<PAGE>
ANNUAL REPORT
SEPTEMBER 30, 1998
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
1998 ANNUAL REPORT
........................................................................
<TABLE>
<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................................... 7
THE OAKMARK SELECT FUND
Letter from the Portfolio Manager......................... 10
Schedule of Investments................................... 12
THE OAKMARK SMALL CAP FUND
Letter from the Portfolio Manager......................... 14
Schedule of Investments................................... 16
THE OAKMARK EQUITY AND INCOME FUND
Letter from the Portfolio Manager......................... 19
Schedule of Investments................................... 21
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......................... 32
International Diversification Chart....................... 34
Schedule of Investments................................... 35
FINANCIAL STATEMENTS
Statement of Assets and Liabilities....................... 38
Statement of Operations................................... 40
Statement of Changes in Net Assets........................ 42
Notes to Financial Statements............................. 48
TRUSTEES AND OFFICERS....................................... 61
</TABLE>
FOR MORE INFORMATION
Access our web site at www.oakmark.com to obtain a
prospectus, an application or periodic reports, or call
1-800-OAKMARK (1-800-625-6275) or 617-328-5000.
WEB SITE AND 24-HOUR NET ASSET VALUE HOTLINE
Access our web site at www.oakmark.com to obtain the current
net asset value of a fund, or call 1-800-GROWOAK
(1-800-476-9625).
<PAGE>
LETTER FROM THE CHAIRMAN AND PRESIDENT...
........................................................................
FELLOW SHAREHOLDERS:
WE ARE PLEASED TO PRESENT THE ANNUAL REPORT FOR THE OAKMARK FAMILY OF FUNDS.
THE PAST YEAR HAS BEEN A DIFFICULT PERIOD AND WE DRAW SMALL COMFORT FROM THE
FACT THAT PREVIOUS LETTERS HAVE ENCOURAGED ALL SHAREHOLDERS TO BE REALISTIC IN
THEIR RETURN EXPECTATIONS AND ASSET MIX. MORE IMPORTANTLY, AS SHAREHOLDERS AND
INVESTMENT MANAGERS, WE ARE CONFIDENT THAT THE CURRENT MARKET VOLATILITY WILL
NOT PROVE TO BE A LONG-TERM DETERRENT TO MEETING OUR INVESTMENT GOALS.
OUR CONFIDENCE IS BASED ON SEVERAL FACTORS. HARRIS ASSOCIATES, INVESTMENT
ADVISER TO THE OAKMARK FAMILY OF FUNDS, WAS FOUNDED IN 1976. THE INVESTMENT
PROFESSIONALS OF OUR FIRM HAVE IMPLEMENTED THE SAME RISK-AVERSE VALUE APPROACH
FROM THE INCEPTION OF THE FIRM. IN OTHER DIFFICULT PERIODS, OUR REACTION HAS
BEEN STRAIGHTFORWARD AND SUCCESSFUL. OUR PEOPLE, PROCESS AND PHILOSOPHY REMAIN
CONSTANT AND PORTFOLIO CHANGES ARE MADE CAREFULLY AND NOT EMOTIONALLY. OUR
LONG-TERM RESULTS AND EXPERIENCE REINFORCE OUR BELIEF THAT THIS IS THE
APPROPRIATE COURSE OF ACTION TO MEET OUR FINANCIAL GOALS.
THE BROAD MARKET WEAKNESS OF THE LAST SEVERAL MONTHS HAS PRESENTED
SIGNIFICANT INVESTMENT OPPORTUNITIES TO EACH OF OUR FUNDS. OUR OPTIMISM IS
STRENGTHENED BY THE QUALITY AND UPSIDE POTENTIAL OF THE SECURITIES THAT WE HOLD
AND HAVE ADDED TO OUR FUNDS. IT IS ENCOURAGING THAT OUR INTERNAL BUY LIST IS
LONGER THAN IT HAS BEEN IN SEVERAL YEARS. THE ATTRACTIVENESS OF THE STOCKS IN
OUR UNIVERSE IS FURTHER CONFIRMED BY OUR DECISION TO RE-OPEN OUR SMALL CAP FUND
TO NEW INVESTORS.
THE FINAL SOURCE OF OUR CONFIDENCE IS A RESULT OF THE ATMOSPHERE AT OUR
FIRM. IN OUR INTERNAL MEETINGS, WE NOTE AN EDGINESS THAT REFLECTS OUR
COMPETITIVE SPIRIT. COMPLACENCY IS THE BIGGEST THREAT TO INVESTMENT SUCCESS--IT
IS NOT TOLERATED AT OUR FIRM. WE ARE WELL POSITIONED TO BENEFIT FROM THE
INEVITABLE REBOUND IN STOCK PRICES AND WE APPRECIATE YOUR CONTINUED CONFIDENCE
IN OUR EFFORTS.
AS THE MILLENNIUM APPROACHES, WE HAVE RECEIVED A NUMBER OF QUESTIONS ABOUT
OUR READINESS. OUR INTERNAL Y2K COMMITTEE HAS BEEN ACTIVE FOR AN EXTENDED
PERIOD.
WE ARE ON SCHEDULE IN DETERMINING THAT OUR INTERNAL SYSTEMS AND OUTSIDE
VENDORS ARE Y2K COMPLIANT. AT THIS TIME, WE EXPECT NO BUSINESS DISRUPTIONS TO
OCCUR WHEN WE ENTER THE NEXT CENTURY.
IN ADDITION, WE ARE WELL PREPARED FOR THE EURO CONVERSION IN THE
INTERNATIONAL MARKETS. THOUGH LESS PUBLICIZED, THIS CURRENCY CHANGE ALSO
REQUIRES SUBSTANTIAL INTERNAL PLANNING AND VENDOR CONTACT. WE SIMILARLY EXPECT
THAT CONVERSION TO A COMMON CURRENCY IN EUROPE WILL NOT CAUSE OPERATIONAL
PROBLEMS FOR OUR INTERNATIONAL FUNDS.
WE LOOK FORWARD TO BETTER TIMES AHEAD.
[SIGNATURE]
VICTOR MORGENSTERN
CHAIRMAN
[SIGNATURE]
ROBERT M. LEVY
PRESIDENT
[LOGO]
1
<PAGE>
THE OAKMARK FAMILY OF FUNDS
SUMMARY INFORMATION
........................................................................
<TABLE>
<CAPTION>
THE OAKMARK THE OAKMARK
PERFORMANCE FOR PERIOD ENDED FUND SELECT
SEPTEMBER 30, 1998 FUND
<S> <C> <C>
-------------------- --------------------
3 MONTHS -13.8% -17.2%
..............................................................................
6 MONTHS -16.2% -15.7%
..............................................................................
1 YEAR -4.1% 3.6%
..............................................................................
AVERAGE ANNUAL TOTAL RETURN
FOR:
3 YEAR 15.0% N/A
..............................................................................
5 YEAR 16.7% N/A
..............................................................................
SINCE INCEPTION 25.2% 31.7%
VALUE OF $10,000 $49,899 $16,936
FROM INCEPTION DATE (8/5/91) (11/1/96)
- ------------------------------------------------------------------------------
TOP FIVE HOLDINGS Philip Morris Cablevision Systems
AS OF SEPTEMBER 30, 1998 Companies, Corporation, Cl
COMPANY AND % OF TOTAL NET Inc. 9.2% A 13.8%
ASSETS Nike, Inc., Cl USG
B 6.1% Corporation 9.7%
Mattel, Inc 5.4% U.S. Industries,
Banc One Inc. 9.2%
Corporation 5.4% PartnerRe
Lockheed Martin Ltd. 8.2%
Corporation 5.3% Gucci Group 8.2%
- ------------------------------------------------------------------------------
TOP FIVE INDUSTRIES Other Consumer Broadcasting &
AS OF SEPTEMBER 30, 1998 Goods & Cable TV 13.8%
INDUSTRIES AND % OF TOTAL NET Services 20.1% Building Materials
ASSETS Food & &
Beverage 15.2%
Banks & Construction 9.7%
Thrifts 14.0% Diversified
Aerospace &
Defense 9.1% Conglomerates 9.2%
Apparel 6.1% Insurance 8.2%
Retail 8.2%
</TABLE>
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> <C>
-------------------- -------------------- -------------------- --------------------
3 Months -26.8% -6.9% -19.4% -17.0%
..............................................................................................................................
6 Months -31.1% -6.4% -29.0% -28.2%
..............................................................................................................................
1 Year -26.4% 2.6% -29.9% -35.2%
..............................................................................................................................
Average Annual Total Return
for:
3 Year N/A N/A 1.7% N/A
..............................................................................................................................
5 Year N/A N/A 4.0% N/A
..............................................................................................................................
Since inception 14.9% 15.4% 8.5% -6.5%
Value of $10,000 $14,976 $15,191 $16,322 $8,211
from inception date (11/1/95) (11/1/95) (9/30/92) (11/1/95)
- ------------------------------------------------------------------------------------------------------------------------------
TOP FIVE HOLDINGS People's Bank of Imation Tomkins plc 5.6% Enix
AS OF SEPTEMBER 30, 1998 Bridgeport, Corp. 4.0% Cordiant Corporation 5.4%
COMPANY AND % OF TOTAL NET CT 7.9% Chrysler Communications Cordiant
ASSETS U.S. Industries, Corporation 3.5% Group plc 5.3% Communications
Inc. 7.8% Quilmes Industrial Group plc 5.0%
Cablevision Systems Tele-Communications, SA 5.1% Lambert Fenchurch
Corporation, Cl Liberty Media, Fernz Corporation Group plc 4.8%
A 4.8% Class A 3.4% Limited 4.5% Haw Par Corporation
First Brands Amli Residential Rolls-Royce Ltd. 4.6%
Corporation 4.4% Properties plc 4.2% Elevadores Atlas,
Ralcorp Holdings, Trust 3.3% SA 4.6%
Inc. 4.0% The Dun &
Bradstreet
Corporation 3.3%
- ------------------------------------------------------------------------------------------------------------------------------
TOP FIVE INDUSTRIES Other Consumer U.S. Government Other Industrial Other Industrial
AS OF SEPTEMBER 30, 1998 Goods & Bonds 25.7% Goods & Goods &
INDUSTRIES AND % OF TOTAL NET Services 13.0% Banks & Services 13.7% Services 11.6%
ASSETS Banks & Thrifts 9.8% Food & Retail 11.3%
Thrifts 11.5% Automotive 6.5% Beverage 10.1% Other
Food & Other Consumer Marketing Financial 11.0%
Beverage 11.2% Goods & Services 9.5% Food &
Other Industrial Services 6.4% Banks 8.2% Beverage 9.6%
Goods & Commercial Real Other Consumer Computer
Services 10.3% Estate 6.2% Goods & Software 7.5%
Automotive 7.9% Services 6.8%
</TABLE>
THE OAKMARK FAMILY OF FUNDS 3
<PAGE>
THE OAKMARK FUND
REPORT FROM ROBERT J. SANBORN, PORTFOLIO MANAGER
........................................................................
[PHOTO]
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION
(8/5/91) TO PRESENT (9/30/98)
AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
The Oakmark Fund S & P 500
<S> <C> <C>
8/91 $10,000 $10,000
10/91 $12,100 $10,202
1/92 $13,910 $10,707
4/92 $14,660 $10,947
7/92 $15,910 $11,279
10/92 $17,110 $11,217
1/93 $19,913 $11,836
4/93 $20,136 $11,957
7/93 $22,052 $12,260
10/93 $24,504 $12,896
1/94 $25,648 $13,357
4/94 $24,855 $12,590
7/94 $25,321 $12,890
10/94 $26,653 $13,384
1/95 $26,480 $13,433
4/95 $28,846 $14,781
7/95 $30,883 $16,248
10/95 $32,397 $16,916
1/96 $36,091 $18,608
4/96 $36,823 $19,242
7/96 $35,559 $18,934
10/96 $38,252 $20,988
1/97 $43,112 $23,510
4/97 $44,197 $24,073
7/97 $51,606 $28,797
9/97 $52,009 $28,668
12/97 $54,132 $29,494
3/98 $59,517 $33,663
6/98 $57,909 $34,775
9/98 $49,899 $31,316
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN*
THROUGH 9/30/98
TOTAL RETURN FROM FUND INCEPTION
9/30/98 NAV $33.54 LAST 3 MOS. 8/5/91
<S> <C> <C>
- ---------------------------------------------------------------------------------
THE OAKMARK FUND -13.8% 25.2%
Standard & Poor's 500 Stock Index w/inc** -10.0% 17.3%
Dow Jones Industrial Average w/ inc** -12.0% 17.1%
Value Line Composite Index** -19.6% 6.7%
</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 S&P 500 is a broad market-weighted
average dominated by blue-chip stocks. The Dow Jones Industrial Average includes
only 30 big companies. The Value Line Index is an unweighted average of more
than 1,000 stocks. Past performance is no guarantee of future results.
WHAT A SUMMER AND WHAT A YEAR...!
...and am I glad it's over!
Summer was beautiful in Chicago-- great weather, another Bulls championship,
Sammy Sosa and the Cubs. It was also the summer we learned the definitions of a
lot of neat words--"salacious," "parse," and "is," among others.
Yet, it was (and remains!) a very rocky period for the global economy and
financial markets. The emerging market contagion, Monicagate, and the hedge fund
debacle all combined to make equity markets very volatile. In the past
month-and-a-half, the Standard & Poor's 500 had 17 trading sessions where it was
up or down more than 1 percent! The height of what Shakespeare termed in TWELFTH
NIGHT "this very midsummer madness" occurred on the morning of Friday, September
11. The Dow opened down big, but in the course of about ten minutes reversed,
appreciating more than 3 percent. The proximate cause of this stunning reversal?
President Clinton's tearful confession that he had "sinned." The market took
this confession as sincere--as opposed to his prior confessions--and, I guess,
interpreted these ostensibly real tears as increasing the chance that he will
remain in office for the rest of his term.
What are value investors like ourselves to do in this sort of wacky environment
in which stock prices are decoupled from intrinsic value?
Well, in light of the new forces driving the stock market, we have decided to
abandon our one-stock-at-a-time, value-based philosophy. Instead, we have hired
a linguist to interpret the nuances of the pronouncements of President Clinton
and Alan Greenspan, we have installed cable tuned to CNBC in every investment
professional's office, and have implemented a new investment philosophy we term
"Buy what's going up." We are very optimistic that these moves will get us back
in synch with the current market.
Just kidding. Repeat: just kidding. REPEAT: JUST KIDDING.
4
THE OAKMARK FUND
<PAGE>
........................................................................
This has been a frustrating year and quarter for us (and for virtually all value
investors, be they large cap, small cap, international--whatever). For the year,
we lagged behind the S&P 500 by thirteen percent and, for the quarter, four
percent. Last quarter, I discussed what I consider to be the reasons for this,
and things have not changed. Frankly, many professional investors tend to be
either paralyzed by the market weakness or, even worse, abandon their stated
philosophies in pursuit of "performance." Many mutual fund managers encounter
pressure from their shareholders and bosses to "do something"; generally, this
means buying the hot stocks and selling the cold ones.
What are we doing? Well, both in our business affairs and our investment
execution, we always do the same thing no matter what the environment. We
continue to adhere to our philosophy and tune out all the noise. In fact, I am
more confident about our Fund's prospects than I have been in a long time.
Apparently, the managements of most of our holdings agree, as share repurchase
activity among our holdings is at a very high level. As I have said before, we
do not regard share buybacks as a panacea, but when stocks are trading
significantly below value, they are a very efficient way to increase long-term
value per share. In the market declines of 1987 and 1990, these were early
indicators of under-valuation in many stocks. I believe it will also be the case
this time.
As I write this, we are seeing very attractive buying opportunities and, in
fact, putting our cash reserves to work. As many of our competitors adopt
shorter and shorter investment time-frames, we find less competition from others
with our long-term time-frame. While the volatility and uncertainty we are
witnessing is not pleasant, it does present us with opportunities that should
pay off over time. In future quarters, I hope to discuss individual investments
at length.
In closing, and mining the same vein that characterized this summer's most
famous speech, I take complete responsibility for the performance of the Fund,
this has gone on too long and hurt too many innocent people. If I have ever
misled anyone--even my wife--that returns would be straight up to the moon, I
offer my regret. God bless you and God bless The Oakmark Fund!
HEDGE FUND 101
What do you get in an investment firm where partners are ex-Vice Chairman of the
Fed, two Nobel Prize winners in economics, and one of the all-time legendary
traders? Answer: a decline in your portfolio of over 90 percent this year.
Long-Term Capital Management was once a successful hedge fund that has
been--alas!--in the news a lot recently.
A hedge fund is an investment vehicle whose investors are institutions and very
wealthy individuals. Due to this clientele, hedge funds are exempt from most of
the onerous regulations that other financial institutions--such as banks and
mutual funds--must follow. While hedge funds follow a large variety of
strategies, most use borrowed money to enhance returns.
