<PAGE>
[OAKMARK LOGO]
THIRD QUARTER REPORT
JUNE 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
[LOGO]
MANAGED BY
HARRIS ASSOCIATES L.P.
OAKMARK
<PAGE>
THE OAKMARK FAMILY OF FUNDS
1998 THIRD QUARTER 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......................... 25
International Diversification Chart....................... 27
Schedule of Investments................................... 28
THE OAKMARK INT'L SMALL CAP FUND
Letter from the Portfolio Manager......................... 33
International Diversification Chart....................... 35
Schedule of Investments................................... 36
TRUSTEES AND OFFICERS....................................... 41
</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).
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...
........................................................................
DEAR FELLOW SHAREHOLDERS:
WE ARE PLEASED TO PRESENT OUR THIRD QUARTER REPORT FOR THE PERIOD ENDING
JUNE 30, 1998. IT HAS BEEN A FRUSTRATING PERIOD, BUT OUR FOCUS HAS NOT CHANGED.
OUR INVESTMENT STYLE IS WELL SUITED TO VOLATILE PERIODS. OUR RISK AVERSION AND
DISCIPLINE WILL SERVE YOU WELL AS WE MANAGE THE FUNDS TO MEET YOUR LONG-TERM
GOALS.
[PHOTO]
AS SHAREHOLDERS AND MANAGERS OF THE OAKMARK FAMILY OF FUNDS, WE VIEW
OURSELVES AS YOUR PARTNERS. AS PARTNERS, WE SHARE RESPONSIBILITIES. OUR JOB IS
TO MANAGE THE FUNDS TO HELP MEET YOUR FINANCIAL GOALS. WE DO THAT BY APPLYING TO
FIVE INVESTMENT GUIDELINES: BUY STOCKS SELLING AT A SIGNIFICANT DISCOUNT TO
THEIR UNDERLYING BUSINESS VALUE, INVEST IN COMPANIES WITH OWNER-ORIENTED
MANAGEMENT, THINK INDEPENDENTLY, DO NOT OVER DIVERSIFY AND INVEST EFFICIENTLY.
YOUR OBJECTIVE AS SHAREHOLDERS IS TO PROPERLY ALLOCATE YOUR ASSETS AMONG OUR
FUNDS. IN SIMPLE TERMS, THE LONGER YOUR TIME HORIZON, THE GREATER YOUR EQUITY
EXPOSURE SHOULD BE. FOR THOSE WITH LOW RISK TOLERANCE, WE HAVE TWO OPTIONS: THE
EQUITY AND INCOME FUND (40% FIXED INCOME) AND MONEY MARKET FUNDS. SUCCESSFUL
PARTNERSHIPS REQUIRE BOTH PARTIES TO "CONTRIBUTE". WE ARE CONFIDENT THAT
CONSISTENT APPLICATION OF OUR INVESTMENT GUIDELINES WILL PROVIDE ATTRACTIVE
LONG-TERM RETURNS. YOU SHOULD ALLOCATE YOUR ASSETS IN OUR FUNDS TO REFLECT YOUR
PERSONAL NEEDS AND GOALS, AS WE DO AS SHAREHOLDERS. THE COMBINATION OF THESE
ACTIVITIES SHOULD REINFORCE THE STRENGTH OF OUR PARTNERSHIP.
AS MANAGERS OF THE FUNDS, WE DISCOURAGE ANY SHAREHOLDER FROM EXCESSIVE
TRADING OR "MARKET-TIMING." FREQUENT TRADING BY SHAREHOLDERS UNDERMINES THE DAY-
TO-DAY MANAGEMENT OF THE FUNDS, MAKING IT DIFFICULT FOR US TO INVEST
EFFECTIVELY. FURTHERMORE, MARKET-TIMING CAN BE COSTLY TO THE FUNDS AND,
ULTIMATELY, TO YOU. RECENTLY, WE HAVE TAKEN ADDITIONAL STEPS TO PREVENT
MARKET-TIMING IN THE FUNDS WITH THE INTENT TO PROTECT YOU, OUR LONG-TERM
INVESTORS.
LAST QUARTER, WE MENTIONED OUR ONGOING FOCUS ON INVESTOR SERVICES. THIS
QUARTER, WE WOULD LIKE TO UPDATE YOU ON OUR PROGRESS. WE NOW HAVE THE EDUCATION
IRA KIT WHICH INCLUDES AN APPLICATION AVAILABLE ON OUR WEBSITE. YOU MAY ACCESS
THIS INFORMATION AT WWW.OAKMARK.COM, OR CALL US AT 1-800-625-6275 FOR FURTHER
INFORMATION. OUR LATEST PROJECT, WHICH IS IN PROCESS, IS DEVELOPING A SYSTEM
WHICH ENABLES SHAREHOLDERS TO ACCESS THEIR ACCOUNT INFORMATION FROM THE
INTERNET. WE HOPE TO HAVE THIS AVAILABLE TO SHAREHOLDERS BY LATE SUMMER.
LASTLY, MANY OF YOU HAVE ASKED US ABOUT THE YEAR 2000 PROBLEM. OUR ANALYSTS
ARE SYSTEMATICALLY QUESTIONING THE MANAGEMENT OF THE COMPANIES IN OUR PORTFOLIOS
AND ARE RECEIVING ASSURANCES THAT THESE COMPANIES ARE PROPERLY ADDRESSING THE
PROBLEM. FROM A SERVICE PERSPECTIVE, WE ARE PLEASED TO REPORT THAT HARRIS
ASSOCIATES (ADVISOR TO THE FUNDS) AND OUR SIGNIFICANT OUTSIDE SERVICE PROVIDERS
HAVE PLANS IN PLACE TO ENSURE THAT THE FUNDS MOVE INTO THE YEAR 2000 FREE OF
MATERIAL DISRUPTION.
VERY TRULY YOURS,
[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
JUNE 30, 1998 FUND
<S> <C> <C>
-------------------- --------------------
3 MONTHS -2.7% 1.9%
..............................................................................
6 MONTHS 7.0% 15.6%
..............................................................................
1 YEAR 18.4% 44.3%
..............................................................................
AVERAGE ANNUAL TOTAL RETURN
FOR:
3 YEAR 24.1% N/A
..............................................................................
5 YEAR 21.9% N/A
..............................................................................
SINCE INCEPTION 29.0% 53.8%
VALUE OF $10,000 $57,909 $20,462
FROM INCEPTION DATE (8/5/91) (11/1/96)
- ------------------------------------------------------------------------------
TOP FIVE HOLDINGS Mattel, Cablevision Systems
AS OF JUNE 30, 1998 Inc. 6.5% Corporation 11.7%
COMPANY AND % OF TOTAL NET Philip Morris U.S. Industries,
ASSETS Companies, Inc. 10.9%
Inc. 6.5% USG
Nike, Inc. 6.4% Corporation 9.4%
Banc One Gucci Group 9.3%
Corporation 5.8% PartnerRe
The Black & Decker Ltd. 7.9%
Corporation 5.8%
- ------------------------------------------------------------------------------
TOP FIVE INDUSTRIES Other Consumer Other Consumer
AS OF JUNE 30, 1998 Goods & Goods &
INDUSTRIES AND % OF TOTAL NET Services 20.5% Services 13.4%
ASSETS Food & Broadcasting &
Beverages 16.5% Cable TV 11.7%
Publishing 10.1% Diversified
Banks 9.5% Conglomerates 11.0%
Aerospace & Building Materials
Defense 7.7% &
Construction 9.4%
Retail 9.3%
</TABLE>
2 THE OAKMARK FAMILY OF FUNDS
<PAGE>
................................................................................
<TABLE>
<CAPTION>
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK
SMALL CAP EQUITY AND INTERNATIONAL INT'L
FUND INCOME FUND FUND SMALL CAP FUND
<S> <C> <C> <C> <C>
-------------------- -------------------- -------------------- --------------------
3 MONTHS -5.8% 0.5% -11.9% -13.5%
..............................................................................................................................
6 MONTHS 0.9% 9.2% 0.8% 2.6%
..............................................................................................................................
1 YEAR 15.9% 21.5% -10.8% -25.0%
..............................................................................................................................
AVERAGE ANNUAL TOTAL RETURN
FOR:
3 YEAR N/A N/A 11.1% N/A
..............................................................................................................................
5 YEAR N/A N/A 10.5% N/A
..............................................................................................................................
SINCE INCEPTION 30.8% 20.2% 13.1% -0.4%
VALUE OF $10,000 $20,467 $16,320 $20,253 $9,892
FROM INCEPTION DATE (11/1/95) (11/1/95) (9/30/92) (11/1/95)
- ------------------------------------------------------------------------------------------------------------------------------
TOP FIVE HOLDINGS People's Bank of Chrysler Tomkins plc 5.1% Cordiant
AS OF JUNE 30, 1998 Bridgeport, Corporation 5.2% Saatchi & Saatchi Communications
COMPANY AND % OF TOTAL NET CT 8.7% Catellus plc 4.9% Group plc 5.8%
ASSETS Cablevision Systems Development Quilmes Industrial Elevadores Atlas,
Corporation 7.1% Corporation 4.2% SA 4.5% SA 5.6%
U.S. Industries, U.S. Industries, Chargeurs Matthew Clark
Inc. 6.5% Inc. 3.8% SA 4.4% plc 4.8%
Catellus Cordiant Lambert Fenchurch
Development Tele-Communications, Communications Group plc 4.7%
Corporation 4.2% Liberty Media Group plc 4.2% Enix Corporation
RenaissanceRe Class A 3.4% Group 3.8%
Holdings H&R Block,
Ltd. 4.0% Inc. 3.3%
- ------------------------------------------------------------------------------------------------------------------------------
TOP FIVE INDUSTRIES Banks 12.8% U.S. Government Other Industrial Other Industrial
AS OF JUNE 30, 1998 Broadcasting & Bonds 28.1% Goods & Goods &
INDUSTRIES AND % OF TOTAL NET Cable TV 9.8% Automotive 7.7% Services 13.5% Services 12.3%
ASSETS Other Industrial Other Consumer Food & Retail 10.8%
Goods & Goods & Beverage 11.5% Other
Services 9.4% Services 7.4% Marketing Financial 10.1%
Insurance 9.3% Insurance 6.9% Services 9.1% Food &
Food & Commercial Real Banks 9.0% Beverage 9.0%
Beverage 9.1% Estate 6.4% Other Consumer Other Consumer
Goods & Goods &
Services 6.6% Services 7.1%
</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 (6/30/98)
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
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN*
THROUGH 6/30/98
TOTAL RETURN FROM FUND INCEPTION
6/30/98 NAV $43.23 LAST 3 MOS. 8/5/91
<S> <C> <C>
- ---------------------------------------------------------------------------------
THE OAKMARK FUND -2.7% 29.0%
Standard & Poor's 500 Stock Index w/inc** 3.3% 19.8%
Dow Jones Industrial Average w/ inc** 2.1% 20.0%
Value Line Composite Index** -4.6% 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 whose
composition is different from the Fund. The S&P 500 is a broad market-weighted
average dominated by blue-chip stocks. The Dow Jones Average includes only 30
big companies. The Value Line Index is an unweighted average of more than 1,000
stocks. Past performance is no guarantee of future results.
