealized appreciation
(depreciation) of investments and foreign
currencies 287,859,202 20,102,753 4,554,518 903,718
Net change in appreciation of forward currency
exchange contracts 0 0 0 0
Net change in appreciation (depreciation)
--other 0 0 0 0
------------ ----------- --------- ---------
Net realized and unrealized gain on investments
and foreign currency transactions: 334,361,000 19,859,46 5,459,342 1,065,657
------------ ----------- --------- ---------
................................................................................................................................
Net increase in net assets resulting
from operations $332,676,561 $19,583,262 $5,931,086 $1,191,185
============ =========== ========== ==========
</TABLE>
See accompanying notes to financial statements. The Oakmark Family of Funds 41
<PAGE>
The Oakmark Family of Funds
Statement of Operations--September 30, 1997 cont.
................................................................................
<TABLE>
<CAPTION>
The Oakmark
International Fund
Eleven Months Year
Ended Ended
September 30, October 31,
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Dividends $ 42,650,820 $ 29,460,152
Interest Income 3,977,499 1,708,929
Securities lending income 1,300,955 376,919
Foreign taxes withheld (3,703,472) (3,243,211)
------------ ------------
Total investment income 44,225,802 28,302,789
................................................................................
Expenses:
Investment advisory fee 13,040,702 10,113,272
Transfer and dividend disbursing agent fees 864,936 1,298,501
Other shareholder servicing fees 582,891 382,248
Custodian and accounting fees 1,482,615 1,306,439
Reports to shareholders 381,555 215,584
Registration and blue sky expenses 100,480 14,675
Trustees fees 42,602 28,936
Legal fees 17,155 19,589
Audit fees 24,851 22,047
Amortization of organization cost 8,394 9,516
Other 36,031 75,039
------------ ------------
Total expenses 16,582,212 13,485,846
Expense reimbursement 0 0
Expense offset arrangements (22,793) (6,181)
------------ ------------
Net expenses 16,559,419 13,479,665
------------ ------------
................................................................................
Net Investment Income: 27,666,383 14,823,124
................................................................................
Net realized and unrealized gain (loss) on
investments and foreign currency transactions:
Net realized gain on investments 217,090,057 2,806,950
Net realized gain (loss) on foreign currency
transactions 17,724,883 (1,017,660)
Net change in unrealized appreciation of
investments and foreign currencies 70,717,122 176,382,416
Net change in appreciation of forward
currency exchange contracts 3,426,674 5,165,941
Net change in appreciation (depreciation)--
other 197,532 (363,425)
------------ ------------
................................................................................
Net realized and unrealized gain on investments
and foreign currency transactions: 309,156,268 182,974,222
------------ ------------
................................................................................
Net increase in net assets resulting
from operations $336,822,651 $197,797,346
============ ============
</TABLE>
42 The Oakmark Family of Funds
<PAGE>
............................................................................
<TABLE>
<CAPTION>
The Oakmark International
Small Cap Fund
Eleven Months Ended Year Ended
September 30, 1997 October 31, 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Investment Income:
Dividends $1,640,601 $ 744,076
Interest Income 162,175 70,932
Securities lending income 25,268 5,649
Foreign taxes withheld (166,750) (70,675)
---------- ----------
Total investment income 1,661,294 749,982
............................................................................
Expenses:
Investment advisory fee 648,148 258,427
Transfer and dividend disbursing
agent fees 84,030 93,991
Other shareholder servicing fees 20,211 4,347
Custodian and accounting fees 138,829 103,589
Legal fees 8,973 10,288
Audit fees 21,830 24,187
Trustees fees 22,456 12,970
Registration and blue sky expenses 45,799 112,215
Reports to shareholders 20,333 9,933
Amortization of organization cost 1,333 1,457
Other 4,128 3,297
---------- ----------
Total expenses 1,016,070 634,701
---------- ----------
Expense reimbursement 0 (35,441)
Expense offset arrangements (824) (4,379)
---------- ----------
Net expenses 1,015,246 594,881
---------- ----------
............................................................................
Net Investment Income: 646,048 155,101
............................................................................
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions:
Net realized gain on investments 6,250,624 1,284,213
Net realized loss on foreign currency
transactions (232,740) (24,656)
Net change in unrealized appreciation
(depreciation) of investments and
foreign currencies (1,464,546) 296,393
Net change in appreciation of forward
currency exchange contracts 0 0
Net change in appreciation
(depreciation)--other 5,257 (1,788)
---------- ----------
............................................................................
Net realized and unrealized gain
on investments and foreign
currency transactions: 4,558,595 1,554,162
---------- ----------
............................................................................
Net increase in net assets resulting
from operations $5,204,643 $1,709,263
========== ==========
</TABLE>
See accompanying notes to financial statements. The Oakmark Family of Funds 43
<PAGE>
The Oakmark Family of Funds
<TABLE>
<CAPTION>
Statement of Changes in Net Assets--September 30, 1997
.....................................................................................................
The Oakmark Fund
Eleven Months Ended Year Ended Year Ended
September 30, 1997 October 31, 1996 October 31, 1995
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
From Operations:
Net investment income $ 55,858,346 $ 41,568,343 $ 27,572,923
Net realized gain on sale of
investments 239,442,987 226,166,113 87,157,237
Net realized loss on foreign currency
transactions (2,673) (12,777) (37,102)
Net change in unrealized appreciation 1,231,138,352 290,431,755 320,305,458
-------------- --------------- --------------
Net increase in net assets from operations 1,526,437,012 558,153,434 434,998,516
.....................................................................................................
Distribution to shareholders from (1):
Net investment income (41,659,757) (29,455,748) (15,107,180)
Net realized short-term gain (13,947,126) (4,354,309) (47,575,398)
Net realized long-term gain (212,039,549) (82,805,333) (48,452,482)
-------------- --------------- --------------
Total distributions to shareholders (267,646,432) (116,615,390) (111,135,060)
.....................................................................................................