The ironically named Long-Term Capital Management was formed by an ex-Solomon
Brothers trader who figured prominently in the book LIAR'S POKER. Its specialty
was in the fixed-income area. Generally, using computer models, its strategy was
to buy and short a wide variety of debt securities that its computers identified
as mispriced. During this past summer, Long-Term's portfolio consisted of about
$100 billion of securities, and the fund itself had partner equity of around
$3.5 billion. This leverage ratio of almost 30:1 made the fund a high-octane one
but also made it very vulnerable if its model failed. Thus, after financing
costs, if Long-Term was able to eke out a one percent gain from its portfolio,
the leverage would allow the partners to realize a return of 30%.
Long-Term Capital attracted some very savvy investors, including the heads of
many of Wall Street's most prominent firms. The terms were pretty tough:
investors paid a management fee plus a percentage of profits, were given only a
sketchy annual peek at the portfolio, and had to commit capital for three years.
With the outsized gains that were generated, why worry?
Well, just like the seemingly infallible HAL in 2001: A SPACE ODYSSEY,
Long-Term's computers made a boo-boo. Its models undoubtedly were sophisticated,
but depended upon order in the markets in which it invested. (This was the same
assumption that blew up portfolio insurance, which was partly responsible for
the Crash of 1987). Well, this summer saw volatile, disorderly markets. Long-
Term's bets were off, and the leverage magnified them. Long-Term has surrendered
virtual control to a passel of
THE OAKMARK FUND
5
<PAGE>
........................................................................
financial institutions who had lent it all that money.
Personally, I think the long-term effects of Long-Term's demise are negligible.
Its clients can afford the loss and should have known about the risk. Perhaps
lenders to hedge funds will now exercise more discretion. However, the long-term
effect on the economy and the stock market is nil.
Individual investors can learn two important lessons from Long-Term. The first
is a skepticism towards focusing soley on the historical returns of an
investment vehicle. Just looking at the returns Long-Term was generating in its
first few years of existence enticed a lot of people who should have known
better. A responsible investor should know how one's money is being invested,
the philosophy behind it, the leverage and any derivatives used, etc. The second
is the ironclad relation between risk and return. Prior to this year, Long-Term
had racked up great returns with an apparently low-risk system. We now know the
risk was far greater than had been assumed by its investors.
[SIGNATURE]
ROBERT J. SANBORN
Portfolio Manager
[email protected]
October 5, 1998
6
THE OAKMARK FUND
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--88.5%
FOOD & BEVERAGE--15.2%
Philip Morris Companies Inc. 13,810,700 $ 636,155,369
H.J. Heinz Company 4,007,250 204,870,656
Gallaher Group Plc (b) 3,835,500 112,667,812
Nabisco Holdings Corporation, Class A 2,572,100 92,434,844
The Quaker Oats Company 118,000 6,962,000
--------------
1,053,090,681
APPAREL--6.1%
Nike, Inc., Class B 11,457,100 $ 421,764,494
RETAIL--0.3%
American Stores Company 648,400 $ 20,870,375
OTHER CONSUMER GOODS & SERVICES--20.1%
Mattel, Inc. 13,439,400 $ 376,303,200
The Black & Decker Corporation (c) 8,267,000 344,113,875
H&R Block, Inc. (c) 7,665,800 317,172,475
Polaroid Corporation (c) 4,552,400 111,818,325
Brunswick Corporation (c) 7,280,800 94,195,350
Fortune Brands, Inc. 2,746,800 81,373,950
Juno Lighting, Inc. (c) 1,085,000 24,276,875
First Brands Corporation 1,070,400 23,348,100
GC Companies, Inc. (a)(c) 397,000 15,334,125
--------------
1,387,936,275
BANKS & THRIFTS--14.0%
Banc One Corporation 8,800,548 $ 375,123,359
Washington Mutual, Inc. 10,100,000 340,875,000
Mellon Bank Corporation 4,540,500 250,011,281
--------------
966,009,640
INSURANCE--1.3%
Old Republic International Corporation 4,122,930 $ 92,765,925
PUBLISHING--4.8%
Knight-Ridder, Inc. (c) 6,929,400 $ 308,358,300
R. H. Donnelley Corporation (c) 2,098,260 25,965,967
--------------
334,324,267
INFORMATION SERVICES--5.6%
The Dun & Bradstreet Corporation (c) 10,491,300 $ 283,265,100
ACNielsen Corporation (c) 4,764,000 105,999,000
--------------
389,264,100
COMPUTER SERVICES--2.2%
Electronic Data Systems Corporation 4,588,000 $ 152,264,250
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FUND
7
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--88.5% (CONT.)
MEDICAL CENTERS--3.9%
Columbia/HCA Healthcare Corporation 13,601,000 $ 272,870,063
MEDICAL PRODUCTS--0.9%
Sybron International Corporation (a) 3,135,600 $ 59,968,350
AUTOMOTIVE--0.5%
SPX Corporation (a)(c) 875,200 $ 36,156,700
AEROSPACE & DEFENSE--9.1%
Lockheed Martin Corporation 3,625,000 $ 365,445,312
The Boeing Company 7,599,400 260,754,413
--------------
626,199,725
MACHINERY & INDUSTRIAL PROCESSING--2.5%
Eaton Corporation 2,721,100 $ 170,578,956
FORESTRY PRODUCTS--0.1%
Fort James Corporation 237,200 $ 7,783,125
MINING--1.2%
DeBeers Centenary AG (b) 6,546,000 $ 82,234,125
OTHER INDUSTRIAL GOODS & SERVICES--0.7%
Bandag Incorporated, Class A 1,104,100 $ 34,227,100
The Geon Company 971,600 17,245,900
--------------
51,473,000
TOTAL COMMON STOCKS (COST: $5,810,888,085) 6,125,554,051
SHORT TERM INVESTMENTS--11.0%
GOVERNMENT AND AGENCY SECURITIES--1.4%
U.S. GOVERNMENT BILLS--1.4%
United States Treasury Bills, 4.29%-5.15%
due 10/15/1998-1/14/1999 $100,000,000 $ 99,199,666
--------------
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $99,146,486) 99,199,666
</TABLE>
8
THE OAKMARK FUND
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--11.0% (CONT.)
COMMERCIAL PAPER--7.4%
American Express Credit Corp., 5.27%-5.55%
due 10/1/1998-10/14/1998 $180,000,000 $ 180,000,000
Ford Motor Credit Corp., 5.40%-5.55% due
10/1/1998-10/9/1998 160,000,000 160,000,000
General Electric Capital Corporation,
5.45%-5.70% due 10/1/1998-10/5/1998 170,000,000 170,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $510,000,000) 510,000,000
REPURCHASE AGREEMENTS--2.2%
State Street Repurchase Agreement, 5.30%
due 10/1/1998 $153,865,000 $ 153,865,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $153,865,000) 153,865,000
TOTAL SHORT TERM INVESTMENTS (COST: $763,011,486) 763,064,666
Total Investments (Cost $6,573,899,571)--99.5% (d) $6,888,618,717
Other Assets In Excess Of Other Liabilities--0.5% 35,339,165
--------------
TOTAL NET ASSETS--100% $6,923,957,882
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depository Receipt.
(c) See footnote number five in the Notes to Financial Statements
regarding transactions in affiliated issuers.
(d) At September 30, 1998, net unrealized appreciation of
$314,719,146, for federal income tax purposes consisted of
gross unrealized appreciation of $1,142,918,937 and gross unrealized
depreciation of $828,199,791.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FUND
9
<PAGE>
THE OAKMARK SELECT FUND
REPORT FROM BILL NYGREN, PORTFOLIO MANAGER
........................................................................
[PHOTO]
- --------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK
SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT
(9/30/98) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK
SELECT FUND S & P 500
<S> <C> <C>
10/96 $10,000 $10,000
1/97 $12,500 $11,202
4/97 $12,250 $11,470
7/97 $15,290 $13,721
9/97 $16,340 $13,659
12/97 $17,704 $14,053
3/98 $20,078 $16,021
6/98 $20,462 $16,551
9/98 $16,936 $14,904
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 9/30/98
TOTAL RETURN FROM FUND INCEPTION
9/30/98 NAV $16.76 LAST 3 MOS. 11/1/96
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK SELECT FUND -17.2% 31.7%
Standard & Poor's 500 Stock
Index w/inc** -10.0% 23.2%
Standard & Poor's MidCap 400
Index w/ inc** -14.5% 14.7%
Value Line Composite Index** -19.6% 3.8%
</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.
For fiscal 1998, The Oakmark Select Fund increased in value by 3.6%. That
performance looks especially good versus the 6.3% decline in the S&P MidCap 400.
In fact, your fund outperformed 98% of the other funds classified by Morningstar
as midcap value funds. Continued strong performance by our cable TV holdings,
especially our largest holding Cablevision
Systems, was the main contributor to these results. Unlike the full year, the
fourth quarter was disappointing as the fund's decline exceeded the drop in the
Index. Although the fund declined less from the July 20 peak than did the MidCap
Index, (16.0% vs. 18.2%), we weren't able to overcome the loss that occurred in
the first week of the quarter when US Industries reported disappointing results.
Our equity weighting at the end of the quarter, 88.3%, was slightly below the
90% level that I've indicated would normally be our minimum. This situation was
created by an unusual combination of events on the last two days of the quarter
including new money coming into the fund, a sharp down market and a tactical
decision to defer purchasing a new position. You should view the current cash
position as extremely unusual and very temporary (it will likely be back to
normal by the time you receive this!). We have no ability to predict the market
level, and because of that, we don't use cash as a market timing tool.
Declines in individual stock prices this quarter seemed to have little
correlation with underlying business value. Because of that, your fund had more
turnover than usual as we opportunistically took steps to improve the portfolio.
As always, we look for transactions that maximize the portfolio's undervaluation
and our confidence in that undervaluation. In addition, we strive to make
portfolio changes as tax-efficiently as possible. I think the portfolio today is
unusually attractive relative to other stock market opportunities. The S&P 500
at September 30 sold at about 23 times estimated 1999 earnings. Excluding our
two cable TV holdings (which aren't valued on a P/E basis), The Oakmark Select
Fund had a weighted average P/E on 1999 estimates of 11.5 times. Look at the
quality
10
THE OAKMARK SELECT FUND
<PAGE>
........................................................................
companies we own and I believe you will agree that a 50% discount to the market
P/E is excessive. This inexpensive valuation should allow us to continue toward
our goal of exceptional long-term performance.
HOW BIG IS TOO BIG?
By far the most frequently asked question in your e-mails is: "When should The
Oakmark Select Fund close?" The topic of optimal fund size has received a great
deal of attention this year thanks largely to the excellent work John Bogle, Jr.
of Numeric Investors did explaining why his funds closed. Unfortunately, it
seems his conclusion--close the funds--has received much more press than has his
well-articulated rationale. I'd like to look at that rationale and see how it
applies to The Oakmark Select Fund.
Intuitively, we all know that there are limits to how much money can be
effectively managed with any investment strategy that attempts to perform better
than the overall market. As assets under management grow, the number of
investments goes up, each position size increases and the cost to enter and exit
each position also goes up. What Mr. Bogle did was to measure the reduction in
his return caused by price movements his own trading created. By quantifying
those costs, Mr. Bogle found that his investment approach maximized expected
excess return with just $350 million under management.
What can we learn from his analysis? Most important, because trading costs are
the key issue, capacity is constrained by trading volume, not assets under
management. Since different investment styles require different levels of
trading, they have different capacity. Mr. Bogle identifies three variables that
determine a fund's trading cost: the average holding period, the amount of a
company being purchased and, lastly, the role stock price momentum plays in the
stock selection process. His style, short holding periods for small cap
companies that show positive price momentum, has very limited capacity. At the
other extreme, a contrarian approach of buying and holding very large companies
would have nearly limitless capacity.
How does The Oakmark Select Fund compare? Mr. Bogle's average holding is an $800
million market cap company that he holds for four months. Our average market cap
today is about $4 billion and our turnover implies a three-year holding period.
Per dollar in the fund, he trades nine times as often as we do and is buying
companies that are about 20% as large as ours. By multiplication, our Fund could
handle 45 times more assets. Further, costs per trade are much higher for
strategies that wait for positive price action before a stock is purchased.
While our approach is indifferent to stock price momentum, generally our buy
targets are hit when a stock is unloved, and our sell targets hit when the stock
is quite popular. Because our trades often go against the trend, our market
impact is typically much less significant.
Capacity for The Oakmark Select Fund, as measured purely by trading costs, would
be a very large number. In fact, we have imposed a much tighter constraint. We
have said that the fund will generally hold twenty or fewer positions and we
want the ability to make meaningful investments in midcap companies when we feel
they are attractively priced. The midcap universe today is commonly defined to
have an average market cap of about $3 billion (that definition was created when
stock prices were much lower, and I think it should now be well above $3
billion). To invest 5% of the fund's assets without owning more than 5% of an
average midcap company, our assets could not be greater than the size of that
average company.
What benefits do current shareholders receive from allowing assets to increase?
The most significant benefit is increased tax-efficiency. Because of our
long-term holding periods, our gains are normally not only deferred, but also
taxed at lower long-term rates. A growing fund gets additional tax benefits.
First, some realized gains are avoided because position sizes can be reduced by
simply allowing new money to dilute these positions. In a closed fund, it would
require a sale, which would generate a taxable gain. Second, both realized and
unrealized taxable gains are shared with the new investors even though they
didn't benefit from them. The flip side of the argument, that it may be unwise
to buy into a fund with a large unrealized gain, is that existing investors have
their per-share taxable gains reduced.
So, if The Oakmark Select Fund becomes larger than an average midcap stock, we
don't develop a large unrealized gain, and we haven't addressed closing, send me
e-mails reminding me of this letter. Until then, we welcome new investors
because we believe we all benefit from their joining us. Thank you for your
continued support.
[SIGNATURE]
WILLIAM C. NYGREN
Portfolio Manager
[email protected]
October 1, 1998
THE OAKMARK SELECT FUND
11
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--88.3%
RETAIL--8.2%
Gucci Group (b) 2,787,900 $ 100,712,887
OTHER CONSUMER GOODS & SERVICES--5.8%
Host Marriott Corporation (a) 3,260,900 $ 41,372,669
Ralston Purina Group 1,016,400 29,729,700
--------------
71,102,369
BANKS & THRIFTS--8.0%
Washington Mutual, Inc. 1,725,000 $ 58,218,750
People's Bank of Bridgeport, Connecticut 1,642,600 40,243,700
--------------
98,462,450
INSURANCE--8.2%
PartnerRe Ltd. (c) 2,522,600 $ 101,061,662
BROADCASTING & CABLE TV--13.8%
Cablevision Systems Corporation, Class A
(a) 3,930,200 $ 169,735,512
TV PROGRAMMING--4.4%
Tele-Communications, Liberty Media, Class A
(a) 1,453,550 $ 53,327,116
INFORMATION SERVICES--4.0%
The Dun & Bradstreet Corporation 1,818,600 $ 49,102,200
COMPUTER SERVICES--7.2%
First Data Corporation 1,900,000 $ 44,650,000
Electronic Data Systems Corporation 1,310,900 43,505,494
--------------
88,155,494
MEDICAL PRODUCTS--6.0%
Amgen, Inc. (a) 975,000 $ 73,673,438
BUILDING MATERIALS & CONSTRUCTION--9.7%
USG Corporation (d) 2,740,800 $ 118,539,600
OTHER INDUSTRIAL GOODS & SERVICES--3.8%
Premark International, Inc. 1,678,800 $ 47,111,325
DIVERSIFIED CONGLOMERATES--9.2%
U.S. Industries, Inc. (d) 7,514,000 $ 113,179,625
TOTAL COMMON STOCKS (COST: $1,075,412,040) 1,084,163,678
</TABLE>
12
THE OAKMARK SELECT FUND
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--12.0%
GOVERNMENT AND AGENCY SECURITIES--3.2%
U.S. GOVERNMENT BILLS--3.2%
United States Treasury Bills, 4.29%-5.07%
due 10/8/1998-1/14/1999 $40,000,000 $ 39,709,859
--------------
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $39,688,587) 39,709,859
COMMERCIAL PAPER--6.1%
American Express Credit Corp., 5.27%-5.55%
due 10/1/1998-10/9/1998 $25,000,000 $ 25,000,000
Ford Motor Credit Corp., 5.30%-5.53% due
10/1/1998-10/7/1998 20,000,000 20,000,000
General Electric Capital Corporation, 5.70%
due 10/1/1998 30,000,000 30,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $75,000,000) 75,000,000
REPURCHASE AGREEMENTS--2.7%
State Street Repurchase Agreement, 5.30%
due 10/1/1998 $32,399,000 $ 32,399,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $32,399,000) 32,399,000
TOTAL SHORT TERM INVESTMENTS (COST: $147,087,587) 147,108,859
Total Investments (Cost $1,222,499,627)--100.3% (e) $1,231,272,537
Other Liabilities In Excess Of Other Assets--(0.3)% (3,378,151)
--------------
TOTAL NET ASSETS--100% $1,227,894,386
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depository Receipt.