PORTFOLIO UPDATE
For the quarter ended June 30, 1998, The Oakmark Fund was down 2.7% vs. a 3.3%
gain for the Standard & Poor's 500. For the six months ended June 30, 1998, your
Fund returned about 7%, not bad in absolute terms but about half the return
generated by the S&P 500. This is the Fund's worst relative performance since
its inception in 1991.
Many of you probably have questions about this situation--"What is the cause?
What are you going to do about it? How should the shareholders evaluate?" I will
try to answer these questions.
There are several causes for our relative performance this year. First is our
average cash holding of about 10%. Second is a number of large holdings that are
down this year--Polaroid (-25%), Nabisco (-22%), Philip Morris (-12%), Boeing
(-2%), and Columbia/HCA (-1%). The third cause is a relative lack of big
winners; in a market up about eighteen percent, your Fund has only one
holding--Black & Decker--up more than 30 percent. Simply, for this six month
period, we have held substantial cash in a bull market and our stocks have not
kept pace.
This year the market has been what is termed a "momentum" market, in which
stocks that have done well continue to do well and companies that disappoint, no
matter what the valuation, get hammered. This is an environment that, frankly,
does not suit our investment approach. (Nor does it seem to suit other mutual
funds that Lipper characterizes as "large-cap value," which are up about ten
percent this year). For example, a stock that we own that becomes the market's
darling and gets "hot" tends to hit our sell target (generally ninety percent of
what we estimate the value of the underlying business to be) long before the
stock tops out. A recent example is our cable investments, which were very
successful for us; however, they have continued to appreciate far beyond the
point where we sold them. I do not regard these as bad sales. Sure, it would be
nice to have held on for the higher prices that did materialize. However, in the
long run (which is what matters!), our sell discipline is logical and we believe
in it, and
4
THE OAKMARK FUND
<PAGE>
........................................................................
have no interest whatsoever in trying to out-psyche the market. Zero.
Comparing a quintessential momentum stock to one of our "value" stocks might
illustrate the current environment. BMC Software (BMCS--$53) makes and sells
computer software for mainframes and has a market capitalization of $12 billion
(to put this number in perspective, it is similar to that of Nike). This places
the company in the large-cap category. Now, I am sure that this is a fine
company with good growth prospects. What are you paying for this growth? Well,
BMC sells at 17x revenues and over 25x operating earnings (and the market
capitalization per employee is over $9 million!!).
We view these sorts of valuations as troublesome and will not pay them. Almost
everything has to go right for a very long time to justify paying these sorts of
valuations, a bet we will not make with your money. Many software, Internet,
Y2K, and technology stocks sell at these kinds of valuations today.
Biotechnology stocks were valued similarly in the early 1990s and I actually
wrote what turned out to be a prescient quarterly letter in 1992 about why your
Fund eschewed these holdings. Of the 32 biotech companies that were public in
1991, only six trade at higher prices today! This is the sort of poor long-term
performance that can result in owning stocks in businesses that have been hot
short-term performers. The meal can be tasty, but the heartburn is painful.
Now let's look at one of our holdings, Polaroid (PRD--$36). Polaroid is the
instant-photography and imaging company that had been mismanaged for quite a
while before Black & Decker executive Gary DiCamillo was appointed CEO a couple
of years ago. This is not an awesome business, but it is at least an average
one. It has a number of solid cash-cow businesses, a couple of gamier ones
(e.g., Russian street photography), and some new ventures that are very
promising.
How does the market value PRD? Well, it is valued at less than 1x revenue (!!!!)
and only 10x operating earnings (and only $200,000 per employee!), which are
understated due to accounting "losses" in the venture area that mask positive
value. When PRD pre-announced disappointing second quarter earnings (largely due
to an inventory adjustment at their biggest customer, Wal-Mart), the stock got
hammered. PRD the stock is down 25 percent this year.
These relative valuations are why we own Polaroid in your Fund and not BMC. BMC
may continue to soar in the market, and PRD may flounder until it gets what the
Street calls "visibility" (this means that the undervaluation is obvious even to
my dog). However, in the long run, I place my (and your) money on Polaroid.
We believe in our philosophy and our execution. It is easy to do so when
short-term performance is good. It is crucial to do when short-term performance
is weak. Investment professionals tend to lose their focus when things are not
going right. Clients and shareholders complain, the media is critical, and many
investors begin to doubt their approach. This is a perfect stew for poor
decision-making, which leads to lousy long-term performance. We are trying our
best to be immune to this malaise.
I know that shareholders want to out-perform ALL the time, every day, month,
year. People, let me deliver the bad news: this is an unattainable goal. It is
important for all of you to have reasonable expectations and to understand why
you own certain investments. At The Oakmark Fund, our goal remains the same as
ever: to deliver superior investment returns over the long term without assuming
undue risk.
ACADEMIC CORNER
I try to keep you abreast of some of the latest theoretical and academic debates
pertaining to investments. The current topic is the appropriate risk premium
that should be applied to equities.
One of the bedrock principles of finance is that the greater the risk (generally
defined as volatility), the greater the required return. The theory is that
stocks are riskier than, say, bonds, and thus must earn a higher return as
compensation. Some theoreticians aver that, due to the strong relative
performance of stocks in the past few years, the risk premium of stocks--i.e.,
the excess expected return relative to bonds--is close to zero. In other words,
bonds and stocks are priced to yield similar returns going forward. The
implication is that stocks, presumably riskier than bonds, are overpriced.
Not so fast, say others. James Glassman of the American Enterprise Institute
argues that, based on investing data for the entire century, stocks in the long
run are no more risky than bonds. Stocks have been more volatile in the short
run, but in the long run have not been. He argues that, since stocks in fact are
no riskier than bonds, the risk premium should be zero. He argues that this
implies that stocks are under-valued relative to bonds. Critics respond that
this is typical bull market sort of analysis.
What do I think? Well, the fact is that there exist no tools to forecast
accurately what the risk premium will be in the future. Stocks do possess an
inherent structural advantage compared to long-term fixed rate bonds. In periods
of unexpected inflation, most stocks and bonds suffer, but stocks have the
flexibility to cope with inflation. For
THE OAKMARK FUND
5
<PAGE>
........................................................................
example, if one buys a 30-year, 5% bond at par and inflation rises to, say, 10%,
the bond would likely be priced to yield something north of that, which would of
course result in a substantial reduction in the value of the bond. The bond can
do nothing.
Equity, representing an ownership piece of a business, is better able to cope
with inflation. Yes, the company's costs rise, but then so likely do the
company's selling prices. Simplistically, a business is relatively immune from
inflation. Given that inflation is always and everywhere a monetary phenomenon
(i.e., the printing of too much money) and given that some politicians may find
inflating an attractive policy, I do think that stocks' ability to weather
inflation better than bonds makes equities a dominant asset class.
Of course, this is only an academic exercise here at The Oakmark Funds. We may
find these debates interesting, but when investing your money, we adhere to the
one-stock-at-a-time approach that has worked well for us for a long time.
[SIGNATURE]
ROBERT J. SANBORN
Portfolio Manager
[email protected]
July 7, 1998
THE OAKMARK
BOOK CLUB
It's time again for another installment of The Oakmark Book Club, wherein I
recommend the books which I have read recently that might be relevant to those
of you interested in investing, finance, business, and economics;
GUNS, GERMS, AND STEEL: THE FATES OF HUMAN SOCIETIES, BY JARED DIAMOND (W.W.
NORTON AND COMPANY, 1997); a masterful history of human societies on earth for
the past 13,000 years, and an illumination of why different societies developed
at dissimilar rates; the bottom line: historical processes, not intelligence,
explains diversity; the most stimulating book I have read in years;
THE WEALTH AND POVERTY OF NATIONS: WHY SOME ARE RICH AND SOME SO POOR, BY DAVID
S. LANDES (W.W. NORTON, 1998); similar to the above book, but covering a shorter
interval--"only" 600 years;
JUST DO IT: THE NIKE SPIRIT IN THE CORPORATE WORLD, BY DONALD KATZ (ADAMS,
1995); an excellent history of Nike, which illuminates the company's unique
culture, which has been the key to its phenomenal success; as an aside, I liked
Akio Morita, then CEO of Sony, telling Nike CEO Phil Knight in 1989 that the US
was on the verge of becoming a hollow industrial power;
FROZEN DESIRE: THE MEANING OF MONEY, BY JAMES BUCHAN (FARAR STRAUS GIROUX,
1997); a survey of the different forms and views of money across the centuries,
especially human beings' psychological attachment to the concept of wealth;
RAGING BULLS, EASY RIDERS: HOW THE SEX, DRUGS, AND ROCK-AND-ROLL GENERATION
SAVED HOLLYWOOD, BY PETER BISKIND (SCHUSTER, 1998); a dishy look at the
"Directors' Decade"; lots of fun, and the investment moral: never, ever invest
in the movie business;
THE COMMANDING HEIGHTS: THE BATTLE BETWEEN GOVERNMENT AND THE MARKETPLACE THAT
IS RE-MAKING THE MODERN WORLD, BY DANIEL YERGIN AND JOSEPH STANISLAW (SCHUSTER,
1998); a handful of intellectuals--among them F.A. Hayek and Milton Friedman--
contended for decades that the larger the government relative to an economy, the
lower the standard of living; this critique of Keynesian orthodoxy met a
collective yawn until the early 1980s; business enterprise has always been a
struggle between those who participate in the private sector--investors,
workers--and those in the power elite who set the rules and tax the profits and
this book is an exhaustive survey of this struggle in the 20th century.