From Fund share transactions:
Proceeds from shares sold 2,107,074,877 1,810,842,079 1,384,343,262
Reinvestment of dividends and capital gain
distributions 256,384,877 110,976,647 106,504,973
Payments for shares redeemed (941,237,366) (1,256,490,130) (664,894,744)
-------------- --------------- --------------
Net increase in net assets from Fund share
transactions 1,422,222,388 665,328,596 825,953,491
-------------- --------------- --------------
.....................................................................................................
Total increase in net assets 2,681,012,968 1,106,866,640 1,149,816,947
Net assets:
Beginning of period 3,933,935,660 2,827,069,020 1,677,252,073
-------------- --------------- --------------
End of period $6,614,948,628 $ 3,933,935,660 $2,827,069,020
============== =============== ==============
Undistributed net investment income $ 49,694,881 $ 35,496,292 $ 23,383,697
============== =============== ==============
(1):
Distributions per share:
Net investment income .3441 .2841 .2310
Net realized short-term gain .1152 .0420 .7277
Net realized long-term gain 1.7514 .7987 .7411
-------------- --------------- --------------
Total distributions to shareholders $ 2.2107 $ 1.1248 $ 1.6998
</TABLE>
44 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
...............................................................................
The Oakmark
Select Fund
Eleven Months Ended
September 30, 1997
- -------------------------------------------------------------------------------
<S> <C>
From Operations:
Net investment income (loss) $ (246,886)
Net realized gain on sale of investments 5,070,435
Net change in unrealized appreciation 87,675,167
------------
Net increase in net assets from operations 92,498,716
...............................................................................
Distribution to shareholders from:
Net investment income 0
Net realized short-term gain 0
Net realized long-term gain 0
------------
Total distributions to shareholders 0
...............................................................................
From Fund share transactions:
Proceeds from shares sold 571,117,746
Reinvestment of dividends and capital gain
distributions 0
Payments for shares redeemed (149,441,890)
------------
Net increase in net assets from Fund share
transactions 421,675,856
------------
...............................................................................
Total increase in net assets 514,174,572
Net assets:
Beginning of period 0
------------
End of period $514,174,572
============
Undistributed net investment loss $ (246,886)
============
</TABLE>
See accompanying notes to financial statements.
The Oakmark Family of Funds 45
<PAGE>
<TABLE>
<CAPTION>
The Oakmark Family of Funds
Statement of Changes in Net Assets--September 30, 1997 cont.
....................................................................................
The Oakmark
Small Cap Fund
Eleven Months Ended Year Ended
September 30, 1997 October 31, 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
From Operations:
Net investment loss $ (1,684,439) $ (276,200)
Net realized gain on sale of investments 46,501,798 (243,291)
Net change in unrealized appreciation 287,859,202 20,102,753
-------------- ------------
Net increase in net assets from operations 332,676,561 19,583,262
...................................................................................
Distribution to shareholders from:
Net investment income 0 0
Net realized short-term gain 0 0
Net realized long-term gain 0 0
-------------- ------------
Total distributions to shareholders 0 0
...................................................................................
From Fund share transactions:
Proceeds from shares sold 1,289,718,462 224,762,208
Reinvestment of dividends and capital gain
distributions 0 0
Payments for shares redeemed (327,419,790) (25,925,063)
-------------- ------------
Net increase in net assets from Fund share
transactions 962,298,672 198,837,145
-------------- ------------
...................................................................................
Total increase in net assets 1,294,975,233 218,420,407
Net assets:
Beginning of period 218,420,407 0
-------------- ------------
End of period $1,513,395,640 $218,420,407
============== ============
Undistributed net investment loss $ (1,960,639) $ (276,200)
============== ============
</TABLE>
46 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
................................................................................
The Oakmark
Equity and Income Fund
Eleven Months Ended Year Ended
September 30, 1997 October 31, 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 471,744 $ 125,528
Net realized gain on sale of investments 904,824 161,939
Net change in unrealized appreciation 4,554,518 903,718
----------- -----------
Net increase in net assets from operations 5,931,086 1,191,185
...............................................................................
Distribution to shareholders from:(1)
Net investment income (148,466) 0
Net realized short-term gain (162,188) 0
Net realized long-term gain 0 0
----------- -----------
Total distributions to shareholders (310,654) 0
...............................................................................
From Fund share transactions:
Proceeds from shares sold 24,903,007 15,231,573
Reinvestment of dividends and capital gain
distributions 288,850 0
Payments for shares redeemed (11,148,702) (2,623,832)
----------- -----------
Net increase in net assets from Fund share
transactions 14,043,155 12,607,741
----------- -----------
...............................................................................
Total increase in net assets 19,663,587 13,798,926
Net assets:
Beginning of period 13,798,926 0
----------- -----------
End of period $33,462,513 $13,798,926
=========== ===========
Undistributed net investment income $ 448,806 $ 125,528
=========== ===========
(1) Distributions per share:
Net investment income .1202 0
Net realized short-term gain .1311 0
Net realized long-term gain 0 0
----------- -----------
Total distributions to shareholders .2513 0
</TABLE>
See accompanying notes to financial statements. The Oakmark Family of Funds 47
<PAGE>
The Oakmark Family of Funds
Statement of Changes in Net Assets--September 30, 1997 cont.
<TABLE>
<CAPTION>
...............................................................................................................................
The Oakmark
International Fund
Eleven Months Ended Year Ended Year Ended
September 30, 1997 October 31, 1996 October 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
From Operations:
Net investment income $ 27,666,383 $ 14,823,124 $ 13,743,307
Net realized gain on sale of investments 217,090,057 2,806,950 62,822,164
Net realized gain (loss) on foreign currency
transactions 17,724,883 (1,017,660) (26,735,730)
Net change in unrealized appreciation (depreciation) 70,717,122 176,382,416 (120,637,092)
Net change in unrealized appreciation (depreciation)
of forward currency exchange contracts 3,426,674 5,165,941 17,767,564
Net change in unrealized appreciation (depreciation)
-other 197,532 (363,425) (20,391)
-------------- -------------- --------------
Net increase (decrease) in net assets
from operations 336,822,651 197,797,346 (53,060,178)
...............................................................................................................................