(c) Represents foreign domiciled corporation.
(d) See footnote number five in the Notes to Financial Statements
regarding transactions in affiliated issuers.
(e) At September 30, 1998, net unrealized appreciation of $8,772,910,
for federal income tax purposes consisted of gross unrealized
appreciation of $155,507,575 and gross unrealized depreciation of
$146,734,665.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK SELECT FUND
13
<PAGE>
THE OAKMARK SMALL CAP FUND
REPORT FROM STEVEN J. REID, PORTFOLIO MANAGER
........................................................................
[PHOTO]
- --------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS
INCEPTION (11/1/95) TO PRESENT (9/30/98) AS COMPARED TO THE RUSSELL 2000 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK
SMALL CAP FUND RUSSELL 2000
<S> <C> <C>
10/95 $10,000 $10,000
1/96 $10,180 $10,684
4/96 $12,180 $11,841
7/96 $11,830 $10,772
10/96 $13,190 $11,661
1/97 $15,180 $12,708
4/97 $15,170 $11,848
7/97 $18,730 $14,369
9/97 $20,340 $15,774
12/97 $20,290 $15,245
3/98 $21,732 $16,779
6/98 $20,467 $15,997
9/98 $14,976 $12,774
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 9/30/98
TOTAL RETURN FROM FUND INCEPTION
9/30/98 NAV $12.63 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK SMALL CAP FUND -26.8% 14.9%
Lipper Small Cap Fund Index** -21.4% 5.0%
Russell 2000 w/ inc** -20.2% 8.8%
S&P Small Cap 600 w/inc** -20.9% 10.9%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions.
**Each of the three indexes or averages is an unmanaged group of stocks or funds
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.
Fortunately, The Oakmark Small Cap Fund's fiscal year ended on September 30,
1998. Results for the fourth quarter and the fiscal year were very
disappointing. The shares of small cap companies have not performed well this
year and continue to trail the broad market. Unfortunately, The Oakmark Small
Cap Fund's results lagged the relevant small cap indices.
"It was the worst of times, it was the best of times." SJR, PM.
Small cap stocks have been through a very difficult period. It is not uncommon
to see a company's shares trading at prices that are down 30% or more from their
annual highs. Nor, is it uncommon to see a company's shares trading at prices
that represent their annual lows. The indices that measure the performance of
the shares of small cap stocks have underperformed the broad market indices for
years. The question I am frequently asked is: "When will small caps start to do
well again?" I honestly don't know the answer. I don't think we will really know
the answer until we can clearly see it in the rear view mirror three to six
months after it has happened. Robert McGough of the Wall Street Journal wrote in
a recent article: "Predictions of the revival of small-company stocks have been
coming about as regularly as Elvis sightings--and so far have had about as much
substance too." Leaving predictions to the gurus and pundits, our focus should
be on where we are now.
I believe we are in the midst of the mutated Dickens quote from above. While
there is no doubt that there are some very unsettling events occurring across
the globe, we need to look beyond the headlines. As investors, we need to be
forward looking. The underperformance of the shares of small cap companies is an
opportunity. Historically, small cap stocks have traded at price earnings (P/E)
ratios that are greater than those of large cap stocks. Very rarely do small cap
stocks trade at a P/E ratio equal to or less than large cap stocks. Right now is
one of
14
THE OAKMARK SMALL CAP FUND
<PAGE>
........................................................................
those rare occasions where small cap stocks are cheaper than large cap stocks.
In fact, we are able to buy small cap stocks that are trading at P/E multiples
that are less than ten times earnings, which is less than half the small or
large cap P/E multiple. Our experience has been that remaining patient and
consistent with our investment philosophy will be rewarded.
REDEMPTIONS, DISTRIBUTIONS, AND RE-OPENING
One year ago, the total assets of The Oakmark Small Cap Fund were over $1.5
billion. At the end of this past fiscal year total assets are over $600 million.
Although it feels like we lost about $900 million, we did not. In fact, net
redemptions, the amount shareholders take out of the Fund less the amount they
put into the Fund, amounted to over $600 million of the change in assets. What
is the effect of redemptions on the Fund? There are several that stand out.
First, redemptions require the Fund to sell portfolio securities in order to
make payments to shareholders who have elected to redeem their shares of the
Fund. Essentially, the Fund was selling solely to create liquidity for
redemptions, not because these investments had met our investment targets. The
second effect, although not quantifiable, is the effect forced selling of our
investments has on the share prices of these companies.
There are several unavoidable events in life--they include death, taxes, and
mutual fund distributions. The Internal Revenue Service requires that mutual
funds annually distribute to shareholders any income and realized capital gains.
Since the Fund's inception, there has been relatively low turnover and hence
very little realized gain distributed to shareholders. Unfortunately, another
significant effect of net redemptions after the portfolio has appreciated is
that they force the Fund to realize a significant amount of gains. Those gains,
which were all long-term, were distributed to shareholders in early August. We
anticipate that any additional distribution will be minimal. It is also worth
noting that the Fund currently is carrying a fairly significant unrealized loss
in the portfolio. Hence, going forward we should be in a fairly benign tax
position.
Investors' disinterest in small cap stocks has reduced the level of competition
for both the sourcing and purchasing of new investments for the Fund. During the
quarter we added five new companies to the portfolio. These companies are all
close to their annual lows and between thirty and seventy percent below their
annual highs. In order to take advantage of the opportunities we were seeing in
the marketplace, the Fund "re-opened" to new investors at the beginning of
September. This has helped stem the level of redemptions, mitigating the adverse
effects noted above. We believe that new shareholders, as well as existing
shareholders, own the Fund for the right reasons...meaning that they want
exposure to small cap value stocks and are intrigued by the long-term
opportunities available to us. In the future, should the level of inflows be too
large or our opportunities to prudently invest the money not be available, we
will take the appropriate action.
Once again, I would like to thank everyone involved, especially our
shareholders, for your support of The Oakmark Small Cap Fund.
[SIGNATURE]
STEVEN J. REID
Portfolio Manager
[email protected]
October 6, 1998
THE OAKMARK SMALL CAP FUND
15
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--91.9%
FOOD & BEVERAGE--11.2%
Ralcorp Holdings, Inc. (a)(b) 1,750,000 $ 24,500,000
Triarc Companies, Inc. (a)(b) 1,250,000 19,453,125
Vlasic Foods International Inc. (a) 500,000 9,343,750
International Multifoods Corporation 500,000 8,218,750
M & F Worldwide Corp. (a) 750,000 7,453,125
--------------
68,968,750
RETAIL--3.7%
Department 56, Inc. (a) 520,000 $ 14,040,000
Ugly Duckling Corporation (a)(b) 1,676,200 8,695,288
--------------
22,735,288
OTHER CONSUMER GOODS & SERVICES--13.0%
First Brands Corporation 1,250,000 $ 27,265,625
Scotsman Industries, Inc. (b) 983,000 22,240,375
Libbey, Inc. 420,500 12,404,750
Barry (R.G.) Corporation (a)(b) 849,100 11,781,262
P.H. Glatfelter Company 500,000 6,531,250
--------------
80,223,262
BANKS & THRIFTS--11.5%
People's Bank of Bridgeport, Connecticut 2,000,000 $ 49,000,000
BankAtlantic Bancorp, Inc., Class A 1,000,001 7,187,507
Northwest Bancorp Inc. 550,000 5,637,500
Niagara Bancorp Inc. (a) 400,000 3,925,000
PennFed Financial Services, Inc. 260,000 3,445,000
Finger Lakes Financial Corp. (b) 188,000 2,068,000
--------------
71,263,007
INSURANCE--2.3%
Financial Security Assurance Holdings Ltd. 292,600 $ 14,264,250
OTHER FINANCIAL--5.5%
ARM Financial Group, Inc., Class A 1,000,000 $ 17,750,000
Duff & Phelps Credit Rating Co. (b) 350,000 16,121,875
--------------
33,871,875
BROADCASTING & CABLE TV--6.8%
Cablevision Systems Corporation, Class A
(a) 689,800 $ 29,790,737
Ascent Entertainment Group, Inc. (a)(b) 1,500,000 12,000,000
--------------
41,790,737
TELECOMMUNICATIONS--0.9%
ROHN Industries, Inc. (b) 3,000,000 $ 5,812,500
COMPUTER SERVICES--1.5%
Symantec Corporation (a) 725,000 $ 9,560,938
</TABLE>
16
THE OAKMARK SMALL CAP FUND
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--91.9% (CONT.)
AUTOMOTIVE--7.9%
SPX Corporation (a) 500,000 $ 20,656,250
Stoneridge, Inc. (a) 1,000,000 16,187,500
Standard Motor Products, Inc. 500,000 12,187,500
--------------
49,031,250
TRANSPORTATION SERVICES--2.7%
Teekay Shipping Corporation (c) 900,000 $ 16,368,750
MACHINERY & INDUSTRIAL PROCESSING--1.9%
Northwest Pipe Company (a)(b) 500,000 $ 9,250,000
The Carbide/Graphite Group, Inc. (a) 240,000 2,670,000
--------------
11,920,000
FORESTRY PRODUCTS--0.8%
Schweitzer-Mauduit International, Inc. 216,500 $ 4,708,875
OTHER INDUSTRIAL GOODS & SERVICES--10.3%
Ferro Corporation 900,000 $ 17,887,500
Columbus McKinnon Corporation (b) 900,000 17,325,000
MagneTek, Inc. (a) 1,500,000 16,406,250
H.B. Fuller Company 200,000 7,575,000
Binks Sames Corporation (b) 275,000 4,675,000
--------------
63,868,750
COMMERCIAL REAL ESTATE--4.1%
Catellus Development Corporation (a) 1,500,000 $ 19,500,000
Prime Hospitality Corp. 800,000 5,600,000
--------------
25,100,000
DIVERSIFIED CONGLOMERATES--7.8%
U.S. Industries, Inc. 3,200,000 $ 48,200,000
TOTAL COMMON STOCKS (COST: $633,782,649) 567,688,232
SHORT TERM INVESTMENTS--7.8%
COMMERCIAL PAPER--5.6%
American Express Credit Corp., 5.27%-5.55%
due 10/1/1998-10/6/1998 $15,000,000 $ 15,000,000
Ford Motor Credit Corp., 5.40% due
10/2/1998 5,000,000 5,000,000
General Electric Capital Corporation, 5.70%
due 10/1/1998 15,000,000 15,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $35,000,000) 35,000,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK SMALL CAP FUND
17
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS--2.2%
State Street Repurchase Agreement, 5.30%
due 10/1/1998 $13,543,000 $ 13,543,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $13,543,000) 13,543,000
TOTAL SHORT TERM INVESTMENTS (COST: $48,543,000) 48,543,000
Total Investments (Cost $682,325,649)--99.7% (d) $ 616,231,232
Other Assets In Excess Of Other Liabilities--0.3% 1,763,530
--------------
TOTAL NET ASSETS--100% $ 617,994,762
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) See footnote number five in the Notes to Financial Statements
regarding transactions in affiliated issuers.
(c) Represents foreign domiciled corporation.
(d) At September 30, 1998, net unrealized depreciation of $66,094,417,
for federal income tax purposes consisted of gross unrealized
appreciation of $47,329,047 and gross unrealized depreciation of
$113,423,464.
18
THE OAKMARK SMALL CAP FUND SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
REPORT FROM CLYDE S. MCGREGOR, PORTFOLIO MANAGER
........................................................................
[PHOTO]
- --------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS
INCEPTION (11/1/95) TO PRESENT (9/30/98) AS COMPARED TO THE LIPPER BALANCED FUND
INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK LIPPER BALANCED
EQUITY & INCOME FUND FUND INDEX
<S> <C> <C>
10/95 $10,000 $10,000
1/96 $10,290 $10,662
4/96 $10,630 $10,778
7/96 $10,660 $10,665
10/96 $11,290 $11,449
1/97 $12,255 $12,197
4/97 $12,429 $12,244
7/97 $14,289 $13,909
9/97 $14,810 $14,005
12/97 $14,941 $14,243
3/98 $16,233 $15,370
6/98 $16,320 $15,599
9/98 $15,191 $14,701
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 9/30/98
TOTAL RETURN FROM FUND INCEPTION
9/30/98 NAV $13.99 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK EQUITY & INCOME
FUND -6.9% 15.4%
Lipper Balanced Fund Index** -5.8% 14.1%
Lehman Govt./ Corp. Bond** 5.0% 8.6%
S&P 500 w/ inc** -10.0% 23.5%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions.
**Each of the three indexes or averages is an unmanaged group of stocks or funds
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.
THE SUMMER OF OUR DISCONTENT
Last quarter saw the end of two wonderful streaks: Cal Ripken Jr.'s record for
consecutive baseball games and the Equity and Income Fund's heretofore
unblemished record of positive return quarters. Time and volatile markets made
it inevitable that these streaks would end, but both are regrettable
developments. Investor confidence seemed to evaporate worldwide during the
summer, and the resulting "flight to liquidity" proved quite painful for some of
our mid-cap equity holdings. The portfolio's fixed income position did its part
to buffer volatility, however, earning a positive total return of 4.6%.
It is important to remember that the market prices on businesses are far more
volatile than the intrinsic values of those businesses. None of the Fund's
holdings announced a loss, fraud, or dividend cut during the quarter. Some
bought back their shares, others announced new repurchase authorizations, and
most saw high levels of share purchases by their own management and directors.
In all cases management has been and is now working hard to increase the value
per share of their business.
In keeping with these deflationary times, the stock market has declared a
clearance sale on most issues. At The Oakmark Family of Funds, we own pieces of
businesses that the stock market has allowed us to purchase for less than their
intrinsic value. We believe that the opportunities which the summer's selloff
has created will prove to be the foundation of future investment returns.
THE STRENGTH OF THE (FIXED INCOME) STRATEGY
While the stock market's difficulties have gotten most of the press recently,
times have also been very tough in the corporate bond market. Risk premiums for
corporate bonds have widened dramatically over the last six months, in part
because of the well-publicized problems of a major hedge fund.
THE OAKMARK EQUITY AND INCOME FUND
19
<PAGE>
........................................................................
Since the Fund's inception, my strategy in fixed income investing has been to
maintain a "quality barbell" of at least 25% in US Treasury notes augmented with
high yield investments developed as byproducts of our equity work. I have
avoided investment grade corporate debt because the spreads versus Treasury
notes were inadequate for all but the most perfect environment. Now that the
world is seen as a risky place again, spreads have expanded to more typical
levels.
How has the strategy worked out in this period of transition from "all news is
good news" to "all news is bad news?" Splendidly. Returns on the Fund's fixed
income position were positive in every month of fiscal 1998. This outcome
resulted in part because I let the percentage allocation for high yield issues
diminish during the year. The one area of increased commitment has been
preferred stocks, specifically trust preferreds (discussed in my August 1997
report). I am pleased to report that all of the Trust preferreds achieved a
positive return in fiscal 1998 despite unfavorable market conditions.
In closing this section, I will note that should current trends continue, I
might have the opportunity to add investment grade issues to the portfolio. I am
not opposed to higher graded bonds; I am opposed to overpaying for them.
MIGHTY OAKS AWARDS
With the close of the fiscal year it is time to issue the Mighty Oaks Awards.
The awards recognize the stock and fixed income investments which achieve the
highest rates of return. Though 1998 proved to be a difficult year, several
issues did make large contributions to the Fund. While two-time award winner
Bill Nygren (of Oakmark Select) made a strong showing in the equity category
with Liberty Media (up 84%), he lost out to analyst Jim Benson who scored a 110%
return from Lexmark International.
Clients often ask us why our portfolios do not have representation in the
technology sector. The answer to this question derives from our investment
philosophy. Before we invest in a company's stock, we ask whether we would be
willing to own the entire company at the current price if we could never sell
shares again. Put differently, could we live off the cash flows that the
business produces if we paid today's price for the entire company? Leading edge
technology companies pose a great problem for our philosophy because of the risk
of obsolescence. We are, happy, however, to own companies that turn
technological innovation to their advantage.
Lexmark International is such a company. Originally the division of IBM which
made Selectric typewriters, Lexmark is now the second largest manufacturer of
printers. The business economics fit the razor/razor blade model. Lexmark's
profits from printers are small, but the company achieves high margins on
associated supplies (e.g. ink cartridges).
Jim recommended Lexmark for the Fund in May 1997, when the stock had dipped on
earnings and product worries. Part of what we do as value investors is to
position our portfolios to benefit from unexpected good fortune, and Lexmark
exemplifies this effort. Shortly after we purchased the stock, the company
introduced new products that were well received. And, the company's free cash
flow proved to be strong enough to support a significant share repurchase.
Congratulations to Jim for this wonderful recommendation.
This year's fixed income winner is Harris Associates' fixed income analyst,
Chris Pilat. Chris advised that I extend the duration of the fixed income
portfolio but keep overall quality high. The Fund's 7-year Treasury notes
returned 18% for the twelve months, 4% more than the Fund's highest-returning
high yield issue. Thanks, Chris, for pushing me out further on the yield curve.