6
THE OAKMARK FUND
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--90.0%
FOOD & BEVERAGE--16.5%
Philip Morris Companies Inc. 14,310,700 $ 563,483,813
Anheuser-Busch Companies Inc. 9,205,400 434,379,812
H.J. Heinz Company 4,007,250 224,906,906
Nabisco Holdings Corporation 3,572,100 128,818,856
Gallaher Group Plc (b) 3,835,500 83,901,563
--------------
1,435,490,950
APPAREL--6.4%
Nike, Inc., Class B 11,457,100 $ 557,817,556
RETAIL--2.4%
American Stores Company 8,500,000 $ 205,593,750
OTHER CONSUMER GOODS & SERVICES--20.5%
Mattel, Inc. 13,439,400 $ 568,654,612
The Black & Decker Corporation 8,267,000 504,287,000
H&R Block, Inc. 6,735,000 283,711,875
Polaroid Corporation 4,552,400 161,894,725
Fortune Brands, Inc. 2,746,800 105,580,125
Brunswick Corporation 3,578,800 88,575,300
First Brands Corporation 1,070,400 27,429,000
Juno Lighting, Inc. 1,085,000 25,633,125
GC Companies, Inc. (a) 397,000 20,594,375
--------------
1,786,360,137
BANKS--9.5%
Banc One Corporation 9,100,548 $ 507,924,335
Mellon Bank Corporation 4,589,200 319,523,050
--------------
827,447,385
INSURANCE--1.4%
Old Republic International Corporation 4,122,930 $ 120,853,386
OTHER FINANCIAL--7.0%
Washington Mutual, Inc. 9,000,000 $ 390,937,500
Fannie Mae 3,557,500 216,118,125
--------------
607,055,625
PUBLISHING--10.1%
Knight-Ridder, Inc. 6,929,400 $ 381,550,087
Dun & Bradstreet Corporation 10,491,300 378,998,213
ACNielsen Corporation (a) 4,764,000 120,291,000
--------------
880,839,300
COMPUTER SERVICES--0.4%
Electronic Data Systems Corporation 950,000 $ 38,000,000
</TABLE>
THE OAKMARK FUND
7
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--90.0% (CONT.)
MEDICAL CENTERS--4.6%
Columbia/HCA Healthcare Corporation 13,601,000 $ 396,129,125
MEDICAL PRODUCTS--0.9%
Sybron International Corporation (a) 3,135,600 $ 79,173,900
AUTOMOTIVE--0.6%
SPX Corporation (a) 875,200 $ 56,341,000
AEROSPACE & DEFENSE--7.7%
Lockheed Martin Corporation 3,625,000 $ 383,796,875
The Boeing Company 6,442,800 287,107,275
--------------
670,904,150
MINING--1.3%
DeBeers Centenary AG (b) 6,546,000 $ 114,555,000
OTHER INDUSTRIAL GOODS & SERVICES--0.7%
Bandag Incorporated, Class A (a) 1,104,100 $ 38,091,450
The Geon Company 971,600 22,286,075
--------------
60,377,525
TOTAL COMMON STOCKS (COST: $6,060,265,851) 7,836,938,789
SHORT TERM INVESTMENTS--9.9%
GOVERNMENT AND AGENCY SECURITIES--4.0%
U.S. GOVERNMENT AGENCIES--2.3%
Federal Farm Credit Bank, 5.46% due
7/1/1998 $200,000,000 $ 200,000,000
U.S. GOVERNMENT BILLS--1.7%
United States Treasury Bills, 4.99%-5.15%
due 7/9/1998-11/12/1998 $150,000,000 $ 149,171,293
--------------
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $349,161,059) 349,171,293
COMMERCIAL PAPER--4.4%
American Express Credit Corp., 5.50%-5.52%
due 7/6/1998-7/22/1998 $100,000,000 $ 100,000,000
Ford Motor Credit Corp., 5.50%-5.53% due
7/2/1998-7/16/1998 120,000,000 120,000,000
General Electric Capital Corporation,
5.52%-6.00% due 7/1/1998-7/20/1998 160,000,000 160,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $380,000,000) 380,000,000
</TABLE>
8
THE OAKMARK FUND
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--9.9% (CONT.)
REPURCHASE AGREEMENTS--1.5%
State Street Repurchase Agreement, 5.65%
due 7/1/1998 126,676,000 $ 126,676,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $126,676,000) 126,676,000
TOTAL SHORT TERM INVESTMENTS (COST: $855,837,059) 855,847,293
Total Investments (Cost $6,916,102,910)--99.9% $8,692,786,082
Other Assets In Excess Of Other Liabilities--0.1% 12,146,494
--------------
TOTAL NET ASSETS--100% $8,704,932,576
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
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
(6/30/98) 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
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 6/30/98
TOTAL RETURN FROM FUND INCEPTION
6/30/98 NAV $20.25 LAST 3 MOS. 11/1/96
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK SELECT FUND 1.9% 53.8%
Standard & Poor's 500 Stock
Index w/inc** 3.3% 35.4%
Standard & Poor's MidCap 400
Index w/ inc** -2.1% 28.6%
Value Line Composite Index** -4.6% 19.0%
</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 the quarter ended June 30, The Oakmark Select Fund increased in value by
1.9% versus a decline of 2.1% for the S&P 400 Midcap index. The performance
award for the quarter goes to the S&P 500, which was up 3.3%, its greatest
quarterly outperformance of the Midcap index since S&P started its Midcap index
in 1991. Your portfolio benefited from gains in Cablevision, whose
undervaluation was highlighted by the price AT&T agreed to pay for
TeleCommunications, Inc. and in Gucci where its competitor Prada purchased 10%
of the company. For the first nine months of fiscal 1998, your Fund gained 25.2%
versus 9.5% for the S&P Midcap and 21.1% for the S&P 500.
ALL INDICES ARE NOT CREATED EQUAL!
Recent press reports have discussed how poorly investment managers are
performing this year with fewer than 10% of mutual funds gaining more than the
S&P 500. Such a small number have outperformed that you can't even charitably
argue that the results are random. Are professional investors suddenly failing
en-masse? Of course not. Pretend that as 1997 drew to a close you correctly
forecast the "lapse" fund managers would experience in 1998. Knowing how
strongly the S&P 500 was likely to perform, you wisely attempted to mimic the
index by putting 1/500th of your portfolio into each of the 500 companies that
make up the index. At the end of June you compute your performance, trying to
suppress the smug laughter. When you see that your performance trailed the S&P
500 by nearly 600 basis points (11.8% versus 17.7%) you become convinced your
spreadsheet has bugs. What's going on?
The S&P 500 is a market capitalization weighted index. The greater a company's
market capitalization (stock price times number of shares outstanding) the
greater that company's stock influences the index. The largest company in the
S&P 500, GE, accounts for 3.5% of the index. The smallest 200 companies in total
account for only 7%. If we look at stocks termed mega-cap (capitalizations over
$25 billion), they account for only 85 of the 500 companies, yet cap-weighted
are nearly two-thirds of the index value. So far in 1998, in the stock market,
bigger has
10
THE OAKMARK SELECT FUND
<PAGE>
........................................................................
been better. The average stock has increased a modest amount while the mega-cap
stocks have continued to perform strongly. Although the S&P Midcap 400 index is
also cap-weighted, because its stocks are more similarly sized, the index is not
dominated by just a few companies and therefore performs much more like the
average stock.
Is it coincidence that most mutual funds underperform when the S&P Midcap
underperforms the S&P 500 and vice versa? Not at all. How do managers decide how
much of their portfolio to invest in each stock? Most, unlike us, simply equal
weight their positions. Except for index funds and closet-indexers, I don't know
investors that invest more just because a company is bigger! So most funds
aren't weighted as heavily in mega-cap companies as the S&P 500 is. The Oakmark
Select Fund invests in a mixture of mid and large cap companies, and at present
has no exposure to mega-cap stocks. Further, our position sizes are based on our
judgement of how attractively priced each stock is, rather than based on market
cap. For those reasons, in the short-run, our results are much more like the
Midcap index than the S&P 500. In the long run, the S&P 500 will only continue
outperforming if the mega cap companies continue to fundamentally outperform
smaller companies. Those big companies have benefited from international growth
and from cutting bloated expense structures, but small companies have the
benefit of being much more flexible. We don't view big or small companies as
having sustainable advantages relative to each other and therefore expect
long-term performance to be much more influenced by company-specific
fundamentals than company size. As you look for signposts to judge whether or
not you are on track toward meeting your long-term goals, comparing to the wrong
index can lead to unnecessary concern or excitement. We expect to continue
achieving excellent long-term results relative to any index by buying
undervalued companies with owner-oriented management.
HOTEL ROOMS 25% OFF!
As regular readers of these letters know, we very much like to see our companies
use excess capital to repurchase their stock. We view repurchase as confirmation
that management shares our view that their stock is undervalued and as an
indication that they are more interested in increasing per-share value than in
merely getting bigger. Why then would your Fund buy Host Marriott after they
announced a large purchase of hotels for which they will pay by issuing equity?
Host Marriott (HMT) is one of the world's largest hotel owners. The majority of
their properties are full service Marriott Hotels. If you've traveled recently,
you've no doubt seen the no-vacancy signs indicating how strong the hotel
business is. Despite the strong hotel market and the strong stock market, HMT
fell 25% from $24 last fall to a current price of $18. The main reason for that
decline is growth in new hotel construction, especially in low- and mid-priced
rooms. The obvious fear is that too many new rooms means the no-vacancy signs
disappear. In April, HMT announced the purchase from Blackstone Group (a LBO
firm) of $1.8 billion of luxury hotel properties that included Ritz Carltons,
Four Seasons and Hyatt Regencies. Like other deals CEO Terry Golden has
completed, this acquisition improved the quality of HMT's portfolio, the price
was below replacement cost and it was additive to HMT cashflow. What was
different this time was that HMT was issuing equity.
When we met with Terry, as you might expect, we wanted to learn why he was
issuing equity. We learned that the seller would not do this deal for $1.8
billion in cash. In addition to gaining tax benefits, the seller believed HMT
stock was significantly undervalued. We were comfortable (as was Terry) that the
per-share business value of HMT was increased by this transaction, and were glad
to learn that Blackstone (who knows a great deal about the hotel business)
shares our view that HMT stock is attractive. Our expectations for HMT are that
capacity additions will not significantly exceed demand growth for upper-end
hotel rooms, and that HMT's year-end conversion to a REIT structure will not
only save a lot of taxes, but will focus other investors on HMT's
undervaluation. Selling at about 7.5x estimated 1999 funds from operations, it
may be harder to get a deal on an HMT room than on their stock!
Thank you for your continuing support.
[SIGNATURE]
BILL NYGREN
Portfolio Manager
[email protected]
July 6, 1998
P.S. On July 2 one of your fund's largest holdings, U.S. Industries, reported an
earnings decline. The stock fell 22% causing your fund to suffer a one-day drop
of 43 cents. We were disappointed with the fundamental results, but feel this
decline is an extreme overreaction. I have added to the position.