Distribution to shareholders from (1):
Net investment income (12,477,945) 0 0
Net realized short-term gain 0 (29,886,815) (56,722,392)
Net realized long-term gain 0 (32,229,556) (30,791,949)
-------------- -------------- --------------
Total distributions to shareholders (12,477,945) (62,116,371) (87,514,341)
...............................................................................................................................
From Fund share transactions:
Proceeds from shares sold 710,447,882 563,952,538 312,101,705
Reinvestment of dividends and capital gain
distributions 11,903,359 57,852,161 81,810,540
Payments for shares redeemed (572,115,610) (404,450,022) (719,598,750)
-------------- -------------- --------------
Net increase in net assets from Fund share
transactions 150,235,631 217,354,677 (325,686,505)
-------------- -------------- --------------
...............................................................................................................................
Total increase (decrease) in net assets 474,580,337 353,035,652 (466,261,024)
Net assets:
Beginning of period 1,172,767,194 819,731,542 1,285,992,566
-------------- -------------- --------------
End of period $1,647,347,531 $1,172,767,194 $ 819,731,542
============== ============== ==============
Undistributed net investment income $ 61,390,009 $ 46,201,571 $ 31,378,447
============== ============== ==============
(1): Distributions per share:
Net investment income .1617 0 0
Net realized short-term gain 0 .5020 .6863
Net realized long-term gain 0 .5413 .3725
-------------- -------------- --------------
Total distributions to shareholders $ .1617 $ 1.0433 $ 1.0588
</TABLE>
48 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
....................................................................................................................................
The Oakmark International
Small Cap Fund
Eleven Months Ended Year Ended
September 30, 1997 October 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Operations:
Net investment income $ 646,048 $ 155,101
Net realized gain on sale of investments 6,250,624 1,284,213
Net realized loss on foreign currency
transactions (232,740) (24,656)
Net change in unrealized appreciation (depreciation) (1,464,546) 296,393
Net change in unrealized appreciation (depreciation)
of forward currency exchange contracts 0 0
Net change in unrealized appreciation (depreciation)
--other 5,257 (1,788)
--------------- --------------
Net increase (decrease) in net assets
from operations 5,204,643 1,709,263
....................................................................................................................................
Distribution to shareholders from (1):
Net investment income (279,216) 0
Net realized short-term gain (1,285,114) 0
Net realized long-term gain 0 0
--------------- --------------
Total distributions to shareholders (1,564,330) 0
....................................................................................................................................
From Fund share transactions:
Proceeds from shares sold 63,012,100 43,181,467
Reinvestment of dividends and capital gain
distributions 1,523,977 0
Payments for shares redeemed (41,955,631) (5,138,689)
--------------- --------------
Net increase in net assets from Fund share
transactions 22,580,446 38,042,778
--------------- --------------
....................................................................................................................................
Total increase in net assets 26,220,759 39,752,041
Net assets:
Beginning of period 39,752,041 0
--------------- --------------
End of period $ 65,972,800 $ 39,752,041
=============== ==============
Undistributed net investment income $ 521,933 $ 155,101
=============== ==============
(1): Distributions per share:
Net investment income .0777 0
Net realized short-term gain .3581 0
Net realized long-term gain 0 0
--------------- --------------
Total distributions to shareholders $ .4358 0
</TABLE>
See accompanying notes to financial statements. The Oakmark Family of Funds 49
<PAGE>
THE OAKMARK FAMILY OF FUNDS
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of The Oakmark Fund
("Oakmark"), The Oakmark Select Fund ("Select"), The Oakmark Small Cap Fund
("Small Cap"), The Oakmark Equity and Income Fund ("Equity and Income"), 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 the Harris Associates Investment Trust (a Massachusetts business
trust). The International Small Cap Fund was named The Oakmark International
Emerging Value Fund prior to March 1, 1997. The Oakmark Equity and Income Fund
was named The Oakmark Balanced Fund prior to July 15, 1997. These policies are
in conformity with generally accepted accounting principles ("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.
Security valuation--
Investments are stated at current value. Securities traded on securities
exchanges and securities traded on the NASDAQ National Market are valued at the
last sales price on the day of valuation, or if lacking any reported sales that
day, at the most recent bid quotation. Over-the-counter securities not so traded
are valued at the most recent bid quotation. Money market instruments having a
maturity of 60 days or less from the date of valuation are valued on an
amortized cost basis which approximates market value. Securities for which
quotations are not readily available are valued at a fair value as determined by
the Pricing Committee of the Board of Trustees.
Foreign currency translations--
Values of investments and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars using the mean of the bid and offer
prices of such currencies at the time 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.
The Funds do not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized gain or loss from investments.
Net realized gains or losses on foreign currency transactions arise from sales
of foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, the difference between the amounts
of dividends, interest, and foreign withholding taxes recorded on the Funds'
books, and the U.S. dollar equivalent of the amounts actually received or paid,
and the realized gains or losses resulting from the portfolio and transaction
hedges.
At September 30, 1997, only the International and Int'l Small Cap Funds had
foreign currency transactions. "Net unrealized appreciation (depreciation)--
other" includes the following components:
<TABLE>
<CAPTION>
International
International Small Cap
<S> <C> <C>
Unrealized depreciation on dividends and
dividend reclaims receivable $ (4,642) $ (996)
Unrealized appreciation (depreciation) on open
securities purchases and sales 19,690 6,723
Unrealized depreciation on transaction hedge
purchases and sales (13,334) (2,356)
Other--net 1,686 98
-------- -------
Net Unrealized Appreciation
(Depreciation)--Other $ 3,400 $ 3,469
======== =======
</TABLE>
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 the accrual basis.