THANKS
As the Fund nears its third anniversary, I would be remiss not to thank long
term shareholders for their support. The consistency and interest of the Fund's
shareholders has been most helpful. Please feel free to e-mail me with your
comments, questions or ideas for quarterly reports.
[SIGNATURE]
CLYDE S. MCGREGOR
Portfolio Manager
[email protected]
October 9, 1998
20
THE OAKMARK EQUITY AND INCOME FUND
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--57.4%
OFFICE EQUIPMENT--3.1%
Lexmark International Group, Inc., Class A
(a) 26,000 $ 1,802,125
OTHER CONSUMER GOODS & SERVICES--6.4%
Juno Lighting, Inc. 76,300 $ 1,707,213
H&R Block, Inc. 33,000 1,365,375
National Presto Industries, Inc. 17,000 637,500
--------------
3,710,088
BANKS & THRIFTS--4.7%
Washington Mutual, Inc. 50,000 $ 1,687,500
Banc One Corporation 23,674 1,009,104
--------------
2,696,604
INSURANCE--4.2%
PartnerRe Ltd. (b) 32,500 $ 1,302,031
Old Republic International Corporation 49,500 1,113,750
--------------
2,415,781
TV PROGRAMMING--3.4%
Tele-Communications, Liberty Media, Class A
(a) 52,800 $ 1,937,100
PUBLISHING--1.5%
Lee Enterprises, Inc. 33,900 $ 879,281
INFORMATION SERVICES--3.3%
The Dun & Bradstreet Corporation 70,000 $ 1,890,000
COMPUTER SERVICES--5.8%
First Data Corporation 80,000 $ 1,880,000
Electronic Data Systems Corporation 45,000 1,493,438
--------------
3,373,438
DATA STORAGE--4.0%
Imation Corp. (a) 125,000 $ 2,312,500
MEDICAL PRODUCTS--3.1%
Sybron International Corporation (a) 93,000 $ 1,778,625
AUTOMOTIVE--6.5%
Chrysler Corporation 42,000 $ 2,010,750
Lear Corporation (a) 40,000 1,750,000
--------------
3,760,750
OTHER INDUSTRIAL GOODS & SERVICES--2.7%
Premark International, Inc. 56,500 $ 1,585,531
</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, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--57.4% (CONT.)
COMMERCIAL REAL ESTATE--6.2%
Amli Residential Properties Trust 90,000 $ 1,918,125
Catellus Development Corporation (a) 127,728 1,660,464
--------------
3,578,589
DIVERSIFIED CONGLOMERATES--2.5%
U.S. Industries, Inc. 94,000 $ 1,415,875
TOTAL COMMON STOCKS (COST: $30,820,268) 33,136,287
FIXED INCOME--33.7%
PREFERRED STOCK--5.1%
BANKS & THRIFTS--5.1%
BBC Capital Trust I, Preferred, 9.50% 28,000 $ 714,000
Pennfed Capital Trust, Preferred, 8.90% 27,500 687,500
PennFirst Capital Trust 1, Preferred,
8.625% 70,000 673,750
RBI Capital Trust I, Preferred, 9.10% 42,500 430,312
Fidelity Capital Trust I, Preferred, 8.375% 43,500 424,125
--------------
2,929,687
TOTAL PREFERRED STOCK (COST: $2,970,738) 2,929,687
CORPORATE BONDS--2.4%
AEROSPACE & AUTOMOTIVE--0.3%
Coltec Industries, Inc., 9.75% due 4/1/2000 $150,000 $ 157,687
Coltec Industries, Inc., 9.75% due
11/1/1999 25,000 26,188
--------------
183,875
BUILDING MATERIALS & CONSTRUCTION--0.3%
USG Corporation, 9.25% due 9/15/2001,
Senior Notes Series B 150,000 $ 160,313
UTILITIES--0.3%
Midland Funding Corporation, 11.75% due
7/23/2005 150,000 $ 173,438
OTHER INDUSTRIAL GOODS & SERVICES--1.5%
Scotsman Industries, Inc., 8.625% due
12/15/2007, Senior Subordinated Note 565,000 $ 560,762
UCAR Global Enterprises Inc., 12.00% due
1/15/2005, Senior Subordinated Note 300,000 304,500
--------------
865,262
TOTAL CORPORATE BONDS (COST: $1,395,124) 1,382,888
</TABLE>
22
THE OAKMARK EQUITY AND INCOME FUND
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME--33.7% (CONT.)
GOVERNMENT AND AGENCY SECURITIES--26.2%
U.S. GOVERNMENT BONDS--25.7%
United States Treasury Notes, 7.875% due
11/15/2004 $6,000,000 $ 7,107,720
United States Treasury Notes, 7.50% due
5/15/2002 6,000,000 6,616,140
United States Treasury Notes, 6.25% due
2/15/2007 1,000,000 1,122,490
--------------
14,846,350
U.S. GOVERNMENT AGENCIES--0.5%
Federal Home Loan Bank, 6.405% due
4/10/2001, Consolidated Bond 300,000 $ 311,895
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $14,288,633) 15,158,245
TOTAL FIXED INCOME (COST: $18,654,495) 19,470,820
SHORT TERM INVESTMENTS--8.5%
COMMERCIAL PAPER--6.1%
American Express Credit Corp., 5.27% due
10/5/1998 $500,000 $ 500,000
Ford Motor Credit Corp., 5.55% due
10/1/1998 1,500,000 1,500,000
General Electric Capital Corporation, 5.70%
due 10/1/1998 1,500,000 1,500,000
--------------
TOTAL COMMERCIAL PAPER (COST: $3,500,000) 3,500,000
REPURCHASE AGREEMENTS--2.4%
State Street Repurchase Agreement, 5.30%
due 10/1/1998 $1,390,000 $ 1,390,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $1,390,000) 1,390,000
TOTAL SHORT TERM INVESTMENTS (COST: $4,890,000) 4,890,000
Total Investments (Cost $54,364,763)--99.6% (c) $ 57,497,107
Other Assets In Excess Of Other Liabilities--0.4% 248,748
--------------
TOTAL NET ASSETS--100% $ 57,745,855
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents foreign domiciled corporation.
(c) At September 30, 1998, net unrealized appreciation of $3,132,344,
for federal income tax purposes consisted of gross unrealized
appreciation of $5,429,008 and gross unrealized depreciation of
$2,296,664.
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
........................................................................
[PHOTO] [PHOTO]
- --------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS
INCEPTION (9/30/92) TO
PRESENT (9/30/98) COMPARED TO THE MORGAN STANLEY
WORLD EX U.S. INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK M.S. WORLD EX
INTERNATIONAL FUND U.S. INDEX
<S> <C> <C>
9/92 $10,000 $10,000
10/92 $9,800 $9,505
1/93 $10,833 $9,621
4/93 $12,105 $11,764
7/93 $12,608 $12,233
10/93 $14,454 $12,981
1/94 $16,488 $13,786
4/94 $15,382 $13,664
7/94 $15,195 $13,899
10/94 $15,122 $14,265
1/95 $13,698 $13,124
4/95 $14,399 $14,437
7/95 $15,507 $14,911
10/95 $14,659 $14,248
1/96 $16,248 $15,312
4/96 $18,162 $16,144
7/96 $17,635 $15,471
10/96 $18,310 $15,843
1/97 $19,909 $15,761
4/97 $21,149 $16,114
7/97 $22,960 $18,426
9/97 $23,283 $18,027
12/97 $20,097 $16,637
3/98 $22,994 $19,083
6/98 $20,253 $19,233
9/98 $16,322 $16,404
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 9/30/98
TOTAL RETURN FROM FUND INCEPTION
9/30/98 NAV $10.42 LAST 3 MOS. 9/30/92
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK INTERNATIONAL FUND -19.4% 8.5%
Morgan Stanley World ex U.S.
w/inc.** -14.7% 8.6%
Morgan Stanley EAFE w/ inc** -14.2% 8.6%
Lipper Analytical
International Fund Index** -15.8% 10.3%
</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 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 Index 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,
Disappointingly, your Fund dropped by 19.4% in the third quarter as turmoil in
the world equity markets intensified. As you can see by the comparative indices,
all were greatly negative with the MS EAFE falling by 14.2% and the Lipper
International Fund Index dropping by 15.8%. Virtually no market in the world was
unscathed with just two exceptions: Korea, up 11.8% and Thailand up 6.6%.
DON'T LET THE PUNDITS SCARE YOU!
As a result of the sharp drop in share price, the global market gurus are
predicting that the gloom and doom will last forever and one should avoid
exposure to the world equity markets, especially those in Latin America and
Asia. To us, this is just another reason why one should be ADDING to ones
positions at these levels. Consider some of their past statements:
"THE USA HAS A SEVERE PROBLEM WITH STRUCTURALLY HIGH INFLATION." This was the
mantra of the media economists in the early 1980's. Certainly if you would have
believed that conventional wisdom, you would have avoided the bond market
thereby missing one of the greatest rallies in history.
"THE USA HAS A SEVERE PROBLEM WITH STRUCTURALLY HIGH UNEMPLOYMENT." This was
conventional wisdom of the late 80's/early 90's. Remember Robert Reich? Of
course, this statement appears nonsensical now that the United States has the
lowest unemployment rate in the developed world.
"WE NEED TO BE MORE LIKE JAPAN AND GERMANY." This consensus began to build in
the late 1980's. Even presidential candidate Bill Clinton preached this static
opinion along with the pundit choir in the election of 1992. Luckily, we did not
become more like them
24
THE OAKMARK INTERNATIONAL FUND
<PAGE>
........................................................................
because Japan's bubble burst and Germany is struggling with genuinely high
structural unemployment. And, remember all of the late 80's fear-mongering over
Japanese ownership of USA assets? Popular authors like Michael Crichton and
closed-minded politicians believed that, from Rockefeller Center to Nebraska
farmland to the Pebble Beach golf club, the entirety of the United States would
be bought up by the invincible Japanese. If you believed this and invested in
Japanese stocks in the late 80's-early 90's you would be broke! By the way, has
anyone seen Lester Thurow lately? In 1992, you couldn't turn on a television set
without seeing this most zealous promoter of the Japanese economic model. He has
become remarkably scarce over the past few years.
"US DOLLAR HAS LOST ITS RESERVE STATUS. IT IS MOST ASSUREDLY ON ITS WAY TOY50
AND DM1.00." Most tel-economists and media-friendly strategists proclaimed this
as the dollar was crashing to new lows in 1995-1996. How wrong they were! The
dollar today is at Y120 and DM1.60 and seems to be the world's only safe haven.
Again, following the advice of conventional wisdom would have taken a
considerable chunk of your net worth.
"ONE SHOULD HAVE AT LEAST 10% OF YOUR PERSONAL NET WORTH IN EMERGING MARKETS. I
AM MAXIMUM BULLISH ON CHINA AND ASIA." This was the attitude of the day at the
end of 1993 when most emerging markets were up over 50%. Again, more of the same
by our global experts who, as you can see, earn their wages by telling you what
just happened, amplifying it and assuming the new amplified version will carry
on into perpetuity. By the way, long-term shareholders of Oakmark International
might remember that we had only 5% of the Fund's assets in Asia at the height of
this mania, given the lack of investments that met our value criteria.
AND, HERE ARE TODAY'S SAMPLES...
"THE JAPANESE YEN IS IN TERMINAL DECLINE. EXPECT IT TO DECLINE TO Y200."
Maybe...but maybe not. The important thing to note is that for the first time in
years we are finding Japanese companies that fit our value criteria and have
business formulas designed to succeed regardless of the direction of the Yen.
"EMERGING MARKETS SHOULD BE AVOIDED...THEY ARE JUST TOO RISKY AND VOLATILE."
Again, reporting rather than analysis. To us, this sounds like perfect
bottom-speak and probably indicates that long-term investors should seriously
consider increasing exposure to this asset class.
"FOREIGN STOCKS SHOULD BE AVOIDED...THEY ARE JUST TOO RISKY AND VOLATILE
COMPARED TO THE US MARKET." As mentioned above, all of these experts seem to be
able to do is to "report" via the rear-view mirror, that is, to tell us what has
already happened. Given what has happened in terms of price drops, one should be
adding, not cutting international holdings.
"ASIA IS DESTROYED, IT WILL BE YEARS BEFORE IT WILL RECOVER ECONOMICALLY." We
don't think the pundits understand Asia at all. Yes, it's tough there and will
continue to be for a while. However, the area has numerous fundamental strengths
that will prove the pundits wrong: solid physical and intellectual
infrastructure, low economy-wide debt levels with high rates of individual
savings, extremely flexible regulatory structures, generally a strong work ethic
and literacy rates, and an important intangible, a fierce "we can do it"
attitude. Investors also must keep in mind that with the unprecedented declines
in most of these markets, a great deal of economic instability has already been
discounted in the prices they are paying for businesses.
THE OAKMARK WAY...
To us, "pundit speak" is nothing more than distracting, random noise. Instead,
we focus on something that is concrete and analyzable: the value of a business.
To the greatest extent possible, we try hard to take advantage of the volatility
that exists in times like these by buying shares of companies that have become
undervalued. We are certain that these conditions are not permanent and that
when things appear most bleak, it is usually a good time to invest. However, we
also realize this is the time when it is most difficult to remain steadfast as a
shareholder. In this regard, it is important for you to hear how extremely
excited we are about the composition of The Oakmark International Fund. It is
full of quality businesses selling at uniquely low prices. We believe this will
eventually move the Fund to a strong future performance. Until this time, we
would like to again thank our fellow shareholders for their continued patience.
[SIGNATURE]
DAVID HERRO
Portfolio Manager
[email protected]
[SIGNATURE]
MICHAEL WELSH
Portfolio Manager
[email protected]
October 5, 1998
THE OAKMARK INTERNATIONAL FUND
25
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 1998
........................................................................
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
% of Fund % of Fund
Net Assets Net Assets
Europe 43.8% Pacific Rim 34.1%
Great Britain 26.0% Japan 9.6%
France 9.4% Hong Kong 7.4%
Finland 3.5% Singapore 7.0%
Italy 2.9% New Zealand 4.5%
Netherlands 2.0% Korea 3.3%
Australia 2.2%
Latin America 16.4% Malaysia 0.1%
Brazil 8.5%
Argentina 5.1%
Panama 2.8%
</TABLE>
26
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
COMMON STOCKS--94.3%
CONSUMER NON-DURABLES--5.7%
Fila Holding S.p.A. (Italy), Athletic Footwear Manufacturing
(b)(e) 2,574,800 $ 21,885,800
Citizen Watch Co. (Japan) Watch Manufacturer and Retailer 3,166,000 21,438,086
--------------
43,323,886
FOOD & BEVERAGE--10.1%
Quilmes Industrial SA Brewer
(Argentina), (b) 4,724,300 $ 38,680,206
Pernod Ricard (France) Manufactures Wines, Spirits, & Fruit 228,579 16,837,894
Juices
Tate & Lyle PLC (Great Sugar Producer & Distributor
Britain) 2,665,700 14,774,171
Lotte Chilsung Beverage Manufacturer of Soft Drinks, Juices, &
Company (Korea) (e) Sport Drinks 123,000 3,095,452
Lotte Confectionery Company Confection Manufacturer
(Korea) 65,270 2,933,219
--------------
76,320,942
HOUSEHOLD PRODUCTS--1.6%
Amway Japan Limited (Japan) Marketing of Household Products 1,630,300 $ 11,934,409
RETAIL--1.2%
Giordano International East Asian Clothing Retailer &
Limited (Hong Kong) (e) Manufacturer 69,304,000 $ 9,391,028
OTHER CONSUMER GOODS & SERVICES--6.8%
Canon, Inc. (Japan) Office and Video Equipment 1,007,000 $ 20,419,383
Sankyo Company, Ltd. (Japan) Pachinko Machine Manufacturer 1,234,800 16,722,520
Mandarin Oriental Hotel Management
International Limited
(Singapore) 30,539,000 14,353,330
--------------
51,495,233
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL FUND
27
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--94.3% (CONT.)
BANKS--8.2%
Uniao de Bancos Brasileiros Major Brazilian Bank
S.A. (Brazil), (c) 1,834,900 $ 24,771,150
Banco Latinoamericano de Multinational Bank
Exportaciones, S.A.,
Class E (Panama), (b)(e) 1,316,500 21,146,282
United Overseas Bank Ltd., Commercial Banking
Foreign Shares
(Singapore) 5,443,000 15,864,668
--------------
61,782,100
OTHER FINANCIAL--3.4%
Sedgwick Group plc (Great Insurance Broker, Financial Services
Britain) 7,510,000 $ 25,343,973
MARKETING SERVICES--9.5%
Cordiant Communications Advertising Services
Group plc (Great Britain)
(e) 21,997,578 $ 40,015,927
Saatchi & Saatchi plc (Great Advertising Services
Britain), (e) 17,757,578 31,699,125
--------------
71,715,052
BROADCASTING & PUBLISHING--5.3%
Singapore Press Holdings Newspaper Publisher
Ltd. (Singapore) 2,740,000 $ 22,725,119
Europe 1 Communication Television Production
(France) 74,020 14,804,529
Woongjin Publishing Company Publisher
(Korea) (e) 148,410 1,259,204
South China Morning Post Newspaper Publisher
(Holdings) Ltd. (Hong
Kong) 3,130,000 1,231,997
--------------
40,020,849
TELECOMMUNICATIONS--2.8%
Telesp Participacoes S.A. Telecommunications
(Brazil), (a) 401,100,000 $ 6,293,357
Embratel Participacoes S.A. Telecommunications
(Brazil), (a) 401,100,000 3,315,855
SK Telecom Co. Ltd. (Korea) Telecommunications 10,395 3,146,716
Tele Centro Sul Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 2,233,127
Tele Norte Leste Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 2,030,115
</TABLE>
28
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--94.3% (CONT.)