THE OAKMARK SELECT FUND
11
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--90.8%
RETAIL--9.3%
Gucci Group (b) 2,829,800 $ 149,979,400
OTHER CONSUMER GOODS & SERVICES--13.4%
Host Marriott Corporation (a) 3,750,000 $ 66,796,875
Ralston Purina Group 531,000 62,027,437
Brunswick Corporation 2,394,900 59,273,775
Polaroid Corporation 815,900 29,015,444
--------------
217,113,531
BANKS--3.3%
People's Bank of Bridgeport, Connecticut 1,531,000 $ 53,010,875
INSURANCE--7.9%
PartnerRe Ltd. 2,506,100 $ 127,811,100
BROADCASTING & CABLE TV--11.7%
Cablevision Systems Corporation (a) 2,270,200 $ 189,561,700
TV PROGRAMMING--4.9%
Tele-Communications, Liberty Media, Class A
(a) 2,053,550 $ 79,703,409
PUBLISHING--4.9%
Dun & Bradstreet Corporation 1,780,500 $ 64,320,563
ACNielsen Corporation (a) 602,100 15,203,025
--------------
79,523,588
COMPUTER SERVICES--3.5%
Electronic Data Systems Corporation 1,410,900 $ 56,436,000
MEDICAL PRODUCTS--4.6%
Amgen, Inc. (a) 1,135,000 $ 74,200,625
AEROSPACE & DEFENSE--3.3%
Lockheed Martin Corporation 505,900 $ 53,562,163
BUILDING MATERIALS & CONSTRUCTION--9.4%
USG Corporation (a) 2,819,200 $ 152,589,200
OTHER INDUSTRIAL GOODS & SERVICES--3.6%
Premark International, Inc. 1,807,200 $ 58,282,200
DIVERSIFIED CONGLOMERATES--11.0%
U.S. Industries, Inc. 7,148,000 $ 176,913,000
TOTAL COMMON STOCKS (COST: $1,198,777,769) 1,468,686,791
</TABLE>
12
THE OAKMARK SELECT FUND
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS SOLD SHORT--0.0%
PUBLISHING--0.0%
R H Donnelley Corporation (257,300) $ (787,981)
--------------
TOTAL COMMON STOCKS SOLD SHORT (PROCEEDS: $(1,018,874)) (787,981)
SHORT TERM INVESTMENTS--9.2%
U.S. GOVERNMENT BILLS--2.4%
United States Treasury Bills, 5.085%-5.28%
due 7/16/1998-12/17/1998 40,000,000 $ 39,443,221
--------------
TOTAL U.S. GOVERNMENT BILLS (COST: $39,432,796) 39,443,221
COMMERCIAL PAPER--5.0%
American Express Credit Corp., 5.55%-5.65%
due 7/1/1998-7/16/1998 25,000,000 $ 25,000,000
Ford Motor Credit Corp., 5.53%-5.65% due
7/2/1998-7/7/1998 25,000,000 25,000,000
General Electric Capital Corporation, 6.00%
due 7/1/1998 30,000,000 30,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $80,000,000) 80,000,000
REPURCHASE AGREEMENTS--1.8%
State Street Repurchase Agreement, 5.65%
due 7/1/1998 29,819,000 $ 29,819,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $29,819,000) 29,819,000
TOTAL SHORT TERM INVESTMENTS (COST: $149,251,796) 149,262,221
Total Investments (Cost $1,347,010,691)--100.0% $1,617,161,031
Other Liabilities In Excess Of Other Assets--(0.0)% (502,246)
--------------
TOTAL NET ASSETS--100% $1,616,658,785
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
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 (6/30/98) 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
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 6/30/98
TOTAL RETURN FROM FUND INCEPTION
6/30/98 NAV $19.59 LAST 3 MOS. 11/1/95
<S> <C> <C>
- --------------------------------------------------------------------------------
THE OAKMARK SMALL CAP FUND -5.8% 30.8%
Lipper Small Cap Fund Index** -3.9% 15.4%
Russell 2000 w/ inc** -4.7% 19.3%
S&P Small Cap 600 w/inc** -4.5% 22.3%
</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 Lipper Small Cap Fund Index is
comprised of 30 Small Cap Funds. The Russell 2000 Index measures the performance
of smaller companies, and represents approximately 10% of the total value of
publicly traded companies in the U.S. The S&P 600 Index measures the performance
of selected U.S. stocks with small market capitalization. Past performance is no
guarantee of future results.
The Oakmark Small Cap Fund's third fiscal quarter ended on June 30, 1998. During
the quarter, the Fund lost 5.8%. For the nine months of the fiscal year, the
Fund gained 0.6%. Although The Oakmark Small Cap Fund has significantly
outperformed the relevant indices since its inception, the recent short-term
results are a bit of a disappointment. It is important to remember that
investing is a marathon, not a sprint. The true measure of the success of our
individual investments in the Fund will not be known for years. As always, we
will be consistent and not deviate from our disciplined investment philosophy.
Over the long term we believe our value-oriented style of investing will produce
results that meet your investment objectives.
For several years now large companies have produced investment returns that are
significantly better than smaller companies. That trend has continued this year.
However, it is worth noting that smaller companies' earnings growth has been
greater than larger companies yet their shares sell at lower valuations. The
inflow of money into equities has pushed the stocks of large companies to
unprecedented levels of valuation. As an example, General Electric Company's
(GE--$92.625) market capitalization recently crossed $300 billion. GE is clearly
an outstanding company; it is a leader in its businesses and extremely well
managed. As a value investor it is hard to accept the stock market's valuation
of their shares. Based on consensus estimates, GE sells at a price-earnings
ratio in excess of 30 times this year's earnings. In contrast, the shares of our
favorite slipper maker (see last quarter's report), R.G. Barry Corporation
(RGB--$17), are valued in the marketplace at a price-earnings ratio that is less
than 15 times. Although these companies are not directly comparable, I feel much
more comfortable owning the shares and products of RGB.
MEA CULPA
Many shareholders have inquired about the precipitous drop in the shares of U.S.
Industries (USI--$19). On
14
THE OAKMARK SMALL CAP FUND
<PAGE>
........................................................................
July 2nd, the share price of USI fell over five dollars. The reason for this was
a decline in earnings from two of the Company's non-core businesses. This is a
great example of a herd-like overreaction to bad news. The earnings at USI for
the current fiscal year have been reduced by $0.20 per share, or roughly 12%,
yet the share price dropped 22%. The market, in essence, valued the reduction in
earnings at a price-earnings multiple of more than 28 times. Furthermore, the
shares of USI are now being valued at a price-earnings ratio of a little more
than 12 times. Although disappointed by this event, my experience with this
management team is that they will act quickly and decisively to correct the
problems facing the Company. Thus I continue to believe that USI remains an
undervalued investment opportunity.
A NEW ADDITION TO THE FLEET
During the quarter, Teekay Shipping Corporation (TK--$24) was added to the
portfolio. TK is an owner and operator of a large modern fleet of oil tankers.
Their size has allowed them to capture a significant share of trade in
the Indo-Pacific Basin. Their modern fleet is both very economical to operate
and environmentally sound. These factors make them a "first call" by customers,
which include many of the well-known international oil companies. These
favorable relationships, combined with excellent fleet management, allow TK to
operate at utilization rates of up to 85% versus their competitors who operate
at rates as low as 50%. This disparity in utilization rates allows TK to earn a
superior return on investment. In a recent visit with management we came away
impressed by their strategies to enhance and optimize the opportunities in their
business. We also take comfort in the fact that insiders own in excess of 50% of
the outstanding shares. Most important, the shares of TK are attractively valued
at about nine times current fiscal year earnings. At the present time there is
very little coverage of TK by Wall Street, which has allowed us to purchase
shares at their 12 month low.
OUTLOOK
Although challenged by the current investment environment, your Fund is
committed to its investment philosophy. I am encouraged by the operating
performance and valuations of our holdings. Investor focus on large companies
has helped create opportunities for investment in small companies. That focus
has reduced the competition for investment in small companies, which improves
our ability to find undervalued investments.
Once again, I would like to thank everyone involved, especially our
shareholders, for your support of The Oakmark Small Cap Fund.
Congratulations to the Chicago Bulls on their sixth NBA Championship!!
[SIGNATURE]
STEVEN J. REID
Portfolio Manager
[email protected]
July 8, 1998
THE OAKMARK SMALL CAP FUND
15
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--92.5%
FOOD & BEVERAGE--9.1%
Ralcorp Holdings, Inc. (a) 2,000,000 $ 37,750,000
Triarc Companies, Inc. (a) 1,500,000 32,906,250
International Multifoods Corporation 1,000,000 27,500,000
M & F Worldwide Corp. (a) 917,600 9,118,650
--------------
107,274,900
RETAIL--4.9%
Cole National Corporation (a) 1,000,000 $ 40,000,000
Ugly Duckling Corporation (a) 1,750,000 16,953,125
--------------
56,953,125
OTHER CONSUMER GOODS & SERVICES--7.3%
Scotsman Industries, Inc. 1,000,000 $ 27,750,000
First Brands Corporation 1,000,000 25,625,000
Barry (R.G.) Corporation (a) 810,000 13,365,000
Libbey, Inc. 300,000 11,493,750
P.H. Glatfelter Company 500,000 7,906,250
--------------
86,140,000
BANKS--12.8%
People's Bank of Bridgeport, Connecticut 2,950,000 $ 102,143,750
Brookline Bancorp, Inc. (a) 800,000 11,900,000
BankAtlantic Bancorp, Inc., Class A 1,000,001 11,812,512
Northwest Bancorp Inc. 550,000 8,696,875
Niagara Bancorp Inc. (a) 500,000 7,375,000
PennFed Financial Services, Inc. 260,000 4,306,250
Savings Bank of the Finger Lakes 188,000 3,501,500
--------------
149,735,887
INSURANCE--9.3%
RenaissanceRe Holdings Limited. 1,009,000 $ 46,729,312
Financial Security Assurance Holdings Ltd. 750,000 44,062,500
Highlands Insurance Group, Inc. (a) 1,000,000 18,500,000
--------------
109,291,812
OTHER FINANCIAL--3.6%
ARM Financial Group, Inc., Class A 1,000,000 $ 22,125,000
Duff & Phelps Credit Rating Co. 350,000 19,512,500
--------------
41,637,500
BROADCASTING & CABLE TV--9.8%
Cablevision Systems Corporation (a) 1,000,000 $ 83,500,000
Ascent Entertainment Group, Inc. (a) 2,000,000 22,250,000
Granite Broadcasting Corporation (a) 800,000 9,500,000
--------------
115,250,000
PUBLISHING--0.7%
Lee Enterprises, Inc. 250,000 $ 7,656,250
TELECOMMUNICATIONS--1.2%
ROHN Industries, Inc. 3,000,000 $ 14,062,500
</TABLE>
16
THE OAKMARK SMALL CAP FUND
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--92.5% (CONT.)