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of regular trading on
the New York Stock Exchange on each day the Exchange is open for trading by
dividing the total value of the Fund's investments and other assets, less
liabilities, by the number of Fund shares outstanding.
Forward foreign currency contracts--
At September 30, 1997, International and Int'l Small Cap had entered into
forward foreign currency contracts under which they are obligated to exchange
currencies at specified future dates. The Funds' currency transactions are
limited to transaction hedging and portfolio hedging involving either specific
transactions or portfolio positions.
The contractual amounts of forward foreign exchange contracts do not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered. Risks arise from the possible inability
of counter parties to meet the terms of their contracts and from movements in
currency values.
50 The Oakmark Family of Funds
<PAGE>
The International Fund had the following outstanding contracts at
September 30, 1997:
<TABLE>
<CAPTION>
Portfolio Hedges:
Unrealized
Settlement Appreciation at
US Dollars Purchased Foreign Currency Sold Date September 30, 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$30,000,000 18,426,387 Pounds Sterling October 1997 $316,838
20,000,000 12,383,901 Pounds Sterling November 1997 58,837
14,997,879 9,217,156 Pounds Sterling November 1997 135,963
7,464,750 4,625,000 Pounds Sterling November 1997 18,548
--------
$530,186
========
</TABLE>
Transaction Hedges: Foreign Currency Purchases:
<TABLE>
<CAPTION>
Unrealized Appreciation
Settlement (Depreciation) at
US Dollars Sold Foreign Currency Purchased Date September 30, 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 192,069 279,595 Swiss Franc October 1997 $ 171
1,029,979 124,143,318 Japanese Yen October 1997 (1,195)
28,285 86,270 Malaysian Ringgit October 1997 (1,693)
--------
$ (2,717)
========
</TABLE>
Foreign Currency Sales:
<TABLE>
<CAPTION>
Unrealized Appreciation
Settlement Depreciation at
US Dollars Purchased Foreign Currency Sold Date September 30, 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 799,022 1,107,753 Australian Dollar October 1997 $ (5,151)
1,594,860 2,203,150 Australian Dollar October 1997 (4,517)
269,253 372,205 Australian Dollar October 1997 (949)
--------
$(10,617)
========
</TABLE>
The Int'l Small Cap Fund had the following outstanding transaction hedges on
purchases of securities: Foreign Currency Purchases at September 30, 1997:
<TABLE>
<CAPTION>
Unrealized Appreciation
Settlement (Depreciation) at
US Dollars Sold Foreign Currency Purchased Date September 30, 1997
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$100,994 140,016 Australian Dollar October 1997 $ 651
11,092 15,323 Australian Dollar October 1997 31
18,010 24,897 Australian Dollar October 1997 64
9,076 12,622 Australian Dollar October 1997 86
3,731 5,148 Australian Dollar October 1997 6
251,514 154,303 Pounds Sterling October 1997 (2,700)
18,030 139,520 Hong Kong Dollar October 1997 -
54,596 93,905,875 Italian Lira October 1997 (195)
9,393 1,132,170 Japanese Yen October 1997 (11)
34,836 4,209,573 Japanese Yen October 1997 49
23,965 2,896,680 Japanese Yen October 1997 40
23,192 2,809,215 Japanese Yen October 1997 88
19,973 2,419,280 Japanese Yen October 1997 76
15,814 526,908 Philippine Peso October 1997 (541)
--------
$(2,356)
=======
</TABLE>
At September 30, 1997, International and Int'l Small Cap Funds each had
sufficient cash and/or securities to cover any commitments under these
contracts.
The Oakmark Family of Funds 51
<PAGE>
THE OAKMARK FAMILY OF FUNDS
Notes to Financial Statements (cont.)
......................................................................
Securities lending--
Each Fund except The Oakmark Fund may lend portfolio securities to broker-
dealers and banks.
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned. The Funds receive income from
lending securities by investing the collateral and continue to earn income on
the loaned securities. Security loans are subject to the risk of failure by the
borrower to return the loaned securities in which case the Funds could incur a
loss. The market values (in thousands) of securities on loan to broker-dealers
at September 30, 1997 are shown below.
<TABLE>
<CAPTION>
Int'l
Equity & Small
Select Small Cap Income International Cap
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Value of
Securities Loaned 0 $115,444 $2,758 $200,605 $1,874
Collateral (Cash and
U.S. Treasuries) 0 120,820 2,836 209,792 2,601
</TABLE>
Federal income taxes, dividends and distributions to shareholders--
No provision is made for Federal income taxes since the Funds elect to be taxed
as "regulated investment companies" and make such distributions to their
shareholders as to be relieved of all Federal income taxes under provisions of
current Federal tax law.
2. TRANSACTIONS WITH AFFILIATES
Each fund has an investment advisory agreement with Harris Associates L.P.
(Adviser). For management services and facilities furnished, the Funds pay the
Adviser monthly fees at annual rates as follows. Oakmark pays 1% on the first
$2.5 billion of net assets, .95% on the next $1.25 billion of net assets, .90%
on the next $1.25 billion of net assets and .85% on the excess of $5 billion of
net assets. International pays 1% on the first $2.5 billion of net assets, .95%
on the next $2.5 billion of net assets and .90% on the excess of $5 billion of
net assets as determined at the end of each calendar month. Select pays 1% of
net assets, Small Cap pays 1.25% of net assets, Equity and Income pays .75% of
net assets and Int'l Small Cap pays 1.25% of net assets. Each fee is calculated
on the total net assets as determined at the end of each preceding calendar
month. The Adviser has voluntarily agreed through Oct. 31, 1998 to reimburse the
Funds to the extent that annual expenses, excluding certain expenses, exceed
1.50% for domestic funds and 2.0% for international funds. For the eleven months
ended September 30, 1997 the Adviser has waived $39,450 of expenses for Equity
and Income.