TELECOMMUNICATIONS--2.8% (CONT.)
Telesp Celular Participacoes Telecommunications
S.A. (Brazil), (a) 401,100,000 $ 1,691,763
Tele Sudeste Celular Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 676,705
Technology Resources Telecommunications
Industries Berhad
(Malaysia) 1,485,000 472,855
Tele Celular Sul Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 304,517
Tele Centro Oeste Celular Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 213,162
Telemig Celular Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 179,327
Tele Nordeste Celular Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 172,560
Tele Leste Celular Telecommunications
Participacoes (Brazil),
(a) 401,100,000 111,656
Tele Norte Celular Telecommunications
Participacoes S.A.
(Brazil), (a) 401,100,000 84,588
Telecomunicacoes Brasileiras Telecommunications
S.A. (Brazil) 401,100,000 84,588
--------------
21,010,891
AEROSPACE--6.0%
Rolls-Royce plc (Great Jet Engines
Britain) 9,228,552 $ 31,928,037
Hong Kong Aircraft Commercial Aircraft Overhaul &
Engineering Company Ltd. Maintenance
(Hong Kong) (e) 11,096,900 13,175,134
--------------
45,103,171
AIRLINES--2.2%
Qantas Airways Limited International Airline
(Australia) 10,798,714 $ 16,828,789
OIL & NATURAL GAS--0.5%
ISIS (France), (a) Oil Services 57,000 $ 3,867,995
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL FUND
29
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--94.3% (CONT.)
CHEMICALS--6.7%
Fernz Corporation Limited Agricultural & Industrial Chemical
(New Zealand) (e) Producer 13,373,250 $ 33,797,841
European Vinyls Corporation PVC Manufacturer
International N.V.
(Netherlands) (e) 1,212,299 15,126,783
Nagase & Co., Ltd. (Japan) Chemical Wholesaler 569,000 2,032,663
--------------
50,957,287
COMPONENTS--3.4%
Varitronix International Liquid Crystal Displays
Limited (Hong Kong) 13,421,000 $ 26,066,752
MACHINERY & METAL PROCESSING--2.2%
Outokumpu Oyj (Finland) Metal Producer 1,235,000 $ 10,250,172
The Rauma Group (Finland) Pulp Machinery 544,300 6,155,423
--------------
16,405,595
MINING AND BUILDING MATERIALS--0.7%
Keumkang Ltd. (Korea) (e) Building Materials 560,460 $ 4,956,792
Asia Cement Manufacturing Cement Producer
Company Ltd. (Korea) 10,500 42,581
--------------
4,999,373
OTHER INDUSTRIAL GOODS & SERVICES--13.7%
Tomkins plc (Great Britain) Industrial Management Company 9,065,000 $ 42,496,931
Chargeurs SA (France) (e) Wool Production Holding Company 524,387 25,752,067
Kone Corporation, Class B Elevators
(Finland) 103,870 10,418,665
Charter plc (Great Britain) Welding Products Manufacturer 1,884,100 10,250,102
Groupe Legris Industries SA European Crane Manufacturer
(France) 217,815 9,720,341
Dongah Tire Industry Company Tire Manufacturer
(Korea), (a)(e) 166,290 4,603,390
--------------
103,241,496
STEEL--2.9%
USIMINAS (Brazil), (e) Steel Production 7,401,370 $ 21,852,288
Pohang Iron & Steel Company Manufactures Steel Products
Ltd. (Korea) 14,000 443,933
--------------
22,296,221
</TABLE>
30
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--94.3% (CONT.)
DIVERSIFIED CONGLOMERATES--1.4%
First Pacific Company Ltd. Diversified Operations
(Hong Kong) 19,948,000 $ 5,856,610
Tae Young Corporation Heavy Construction
(Korea) (e) 518,300 4,770,261
Lamex Holdings Ltd. (Hong Office Furniture Supplier
Kong) (e) 14,040,000 322,517
--------------
10,949,388
TOTAL COMMON STOCKS (COST: $1,061,918,399) 713,054,430
</TABLE>
<TABLE>
<S> <C> <C>
SHORT TERM INVESTMENTS--3.5%
COMMERCIAL PAPER--2.0%
General Electric Capital Corporation, 5.70% due 10/1/1998 $15,000,000 $ 15,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $15,000,000) 15,000,000
REPURCHASE AGREEMENTS--1.5%
State Street Repurchase Agreement, 5.30% due 10/1/1998 $11,121,000 $ 11,121,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $11,121,000) 11,121,000
TOTAL SHORT TERM INVESTMENTS (COST: $26,121,000) 26,121,000
Total Investments (Cost $1,088,039,399)--97.8% (f) $ 739,175,430
Foreign Currencies (Proceeds $1,367,998)--0.2% 1,367,813
Other Assets In Excess Of Other Liabilities--2.0% (d) 15,561,065
--------------
TOTAL NET ASSETS--100% $ 756,104,308
--------------
--------------
</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 five in the Notes to Financial Statements
regarding transactions in affiliated issuers.
(f) At September 30, 1998, net unrealized depreciation of
$348,863,969, for federal income tax purposes consisted of gross
unrealized appreciation of $42,503,436 and gross unrealized
depreciation of $391,367,405.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL FUND
31
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS
........................................................................
[PHOTO] [PHOTO]
- --------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK
INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95)
TO PRESENT (9/30/98) AS COMPARED TO THE MORGAN STANLEY
WORLD EX U.S. INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK INTERNATIONAL M.S. WORLD EX
SMALL CAP FUND U.S. INDEX
<S> <C> <C>
10/95 $10,000 $10,000
1/96 $10,530 $10,747
4/96 $11,340 $11,331
7/96 $11,040 $10,858
10/96 $11,410 $11,120
1/97 $12,142 $11,062
4/97 $12,152 $11,310
7/97 $13,253 $12,933
9/97 $12,672 $12,652
12/97 $9,642 $11,677
3/98 $11,429 $13,394
6/98 $9,892 $13,499
9/98 $8,211 $11,513
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 9/30/98
TOTAL RETURN FROM FUND INCEPTION
9/30/98 NAV $6.89 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ----------------------------------------------------------------------------
THE OAKMARK INTERNATIONAL
SMALL CAP FUND -17.0% -6.5%
Morgan Stanley World ex U.S.
w/inc.** -14.7% 5.0%
Lipper Analytical
International Small Cap Fund
Average** -17.0% 5.8%
Micropal International Small
Co. Fund Index** -16.8% 5.6%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions.
**Each of the three indexes or averages is an unmanaged group of indexes 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 Small Cap
Fund Average includes 59 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,
The Oakmark International Small Cap Fund declined by 17% in the past quarter.
This compares with a drop of 17% of the Lipper International Small Cap Fund
Index and a 14% drop of EAFE. Market conditions for global equities and
especially international equities with exposure in emerging markets continue to
be volatile. Besides the obvious places like the emerging markets, there have
been certain pockets of severe price contraction in apparently economically
healthy countries.
AS AN EXAMPLE...
Your fund currently has over 20% of its assets invested in the United Kingdom.
Though conditions there are stable (See Traveler's Log below), that country's
small cap index has dropped by close to 25% in the last three months.
Furthermore, over the last year that index is down by over 15%. What gives? Last
year, in order to head off the possibility of rising inflation, The Bank of
England began raising interest rates. This caused sterling to strengthen which
ultimately hit small and medium cap stocks and especially weakened stocks in the
export sector. Our fund was not exempted from the mark-down...some of our larger
positions were hit hard, hurting the performance of your Fund.
One example of this was in the price of retailer CARPETRIGHT. When we began
purchasing the stock, it had plummeted off its highs because of a slowing in the
torrid pace of home remodeling in the UK; market punishment of a leading
competitor for significant accounting problems also hurt sentiment for the
industry. The company has little debt,
32
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
........................................................................
has a shareholder-oriented management that owns a lot of stock, and is one of
the most efficient retailers in the UK. Unfortunately, the price continues to
drop, and has fallen roughly 40% from our first purchases. Today Carpetright is
yielding 14% on a stable dividend, and trades at 7.5 times core earnings. All
through the price fall, those who know the company the best, management and the
board of directors, have been buying stock. Furthermore, the company itself has
also bought back shares. While the recent price drop has been another painful
example of sell first, ask questions later, we feel extremely comfortable being
investors in this business at this price. We have also taken advantage of price
weakness to increase our holding.
TRAVELER'S LOG...THE UNITED KINGDOM
Recently, we spent a week visiting companies in the United Kingdom. Though it is
an area of Europe with some of the strongest economic fundamentals, the most
market-oriented government, and some of the best managements, the equity market
has greatly underperformed those of the continent. Many of the companies we met
with have experienced falls in their share prices of over 50% in the last year
and are currently trading at five-year lows. Most of these managements were
baffled by the share price declines, saying that while business conditions have
slowed, they have experienced no collapse nor do they expect one. Clearly, there
is a pervasive fright in the UK and in foreign markets that is taking prices
down to unrealistic levels. Besides Carpetright, consider ROYAL DOULTON. This
company makes tableware and gifts and is one of the global leaders in those two
sectors. Formerly, the company was a poorly managed, neglected stepchild of a
diversified conglomerate that didn't seem to bother focusing on the business's
fundamentals. Recently, the newly independent company which was spun out of its
parent, has installed new, more aggressive management that is much more focused
on enhancing the profitability of the brand. Since the spin-off, the stock has
dropped by over 50%, giving us the opportunity to buy it at a very attractive
price. In Royal Doulton we are getting a good global brand and new, incentivized
management focused on enhancing profitability. Equally important, Royal Doulton
is trading at a price of about four times our estimate of "normal" earnings. The
new chairman also thinks the stock is cheap, as he recently purchased a big
block of stock for himself on the open market.
THINGS WILL GET BETTER!
Though share prices have been weak, and this fund has been slumping since the
Asia crisis started last year, we continue to be confident about the future. It
is true that as shareholders we have
all suffered over the last year. However, we strongly assert that current prices
of this FUND'S UNDERLYING INVESTMENTS DO NOT COME CLOSE TO REFLECTING THEIR TRUE
FUNDAMENTAL VALUE. Over time, value and price have always converged and we have
no reason to believe it will not happen again this time. We feel so certain of
this that, as co-portfolio managers of this fund, we represent the largest
ownership block and we continue to invest in the Fund. Fundamentals will assert
themselves and while we wait, we thank you for your patience.
[SIGNATURE]
DAVID HERRO
Portfolio Manager
[email protected]
[SIGNATURE]
MICHAEL WELSH
Portfolio Manager
[email protected]
October 5, 1998
THE OAKMARK INTERNATIONAL SMALL CAP FUND
33
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
INTERNATIONAL DIVERSIFICATION--SEPTEMBER 30, 1998
........................................................................
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C>
% of Fund % of Fund
Net Assets Net Assets
Pacific Rim 58.9% Europe 30.7%
Japan 19.0% Great Britain 21.5%
New Zealand 7.9% France 4.3%
Hong Kong 7.0% Germany 2.9%
Australia 6.9% Netherlands 2.0%
Korea 6.7%
Singapore 4.6% Other 0.8%
Thailand 3.5% Canada 0.8%
Phillipines 3.3%
Latin America 5.3%
Brazil 5.3%
</TABLE>
34
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCKS--95.7%
CONSUMER NON-DURABLES--3.9%
Royal Doulton plc (Great Britain) Tableware and Giftware 990,000 $ 1,540,035
Designer Textiles (NZ) Limited Knit Fabrics
(New Zealand) (c) 2,960,000 459,213
Dickson Concepts International Jewlery Wholesaler and Retailer
Limited (Hong Kong) 20,000 15,615
--------------
2,014,863
FOOD & BEVERAGE--9.6%
Matthew Clark plc (Great Britain) Spirits & Drinks 1,054,000 $ 2,150,285
Alaska Milk Corporation Milk Producer
(Philippines), (a) 39,327,000 1,707,915
Hite Brewery Company (Korea) Brewer 165,010 761,722
Souza Cruz S/A (Brazil) Tobacco Products 55,000 347,969
--------------
4,967,891
RETAIL--11.3%
Carpetright plc (Great Britain) Carpet Retailer 650,000 $ 2,375,889
Daimon (Japan) (c) Liquor Retailer & Distributor 657,700 1,516,602
Paris Miki Inc. (Japan) Optical Supplies Retailer 85,100 1,140,024
Giordano International Limited East Asian Clothing Retailer &
(Hong Kong) Manufacturer 3,112,000 421,691
Jusco Stores Co., Limited (Hong Department Stores
Kong) 4,244,000 410,773
--------------
5,864,979
OTHER CONSUMER GOODS & SERVICES--6.5%
Sanford Limited (New Zealand) Fisheries 1,275,240 $ 1,595,485
CeWe Color Holding AG (Germany) Photo Equipment & Supplies 9,400 1,519,806
CDL Hotels International Limited Hotel Operator
(Hong Kong) 1,072,000 246,252
--------------
3,361,543
BANKS--0.3%
Shinhan Bank (Korea) Commercial Bank 47,764 $ 110,931
Kookmin Bank (Korea) Commercial Bank 11,351 27,587
--------------
138,518
OTHER FINANCIAL--11.0%
Lambert Fenchurch Group plc Insurance Broker
(Great Britain) 1,411,000 $ 2,470,805
JCG Holdings Ltd. (Hong Kong) Investment Holding Company 9,461,000 1,709,348
Ichiyoshi Securities (Japan) Stock Broker 1,575,000 1,498,847
--------------
5,679,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK INTERNATIONAL SMALL
CAP FUND
35
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--95.7% (CONT.)
COMPUTER SOFTWARE--7.5%
Enix Corporation (Japan) Entertainment Software 129,100 $ 2,778,478
Koei (Japan) Computer Software 196,000 1,120,574
--------------
3,899,052
COMPUTER SYSTEMS--3.9%
Solution 6 Holdings Limited Systems Design & Consulting
(Australia), (a)(c) 4,150,893 $ 1,992,286
MARKETING SERVICES--5.0%
Cordiant Communications Group plc Advertising Services
(Great Britain) 1,428,500 $ 2,598,593
BROADCASTING & PUBLISHING--5.2%
Matichon Public Company Limited, Newspaper Publisher
Foreign Shares (Thailand) (c) 2,038,900 $ 1,801,468
Woongjin Publishing Company Publisher
(Korea) 107,076 908,501
Matichon Public Company Limited Newspaper Publisher
(Thailand) 600 505
--------------
2,710,474
TELECOMMUNICATIONS--0.5%
SK Telecom Co. Ltd. (Korea) Telecommunications 803 $ 243,080
CHEMICALS--2.0%
European Vinyls Corporation PVC Manufacturer
International N.V.
(Netherlands) 83,100 $ 1,036,902
MACHINERY & METAL PROCESSING--1.5%
Denyo Co., Ltd. (Japan) Welding Machines & Power Generators 184,000 $ 793,353
MINING AND BUILDING MATERIALS--3.1%
Parbury Limited (Australia) (c) Building Products 11,119,712 $ 1,581,357
OTHER INDUSTRIAL GOODS & SERVICES--11.6%
Elevadores Atlas, SA (Brazil) Elevators 229,200 $ 2,378,135
Dongah Tire Industry Company Tire Manufacturer
(Korea), (a) 43,900 1,215,280
Nishio Rent All Company (Japan) Construction Equipment Rental 163,900 995,842
Yip's Hang Cheung Ltd. (Hong Paint & Solvents
Kong) (c) 24,724,000 845,532
</TABLE>
36
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--95.7% (CONT.)
OTHER INDUSTRIAL GOODS & SERVICES--11.6% (CONT.)