AUTOMOTIVE--6.4%
SPX Corporation (a) 600,000 $ 38,625,000
Stoneridge, Inc. (a) 1,376,500 25,121,125
Standard Motor Products, Inc. 500,000 11,125,000
--------------
74,871,125
TRANSPORTATION SERVICES--1.1%
Teekay Shipping Corporation 530,000 $ 13,283,125
MACHINERY & INDUSTRIAL PROCESSING--4.0%
The Carbide/Graphite Group, Inc. (a) 750,000 $ 20,859,375
DT Industries, Inc. 600,000 14,550,000
Northwest Pipe Company (a) 500,000 11,750,000
--------------
47,159,375
OIL & NATURAL GAS--2.3%
Titan Exploration, Inc. (a) 3,000,000 $ 26,625,000
OTHER INDUSTRIAL GOODS & SERVICES--9.4%
MagneTek, Inc. (a) 2,500,000 $ 39,375,000
Columbus McKinnon Corporation 1,000,000 26,000,000
Ferro Corporation 1,000,000 25,312,500
Binks Sames Corporation 247,000 10,790,812
H.B. Fuller Company 145,000 8,038,438
Binks Sames Corporation, Restricted Shares 28,000 1,076,460
--------------
110,593,210
COMMERCIAL REAL ESTATE--4.1%
Catellus Development Corporation (a) 2,750,000 $ 48,640,625
DIVERSIFIED CONGLOMERATES--6.5%
U.S. Industries, Inc. 3,066,400 $ 75,893,400
TOTAL COMMON STOCKS (COST: $924,038,518) 1,085,067,834
SHORT TERM INVESTMENTS--6.7%
COMMERCIAL PAPER--4.7%
American Express Credit Corp., 5.56% due
7/6/1998-7/9/1998 $10,000,000 $ 10,000,000
Ford Motor Credit Corp., 5.53%-5.61% due
7/2/1998-7/6/1998 15,000,000 15,000,000
General Electric Capital Corporation,
5.57%-6.00% due7/1/1998-7/8/1998 30,000,000 30,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $55,000,000) 55,000,000
</TABLE>
THE OAKMARK SMALL CAP FUND
17
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--6.7% (CONT.)
REPURCHASE AGREEMENTS--2.0%
State Street Repurchase Agreement, 5.65%
due 7/1/1998 $22,802,000 $ 22,802,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $22,802,000) 22,802,000
TOTAL SHORT TERM INVESTMENTS (COST: $77,802,000) 77,802,000
Total Investments (Cost $1,001,840,518)--99.2% $1,162,869,834
Other Assets In Excess Of Other Liabilities--0.8% 9,860,544
--------------
TOTAL NET ASSETS--100% $1,172,730,378
--------------
--------------
</TABLE>
(a) Non-income producing security.
18
THE OAKMARK SMALL CAP FUND
<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 (6/30/98) 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
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 6/30/98
TOTAL RETURN FROM FUND INCEPTION
6/30/98 NAV $15.03 LAST 3 MOS. 11/1/95
<S> <C> <C>
- --------------------------------------------------------------------------------
THE OAKMARK EQUITY & INCOME
FUND 0.5% 20.2%
Lipper Balanced Fund Index** 1.5% 18.2%
Lehman Govt./ Corp. Bond** 2.6% 7.5%
S&P 500 w/ inc** 3.3% 31.0%
</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.
QUARTER UPDATE
Last quarter I wrote that the stocks in The Equity and Income Fund had generated
all of the substantial return realized by the Fund between January and March.
The June quarter was quite different. Stocks, particularly smaller and mid-cap
issues, struggled, leaving it up to the fixed income segment to provide
sufficient returns to push the Fund into positive territory. These disparate
outcomes are two sides of the same coin. The economic decline in Asia has caused
profit shortfalls for many US concerns while at the same time diminishing the
probability that the Federal Reserve will increase interest rates. In addition,
the strength of the dollar against most foreign currencies reduces reported
profits for US companies with international operations while it enhances the
attraction of US bond issues to foreign investors. The results in these two
quarters once again demonstrate the benefits of diversification across asset
classes. The usual 60% equity 40% fixed income mix in The Equity and Income Fund
enables investors to capture those benefits.
CHRYSLER
The Fund's holding in the shares of Chrysler Corporation generated the biggest
single contribution to the June quarter return. When the May 6th announcement
came of Daimler-Benz's agreement with Chrysler for a friendly acquisition, I was
surprised to discover that your fund's 4.2% position in the stock was the
largest percentage holding of Chrysler by any mutual fund. This was particularly
unexpected given that your fund was only 59% invested in stocks at that moment
and other firms have mutual funds which invest 100% of their assets in equities
from the automotive sector. The size of the holding elicited numerous questions
from the media as well as fund investors as to what I saw in Chrysler and why I
had taken a concentrated position in the Fund. I devote the remainder of this
report to our thought process supporting the Chrysler investment.
THE OAKMARK EQUITY AND INCOME FUND
19
<PAGE>
........................................................................
When I consider an equity investment for your fund, I examine the issue's
valuation, financial condition, and fundamental outlook as well as the
orientation of the company's management team. Since the Equity and Income Fund
has an income orientation, I also pay attention to the stock's dividend yield.
Chrysler is a prototypical example of a stock which excelled in every category.
I first purchased Chrysler stock one year ago. The shares then traded for less
than 7 times our estimate for 1998 earnings. The condition of the company's
balance sheet was extraordinary: cash exceeded $7 billion against total debt of
around $2 billion, the once seriously underfunded pension plans were in surplus,
and the company had over $1 billion of reserves set aside for the health costs
of retired employees. The stock's dividend yield at the time of the initial
purchase was 4.3%, making it the third highest yielding stock in your fund.
Management was using the company's financial strength to undertake significant
and persistent stock repurchases.
Management had obviously demonstrated expertise in financial administration of
the company, but what seemed to be less appreciated was their leadership in
technology and labor relations. Some readers may have seen commercials for the
Dodge Intrepid, one of Chrysler's "LH" models. The commercials describe how the
company used computers alone to design the car without building scale models.
What was not shown was how it took the engineers only 4 minutes to make the body
of the first production model fit onto the chassis. When Chrysler developed the
previous generation of LH cars, it took the engineers several months to fit the
body to the chassis. Change of this sort saves costs, improves quality, and
makes it possible to keep the product line fresher.
As I write this letter, General Motors has lost most of its production capacity
because of a labor action at one critical parts manufacturing facility. Chrysler
has kept labor problems to a minimum in the 1990's largely because the company
now outsources approximately 70% of the manufacturing process (the comparable
number at GM is roughly 30%). While it is true that this outcome was more a
product of Chrysler's historic financial weakness rather than brilliant
management foresight, the company has used this advantage effectively to become
the low cost producer in most of its product segments.
I initiated a normal sized position in Chrysler in the Fund last July. As
sometimes happens, I had the opportunity to add to the position at a lower price
in January when Wall Street began to fret about the slow introduction of the LH
cars. We noticed that factory production of these cars was rising, the new Dodge
Durango sport utility vehicle was selling briskly (I own one myself), and the
company had new offerings in the pickup truck market. I made the decision to
increase the position to 5% at that point and have not added to the holding
since then.
I wrote about diversification in the previous quarterly letter, so I will not
repeat myself. The Chrysler experience demonstrates why we should emphasize
those holdings which most perfectly fulfill our stock selection criteria of
valuation, financial strength, and management.
In closing, I would be quite remiss were I not to thank Jim Benson of our
research team for bringing this idea to The Fund.
As always, please e-mail me with your questions or comments.
[SIGNATURE]
CLYDE S. MCGREGOR
Portfolio Manager
[email protected]
July 8, 1998
20
THE OAKMARK EQUITY AND INCOME FUND
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
EQUITY AND EQUIVALENTS--62.5%
OFFICE EQUIPMENT--2.6%
Lexmark International Group, Inc., Class A
(a) 26,000 $ 1,586,000
OTHER CONSUMER GOODS & SERVICES--7.4%
H&R Block, Inc. 48,000 $ 2,022,000
Juno Lighting, Inc. 76,300 1,802,587
National Presto Industries, Inc. 17,000 661,938
--------------
4,486,525
BANKS--2.2%
Banc One Corporation 23,674 $ 1,321,305
INSURANCE--6.9%
PartnerRe Ltd. 32,500 $ 1,657,500
Old Republic International Corporation 49,500 1,450,969
Aon Corporation 15,000 1,053,750
--------------
4,162,219
OTHER FINANCIAL--2.5%
Washington Mutual, Inc. 35,000 $ 1,520,312
TV PROGRAMMING--3.4%
Tele-Communications, Liberty Media, Class A
(a) 52,800 $ 2,049,300
PUBLISHING--4.4%
Dun & Bradstreet Corporation 45,000 $ 1,625,625
Lee Enterprises, Inc. 33,900 1,038,187
--------------
2,663,812
COMPUTER SERVICES--3.3%
Electronic Data Systems Corporation 50,000 $ 2,000,000
DATA STORAGE--3.3%
Imation Corp. (a) 120,200 $ 1,990,813
MEDICAL PRODUCTS--1.6%
Sybron International Corporation a 40,000 $ 1,010,000
AUTOMOTIVE--7.7%
Chrysler Corporation 56,000 $ 3,157,000
Lear Corporation (a) 15,000 769,687
Borg-Warner Automotive, Inc. 15,000 720,938
--------------
4,647,625
AEROSPACE & DEFENSE--1.9%
The Boeing Company 25,800 $ 1,149,713
</TABLE>
THE OAKMARK EQUITY AND INCOME FUND
21
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
EQUITY AND EQUIVALENTS--62.5% (CONT.)
MINING--2.9%
DeBeers Centenary AG (b) 100,000 $ 1,750,000
OTHER INDUSTRIAL GOODS & SERVICES--2.2%
Premark International, Inc. 41,500 $ 1,338,375
COMMERCIAL REAL ESTATE--6.4%
Catellus Development Corporation (a) 142,728 $ 2,524,501
Amli Residential Properties Trust 65,000 1,393,438
--------------
3,917,939
DIVERSIFIED CONGLOMERATES--3.8%
U.S. Industries, Inc. 92,250 $ 2,283,187
--------------
TOTAL EQUITY AND EQUIVALENTS (COST: $30,828,605) 37,877,125
FIXED INCOME--35.9%
PREFERRED STOCK--4.9%
BANKS--4.2%
BBC Capital Trust 1, Preferred, 9.50% 28,000 $ 717,500
PennFirst Capital Trust 1, Preferred,
8.625% 70,000 700,000
Pennfed Capital Trust, Preferred, 8.90% 27,500 697,812
RBI Capital Trust I, Preferred, 9.10% 42,500 432,969
--------------
2,548,281
OTHER FINANCIAL--0.7%
Fidelity Capital Trust I, Preferred, 8.375% 43,500 $ 429,563
TOTAL PREFERRED STOCK (COST: $2,970,737) 2,977,844
CORPORATE BONDS--2.4%
AEROSPACE & AUTOMOTIVE--0.3%
Coltec Industries, Inc., 9.75% due 4/1/2000 $150,000 $ 159,187
Coltec Industries, Inc., 9.75% due
11/1/1999 25,000 26,375
--------------
185,562
BUILDING MATERIALS & CONSTRUCTION--0.3%
USG Corporation, 9.25% due 9/15/2001,
Senior Notes Series B 150,000 $ 162,750
UTILITIES--0.3%
Midland Funding Corporation, 11.75% due
7/23/2005 150,000 $ 177,750
</TABLE>
22
THE OAKMARK EQUITY AND INCOME FUND
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME--35.9% (CONT.)