Beginning October 1, 1997, Small Cap will pay 1.25% on the first $1 billion of
net assets, 1.15% on the next $500 million of net assets, 1.1% on the next $500
million of net assets, 1.05% on the next $500 million of net assets and 1.0% on
the excess of $2.5 billion. Select will pay 1% on the first $1 billion of net
assets, .95% on the next $500 million, .90% on the next $500 million, .85% on
the next $500 million and .80% on the excess of $2.5 billion.
In connection with the organization of the Funds, expenses of approximately
$146,500 and $47,000 were advanced to Oakmark and International, approximately
$7,283 each to Small Cap, Equity and Income and Int'l Small Cap, and $3,500 to
Select by the Adviser. These expenses are being amortized on a straight line
basis through October, 2000 for Small Cap, Equity and Income and Int'l Small
Cap, and October, 2001 for Select. Oakmark and International have fully
amortized all organization expenses. Registration expenses of approximately
$62,282, $56,751, $56,811 and $56,726 were advanced to Select, Small Cap, Equity
and Income and Int'l Small Cap, respectively, by the Adviser. Registration
expenses have been fully amortized for all funds.
During the eleven months ended September 30, 1997, the Funds incurred brokerage
commissions of $3,094,186, $750,698, $1,906,448, $24,588, $5,319,725 and
$332,214 of which $997,845, $341,805, $401,345, $15,611, $9,732, and $732 were
paid by Oakmark, Select, Small Cap, Equity and Income, International and Int'l
Small Cap, respectively, to an affiliate of the Adviser.
52 The Oakmark Family of Funds
<PAGE>
3. FUND SHARE TRANSACTIONS
Proceeds and payments on Fund shares as shown in the statement of changes in net
assets are in respect of the following number of shares (in thousands):
<TABLE>
<CAPTION>
Eleven Months Ended September 30, 1997
-----------------------------------------------------------------------------
Equity & Int'l Small
Oakmark Select Small Cap Income International Cap
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares sold 57,226 45,529 78,065 1,941 41,288 5,229
Shares issued in reinvestment
of dividends 7,962 0 0 25 793 135
Less shares redeemed (26,115) (11,063) (20,201) (880) (32,946) (3,438)
------- ------- ------- ----- ------- ------
Net increase in shares
outstanding 39,073 31,466 57,864 1,086 9,135 1,926
======= ======= ======= ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1996
-----------------------------------------------------------------
Equity & Int'l Small
Oakmark Small Cap Income International Cap
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares sold 59,070 18,656 1,466 39,590 3,943
Shares issued in reinvestment
of dividends 3,733 0 0 4,757 0
Less shares redeemed (40,632) (2,102) (244) (28,966) (460)
------- ------- ----- ------- ------
Net increase in shares
outstanding 22,171 16,554 1,222 15,381 3,483
======= ======= ===== ======= ======
</TABLE>
4. INVESTMENT TRANSACTIONS
Transactions in investment securities (excluding short term securities) were as
follows (in thousands):
<TABLE>
<CAPTION>
Int'l
Equity & Small
Oakmark Select Small Cap Income International Cap
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Purchases $1,469,998 $474,370 $1,033,683 $24,488 $977,409 $52,411
Proceeds from sales 782,546 91,543 185,180 10,736 828,231 33,879
</TABLE>
5. SHORT TERM BORROWINGS
To facilitate portfolio liquidity, the Funds maintain credit arrangements under
which they can borrow against portfolio securities for temporary purposes.
During the eleven months ended September 30, 1997, bank borrowing activity was
as follows:
<TABLE>
<CAPTION>
Average Debt Maximum Amount
Debt Outstanding at Weighted Average Outstanding During Period Outstanding During Period
End of Period Interest Rate (in thousands) (in thousands)
..................................................................................................................
<S> <C> <C> <C> <C>
Select $0 6.217% $126 $10,000
Small Cap $0 6.318% $198 $19,000
Equity and Income $0 6.215% $ 6 $ 1,000
</TABLE>
The Oakmark Family of Funds 53
<PAGE>
THE OAKMARK FAMILY OF FUNDS
Notes to Financial Statements (cont.)
......................................................................
6. TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS
An affiliated issuer, as defined under the Investment Company Act of 1940, is a
company in which a Fund holds 5% or more of the voting securities. A summary of
the Funds' transactions in the securities of these issuers during the eleven
months ended September 30, 1997 is set forth below:
Summary of Transactions with Affiliated Companies
The Oakmark Fund
<TABLE>
<CAPTION>
Market
Purchases Sales Dividend Value
Affiliates (Cost) (Proceeds) Income September 30, 1997
........................................................................................................................
<S> <C> <C> <C> <C>
AC Nielsen Corporation $ 53,012,045 - - $ 114,336,000
AMBAC, Inc. - - $1,481,558 178,609,988
The Black & Decker Corporation 102,620,969 - - 262,023,950
Carson Pirie Scott & Company - - - 39,437,500
GC Companies, Inc. - $ 3,470,984 - 17,071,000
Juno Lighting, Incorporated 3,150,000 - 315,200 18,580,625
Knight Ridder 12,090,376 - 2,694,520 254,006,250
Polaroid Corporation 61,073,274 - 2,333,100 221,744,250
SPX Corporation 3,529,357 7,846,953 184,830 51,308,600
------------ ----------- ---------- --------------
Totals 235,476,021 11,317,937 7,009,208 1,157,118,163
Summary of Transactions with Affiliated Companies
The Oakmark Small Cap Fund
Market
Purchases Sales Dividend Value
Affiliates (Cost) (Proceeds) Income September 30, 1997
........................................................................................................................