Groupe Legris Industries SA European Crane Manufacturer
(France) 12,800 $ 571,220
--------------
6,006,009
PRODUCTION EQUIPMENT--3.9%
NSC Groupe (France) Manufacturer of Textile Equipment 11,532 $ 1,637,191
Skyjack Inc. (Canada), (a) Producer of Elevating Platforms & Lifts 32,200 406,339
--------------
2,043,530
STEEL--4.3%
Steel & Tube Holdings Ltd. (New Produces and Distributes Steel
Zealand) 2,995,400 $ 2,023,714
Pohang Iron & Steel Company Ltd. Manufactures Steel Products
(Korea) 6,580 208,649
--------------
2,232,363
DIVERSIFIED CONGLOMERATES--4.6%
Haw Par Corporation Ltd. Healthcare and Leisure Products
(Singapore) 3,113,000 $ 2,397,452
TOTAL COMMON STOCKS (COST: $78,457,722) 49,561,245
</TABLE>
<TABLE>
<S> <C> <C>
SHORT TERM INVESTMENTS--1.9%
REPURCHASE AGREEMENTS--1.9%
State Street Repurchase Agreement,
5.30% due 10/1/1998 $967,000 $ 967,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $967,000) 967,000
TOTAL SHORT TERM INVESTMENTS (COST: $967,000) 967,000
Total Investments (Cost $79,424,722)--97.6% (d) $ 50,528,245
Foreign Currencies (Proceeds $31,439)--0.1% 31,436
Other Assets In Excess Of Other Liabilities--2.3% (b) 1,210,894
--------------
TOTAL NET ASSETS--100% $ 51,770,575
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Includes portfolio and transaction hedges.
(c) See footnote number five in the Notes to Financial Statements
regarding transactions in affiliated issuers.
(d) At September 30, 1998, net unrealized depreciation of $28,896,477,
for federal income tax purposes consisted of gross unrealized
appreciation of $437,043 and gross unrealized depreciation of
$29,333,520.
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, 1998
........................................................................
<TABLE>
<CAPTION>
THE OAKMARK THE OAKMARK
FUND SELECT FUND
<S> <C> <C>
------------------------- -------------------------
- ---------------------------------------------------------------------------------
ASSETS
Investments, at market
value $ 6,888,618,717 $ 1,231,272,537
(cost: $6,573,899,571) (cost: $1,222,499,627)
Cash 47,767 652
Foreign currency, at value 0 0
Collateral for securities
loaned, at value 0 159,033,480
Receivable for:
Forward foreign currency
contracts 0 0
Securities sold 23,602,941 467,123
Fund shares sold 9,105,820 2,884,796
Dividends and interest 17,548,208 750,119
------------------------- -------------------------
Total receivables 50,256,969 4,102,038
Other assets 37,203 8,444
------------------------- -------------------------
Total assets $ 6,938,960,656 $ 1,394,417,151
------------------------- -------------------------
------------------------- -------------------------
.................................................................................
LIABILITIES AND NET ASSETS
Payable for:
Collateral for securities
loaned, at value $ 0 $ 159,033,480
Securities purchased 0 4,837,276
Fund shares redeemed 7,227,480 1,045,502
Due to adviser 5,290,462 957,981
Forward foreign currency
contracts 0 0
Other 2,484,832 648,526
------------------------- -------------------------
Total liabilities 15,002,774 166,522,765
------------------------- -------------------------
Net assets applicable to
fund shares outstanding $ 6,923,957,882 $ 1,227,894,386
------------------------- -------------------------
------------------------- -------------------------
Fund shares outstanding 206,454,614 73,251,709
------------------------- -------------------------
------------------------- -------------------------
.................................................................................
PRICE OF SHARES
Net asset value per share $ 33.54 $ 16.76
------------------------- -------------------------
------------------------- -------------------------
.................................................................................
ANALYSIS OF NET ASSETS
Paid in capital $ 6,156,111,515 $ 1,149,816,590
Accumulated undistributed
net realized gain (loss)
on sale of investments,
forward contracts and
foreign currency exchange
transactions 375,272,768 67,603,248
Net unrealized appreciation
(depreciation) of
investments 314,719,146 8,772,910
Net unrealized appreciation
(depreciation) of foreign
currency portfolio hedges 0 0
Net unrealized appreciation
(depreciation)--other 0 0
Accumulated undistributed
net investment income
(loss) 77,854,453 1,701,638
------------------------- -------------------------
Net assets applicable to
Fund shares outstanding $ 6,923,957,882 $ 1,227,894,386
------------------------- -------------------------
------------------------- -------------------------
</TABLE>
38 THE OAKMARK FAMILY OF FUNDS
<PAGE>
......................................................................
<TABLE>
<CAPTION>
THE OAKMARK THE OAKMARK THE OAKMARK
SMALL CAP EQUITY AND INTERNATIONAL
FUND INCOME FUND FUND
<S> <C> <C> <C>
------------------------- ------------------------- -------------------------
- -----------------------------------------------------------------------------------------------------------
ASSETS
Investments, at market
value $ 616,231,232 $ 57,497,107 $ 739,175,430
(cost: $682,325,649) (cost: $54,364,763) (cost: $1,088,039,399)
Cash 1,013,396 585 601
Foreign currency, at value 0 0 1,367,813
Collateral for securities
loaned, at value 26,009,161 1,759,177 73,675,393
Receivable for:
Forward foreign currency
contracts 0 0 2,446,315
Securities sold 12,674,906 0 15,095,665
Fund shares sold 1,033,409 15,175 203,924
Dividends and interest 532,476 461,512 5,128,670
------------------------- ------------------------- -------------------------
Total receivables 14,240,791 476,687 22,874,574
Other assets 8,548 3,274 5,399
------------------------- ------------------------- -------------------------
Total assets $ 657,503,128 $ 59,736,830 $ 837,099,210
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
...........................................................................................................
LIABILITIES AND NET ASSETS
Payable for:
Collateral for securities
loaned, at value $ 26,009,161 $ 1,759,177 $ 73,675,393
Securities purchased 11,122,483 0 0
Fund shares redeemed 1,436,217 135,567 2,048,641
Due to adviser 670,322 34,324 683,804
Forward foreign currency
contracts 0 0 3,977,540
Other 270,183 61,907 609,524
------------------------- ------------------------- -------------------------
Total liabilities 39,508,366 1,990,975 80,994,902
------------------------- ------------------------- -------------------------
Net assets applicable to
fund shares outstanding $ 617,994,762 $ 57,745,855 $ 756,104,308
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
Fund shares outstanding 48,938,247 4,127,329 72,552,725
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
...........................................................................................................
PRICE OF SHARES
Net asset value per share $ 12.63 $ 13.99 $ 10.42
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
...........................................................................................................
ANALYSIS OF NET ASSETS
Paid in capital $ 684,807,280 $ 52,589,935 $ 1,015,075,572
Accumulated undistributed
net realized gain (loss)
on sale of investments,
forward contracts and
foreign currency exchange
transactions 6,202,400 1,002,213 52,470,799
Net unrealized appreciation
(depreciation) of
investments (66,094,417) 3,132,344 (348,864,154)
Net unrealized appreciation
(depreciation) of foreign
currency portfolio hedges 0 0 (1,515,552)
Net unrealized appreciation
(depreciation)--other 0 0 198,784
Accumulated undistributed
net investment income
(loss) (6,920,501) 1,021,363 38,738,859
------------------------- ------------------------- -------------------------
Net assets applicable to
Fund shares outstanding $ 617,994,762 $ 57,745,855 $ 756,104,308
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
<CAPTION>
THE OAKMARK
INTERNATIONAL
SMALL CAP FUND
<S> <C>
------------------------- -------------------------
-------------------------
- ------------------------------
ASSETS
Investments, at market
value $ 50,528,245
(cost: $79,424,722)
Cash 940
Foreign currency, at value 31,436
Collateral for securities
loaned, at value 3,218,851
Receivable for:
Forward foreign currency
contracts 1,877
Securities sold 1,087,279
Fund shares sold 24,414
Dividends and interest 512,069
-------------------------
Total receivables 1,625,639
Other assets 3,350
-------------------------
Total assets $ 55,408,461
-------------------------
-------------------------
..............................
LIABILITIES AND NET ASSETS
Payable for:
Collateral for securities
loaned, at value $ 3,218,851
Securities purchased 0
Fund shares redeemed 34,598
Due to adviser 58,195
Forward foreign currency
contracts 179,274
Other 146,968
-------------------------
Total liabilities 3,637,886
-------------------------
Net assets applicable to
fund shares outstanding $ 51,770,575
-------------------------
-------------------------
Fund shares outstanding 7,514,807
-------------------------
-------------------------
..............................
PRICE OF SHARES
Net asset value per share $ 6.89
-------------------------
-------------------------
..............................
ANALYSIS OF NET ASSETS
Paid in capital $ 80,845,737
Accumulated undistributed
net realized gain (loss)
on sale of investments,
forward contracts and
foreign currency exchange
transactions (1,634,583)
Net unrealized appreciation
(depreciation) of
investments (28,896,480)
Net unrealized appreciation
(depreciation) of foreign
currency portfolio hedges (179,057)
Net unrealized appreciation
(depreciation)--other 5,883
Accumulated undistributed
net investment income
(loss) 1,629,075
-------------------------
Net assets applicable to
Fund shares outstanding $ 51,770,575
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 39
<PAGE>
THE OAKMARK FAMILY OF FUNDS
STATEMENT OF OPERATIONS--YEAR ENDED SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
THE OAKMARK
THE OAKMARK SELECT
FUND FUND
<S> <C> <C>
------------------------- -------------------------
- -----------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 132,309,356 $ 10,572,619
Interest Income 47,671,926 5,735,556
Securities lending income 0 109,602
Foreign taxes withheld (1,820,235) (169,788)
------------------------- -------------------------
Total investment income 178,161,047 16,247,989
.........................................................................................
EXPENSES:
Investment advisory fee 72,196,251 11,525,158
Transfer and dividend
disbursing agent fees 4,376,441 1,063,152
Other shareholder servicing
fees 3,387,013 764,027
Reports to shareholders 1,664,357 318,511
Custody and accounting fees 868,661 178,446
Registration and blue sky
expenses 673,806 335,384
Trustees fees 90,748 30,422
Legal fees 58,259 19,206
Audit fees 27,925 20,999
Other 343,480 46,872
------------------------- -------------------------
Total expenses 83,686,941 14,302,177
Expense offset
arrangements (6,489) (2,712)
------------------------- -------------------------
Net expenses 83,680,452 14,299,465
------------------------- -------------------------
.........................................................................................
NET INVESTMENT INCOME (LOSS): 94,480,595 1,948,524
.........................................................................................
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss)
on investments 1,258,937,339 69,415,172
Net realized gain (loss)
on foreign currency
transactions (8,898) 0
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies (1,704,966,868) (78,902,257)
Net change in
appreciation of forward
currency exchange
contracts 0 0
Net change in
appreciation
(depreciation)--other 0 0
------------------------- -------------------------
.........................................................................................
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS AND
FOREIGN CURRENCY
TRANSACTIONS: (446,038,427) (9,487,085)
------------------------- -------------------------
.........................................................................................
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (351,557,832) $ (7,538,561)
------------------------- -------------------------
------------------------- -------------------------
</TABLE>
40 THE OAKMARK FAMILY OF FUNDS
<PAGE>
......................................................................
<TABLE>
<CAPTION>
THE OAKMARK THE OAKMARK THE OAKMARK
SMALL CAP EQUITY AND INTERNATIONAL
FUND INCOME FUND FUND
<S> <C> <C> <C>
------------------------- ------------------------- -------------------------
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 8,702,112 $ 737,103 $ 38,964,663
Interest Income 3,864,378 1,064,634 2,761,336
Securities lending income 434,864 5,635 1,625,921
Foreign taxes withheld 0 (1,560) (3,542,574)
------------------------- ------------------------- -------------------------
Total investment income 13,001,354 1,805,812 39,809,346
.......................................................................................................................
EXPENSES:
Investment advisory fee 15,863,707 359,708 12,623,371
Transfer and dividend
disbursing agent fees 780,579 95,816 967,291
Other shareholder servicing
fees 700,403 12,676 580,069
Reports to shareholders 301,533 20,847 335,053
Custody and accounting fees 179,707 49,662 1,350,813
Registration and blue sky
expenses 55,750 43,519 53,679
Trustees fees 30,535 18,442 27,749
Legal fees 20,157 11,337 17,726
Audit fees 21,041 19,544 26,722
Other 56,482 7,909 123,111
------------------------- ------------------------- -------------------------
Total expenses 18,009,894 639,460 16,105,584
Expense offset
arrangements (48,678) (212) (105,661)
------------------------- ------------------------- -------------------------
Net expenses 17,961,216 639,248 15,999,923
------------------------- ------------------------- -------------------------
.......................................................................................................................
NET INVESTMENT INCOME (LOSS): (4,959,862) 1,166,564 23,809,423
.......................................................................................................................
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss)
on investments 124,757,914 1,578,730 86,532,713
Net realized gain (loss)
on foreign currency
transactions 0 0 (3,890,444)
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies (374,056,372) (2,325,892) (502,914,491)
Net change in
appreciation of forward
currency exchange
contracts 0 0 (2,045,738)
Net change in
appreciation
(depreciation)--other 0 0 195,384
------------------------- ------------------------- -------------------------
.......................................................................................................................
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS AND
FOREIGN CURRENCY
TRANSACTIONS: (249,298,458) (747,162) (422,122,576)
------------------------- ------------------------- -------------------------
.......................................................................................................................
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (254,258,320) $ 419,402 $ (398,313,153)
------------------------- ------------------------- -------------------------
------------------------- ------------------------- -------------------------
<CAPTION>
THE OAKMARK
INTERNATIONAL
SMALL CAP FUND
<S> <C>
------------------------- ------------------
-------------------------
- ------------------------------
INVESTMENT INCOME:
Dividends $ 2,777,457
Interest Income 214,453
Securities lending income 7,556
Foreign taxes withheld (304,967)
-------------------------
Total investment income 2,694,499
..............................
EXPENSES:
Investment advisory fee 827,611
Transfer and dividend
disbursing agent fees 112,828
Other shareholder servicing
fees 27,531
Reports to shareholders 31,378
Custody and accounting fees 176,922
Registration and blue sky
expenses 35,377
Trustees fees 18,433
Legal fees 12,111
Audit fees 24,144
Other 13,299
-------------------------
Total expenses 1,279,634
Expense offset
arrangements (292)
-------------------------
Net expenses 1,279,342
-------------------------
..............................
NET INVESTMENT INCOME (LOSS): 1,415,157
..............................
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
TRANSACTIONS:
Net realized gain (loss)
on investments (96,290)
Net realized gain (loss)
on foreign currency
transactions (162,499)
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies (27,728,327)
Net change in
appreciation of forward
currency exchange
contracts (179,057)
Net change in
appreciation
(depreciation)--other 2,414
-------------------------
..............................
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS AND
FOREIGN CURRENCY
TRANSACTIONS: (28,163,759)
-------------------------
..............................
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (26,748,602)
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 41
<PAGE>
THE OAKMARK FAMILY OF FUNDS
STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 1998
........................................................................
<TABLE>
<CAPTION>
THE OAKMARK FUND
<S> <C> <C>
-------------------------------------------------------
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 94,480,595 $ 55,858,346
Net realized gain on sale
of investments 1,258,937,339 239,442,987
Net realized gain (loss) on
foreign currency
transactions (8,898) (2,673)
Net change in unrealized
appreciation (1,704,966,868) 1,231,138,352
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS (351,557,832) 1,526,437,012
.........................................................................................
DISTRIBUTION TO SHAREHOLDERS
FROM (1):
Net investment income (66,321,023) (41,659,757)
Net realized short-term
gain (25,210,618) (13,947,126)
Net realized long-term gain (1,098,260,243) (212,039,549)
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (1,189,791,884) (267,646,432)
.........................................................................................
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 2,836,315,983 2,107,074,877
Reinvestment of dividends
and capital gain
distributions 1,133,761,068 256,384,877
Payments for shares
redeemed (2,119,718,081) (941,237,366)
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM FUND SHARE
TRANSACTIONS 1,850,358,970 1,422,222,388
------------------------- -------------------------
.........................................................................................
TOTAL INCREASE IN NET ASSETS 309,009,254 2,681,012,968
NET ASSETS:
Beginning of period 6,614,948,628 3,933,935,660
------------------------- -------------------------
End of period $ 6,923,957,882 $ 6,614,948,628
------------------------- -------------------------
------------------------- -------------------------
Undistributed net
investment income $ 77,854,452 $ 49,694,881
------------------------- -------------------------
------------------------- -------------------------
(1) DISTRIBUTIONS PER SHARE:
Net investment income 0.3996 0.3441
Net realized short-term
gain 0.1519 0.1152
Net realized long-term gain 5.8556 1.7514
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS $ 6.4071 $ 2.2107
</TABLE>
42 THE OAKMARK FAMILY OF FUNDS
<PAGE>
......................................................................
<TABLE>
<CAPTION>
SELECT FUND THE OAKMARK
<S> <C> <C>
-------------------------------------------------------
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 1,948,524 $ (246,886)
Net realized gain on sale
of investments 69,415,172 5,070,435
Net realized gain (loss) on
foreign currency
transactions 0 0
Net change in unrealized
appreciation (78,902,257) 87,675,167
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS (7,538,561) 92,498,716
.........................................................................................
DISTRIBUTION TO SHAREHOLDERS
FROM (1):
Net investment income 0 0
Net realized short-term
gain (6,882,359) 0
Net realized long-term gain -- 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (6,882,359) 0
.........................................................................................