OTHER INDUSTRIAL GOODS & SERVICES--1.5%
Scotsman Industries, Inc., 8.625% due
12/15/2007, Senior Subordinated Note $565,000 $ 575,594
UCAR Global Enterprises Inc., 12.00% due
1/15/2005, Senior Subordinated Note 300,000 336,375
--------------
911,969
TOTAL CORPORATE BONDS (COST: $1,397,505) 1,438,031
GOVERNMENT AND AGENCY SECURITIES--28.6%
U.S. GOVERNMENT BONDS--28.1%
United States Treasury Notes, 7.875% due
11/15/2004 6,000,000 $ 6,735,780
United States Treasury Notes, 7.50% due
5/15/2002 6,000,000 6,399,900
United States Treasury Notes, 7.125% due
9/30/1999 3,800,000 3,872,542
--------------
17,008,222
U.S. GOVERNMENT AGENCIES--0.5%
Federal Home Loan Bank, 6.405% due
4/10/2001, Consolidated Bond 300,000 $ 305,400
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $17,059,955) 17,313,622
TOTAL FIXED INCOME (COST: $21,428,197) 21,729,497
SHORT TERM INVESTMENTS--4.4%
COMMERCIAL PAPER--3.3%
American Express Credit Corp., 5.51% due
7/6/1998 $500,000 $ 500,000
Ford Motor Credit Corp., 5.53%-5.55% due
7/7/1998-7/9/1998 1,000,000 1,000,000
General Electric Capital Corporation, 5.57%
due 7/8/1998 500,000 500,000
--------------
TOTAL COMMERCIAL PAPER (COST: $2,000,000) 2,000,000
</TABLE>
THE OAKMARK EQUITY AND INCOME FUND
23
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--4.4% (CONT.)
REPURCHASE AGREEMENTS--1.1%
State Street Repurchase Agreement, 5.65%
due 7/1/1998 $644,000 $ 644,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $644,000) 644,000
TOTAL SHORT TERM INVESTMENTS (COST: $2,644,000) 2,644,000
Total Investments (Cost $54,900,802)--102.8% $ 62,250,622
Other Liabilities In Excess Of Other Assets--(2.8)% (1,695,938 )
--------------
TOTAL NET ASSETS--100% $ 60,554,684
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
24
THE OAKMARK EQUITY AND INCOME FUND
<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 (6/30/98) 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
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 6/30/98
TOTAL RETURN FROM FUND INCEPTION
6/30/98 NAV $12.93 LAST 3 MOS. 9/30/92
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK INTERNATIONAL FUND -11.9% 13.1%
Morgan Stanley World ex U.S.
w/inc.** .8% 12.0%
Morgan Stanley EAFE w/inc** 1.1% 11.9%
Lipper Analytical
International Fund Index** .8% 14.1%
</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,
After a strong first calendar quarter, your Fund has declined by 11.9% in the
second quarter of 1998. This compares unfavorably with a .8% return for both the
MSCI World ex-USA and Lipper International indices. Since your Fund's inception
in 1992, it has returned 13.1% versus the MSCI World ex-USA of 12.0% and a
Lipper International return of 14.1%.
EMERGING MARKETS SUBMERGE
Our weak 2nd calendar quarter performance is due to our investment exposure to
the Pacific Rim and Latin America. As an example, Brazil was down 18%, Hong Kong
26% and Korea 38%. Even innocent Australia was down nearly 5% during this
period. These adverse movements hit us hard because we have increased our
investment in these depressed markets, unlike some of our peers who liquidated
their holdings.
Many of you have asked why we have not fled Asia like most of our competition.
The answer, in one word, is VALUE. As value investors, we remain convinced that
over time, the price of a business converges with the value of a business.
History has shown this time and time again. In fact, your Fund went through a
similar period from March of 1994 through Spring of 1995. During that time, The
International Fund dropped approximately 10%, due mainly to the negative price
activity in the emerging markets, Latin America specifically. The Fund behaved
similarly to today: we increased our weightings in these regions, focusing on
companies which were under priced but financially sound and globally
competitive. Our performance from late Spring 1995 to late Spring 1997 was
outstanding, allowing the Fund to
THE OAKMARK INTERNATIONAL FUND
25
<PAGE>
........................................................................
recapture all its losses and add gains. In calendar year 1996, your Fund, along
with The Oakmark International Small Cap Fund was one of the top performing
diversified international funds. In fact, The Oakmark International Fund climbed
over 50% during that period! See graph below.
Nevertheless, we believe that performance needs to be viewed in the long-term
perspective. Our performance history indicates that the pain we are suffering
today should eventually lead to gain in the future. As VALUE INVESTORS we feel
that we are paid to invest our shareholders' money in those stocks which offer
the best LONG-TERM value. Today, those stocks are in companies located in places
like Korea, New Zealand, Brazil and Hong Kong (see below). History and the laws
of economics strongly suggest that these markets and companies will rebound.
When this happens, there will be a rush by our peers (similar to the LatAm
situation) to get back into these areas, eventually driving prices wildly
higher. We hope to be the prime beneficiaries when these companies/ markets are
back in vogue.
EXAMPLES OF HIGH QUALITY AT A LOW PRICE...
In Brazil, two of our larger holdings are USIMINAS and UNIBANCO. Usiminas is one
of the most efficient producers of steel in the world. Brazil is one of the
fastest growing markets for steel. The company is very shareholder friendly
(the company recently announced another stock buy back and yields over 10%). At
the time of this writing, the company was priced at 3.5x earnings and 2.3x cash
flow, levels which we think are completely unjustified and subject to huge
potential upside revision. Unibanco is one of Brazil's leading banks. It has
made money in good times and bad and is extremely well positioned to benefit
from the growth of financial services in Brazil. It sells for under one times
adjusted book, returns greater than 15% on its equity, and is a leader in low
loan losses and in expense containment. Compare this to banks in Europe that
sell at 3-5 times, a much slower growing book value.
In Asia, value is everywhere, even in Japan. Recently we have added two names,
CANON (cameras, copiers, printers, etc.) and CITIZEN (watches, watch
components). Both companies are extremely competitive globally, trade at rock
bottom prices, will benefit from a weaker yen and are becoming attentive to
shareholder value. In Hong Kong, we own two groups in the hotel business,
MANDARIN ORIENTAL and HONG KONG AND SHANGHAI HOTEL GROUP (PENINSULA), which are
extremely strong franchises selling at a fraction of the price European or
American hotel companies are selling.
WE ARE CONFIDENT!
Yes, there has been volatility in foreign markets. Yes, select markets have
crashed. And yes, many have panicked and left certain regions altogether. But,
we remain invested in these emerging markets and are convinced that our approach
will again yield strong results. This confidence stems from the knowledge we
have of our companies, their competitive positions as well as their financial
soundness. We also know that in the past, price and value have converged.
Finally, we would like to thank our fellow shareholders for your continued
support.
[SIGNATURE]
DAVID HERRO
Portfolio Manager
[email protected]
[SIGNATURE]
MICHAEL J. WELSH
Portfolio Manager
[email protected]
July 7, 1998
- --------------------------------------------------------------------------------
OAKMARK INTERNATIONAL: LATIN AMERICAN CRISIS &
POST LATIN AMERICAN CRISIS
CUMULATIVE RETURN: $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OAKMARK M.S. WORLD EX LIPPER
INTERNATIONAL U.S. INDEX INTERNATIONAL
<S> <C> <C> <C>
12/31/94 $10,000 $10,000 $10,000
3/31/95 $9,670 $10,190 $9,751
6/30/95 $10,516 $10,290 $10,248
9/30/95 $11,056 $10,708 $10,807
12/31/95 $10,832 $11,141 $11,002
3/31/96 $12,135 $11,477 $11,487
6/30/96 $13,107 $11,664 $11,933
9/30/96 $13,080 $11,673 $11,968
12/31/96 $13,867 $11,906 $12,589
3/31/97 $14,946 $11,721 $12,904
6/30/97 $16,184 $13,242 $14,350
LATIN CRISIS
POST LATIN CRISIS
</TABLE>
26
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
INTERNATIONAL DIVERSIFICATION--JUNE 30, 1998
........................................................................
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Pacific Rim 27.6%
Europe 49.5%
Latin America 18.1%
</TABLE>
<TABLE>
<CAPTION>
% OF FUND
NET
ASSETS
-------------------------------
<S> <C> <C>
EUROPE 49.5%
Great Britain 25.8%
France 11.3%
Italy 3.3%
Finland 2.9%
Sweden 2.9%
Netherlands 2.1%
Switzerland 1.2%
LATIN AMERICA 18.1%
Brazil 9.8%
Argentina 4.5%
Panama 3.8%
<CAPTION>
% OF FUND
NET
ASSETS
-------------------------------
<S> <C> <C>
PACIFIC RIM 27.6%
Japan 8.0%
Hong Kong 7.1%
Singapore 3.2%
Australia 2.8%
New Zealand 2.8%
Korea 2.4%
Malaysia 1.2%
Thailand 0.1%
</TABLE>
THE OAKMARK INTERNATIONAL FUND
27
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--95.2%
CONSUMER NON-DURABLES--5.4%
Fila Holding S.p.A. (Italy), (b) Athletic Footwear Manufacturing 2,454,500 $ 36,817,500
Citizen Watch Co. (Japan) Watch Manufacturer and Retailer 2,706,000 22,408,114
BYC Co. Ltd. (Korea) Textile Manufacturer 33,540 916,060
Yue Yuen Industrial Holdings (Hong Athletic Footwear Manufacturing
Kong) 360,600 644,593
--------------
60,786,267
FOOD & BEVERAGE--11.5%
Quilmes Industrial SA (Argentina), (b) Brewer 5,182,800 $ 50,532,300
Tate & Lyle PLC (Great Britain) Sugar Producer & Distributor 4,538,921 36,074,308
Pernod Ricard (France) Manufactures Wines, Spirits, & Fruit 510,780 35,399,841
Juices
Lotte Chilsung Beverage Company Manufacturer of Soft Drinks, Juices, &
(Korea) SportDrinks 123,000 3,672,979
Lotte Confectionery Company (Korea) Confection Manufacturer 65,270 3,327,677
--------------
129,007,105
HOUSEHOLD PRODUCTS--2.0%
Amway Japan Limited (Japan) Marketing of Household Products 2,030,900 $ 21,591,256
Amway Japan Limited (Japan), (b) Marketing of Household Products 152,400 828,675
--------------
22,419,931
RETAIL--1.2%
Giordano International Limited (Hong East Asian Clothing Retailer &
Kong) Manufacturer 67,299,000 $ 13,636,994
York-Benimaru Co., Ltd. (Japan) Supermarket Chain 15,200 286,917
--------------
13,923,911
OTHER CONSUMER GOODS & SERVICES--6.6%
Canon, Inc. (Japan) Office and Video Equipment 1,007,000 $ 22,940,984
Sankyo Company, Ltd. (Japan) Pachinko Machine Manufacturer 1,234,800 20,093,295
Mandarin Oriental International Hotel Management
Limited(Singapore) 30,539,000 17,407,230
The Hongkong and Shanghai Hotels, Hotel Operator
Limited (HongKong) 28,133,000 14,070,131
--------------
74,511,640
</TABLE>
28
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--95.2% (CONT.)