<S> <C> <C> <C> <C>
Ascent Entertainment Group, Inc. $ 19,424,991 - - $ 18,975,000
Atchison Casting Corporation 11,239,014 - - 15,096,000
Binks Sames Corporation 9,915,025 - $ 21,890 10,728,840
Castle & Cooke, Inc. 20,176,090 $ 82,277 - 28,260,000
The Carbide/Graphite Group, Inc. 11,684,094 1,338,080 - 27,200,000
Chartwell Re Corporation 20,014,224 1,612,626 80,000 31,950,000
Cole National Corporation 32,221,622 2,206,998 - 41,562,500
Columbus McKinnon Corporation 14,353,240 - 112,658 21,220,500
Duff & Phelps Credit Rating Company 1,118,438 - 33,813 9,497,600
Gardner Denver Machinery, Inc. 9,996,693 - - 30,318,750
Highlands Insurance Group, Inc. 18,094,744 1,631,001 - 26,812,500
International Multifoods Corporation 25,688,035 - 206,400 30,637,500
MagneTek, Inc. 37,698,978 4,508,884 - 53,700,000
NVR Inc. 14,311,318 1,323,089 - 26,000,000
Northwest Pipe Company 5,238,250 - - 14,040,000
Pocahontas Federal Savings and
Loan Assn. - - 123,900 4,620,000
PXRE Corporation 32,976,461 - 346,500 37,433,125
Ralcorp Holdings, Inc. 28,831,676 1,529,949 45,100 56,062,500
RenaissanceRe Holdings 45,105,022 17,344 591,825 62,470,337
Barry (R.G.) Corporation 7,448,617 - - 8,278,594
Savings Bank of the Finger Lakes 114,375 - 27,450 2,256,000
Scotsman Industries, Inc. 27,930,792 386,712 64,618 27,037,500
SPX Corporation 25,821,828 5,209,408 123,500 52,762,500
</TABLE>
54 The Oakmark Family of Funds
<PAGE>
<TABLE>
<CAPTION>
Market
Purchases Sales Dividend Value
Affiliates (Cost) (Proceeds) Income September 30, 1997
.....................................................................................................
<S> <C> <C> <C> <C>
TCI Satellite Entertainment, Inc. $ 34,421,429 $ 1,934,316 - $ 28,737,500
Titan Exploration, Inc. 33,215,790 - - 36,000,000
Triarc Companies, Inc. 25,298,057 824,097 - 33,216,312
Zurn Industries, Inc. 12,045,748 - $ 196,670 23,614,250
------------ ----------- ---------- ------------
Totals 524,384,551 22,604,781 1,974,324 758,487,808
</TABLE>
Summary of Transactions with Affiliated Companies
The Oakmark International Fund
<TABLE>
<CAPTION>
Market
Purchases Sales Dividend Value
Affiliates (Cost) (Proceeds) Income September 30, 1997
.....................................................................................................
<S> <C> <C> <C> <C>
Fernz Corporation Ltd. $ 38,924,697 - $ 792,093 $ 40,171,130
Varitronix International Limited 13,005,765 - 869,801 29,165,831
Hong Kong Aircraft Engineering
Company 6,144,747 - 947,202 30,883,574
Giordano International Limited 17,975,935 $ 1,498,722 835,744 26,656,113
Lamex Holdings Ltd. - - 63,447 4,808,219
Chargeurs International Sa 17,210,972 - 1,088,845 44,587,497
European Vinyls Corporation Intl. NV 12,063,518 - 1,856,537 32,957,974
Cordiant LPC 18,888,229 4,256,573 677,913 75,906,653
Sedgwick Group PLC 64,593,626 - 1,550,384 65,759,770
Quilmes Industrial SA 61,379,416 2,399,479 908,562 80,471,350
BYC Co. Ltd. 611,730 182,663 27,752 3,686,743
Keumkang Ltd. 11,139,897 - 150,450 16,327,869
Fila Holding S.p.A. 57,218,278 - 116,960 50,848,875
------------ ----------- ---------- ------------
Totals 319,156,810 8,337,437 9,885,690 502,231,598
</TABLE>
Summary of Transactions with Affiliated Companies
The Oakmark International Small Cap Fund
<TABLE>
<CAPTION>
Market
Purchases Sales Dividend Value
Affiliates (Cost) (Proceeds) Income September 30, 1997
.....................................................................................................
<S> <C> <C> <C> <C>
Designer Textiles (NZ) Limited $ 1,768,118 - $ 112,978 $ 1,498,096
Matichon Public Company Limited 2,799,560 - - 1,835,200
Solution 6 Holdings Ltd. 1,569,845 - - 1,871,590
------------ ----------- ---------- ------------
Totals 6,137,523 - 112,978 5,204,886
</TABLE>
The Oakmark Family of Funds 55
<PAGE>
THE OAKMARK FUND
Financial Highlights
................................................................................
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Eleven Year Ended October 31, Period Ended
Months Ended --------------------------------------------------- October 31,
September 30, 1997 1996 1995 1994 1993 1992 1991(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 32.39 $ 28.47 $ 25.21 $ 24.18 $ 17.11 $ 12.10 $10.00
Income From Investment Operations:
Net Investment Income (Loss) 0.36 0.34 0.30 0.27 0.17 (0.03) (0.01)
Net Gains or Losses on Securities
(both realized and unrealized) 10.67 4.70 4.66 1.76 7.15 5.04 2.11
-------- -------- -------- -------- -------- ------- ------
Total From Investment Operations 11.03 5.04 4.96 2.03 7.32 5.01 2.10
Less Distributions:
Dividends (from net investment
income) (0.34) (0.28) (0.23) (0.23) (0.04) -- --
Distributions (from capital gains) (1.87) (0.84) (1.47) (0.77) (0.21) -- --
-------- -------- -------- -------- -------- ------- ------
Total Distributions (2.21) (1.12) (1.70) (1.00) (0.25) -- --
-------- -------- -------- -------- -------- ------- ------
Net Asset Value, End of Period $ 41.21 $ 32.29 28.47 $ 25.21 $ 24.18 $ 17.11 $12.10
======== ======== ======== ======== ======== ======= ======
Total Return 39.24%* 18.07% 21.55% 8.77% 43.21% 41.40% 87.10%*
Ratios/Supplemental Data:
Net Assets, End of Period
($ million) $6,614.9 $3,933.9 $2,827.1 $1,677.3 $1,107.0 $ 114.7 $ 4.8
Ratio of Expenses to Average
Net Assets 1.08%* 1.18% 1.17% 1.22% 1.32% 1.70% 2.50%(b)*
Ratio of Net Income (Loss)
to Average Net Assets 1.19%* 1.13% 1.27% 1.19% 0.94% (0.24)% (0.66)%(b)*
Portfolio Turnover Rate 17.3% 23.7% 18.0% 29.3% 18.0% 34.0% 0.0%
Average Brokerage
Commission Paid $ 0.0537 $ 0.0530 n/a n/a n/a n/a n/a
*Data has been annualized.