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 1,440,695,723 571,117,746
Reinvestment of dividends
and capital gain
distributions 6,568,333 0
Payments for shares
redeemed (719,123,322) (149,441,890)
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM FUND SHARE
TRANSACTIONS 728,140,734 421,675,856
------------------------- -------------------------
.........................................................................................
TOTAL INCREASE IN NET ASSETS 713,719,814 514,174,572
NET ASSETS:
Beginning of period 514,174,572 0
------------------------- -------------------------
End of period $ 1,227,894,386 $ 514,174,572
------------------------- -------------------------
------------------------- -------------------------
Undistributed net
investment income $ 1,701,638 $ (246,886)
------------------------- -------------------------
------------------------- -------------------------
(1) DISTRIBUTIONS PER SHARE:
Net investment income 0 0
Net realized short-term
gain 0.1678 0
Net realized long-term gain 0 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS $ 0.1678 $ 0
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 43
<PAGE>
THE OAKMARK FAMILY OF FUNDS
STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
SMALL CAP FUND THE OAKMARK
<S> <C> <C>
-------------------------------------------------------
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ (4,959,862) $ (1,684,439)
Net realized gain on sale
of investments 124,757,914 46,501,798
Net realized gain (loss) on
foreign currency
transactions 0 0
Net change in unrealized
appreciation (374,056,372) 287,859,202
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS (254,258,320) 332,676,561
.........................................................................................
DISTRIBUTION TO SHAREHOLDERS
FROM: (1)
Net investment income 0 0
Net realized short-term
gain (35,041,133) 0
Net realized long-term gain (129,772,888) 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (164,814,021) 0
.........................................................................................
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 416,817,749 1,289,718,462
Reinvestment of dividends
and capital gain
distributions 156,645,973 0
Payments for shares
redeemed (1,049,792,259) (327,419,790)
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM FUND SHARE
TRANSACTIONS (476,328,537) 962,298,672
------------------------- -------------------------
.........................................................................................
TOTAL INCREASE IN NET ASSETS (895,400,878) 1,294,975,233
NET ASSETS:
Beginning of period 1,513,395,640 218,420,407
------------------------- -------------------------
End of period $ 617,994,762 $ 1,513,395,640
------------------------- -------------------------
------------------------- -------------------------
Undistributed net
investment income $ (6,920,502) $ (1,960,639)
------------------------- -------------------------
------------------------- -------------------------
(1) DISTRIBUTIONS PER SHARE:
Net investment income 0 0
Net realized short-term
gain 0.4738 0
Net realized long-term gain 2.3874 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS $ 2.8612 $ 0
</TABLE>
44 THE OAKMARK FAMILY OF FUNDS
<PAGE>
......................................................................
<TABLE>
<CAPTION>
THE OAKMARK
EQUITY AND INCOME FUND
<S> <C> <C>
-------------------------------------------------------
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 1,166,564 $ 471,744
Net realized gain on sale
of investments 1,578,730 904,824
Net realized gain (loss) on
foreign currency
transactions 0 0
Net change in unrealized
appreciation (2,325,892) 4,554,518
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS 419,402 5,931,086
.........................................................................................
DISTRIBUTION TO SHAREHOLDERS
FROM: (1)
Net investment income (594,007) (148,466)
Net realized short-term
gain (882,071) (162,188)
Net realized long-term gain (599,021) 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (2,075,099) (310,654)
.........................................................................................
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 43,125,943 24,903,007
Reinvestment of dividends
and capital gain
distributions 1,964,129 288,850
Payments for shares
redeemed (19,151,033) (11,148,702)
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM FUND SHARE
TRANSACTIONS 25,939,039 14,043,155
------------------------- -------------------------
.........................................................................................
TOTAL INCREASE IN NET ASSETS 24,283,342 19,663,587
NET ASSETS:
Beginning of period 33,462,513 13,798,926
------------------------- -------------------------
End of period $ 57,745,855 $ 33,462,513
------------------------- -------------------------
------------------------- -------------------------
Undistributed net
investment income $ 1,021,363 $ 448,806
------------------------- -------------------------
------------------------- -------------------------
(1) DISTRIBUTIONS PER SHARE:
Net investment income 0.2359 0.1202
Net realized short-term
gain 0.3503 0.1311
Net realized long-term gain 0.2379 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS $ 0.8241 $ 0.2513
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 45
<PAGE>
THE OAKMARK FAMILY OF FUNDS
STATEMENT OF CHANGES IN NET ASSETS--SEPTEMBER 30, 1998 CONT.
........................................................................
<TABLE>
<CAPTION>
INTERNATIONAL FUND THE OAKMARK
<S> <C> <C>
-------------------------------------------------------
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 23,809,423 $ 27,666,383
Net realized gain on sale
of investments 86,532,713 217,090,057
Net realized gain (loss) on
foreign currency
transactions (3,890,444) 17,724,883
Net change in unrealized
appreciation
(depreciation) (502,914,491) 70,717,122
Net change in unrealized
appreciation
(depreciation) of forward
currency exchange
contracts (2,045,738) 3,426,674
Net change in unrealized
appreciation
(depreciation)--other 195,384 197,532
------------------------- -------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS (398,313,153) 336,822,651
.........................................................................................
DISTRIBUTION TO SHAREHOLDERS
FROM: (1)
Net investment income (46,460,573) (12,477,945)
Net realized short-term
gain (57,985,224) 0
Net realized long-term gain (173,099,244) 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (277,545,041) (12,477,945)
.........................................................................................
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 482,976,228 710,447,882
Reinvestment of dividends
and capital gain
distributions 263,415,429 11,903,359
Payments for shares
redeemed (961,776,686) (572,115,610)
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM FUND SHARE
TRANSACTIONS (215,385,029) 150,235,631
------------------------- -------------------------
.........................................................................................
TOTAL INCREASE (DECREASE) IN
NET ASSETS (891,243,223) 474,580,337
NET ASSETS:
Beginning of period 1,647,347,531 1,172,767,194
------------------------- -------------------------
End of period $ 756,104,308 $ 1,647,347,531
------------------------- -------------------------
------------------------- -------------------------
Undistributed net
investment income $ 38,738,859 $ 61,390,009
------------------------- -------------------------
------------------------- -------------------------
(1) DISTRIBUTIONS PER SHARE:
Net investment income 0.5758 0.1617
Net realized short-term
gain 0.7186 0
Net realized long-term gain 2.1453 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS $ 3.4397 $ 0.1617
</TABLE>
46 THE OAKMARK FAMILY OF FUNDS
<PAGE>
......................................................................
<TABLE>
<CAPTION>
SMALL CAP FUND THE OAKMARK INTERNATIONAL
<S> <C> <C>
-------------------------------------------------------
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- -----------------------------------------------------------------------------------------
FROM OPERATIONS:
Net investment income $ 1,415,157 $ 646,048
Net realized gain on sale
of investments (96,290) 6,250,624
Net realized gain (loss) on
foreign currency
transactions (162,499) (232,740)
Net change in unrealized
appreciation
(depreciation) (27,728,327) (1,464,546)
Net change in unrealized
appreciation
(depreciation) of forward
currency exchange
contracts (179,057) 0
Net change in unrealized
appreciation
(depreciation)--other 2,414 5,257
------------------------- -------------------------
NET INCREASE (DECREASE) IN
NET ASSETS FROM
OPERATIONS (26,748,602) 5,204,643
.........................................................................................
DISTRIBUTION TO SHAREHOLDERS
FROM: (1)
Net investment income (308,015) (279,216)
Net realized short-term
gain (3,477,982) (1,285,114)
Net realized long-term gain (3,890,139) 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (7,676,136) (1,564,330)
.........................................................................................
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 77,339,314 63,012,100
Reinvestment of dividends
and capital gain
distributions 7,427,846 1,523,977
Payments for shares
redeemed (64,544,647) (41,955,631)
------------------------- -------------------------
NET INCREASE IN NET ASSETS
FROM FUND SHARE
TRANSACTIONS 20,222,513 22,580,446
------------------------- -------------------------
.........................................................................................
TOTAL INCREASE (DECREASE) IN
NET ASSETS (14,202,225) 26,220,759
NET ASSETS:
Beginning of period 65,972,800 39,752,041
------------------------- -------------------------
End of period $ 51,770,575 $ 65,972,800
------------------------- -------------------------
------------------------- -------------------------
Undistributed net
investment income $ 1,629,074 $ 521,933
------------------------- -------------------------
------------------------- -------------------------
(1) DISTRIBUTIONS PER SHARE:
Net investment income 0.0559 0.0777
Net realized short-term
gain 0.6312 0.3581
Net realized long-term gain 0.7060 0
------------------------- -------------------------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS $ 1.3931 $ 0.4358
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 47
<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). 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 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 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, 1998, 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 appreciation on
dividends and dividend
reclaims receivable $238,449 $ 12,428
Unrealized depreciation on
open securities purchases
and sales (17,431) (6,912)
Unrealized appreciation
(depreciation) on
transaction hedge purchases
and sales (15,673) 1,660
Unrealized depreciation on tax
expense payable (6,561) (1,293)
--------- ----------
Net Unrealized Appreciation
- Other $198,784 $ 5,883
--------- ----------
--------- ----------
</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, 1998, 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.
48
THE OAKMARK FAMILY OF FUNDS
<PAGE>
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.
The International Fund had the following outstanding contracts at September 30,
1998:
PORTFOLIO HEDGES--
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) AT
US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998
<C> <C> <S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$25,000,000 31,235,000 Brazilian Real January 1998 $ 1,310,201
20,000,000 24,992,000 Brazilian Real January 1998 1,112,769
30,654,500 18,500,000 Pound Sterling October 1998 (753,068)
37,289,250 22,500,000 Pound Sterling November 1998 (894,688)
14,801,400 9,000,000 Pound Sterling November 1998 (466,449)
14,794,200 9,000,000 Pound Sterling November 1998 (473,649)
14,607,000 9,000,000 Pound Sterling November 1998 (658,415)
14,233,120 8,800,000 Pound Sterling November 1998 (692,253)
-------------------
$(1,515,552)
-------------------
-------------------
</TABLE>
TRANSACTION HEDGES: FOREIGN CURRENCY SALES--
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) AT
US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998
<C> <C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
$3,738,928 20,963,421 French Franc October 1998 $ (4,674)
3,143,545 1,865,827 Pound Sterling October 1998 (28,545)
1,594,391 933,429 Pound Sterling October 1998 7,468
3,223,084 1,886,499 Pound Sterling October 1998 15,848
1,844,181 1,087,820 Pound Sterling October 1998 (5,221)
472,144 278,043 Pound Sterling October 1998 (556)
14,664 20,353,856 South Korean Won October 1998 29
24,850 49,700 New Zealand Dollar October 1998 (22)
----------
$ (15,673)
----------
----------
</TABLE>
The Int'l Small Cap Fund had the following outstanding contracts:
PORTFOLIO HEDGES--
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) AT
US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998
<C> <C> <S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$7,456,500 4,500,000 Pound Sterling November 1998 $ (179,057)
----------
----------
</TABLE>
TRANSACTION HEDGES: FOREIGN CURRENCY SALES--
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) AT
US DOLLARS PURCHASED FOREIGN CURRENCY SOLD SETTLEMENT DATE SEPTEMBER 30, 1998
<C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
$ 36,402 55,680 Canadian Dollar October 1998 $ (99)
441,298 259,480 Pound Sterling October 1998 156
214,840 125,748 Pound Sterling October 1998 1,057
7,541 1,025,913 Japanese Yen October 1998 31
60,660 8,252,168 Japanese Yen October 1998 251
92,447 12,576,472 Japanese Yen October 1998 382
131,033 262,066 New Zealand Dollar October 1998 (118)
------
$1,660
------
------
</TABLE>
At September 30, 1998, 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
49
<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 lending Fund could
incur a loss. The market values (in thousands) of securities on loan to
broker-dealers at September 30, 1998 are shown below.
<TABLE>
<CAPTION>
INT'L
SMALL EQUITY & SMALL
SELECT CAP INCOME INTERNATIONAL CAP
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Market Value of Securities
Loaned $153,993 $24,519 $ 1,696 $67,416 $ 2,988
Collateral (Cash and U.S.
Treasuries) 159,033 26,009 1,759 73,675 3,219
</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.
The Funds hereby designate the following long term capital gain distributions
for purposes of the dividends received deduction (in thousands):
<TABLE>
<CAPTION>
INT'L
SMALL EQUITY & SMALL
OAKMARK SELECT CAP INCOME INTERNATIONAL CAP
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Long Term Capital Gain $1,111,813 $ 67,892 $124,758 $ 1,111 $23,108 $ 0
</TABLE>
BANK LOANS--
The Funds have two unsecured lines of credit with a syndication of banks. One
line of credit is a committed line of $350 million and the other is an
uncommitted line of $250 million. Borrowings under this arrangement bear
interest at .50% above the Federal Funds Effective Rate. As of September 30,
1998, there were no outstanding borrowings.
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. Select pays 1% on the first $1 billion and .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 million of net assets. Small Cap pays 1.25% on the first
$1 billion of net assets, 1.15% on the next $500 million, 1.10% on the next $500
million, 1.05% on the next $500 million, and 1% on the excess of $2.5 billion.
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. Beginning October 1, 1998, additional
breakpoints will be as follows: Oakmark will pay .80% on net assets in excess of
$10 billion and Select will pay .75% on excess of $5 billion of net assets. The
Adviser has voluntarily agreed to reimburse the Funds to the extent that annual
expenses, excluding certain expenses, exceed 1.5% for domestic funds and 2.0%
for international funds.
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.
During the year ended September 30, 1998, the Funds incurred brokerage
commissions of $7,658,348, $2,399,359, $1,956,260, $66,195, $4,295,208 and
$384,909 of which $2,068,690, $589,570, $193,708, $41,979, $0, and $0 were paid
by Oakmark, Select, Small Cap, Equity and Income, International and Int'l Small
Cap, respectively, to an affiliate of the Adviser.
50
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>
YEAR ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------
EQUITY & INT'L SMALL
OAKMARK SELECT SMALL CAP INCOME INTERNATIONAL CAP
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Shares sold 68,340 81,093 22,121 3,014 34,513 8,604
Shares issued in reinvestment of
dividends 30,513 410 9,667 149 20,108 786
Less shares redeemed (52,910) (39,717) (57,261) (1,344) (69,820) (7,284)
------- ------- --------- -------- ------------- -----
Net increase (decrease) in shares
outstanding 45,943 41,786 (25,473) 1,819 (15,199) 2,106
------- ------- --------- -------- ------------- -----
------- ------- --------- -------- ------------- -----
</TABLE>
<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> <C>
- -------------------------------------------------------------------------------------------------------------
Shares sold 57,226 42,529 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>
4. INVESTMENT TRANSACTIONS
Transactions in investment securities (excluding short term securities) were as
follows (in thousands):
<TABLE>
<CAPTION>
EQUITY & INT'L SMALL
OAKMARK SELECT SMALL CAP INCOME INTERNATIONAL CAP
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Purchases $3,681,990 $1,219,648 $391,185 $41,789 $502,915 $57,346
Proceeds from sales 2,991,049 601,544 968,060 20,783 923,456 41,576
</TABLE>
THE OAKMARK FAMILY OF FUNDS
51
<PAGE>
THE OAKMARK FAMILY OF FUNDS
- --------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONT.)
........................................................................