BANKS--9.0%
Banco Latinoamericano de Multinational Bank
Exportaciones, S.A., Class E
(Panama), (b) 1,394,100 $ 42,868,575
Uniao de Bancos Brasileiros S.A. Major Brazilian Bank
(Brazil), (c) 1,128,900 33,302,550
Uniao de Bancos Brasileiros S.A. - Major Brazilian Bank
units (Brazil) 286,362,500 16,935,883
United Overseas Bank Ltd., Foreign Commercial Banking
Shares (Singapore) 2,600,000 8,100,890
--------------
101,207,898
OTHER FINANCIAL--3.7%
Sedgwick Group plc (Great Britain) Insurance Broker, Financial Services 19,285,000 $ 41,216,209
MARKETING SERVICES--9.1%
Saatchi & Saatchi plc (Great Britain), Advertising Services
(a) 20,007,578 $ 55,455,043
Cordiant Communications Group plc Advertising Services
(Great Britain) 21,497,578 47,560,219
--------------
103,015,262
BROADCASTING & PUBLISHING--2.5%
Europe 1 Communication (France) Television Production 74,020 $ 16,895,909
Singapore Press Holdings Ltd. Newspaper Publisher
(Singapore) 1,530,000 10,260,534
Woongjin Publishing Company (Korea) Publisher 148,410 1,183,605
--------------
28,340,048
TELECOMMUNICATIONS--3.5%
Telecomunicacoes Brasileiras S.A. Telecommunications
(Brazil) 290,100,000 $ 23,076,564
Technology Resources Industries Berhad Telecommunications
(Malaysia) 19,707,000 13,532,908
SK Telecom Co. Ltd. (Korea) Telecommunications 10,395 3,240,393
--------------
39,849,865
TRANSPORTATION--2.9%
Volvo AB, Class B (Sweden) Automobiles and Trucks 1,082,600 $ 32,236,397
</TABLE>
THE OAKMARK INTERNATIONAL FUND
29
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--95.2% (CONT.)
TRANSPORTATION SERVICES--1.2%
Danzas Holding AG (Switzerland), (a) Freight Distributor 51,950 $ 13,996,962
AEROSPACE--4.9%
Rolls-Royce plc (Great Britain) Jet Engines 9,068,552 $ 37,589,421
Hong Kong Aircraft Engineering Company Commercial Aircraft Overhaul &
Ltd. (Hong Kong) Maintenance 11,091,700 17,178,679
--------------
54,768,100
AIRLINES--1.4%
Qantas Airways Limited (Australia) International Airline 10,670,000 $ 16,094,863
OIL & NATURAL GAS--0.6%
ISIS (France), (a) Oil Services 57,000 $ 6,976,860
CHEMICALS--5.1%
Fernz Corporation Limited (New Agricultural & Industrial Chemical
Zealand) Producer 14,132,500 $ 31,621,546
European Vinyls Corporation PVC Manufacturer
International N.V. (Netherlands) 1,367,785 23,887,034
Nagase & Co., Ltd. (Japan) Chemical Wholesaler 532,000 1,946,857
--------------
57,455,437
COMPONENTS--2.7%
Varitronix International Limited (Hong Liquid Crystal Displays
Kong) 15,374,000 $ 30,755,937
MACHINERY & METAL PROCESSING--1.6%
Outokumpu Oyj (Finland) Metal Producer 731,800 $ 9,346,019
The Rauma Group (Finland) Pulp Machinery 429,500 8,815,601
--------------
18,161,620
MINING AND BUILDING MATERIALS--2.0%
Pioneer International Limited Concrete Products, Aggregates
(Australia) 6,585,176 $ 15,737,825
Keumkang Ltd. (Korea) Building Materials 560,460 4,816,772
Siam City Cement Public Company Cement Producer
Limited, Foreign Shares (Thailand) 2,082,349 1,480,343
</TABLE>
30
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--95.2% (CONT.)
MINING AND BUILDING MATERIALS--2.0% (CONT.)
Asia Cement Manufacturing Company Ltd. Cement Producer
(Korea) 40,350 $ 191,023
--------------
22,225,963
OTHER INDUSTRIAL GOODS & SERVICES--13.5%
Tomkins plc (Great Britain) Industrial Management Company 10,616,228 $ 57,742,170
Chargeurs SA (France) Wool Production Holding Company 602,387 49,769,639
Charter plc (Great Britain) Welding Products Manufacturer 1,469,100 15,392,300
Kone Corporation, Class B (Finland) Elevators 103,870 14,592,076
Groupe Legris Industries SA (France) European Crane Manufacturer 217,815 10,195,949
Dongah Tire Industry Company (Korea), Tire Manufacturer
(a) 156,670 4,221,988
--------------
151,914,122
STEEL--3.3%
USIMINAS (Brazil), (a) Steel Production 7,251,370 $ 36,991,987
Pohang Iron & Steel Company Ltd. Manufactures Steel Products
(Korea) 14,000 395,630
--------------
37,387,617
DIVERSIFIED CONGLOMERATES--1.5%
Compagnie Generale des Eaux (France) Industrial Services 38,000 $ 8,114,528
Tae Young Corporation (Korea) Heavy Construction 633,000 5,347,997
First Pacific Company Ltd. (Hong Kong) Diversified Operations 6,897,000 2,893,037
Lamex Holdings Ltd. (Hong Kong) Office Furniture Supplier 14,040,000 543,624
--------------
16,899,186
TOTAL COMMON STOCKS (COST: $1,248,179,123) 1,073,151,200
</TABLE>
THE OAKMARK INTERNATIONAL FUND
31
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS--4.8%
COMMERCIAL PAPER--3.5%
American Express Credit Corp., 5.51% due 7/6/1998-7/7/1998
$10,000,000 $ 10,000,000
Ford Motor Credit Corp., 5.57% due 7/9/1998-7/10/1998 10,000,000 10,000,000
General Electric Capital Corporation, 5.57%-6.00% due 7/1/1998-7/8/1998
20,000,000 20,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $40,000,000) 40,000,000
REPURCHASE AGREEMENTS--1.3%
State Street Repurchase Agreement, 5.65% due 7/1/1998 $14,241,000 $ 14,241,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $14,241,000) 14,241,000
TOTAL SHORT TERM INVESTMENTS (COST: $54,241,000) 54,241,000
Total Investments (Cost $1,302,420,123)--100.0% $1,127,392,200
Foreign Currencies (Proceeds $2,753,194)--0.2% 2,764,594
Other Liabilities In Excess Of Other Assets--(0.2)% (d) (2,783,886)
--------------
TOTAL NET ASSETS--100% $1,127,372,908
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Represents a Global Depositary Receipt.
(d) Includes portfolio and transaction hedges.
32
THE OAKMARK INTERNATIONAL FUND
<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 (6/30/98) 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
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 6/30/98
TOTAL RETURN FROM FUND INCEPTION
6/30/98 NAV $8.30 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK INTERNATIONAL
SMALL CAP FUND -13.5% -.4%
Morgan Stanley World ex U.S.
w/inc.** .8% 11.9%
Lipper Analytical
International Small Cap Fund
Average** 3.3% 13.8%
Micropal International Small
Co. Fund Index** 3.6% 13.8%
</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 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 56 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,
Your Fund had a tough 2nd quarter, giving back a lot of the strong gains
achieved in the first quarter. For the period ended June 30, 1998, your Fund was
down 13.5% versus 3.6% and 3.3% for the Micropal and Lipper international
indices respectively. The largest factor impacting your Fund's performance is
its 50% exposure to the Pacific Rim, whereas most of our peers invest
approximately 15-20% in this region. Though the region has been in crisis since
last summer, we believe it offers the greatest investment opportunity anywhere.
WE ARE VERY BULLISH ON ASIA...
The "old" news is that starting last summer, currencies and equity markets
dramatically dropped across Asia. There were a few major causes of this event.
First, most Asian currencies were pegged to the dollar. This resulted in
overvalued currencies and current account deficits, thus pressuring the "peg"
and eventually causing it to fail. Secondly, "crony capitalism" in the region
meant that companies didn't make economic decisions based on economic
risk/return analysis. Social and political implications seemed to guide
decisions and economics were left out. This was possible because of the closed
and opaque nature of the typical Asian economy. The end result was that
resources flowed to areas where they were not needed, and those areas that
actually needed resources were starved of capital and investment. Though Asia
was not totally void of sensibility, bad practice advanced faster than good and
today we see the results.
THE OAKMARK INTERNATIONAL SMALL CAP FUND
33
<PAGE>
........................................................................
...AS REAL CHANGE IS TAKING PLACE.
Having said the above, the "new" news is that Asia is changing faster than
anyone would imagine. Economies are opening up and the discipline of the
marketplace is replacing "crony capitalism". It is not occurring at the same
speed everywhere, but it is noticeable. It is most evident in South Korea. Newly
elected President Kim Dae Jung in six months transformed the Korean economy from
one of the world's most closed and protected to an open one. As an example,
prior to Kim's election, foreign investors had been limited to just a small
fraction of a company's ownership. Today a foreign company or individual can
make a hostile bid for a Korean company. This is exactly the type of change
needed to put Korean business in a "shape-up or ship-out" mode. In the past, in
Kim's words, the government protected big business. Today, all protections are
being removed and Korean companies are starting to shape-up out of necessity.
Across Asia, "micro-economic reform" is taking place. China and Thailand are
moving swiftly in the right direction. Singapore was always, and still is, fine.
Malaysia is still debating change and a populist revolution has occurred in
Indonesia. Though it's still very early, the new leadership in Jakarta seems to
be acting responsibly. Japan remains a stumbling block but it is hard to imagine
that they can dodge economic forces forever. The concern of Chinese economic
supremacy will ultimately move them.
What this means is that the economies of Asia will be well positioned for longer
and more stable post recession growth. The basic positive economic fundamentals
that have propelled Asia over the last decade are still in place and are now
made more potent with the new reforms. These fundamentals include high
government and individual savings rates, very sound intellectual and physical
infrastructure, productive work forces, strong families, and the "Asian
Intangible"....the ability of people in the greater Asian region to adapt,
overcome and improvise. In a few years, this intangible will become more evident
to the world than it already is.
WE ARE NOT THE ONLY BULLS!