</TABLE>
(a) From August 5, 1991, the date on which Fund shares were first offered for
sale to the public.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement by the adviser, the annualized ratio of expenses to average net
asset would have been 4.92% and the annualized ratio of net income (loss) to
average net assets would have been (3.08%).
56 The Oakmark Family Of Funds
<PAGE>
THE OAKMARK SELECT FUND
Financial Highlights
................................................................................
For a share outstanding throughout the period
<TABLE>
<CAPTION>
Eleven
Months Ended
September 30, 1997
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
Income From Investment Operations:
Net Investment Income (Loss) (0.01)
Net Gains or Losses on Securities (both realized and unrealized) 6.35
-------
Total From Investment Operations 6.34
Less Distributions:
Dividends (from net investment income) 0.00
Distributions (from capital gains) 0.00
-------
Total Distributions 0.00
-------
Net Asset Value, End of Period $ 16.34
=======
Total Return 69.16%*
Ratios/Supplemental Data:
Net Assets, End of Period ($million) $514.17
Ratio of Expenses to Average Net Assets 1.12%*
Ratio of Net Income (Loss) to Average Net Assets (0.11%)*
Portfolio Turnover Rate 36.93%
Average Commission Rate Paid $ .0573
</TABLE>
*Data has been annualized.
See accompanying notes to financial statements.
THE OAKMARK FAMILY OF FUNDS 57
<PAGE>
The Oakmark Small Cap Fund
Financial Highlights
................................................................................
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Eleven Year Ended
Months Ended October 31,
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 13.19 $ 10.00
Income From Investment Operations:
Net Investment Income (Loss) (0.01) (0.02)
Net Gains or Losses on Securities (both realized and unrealized) 7.16 3.21
-------- -------
Total From Investment Operations 7.15 3.19
Less Distributions:
Dividends (from net investment income) 0.00 0.00
Distributions (from capital gains) 0.00 0.00
-------- -------
Total Distributions 0.00 0.00
-------- -------
Net Asset Value, End of Period $ 20.34 $ 13.19
======== =======
Total Return 59.14%* 31.94%
Ratios/Supplemental Data:
Net Assets, End of Period ($million) $1,513.4 $ 218.4
Ratio of Expenses to Average Net Assets 1.37%* 1.61%
Ratio of Net Income (Loss) to Average Net Assets (0.25%)* (0.29%)
Portfolio Turnover Rate 26.88% 23.15%
Average Commission Rate Paid $ 0.0482 $0.0520
*Data has been annualized.
</TABLE>
58 The Oakmark Family of Funds
<PAGE>
The Oakmark Equity and Income Fund
Financial Highlights
................................................................................
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Eleven Months Year
Ended Ended
September 30, 1997 October 31, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 11.29 $ 10.00
Income From Investment Operations:
Net Investment Income (Loss) 0.21 0.10
Net Gains or Losses on Securities (both realized and unrealized) 3.24 1.19
------- -------
Total From Investment Operations 3.45 1.29
Less Distributions:
Dividends (from net investment income) (0.12) 0.00
Distributions (from capital gains) (0.13) 0.00
------- -------
Total Distributions (0.25) 0.00
------- -------
Net Asset Value, End of Period $ 14.49 $ 11.29
======= =======
Total Return 34.01%* 12.91%
Ratios/Supplemental Data:
Net Assets, End of Period ($million) $ 33.46 $ 13.8
Ratio of Expenses to Average Net Assets (a) 1.50%* 2.50%
Ratio of Net Income (Loss) to Average Net Assets (a) 2.38%* 1.21%
Portfolio Turnover Rate 52.82% 66.35%
Average Commission Rate Paid $0.0554 $0.0581
*Data has been annualized.
</TABLE>
(a) If the fund paid all of its expenses and there had been no expense
reimbursement by the investment adviser, for the period ended September 30,
1997 and the year ended October 31, 1996, the ratios of expenses to average
net assets would have been 1.70%* and 2.64% respectively, and the ratios of
net income to average net assets would have been 2.18%* and 1.08%
respectively.
See accompanying notes to financial statements.
The Oakmark Family of Funds 59
<PAGE>
The Oakmark International Fund
Financial Highlights
................................................................................