5. TRANSACTIONS IN SECURITIES OF AFFILIATED ISSUERS
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended September
30, 1998 is set forth below:
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES
THE OAKMARK FUND
<TABLE>
<CAPTION>
PURCHASE SALES DIVIDEND MARKET
AFFILIATES COST PROCEEDS INCOME VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
AC Nielsen Corporation $ - $ - $ - $ 105,999,000
Brunswick Corporation 47,321,680 - 1,789,400 94,195,350
GC Companies, Inc. - - - 15,334,125
H & R Block, Inc. 340,780,489 - 2,941,950 317,172,475
Juno Lighting, Incorporated - - 390,600 24,276,875
Knight Ridder 128,013,079 - 4,480,340 308,358,300
Polaroid Corporation 11,171,805 - 2,731,440 111,818,325
R. H. Donnelley Corporation 10,418,862 - 1,835,978 25,965,967
SPX Corporation - - - 36,156,700
The Black & Decker Corporation 46,677,053 - 3,899,160 344,113,875
The Dun & Bradstreet Corporation 107,175,516 - 6,115,747 283,265,100
------------ ----------- ----------- --------------
TOTALS $691,558,484 - $24,184,615 $1,666,656,092
</TABLE>
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES
THE OAKMARK SELECT FUND
<TABLE>
<CAPTION>
PURCHASE SALES DIVIDEND MARKET
AFFILIATES COST PROCEEDS INCOME VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
USG Corporation $ 96,334,193 $ 3,793,551 $ 26,492 $ 118,539,600
US Industries Inc. 148,983,455 16,251,897 1,212,415 113,179,625
------------ ----------- ----------- --------------
TOTALS $245,317,648 $20,045,448 $ 1,238,907 $ 231,719,225
</TABLE>
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES
THE OAKMARK SMALL CAP FUND
<TABLE>
<CAPTION>
PURCHASE SALES DIVIDEND MARKET
AFFILIATES COST PROCEEDS INCOME VALUE
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Ascent Entertainment Group, Inc. $ 3,794,484 $ 5,437,319 $ - $ 12,000,000
Barry (R.G.) Corporation 3,388,252 - - 11,781,263
Binks Sames Corporation 1,078,125 - 24,700 4,675,000
Columbus McKinnon Corporation 5,432,270 1,724,192 249,816 17,325,000
Duff & Phelps Credit Rating Company 3,082,142 - 38,808 16,121,875
Finger Lakes Financial Corp. - - 41,360 2,068,000
Northwest Pipe Company 1,520,000 2,103,411 - 9,250,000
Ralcorp Holdings, Inc. - 23,429,934 - 24,500,000
ROHN Industries, Inc. 17,335,121 - 50,000 5,812,500
Scotsman Industries, Inc. - 1,664,975 100,612 22,240,375
Triarc Companies, Inc. 1,959,905 10,981,722 - 19,453,125
Ugly Duckling Corporation 20,320,181 8,194,979 - 8,695,288
------------ ----------- ----------- --------------
TOTALS $ 57,910,480 $53,536,532 $ 505,296 $ 153,922,426
</TABLE>
52
THE OAKMARK FAMILY OF FUNDS
<PAGE>
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES
THE OAKMARK INTERNATIONAL FUND
<TABLE>
<CAPTION>
PURCHASE SALES DIVIDEND MARKET
AFFILIATES COST PROCEEDS INCOME VALUE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Banco Latinoamericano de
Exportaciones,S.A. Class E $ 39,751,365 $ 3,301,540 $ 849,888 $ 21,146,282
Chargeurs International SA - 9,934,608 1,430,885 25,752,067
Cordiant Communications Group PLC 2,891,044 - 420,931 40,015,927
Dongah Tire Industry Company 5,643,713 - - 4,603,390
European Vinyls Corporation Intl. NV - 3,188,031 1,951,039 15,126,783
Fernz Corporation Ltd. 6,718,676 2,115,546 1,574,294 33,797,841
Fila Holding S.p.A. 20,288,049 187,177 685,787 21,885,800
Giordano International Limited 8,556,185 98,829 89,476 9,391,028
Hong Kong Aircraft Engineering Company 3,216,275 607,632 1,026,373 13,175,134
Keumkang Ltd. 2,940,243 - 159,292 4,956,792
Lamex Holdings Ltd. - - 181,184 322,517
Lotte Chilsung Beverage Company 3,009,525 - 17,504 3,095,452
Saatchi & Saatchi PLC 523,408 7,666,881 492,036 31,699,125
Tae Young Corporation 13,975,221 1,023,976 88,023 4,770,261
USIMINAS 12,560,055 - 5,885,389 21,852,288
Woongjin Publishing Company 2,936,743 - 34,695 1,259,204
------------ ----------- ----------- ------------
TOTALS $123,010,502 $28,124,220 $14,886,796 $252,849,891
</TABLE>
SUMMARY OF TRANSACTIONS WITH AFFILIATED COMPANIES
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<TABLE>
<CAPTION>
PURCHASE SALES DIVIDEND MARKET
AFFILIATES COST PROCEEDS INCOME VALUE
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Daimon $ 836,251 $ 61,037 $ 63,270 $ 1,516,602
Designer Textiles (NZ) Limited - - 56,322 459,213
Matichon Public Company Limited,
Foreign Shares 648,794 - 75,237 1,746,991
Parbury Limited 2,899,156 - 65,550 1,581,357
Solution 6 Holdings Ltd. 431,130 - - 1,992,286
Yip's Hang Cheung Ltd. 539,149 2,540 89,119 845,532
------------ ----------- ----------- ------------
TOTALS $ 5,354,480 $ 63,577 $ 349,498 $ 8,141,981
</TABLE>
6. INTRODUCTION OF THE EURO
The European Monetary Union intends to establish a common European currency for
participating countries to be called the "euro." Each participating country will
supplement its existing currency with the euro on January 1, 1999 and replace
its existing currency with the euro on July 2, 2002. The consequences of the
euro conversion for foreign exchange rates, interest rates and the value of
European securities are presently unclear. Uncertainties include whether
operational systems of banks and other financial institutions will be ready by
January 1, 1999; the application of exchange rates for existing currencies and
the euro; the creation of suitable clearing and settlement systems for the new
currency; the legal treatment of certain outstanding financial contracts after
January 1, 1999 that refer to existing currencies rather than the euro; and
whether the interest rate, tax and labor regimes of European countries
participating in the euro will converge over time. These and other factors,
including economic and political risks, could cause market disruptions before or
after the introduction of the euro, and could adversely affect the value of
securities held by the Funds.
THE OAKMARK FAMILY OF FUNDS
53
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
FINANCIAL HIGHLIGHTS
...............................................................................
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED OCTOBER 31,
SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 41.21 $ 32.39 $ 28.47 $ 25.21 $ 24.18 $ 17.11
Income From Investment
Operations:
Net Investment Income
(Loss) 0.47 0.36 0.34 0.30 0.27 0.17
Net Gains or Losses on
Securities (both realized
and unrealized) (1.73) 10.67 4.70 4.66 1.76 7.15
-------- -------------- --------- --------- --------- ---------
Total From Investment
Operations: (1.26) 11.03 5.04 4.96 2.03 7.32
Less Distributions:
Dividends (from net
investment income) (0.40) (0.34) (0.28) (0.23) (0.23) (0.04)
Distributions (from capital
gains) (6.01) (1.87) (0.84) (1.47) (0.77) (0.21)
-------- -------------- --------- --------- --------- ---------
Total Distributions (6.41) (2.21) (1.12) (1.70) (1.00) (0.25)
-------- -------------- --------- --------- --------- ---------
Net Asset Value, End of Period $ 33.54 $ 41.21 $ 32.39 $ 28.47 $ 25.21 $ 24.18
-------- -------------- --------- --------- --------- ---------
-------- -------------- --------- --------- --------- ---------
Total Return (4.06)% 39.24%* 18.07% 21.55% 8.77% 43.21%
Ratios/Supplemental Data:
Net Assets, End of Period
($ million) $ 6,924.0 $ 6,614.9 $ 3,933.9 $ 2,827.1 $ 1,677.3 $ 1,107.0
Ratio of Expenses to
Average Net Assets 1.08% 1.08%* 1.18% 1.17% 1.22% 1.32%
Ratio of Net Income (Loss)
to Average Net Assets 1.22% 1.19%* 1.13% 1.27% 1.19% 0.94%
Portfolio Turnover Rate 43% 17% 24% 18% 29% 18%
<CAPTION>
PERIOD
ENDED
OCTOBER 31,
1992 1991(A)
<S> <C> <C>
- ------------------------------
Net Asset Value, Beginning of
Period $ 12.10 $ 10.00
Income From Investment
Operations:
Net Investment Income
(Loss) (0.03) (0.01)
Net Gains or Losses on
Securities (both realized
and unrealized) 5.04 2.11
--------- -----------
Total From Investment
Operations: 5.01 2.10
Less Distributions:
Dividends (from net
investment income) -- --
Distributions (from capital
gains) -- --
--------- -----------
Total Distributions -- --
--------- -----------
Net Asset Value, End of Period $ 17.11 $ 12.10
--------- -----------
--------- -----------
Total Return 41.40% 87.10%*
Ratios/Supplemental Data:
Net Assets, End of Period
($ million) $ 114.7 $ 4.8
Ratio of Expenses to
Average Net Assets 1.70% 2.50%(b)*
Ratio of Net Income (Loss)
to Average Net Assets (0.24)% (0.66)%(c)*
Portfolio Turnover Rate 34% 0%
</TABLE>
*Data has been annualized.
(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, this annualized ratio would have been 4.92% for the period.
(c) Computed giving effect to the Adviser's expense limitation undertaking.
54 THE OAKMARK FAMILY OF FUNDS
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
FINANCIAL HIGHLIGHTS
...............................................................................
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
ELEVEN
MONTHS
YEAR ENDED ENDED
SEPTEMBER SEPTEMBER
30, 1998 30, 1997
<S> <C> <C>
- -----------------------------------------------------------
Net Asset Value, Beginning of
Period $ 16.34 $ 10.00
Income From Investment
Operations:
Net Investment Income
(Loss) 0.03 (0.01)
Net Gains or Losses on
Securities (both realized
and unrealized) 0.56 6.35
---------- ----------
Total From Investment
Operations: 0.59 6.34
Less Distributions:
Dividends (from net
investment income) 0.00 0.00
Distributions (from capital
gains) (0.17) 0.00
---------- ----------
Total Distributions (0.17) 0.00
---------- ----------
Net Asset Value, End of Period $ 16.76 $ 16.34
---------- ----------
---------- ----------
Total Return 3.64% 69.16%*
Ratios/Supplemental Data:
Net Assets, End of Period
($ million) $ 1,227.9 $ 514.2
Ratio of Expenses to
Average Net Assets (a) 1.22% 1.12%*
Ratio of Net Income (Loss)
to Average Net Assets (a) 0.17% (0.11)%*
Portfolio Turnover Rate 56% 37%
</TABLE>
Notes
*Ratios have been annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 55
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
FINANCIAL HIGHLIGHTS
...............................................................................
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ELEVEN
MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER SEPTEMBER OCTOBER
30, 1998 30, 1997 31, 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 20.34 $ 13.19 $ 10.00
Income From Investment
Operations:
Net Investment Income
(Loss) (0.12) (0.01) (0.02)
Net Gains or Losses on
Securities (both realized
and unrealized) (4.73) 7.16 3.21
---------- ---------- ----------
Total From Investment
Operations: (4.85) 7.15 3.19
Less Distributions:
Dividends (from net
investment income) 0.00 0.00 0.00
Distributions (from capital
gains) (2.86) 0.00 0.00
---------- ---------- ----------
Total Distributions (2.86) 0.00 0.00
---------- ---------- ----------
Net Asset Value, End of Period $ 12.63 $ 20.34 $ 13.19
---------- ---------- ----------
---------- ---------- ----------
Total Return (26.37%) 59.14%* 31.94%
Ratios/Supplemental Data:
Net Assets, End of Period
($million) $ 618.0 $ 1,513.4 $ 218.4
Ratio of Expenses to
Average Net Assets 1.45% 1.37%* 1.61%
Ratio of Net Income (Loss)
to Average Net Assets (0.40%) (0.25%)* (0.29%)
Portfolio Turnover Rate 34% 27% 23%
</TABLE>
*Data has been annualized.
56 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 YEAR ENDED
SEPTEMBER SEPTEMBER OCTOBER
30, 1998 30, 1997 31, 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 14.49 $ 11.29 $ 10.00
Income From Investment
Operations:
Net Investment Income
(Loss) 0.29 0.21 0.10
Net Gains or Losses on
Securities (both realized
and unrealized) 0.04 3.24 1.19
---------- ---------- ----------
Total From Investment
Operations: 0.33 3.45 1.29
Less Distributions:
Dividends (from net
investment income) (0.24) (0.12) 0.00
Distributions (from capital
gains) (0.59) (0.13) 0.00
---------- ---------- ----------
Total Distributions (0.83) (0.25) 0.00
---------- ---------- ----------
Net Asset Value, End of Period $ 13.99 $ 14.49 $ 11.29
---------- ---------- ----------
---------- ---------- ----------
Total Return 2.57% 34.01%* 12.91%
Ratios/Supplemental Data:
Net Assets, End of Period
($million) $ 57.7 $ 33.5 $ 13.8
Ratio of Expenses to
Average Net Assets 1.31% 1.50%*(a) 2.50%(a)
Ratio of Net Income (Loss)
to Average Net Assets 2.39% 2.38%*(a) 1.21%(a)
Portfolio Turnover Rate 46% 53% 66%
</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, ratios would have been as follows:
<TABLE>
<CAPTION>
SEPTEMBER OCTOBER
30, 1997 31, 1996
<S> <C> <C>
- ------------------------------------------------------
Ratio of Expenses to Average
Net Assets 1.70 % 2.64 %
Ratio of Net Income (Loss) to
Average Net Assets 2.18 % 1.08 %
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 57
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
FINANCIAL HIGHLIGHTS
...............................................................................
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ELEVEN PERIOD
MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED OCTOBER 31, OCTOBER
SEPTEMBER SEPTEMBER -------------------------------------------- 31,
30, 1998 30, 1997 1996 1995 1994 1993 1992(A)
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 18.77 $ 14.92 $ 12.97 $ 14.50 $ 14.09 $ 9.80 $ 10.00
Income From Investment
Operations:
Net Investment Income
(Loss) 0.41 0.27 0.09 0.30 0.21 0.06 0.26
Net Gains or Losses on
Securities (both realized
and unrealized) (5.32) 3.74 2.90 (0.77) 0.43 4.48 (0.46)
---------- ---------- -------- -------- -------- -------- ----------
Total From Investment
Operations: (4.91) 4.01 2.99 (0.47) 0.64 4.54 (0.20)
Less Distributions:
Dividends (from net
investment income) (0.58) (0.16) 0.00 0.00 (0.08) (0.25) --
Distributions (from capital
gains) (2.86) 0.00 (1.04) (1.06) (0.15) -- --
---------- ---------- -------- -------- -------- -------- ----------
Total Distributions (3.44) (0.16) (1.04) (1.06) (0.23) (0.25) --
---------- ---------- -------- -------- -------- -------- ----------
Net Asset Value, End of Period $ 10.42 $ 18.77 $ 14.92 $ 12.97 $ 14.50 $ 14.09 9.80
---------- ---------- -------- -------- -------- -------- ----------
---------- ---------- -------- -------- -------- -------- ----------
Total Return (29.90%) 29.63%* 24.90% (3.06%) 4.62% 47.49% (22.81%)*
Ratios/Supplemental Data:
Net Assets, End of Period
($million) $ 756.1 $ 1,647.3 $1,172.8 $ 819.7 $1,286.0 $ 815.4 $ 23.5
Ratio of Expenses to
Average Net Assets 1.32% 1.26%* 1.32% 1.40% 1.37% 1.26% 2.04%*
Ratio of Net Income (Loss)
to Average Net Assets 1.95% 2.09%* 1.45% 1.40% 1.44% 1.55% 37.02%*
Portfolio Turnover Rate 43% 61% 42% 26% 55% 21% 0%
</TABLE>
*Ratios have been annualized.
(a) From September 30, 1992, the date on which Fund shares were first offered
for sale to the public.
58 THE OAKMARK FAMILY OF FUNDS
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
FINANCIAL HIGHLIGHTS
...............................................................................
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
ELEVEN
MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER SEPTEMBER OCTOBER
30, 1998 30, 1997 31, 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Net Asset Value, Beginning of
Period $ 12.20 $ 11.41 $ 10.00
Income From Investment
Operations:
Net Investment Income
(Loss) 0.18 0.13 0.04
Net Gains or Losses on
Securities (both realized
and unrealized) (4.09) 1.10 1.37
---------- ---------- ----------
Total From Investment
Operations: (3.91) 1.23 1.41
Less Distributions:
Dividends (from net
investment income) (0.06) (0.08) 0.00
Distributions (from capital
gains) (1.34) (0.36) 0.00
---------- ---------- ----------
Total Distributions (1.40) (0.44) 0.00
---------- ---------- ----------
Net Asset Value, End of Period $ 6.89 $ 12.20 $ 11.41
---------- ---------- ----------
---------- ---------- ----------
Total Return (35.20%) 12.07%* 14.15%
Ratios/Supplemental Data:
Net Assets, End of Period
($million) $ 51.8 $ 66.0 $ 39.8
Ratio of Expenses to
Average Net Assets 1.96% 1.93%* 2.50%(a)
Ratio of Net Income (Loss)
to Average Net Assets 2.17% 1.23%* 0.65%(a)
Portfolio Turnover Rate 69% 63% 27%
</TABLE>
Notes
*Ratios have been annualized.
(a) If the fund had paid all of its expenses and there had been no expense
reimbursement by the investment advisor, the ratio of expenses to average
net assets would have been 2.65% and the ratio of net income (loss) to
average net assets would have been .50%.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. THE OAKMARK FAMILY OF FUNDS 59
<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 7-9, 12-13, 16-18, 21-23, 27-31, AND 35-37, AS
OF SEPTEMBER 30, 1998, 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, 1998, 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, 1998, THE RESULTS
OF THEIR OPERATIONS, THE CHANGES IN THEIR NET ASSETS, AND THEIR
FINANCIAL HIGHLIGHTS FOR THE PERIODS INDICATED THEREON IN CONFORMITY
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 21, 1998
60
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)
or 617-328-5000
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>
OAKMARK
FAMILY OF FUNDS
P.O. BOX 8510
BOSTON, MA 02266-8510