Although many international portfolio managers seem to have pulled out of Asia,
direct investors and businesses looking for bargains are going on a buying
binge. From steel to financial services to electronics, Western businesses like
Volvo, MetLife, Coca-Cola, GE Capital, LSI Logic and Interbrew are spending
hundreds of millions of dollars on acquiring Asian companies. It's a sign of the
confidence that long-term, "direct" investors have in Asia. We are in complete
agreement with their view and, as long-term value investors, feel that patience
today will yield lucrative results. We continue to believe that investment
success over time is derived from a simple axiom--buying low and selling high.
We will continue to do this no matter what the crowd is doing.
Finally, we would like to thank our fellow shareholders for continuing to show
confidence in our abilities as stewards to your savings. We will continue to
work hard to achieve satisfactory results.
[SIGNATURE]
DAVID G. HERRO
Portfolio Manager
[email protected]
[SIGNATURE]
MICHAEL J. WELSH
Portfolio Manager
[email protected]
July 7, 1998
34
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
INTERNATIONAL DIVERSIFICATION--JUNE 30, 1998
........................................................................
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Pacific Rim 48.9%
Europe 34.3%
Latin America 6.9%
Other Countries 1.9%
</TABLE>
<TABLE>
<CAPTION>
% OF FUND
NET
ASSETS
-------------------------------
<S> <C> <C>
PACIFIC RIM 48.9%
Japan 15.0%
Australia 7.0%
New Zealand 6.9%
Hong Kong 6.5%
Korea 5.4%
Thailand 3.2%
Singapore 2.5%
Phillipines 2.4%
LATIN AMERICA 6.9%
Brazil 6.2%
Panama 0.7%
<CAPTION>
% OF FUND
NET
ASSETS
-------------------------------
<S> <C> <C>
EUROPE 34.3%
Great Britain 23.2%
Germany 3.8%
France 3.7%
Netherlands 2.4%
Italy 1.2%
OTHER 1.9%
Canada 1.9%
</TABLE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
35
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--92.0%
CONSUMER NON-DURABLES--2.9%
Royal Doulton plc (Great Britain) Tableware and Giftware 440,000 $ 1,608,923
Designer Textiles (NZ) Limited (New Knit Fabrics
Zealand) 2,960,000 385,059
--------------
1,993,982
FOOD & BEVERAGE--9.0%
Matthew Clark plc (Great Britain) Spirits & Drinks 1,054,000 $ 3,299,745
Alaska Milk Corporation (Philippines), Milk Producer
(a) 36,372,000 1,622,348
Hite Brewery Company (Korea) Brewer 165,010 853,293
Souza Cruz S/A (Brazil) Tobacco Products 55,000 408,975
--------------
6,184,361
HOUSEHOLD PRODUCTS--0.5%
WMF (Germany) Tableware and Kitchenware 1,753 $ 315,908
RETAIL--10.8%
Carpetright plc (Great Britain) Carpet Retailer 495,000 $ 2,157,169
Somerfield plc (Great Britain) Food Retailer 261,000 1,666,903
Daimon (Japan) Liquor Retailer & Distributor 612,200 1,505,373
Paris Miki Inc. (Japan) Optical Supplies Retailer 80,600 1,061,493
Giordano International Limited (Hong East Asian Clothing Retailer &
Kong) Manufacturer 3,112,000 630,594
Jusco Stores (Hong Kong) Co., Limited Department Stores
(Hong Kong) 2,996,000 406,014
--------------
7,427,546
OTHER CONSUMER GOODS & SERVICES--7.1%
Sanford Limited (New Zealand) Fisheries 1,689,240 $ 2,575,459
CeWe Color Holding AG (Germany) Photo Equipment & Supplies 11,150 2,318,473
--------------
4,893,932
BANKS--1.0%
Banco Latinoamericano de Multinational Bank
Exportaciones, S.A., Class E
(Panama), (b) 15,300 $ 470,475
Shinhan Bank (Korea) Commercial Bank 47,764 158,634
Kookmin Bank (Korea) Commercial Bank 11,351 42,163
--------------
671,272
</TABLE>
36
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--92.0% (CONT.)
OTHER FINANCIAL--10.1%
Lambert Fenchurch Group plc (Great Insurance Broker
Britain) 1,871,000 $ 3,202,109
JCG Holdings Ltd. (Hong Kong) Investment Holding Company 7,711,000 2,139,733
Ichiyoshi Securities (Japan) Stock Broker 1,245,000 1,575,721
--------------
6,917,563
COMPUTER SOFTWARE--5.9%
Enix Corporation (Japan) Entertainment Software 133,400 $ 2,604,903
Koei (Japan) Computer Software 196,000 1,474,217
--------------
4,079,120
COMPUTER SYSTEMS--3.8%
Solution 6 Holdings Limited Systems Design & Consulting
(Australia), (a) 4,150,893 $ 2,576,666
MARKETING SERVICES--5.8%
Cordiant Communications Group plc Advertising Services
(Great Britain) 1,808,500 $ 4,001,039
BROADCASTING & PUBLISHING--4.7%
Matichon Public Company Limited, Newspaper Publisher
Foreign Shares (Thailand) 1,969,100 $ 2,099,751
Woongjin Publishing Company (Korea) Publisher 134,076 1,069,288
Matichon Public Company Limited Newspaper Publisher
(Thailand) 70,400 66,730
--------------
3,235,769
TELECOMMUNICATIONS--0.4%
SK Telecom Co. Ltd. (Korea) Telecommunications 803 $ 250,316
PHARMACEUTICAL--1.2%
Recordati (Italy) Pharmaceuticals 84,500 $ 798,987
CHEMICALS--2.4%
European Vinyls Corporation PVC Manufacturer
International N.V. (Netherlands) 93,100 $ 1,625,901
MACHINERY & METAL PROCESSING--1.1%
Denyo Co., Ltd. (Japan) Welding Machines & Power Generators 144,000 $ 718,594
</TABLE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
37
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--92.0% (CONT.)
MINING AND BUILDING MATERIALS--3.2%
Parbury Limited (Australia) Building Products 11,119,712 $ 2,208,819
OTHER INDUSTRIAL GOODS & SERVICES--12.3%
Elevadores Atlas, SA (Brazil) Elevators 229,200 $ 3,864,425
Nishio Rent All Company (Japan) Construction Equipment Rental 163,900 1,327,605
Dongah Tire Industry Company (Korea), Tire Manufacturer
(a) 43,900 1,183,030
Yip's Hang Cheung Ltd. (Hong Kong) Paint & Solvents 23,708,000 1,178,056
Groupe Legris Industries SA (France) European Crane Manufacturer 17,400 814,496
Lamex Holdings Ltd. (Hong Kong) Office Furniture Supplier 2,110,000 81,699
--------------
8,449,311
PRODUCTION EQUIPMENT--4.4%
NSC Groupe (France) Manufacturer of Textile Equipment 11,562 $ 1,738,402
Skyjack Inc. (Canada), (a) Producer of Elevating Platforms & Lifts 88,700 1,304,988
--------------
3,043,390
STEEL--2.9%
Steel & Tube Holdings Ltd. (New Produces and Distributes Steel
Zealand) 2,615,400 $ 1,769,201
Pohang Iron & Steel Company Ltd. Manufactures Steel Products
(Korea) 6,580 185,946
--------------
1,955,147
DIVERSIFIED CONGLOMERATES--2.5%
Haw Par Corporation Ltd. (Singapore) Healthcare and Leisure Products 1,653,000 $ 1,736,386
TOTAL COMMON STOCKS (COST: $82,218,226) 63,084,009
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SHORT TERM INVESTMENTS--4.9%
COMMERCIAL PAPER--2.2%
American Express Credit Corporation,
5.51% due 7/6/1998 $500,000 $ 500,000
General Electric Capital Corporation,
5.57% due 7/7/1998-- 7/8/1998 1,000,000 1,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $1,500,00) 1,500,000
</TABLE>
38
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--JUNE 30, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--4.9% (CONT.)
REPURCHASE AGREEMENTS--2.7%
State Street Repurchase Agreement,
5.65% due 7/1/1998 $1,870,000 $ 1,870,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $1,870,000) 1,870,000
TOTAL SHORT TERM INVESTMENTS (COST: $3,370,000) 3,370,000
Total Investments (Cost $85,588,226)--96.9% $ 66,454,009
Foreign Currencies (Proceeds $23,911)--0.0% 26,254
Other Assets In Excess Of Other Liabilities--3.1% (c) 2,121,394
--------------
TOTAL NET ASSETS--100% $ 68,601,657
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Includes transaction hedges.
THE OAKMARK INTERNATIONAL SMALL CAP FUND
39
<PAGE>
[LOGO]
40
THE OAKMARK FAMILY OF FUNDS
<PAGE>
THE OAKMARK FAMILY OF FUNDS
TRUSTEES AND OFFICERS
........................................................................
TRUSTEES
Michael J. Friduss
Thomas H. Hayden
Christine M. Maki
Victor A. Morgenstern
Allan J. Reich
Marv Rotter
Burton W. Ruder
Peter S. Voss
Gary Wilner, M.D.
OFFICERS
Victor A. Morgenstern--CHAIRMAN
Robert M. Levy--PRESIDENT
Robert J. Sanborn--EXECUTIVE VICE PRESIDENT
David G. Herro--VICE PRESIDENT
Clyde S. McGregor--VICE PRESIDENT
William C. Nygren--VICE PRESIDENT
Steven J. Reid--VICE PRESIDENT
Michael J. Welsh--VICE PRESIDENT
Donald Terao--VICE PRESIDENT--FINANCE
Anita M. Nagler--SECRETARY
Ann W. Regan--VICE PRESIDENT--
SHAREHOLDER OPERATIONS AND ASSISTANT SECRETARY
Kristi L. Rowsell--TREASURER
OTHER INFORMATION
INVESTMENT ADVISER
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602-3790
TRANSFER AGENT
State Street Bank and Trust Company
Attention: The Oakmark Family of Funds
P.O. Box 8510
Boston, Massachusetts 02266-8510
LEGAL COUNSEL
Bell, Boyd & Lloyd
Chicago, Illinois
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Chicago, Illinois
FOR MORE INFORMATION:
Please call 1-800-OAKMARK
(1-800-625-6275)
WEBSITE
www.oakmark.com
24-HOUR NAV HOTLINE
1-800-GROWOAK (1-800-476-9625)
This report, including the unaudited financial statements contained
herein, is submitted for the general information of the shareholders
of the Funds. The report is not authorized for distribution to
prospective investors in the Funds unless it is accompanied or
preceded by a currently effective prospectus of the Funds. No sales
charge to the shareholder or to the new investor is made in offering
the shares of the Funds.
<PAGE>
[OAKMARK FAMILY OF FUNDS LOGO]
P.O. BOX 8510
BOSTON, MA 02266-8510