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Eleven Year Ended October 31, Period Ended
Months Ended ------------------------------------------- October 31,
September 30, 1997 1996 1995 1994 1993 1992(a)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.92 $ 12.97 $ 14.50 $ 14.09 $ 9.80 $ 10.00
Income From Investment Operations:
Net Investment Income (Loss) 0.27 0.09 0.30 0.21 0.06 0.26
Net Gains or Losses on Securities
(both realized and unrealized) 3.74 2.90 (0.77) 0.43 4.48 (0.46)
-------- -------- ------- -------- ------ ----------
Total From Investment Operations 4.01 2.99 (0.47) 0.64 4.54 (0.20)
Less Distributions:
Dividends (from net investment income) (0.16) 0.00 0.00 (0.08) (0.25) --
Distributions (from capital gains) 0.00 (1.04) (1.06) (0.15) N --
-------- -------- ------- -------- ------ ----------
Total Distributions (0.16) (1.04) (1.06) (0.23) (0.25) --
-------- -------- ------- -------- ------ ----------
Net Asset Value, End of Period $ 18.77 $ 14.92 $ 12.97 $ 14.50 $14.09 $ 9.80
======== ======== ======= ======== ====== ==========
Total Return 29.63%* 24.90% (3.06)% 4.62% 47.49% (22.81%)*
Ratios/Supplemental Data:
Net Assets, End of Period ($ million) $1,647.3 $1,172.8 $ 819.7 $1,286.0 $815.4 $ 23.5
Ratio of Expenses to Average Net Assets 1.26%* 1.32% 1.40% 1.37% 1.26% 2.04%*
Ratio of Net Income (Loss)
to Average Net Assets 2.09%* 1.45% 1.40% 1.44% 1.55% 37.02%*
Portfolio Turnover Rate 61.28% 41.83% 26.49% 55.00% 21.00% 0%
Average Commission Rate Paid $ 0.0052 $ 0.0158 n/a n/a n/a n/a
*Data has been annualized.
</TABLE>
(a) From September 30, 1992, the date on which Fund shares were first offered
for sale to the public.
60 The Oakmark Family of Funds
<PAGE>
The Oakmark International Small Cap Fund
Financial Highlights
................................................................................
For a share outstanding throughout each period
<TABLE>
<CAPTION>
<S> <C> <C>
Eleven Year
Months Ended Ended
September 30, 1997 October 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 11.41 $ 10.00
Income From Investment Operations:
Net Investment Income (Loss) 0.13 0.04
Net Gains or Losses on Securities (both realized and unrealized) 1.10 1.37
-------- --------
Total From Investment Operations 1.23 1.41
Less Distributions:
Dividends (from net investment income) (0.08) 0.00
Distributions (from capital gains) (0.36) 0.00
-------- --------
Total Distributions (0.44) 0.00
-------- --------
Net Asset Value, End of Period $ 12.20 $ 11.41
======== ========
Total Return 12.07%* 14.15%
Ratios/Supplemental Data:
Net Assets, End of Period ($million) $ 65.97 $ 39.80
Ratio of Expenses to Average Net Assets 1.93%* 2.50%(a)
Ratio of Net Income (Loss) to Average Net Assets 1.23%* 0.65%(a)
Portfolio Turnover Rate 62.63% 27.44%
Average Commission Rate Paid $ 0.0025 $ 0.0036
</TABLE>
*Data has been annualized.
(a) If the fund had paid all of its expenses and there had been no expense
reimbursement by the investment adviser, the ratio of expenses to average
net assets would have been 2.65% and the ratio of net income to average net
assets would have been .50%.
See accompanying notes to financial statements.
The Oakmark Family of Funds 61
<PAGE>
The Oakmark Family of Funds
Report of Independent Public Accountants
................................................................................
To the Shareholders and Board of Trustees of Harris Associates Investment Trust:
We have audited the accompanying statements of assets and liabilities of
The Oakmark Fund, The Oakmark Select Fund, The Oakmark Small Cap Fund, The
Oakmark Equity and Income Fund, The Oakmark International Fund, and The Oakmark
International Small Cap Fund (each a series of Harris Associates Investment
Trust), including the schedules of investments on pages 6-8, 11-12, 15-17, 20-
23, 27-30 and 34-37, as of September 30, 1997, and the related statements of
operations, statements of changes in net assets and the financial highlights for
the periods indicated thereon. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1997, by correspondence with the custodian and brokers. As to
securities purchased but not received, we requested confirmation from brokers,
and when replies were not received, we carried out alternative 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 positions of
The Oakmark Fund, The Oakmark Select Fund, The Oakmark Small Cap Fund, The
Oakmark Equity and Income Fund, The Oakmark International Fund, and The Oakmark
International Small Cap Fund of the Harris Associates Investment Trust as of
September 30, 1997, the results of their operations, the changes in their net
assets, and the financial highlights for the periods indicated thereon in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
October 24, 1997
62 The Oakmark Family of Funds
<PAGE>
The Oakmark Family Of Funds
Trustees and Officers
...........................................................................
Trustees
Michael J. Friduss
Thomas H. Hayden
Christine M. Maki
Victor A. Morgenstern
Allan J. Reich
Marv Rotter
Burton W. Ruder
Peter S. Voss
Gary Wilner, M.D.
Officers
Victor A. Morgenstern--Chairman
Robert M. Levy--President
Robert J. Sanborn--Executive Vice President
David G. Herro--Vice President
Clyde S. McGregor--Vice President
William C. Nygren--Vice President
Steven J. Reid--Vice President
Michael J. Welsh--Vice President
Donald Terao--Vice President--Finance
Anita M. Nagler--Secretary
Ann W. Regan--Vice President--
Shareholder Operations and Assistant Secretary
Kristi L. Rowsell--Treasurer
Other Information
Investment Adviser
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602-3790
Transfer Agent
State Street Bank and Trust Company
Attention: The Oakmark Family of Funds
P.O. Box 8510
Boston, Massachusetts 02266-8510
Legal Counsel
Bell, Boyd & Lloyd
Chicago, Illinois
Independent Public Accountants
Arthur Andersen LLP
Chicago, Illinois
For More Information:
Please call 1-800-OAKMARK
(1-800-625-6275)
Website
www.oakmark.com
24-hour NAV hotline
1-800-GROWOAK (1-800-476-9625)
This report, including the audited 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 OF OAKMARK FAMILY OF FUNDS]
HARRIS ASSOCIATES L.P.
2 NORTH LASALLE STREET
CHICAGO, IL 60602-3790
