<PAGE>
FIRST QUARTER REPORT
DECEMBER 31, 1998
THE OAKMARK
FUND
THE OAKMARK
SELECT FUND
THE OAKMARK
SMALL CAP FUND
THE OAKMARK
EQUITY AND
INCOME FUND
THE OAKMARK
INTERNATIONAL
FUND
[LOGO]
MANAGED BY
THE OAKMARK
HARRIS INTENATIONAL
ASSOCIATES L.P. SMALL CAP FUND
OAKMARK
<PAGE>
THE OAKMARK FAMILY OF FUNDS
1999 FIRST 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......................... 32
International Diversification Chart....................... 34
Schedule of Investments................................... 35
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) or 617-483-5000.
WEB SITE AND 24-HOUR NET ASSET VALUE HOTLINE
Access our web site at www.oakmark.com to obtain the current
net asset value of a fund, or call 1-800-GROWOAK
(1-800-476-9625).
<PAGE>
LETTER FROM THE CHAIRMAN AND PRESIDENT...
........................................................................
FELLOW SHAREHOLDERS:
WE ARE PLEASED TO PRESENT THE FIRST QUARTER REPORT FOR THE OAKMARK FAMILY OF
FUNDS. IN OUR LAST REPORT, WE HIGHLIGHTED THE SIGNIFICANT INVESTMENT
OPPORTUNITIES THAT WERE CREATED BY THE BROAD MARKET WEAKNESS IN THE LATE SUMMER
OF 1998. WHILE THE FUNDAMENTAL ATTRACTIVENESS OF THESE HOLDINGS WAS EASY TO
DOCUMENT, THE TIMING OF
[PHOTO]
THEIR PRICE IMPROVEMENT WAS UNCERTAIN. WE WERE SOMEWHAT SURPRISED BY THE
IMMEDIATE DRAMATIC IMPROVEMENT IN STOCK PRICES IN THE LATEST QUARTER AND ARE
PLEASED TO REPORT THAT ALL OAKMARK FUNDS WERE STRONGLY POSITIVE FOR THE PERIOD.
THERE ARE TWO BASIC WAYS TO MEASURE INVESTMENT PERFORMANCE: ABSOLUTE AND
RELATIVE. OUR INDUSTRY IS GENERALLY FOCUSED ON RELATIVE PERFORMANCE, THAT IS,
HOW DID WE DO VERSUS OTHER FUNDS AND RELEVANT INDICES? TO SOME EXTENT, THIS IS
APPROPRIATE AND OUR INVESTMENT PROFESSIONALS ARE COLLECTIVELY ENERGIZED BY THIS
COMPETITIVE ENVIRONMENT.
ON THE OTHER HAND, AS RISK AVERSE LONG-TERM INVESTORS, NOT ONLY DO WE LOOK
AT RELATIVE PERFORMANCE BUT WE ALSO FOCUS ON ABSOLUTE RETURNS. OUR FELLOW
SHAREHOLDERS HAVE ENTRUSTED US WITH ASSETS TO BE MANAGED EFFECTIVELY AND TO BE
GROWN TO MEET THEIR LONG-TERM GOALS. IN THE EQUITY MARKETS, SHORT-TERM PERIODS
OF NEGATIVE RETURNS ARE INEVITABLE. WE ADHERE TO AN INVESTMENT PHILOSOPHY AND
STYLE THAT SHOULD MINIMIZE THE EFFECTS OF THESE PERIODS. WE ARE NEVER SATISFIED
BY NEGATIVE RETURNS EVEN IF THEY ARE GOOD IN RELATIVE TERMS. THE FIRST QUARTER
OF THE CURRENT FISCAL YEAR WAS CHARACTERIZED BY STRONG ABSOLUTE RETURNS FOR ALL
OF OUR FUNDS. WE WILL CONTINUE TO WORK HARD TO MAINTAIN THIS TREND.
WE BELIEVE EFFECTIVE SHAREHOLDER COMMUNICATION IS PART OF OUR RESPONSIBILITY
TO OUR FELLOW INVESTORS. LATE LAST QUARTER, WE ROLLED OUT OUR NEWLY DESIGNED
WEBSITE (www.oakmark.com). WE ADDED SEVERAL NEW FEATURES SUCH AS FUND
PERFORMANCE AND FUND OVERVIEWS. ADDITIONALLY, WE HAVE ADDED UP-TO-DATE COMMENTS
FROM THE FUND MANAGERS ESPECIALLY RELATING TO UNUSUAL EVENTS OR VOLATILITY IN
PORTFOLIO HOLDINGS. THESE COMMENTS ARE AVAILABLE ON OUR AUDIO RESPONSE SYSTEM.
TO LISTEN, CALL 1-800-OAKMARK, PRESS 1 THEN PRESS 5.
LASTLY, WE ARE HOSTING A SHAREHOLDER INFORMATION MEETING ON THURSDAY, APRIL
29, 1999 AT THE HOTEL INTER-CONTINENTAL LOCATED IN CHICAGO FROM 5 TO 9 PM. OUR
FUND MANAGERS AND STAFF WILL PRESENT PORTFOLIO UPDATES AND INVESTMENT STRATEGIES
AND BE AVAILABLE FOR QUESTIONS. ATTENDANCE WILL BE BY REGISTRATION. WE HOPE TO
SEE YOU THERE.
AS ALWAYS, WE ENTER 1999 FOCUSED ON PROVIDING SUPERIOR PERFORMANCE AND
SERVICE. YOUR CONTINUED CONFIDENCE IS APPRECIATED.
/s/ Victor Morgenstern
VICTOR MORGENSTERN
CHAIRMAN
/s/ Robert M. Levy
ROBERT M. LEVY
PRESIDENT
[LOGO]
1
<PAGE>
THE OAKMARK FAMILY OF FUNDS
SUMMARY INFORMATION
........................................................................
<TABLE>
<CAPTION>
THE OAKMARK
PERFORMANCE FOR PERIOD THE OAKMARK SELECT
ENDED FUND FUND
DECEMBER 31, 1998
<S> <C> <C>
------------------------ ------------------------
3 MONTHS 12.5% 21.5%
...........................................................................................
6 MONTHS -3.0% 0.6%
...........................................................................................
PERFORMANCE FOR:
1 YEAR 3.7% 16.2%
...........................................................................................
3 YEAR 16.9% N/A
...........................................................................................
5 YEAR 17.3% N/A
...........................................................................................
SINCE INCEPTION 26.2% 39.5%
VALUE OF $10,000 $56,155 $20,575
FROM INCEPTION DATE (8/5/91) (11/1/96)
- -------------------------------------------------------------------------------------------
TOP FIVE HOLDINGS Philip Morris Companies, Cablevision Systems
AS OF DECEMBER 31, 1998 Inc. 10.1% Corporation 11.9%
COMPANY AND % OF TOTAL Nike, Inc., Cl B 6.4% U.S. Industries, Inc. 9.8%
NET ASSETS The Black & Decker USG Corporation 8.9%
Corporation 6.3% PartnerRe Ltd. 8.3%
Banc One Corporation 6.1% Gucci Group 8.0%
Washington Mutual,
Inc. 5.5%
- -------------------------------------------------------------------------------------------
TOP FIVE INDUSTRIES Food & Beverage 15.3% Broadcasting & Cable
AS OF DECEMBER 31, 1998 Other Consumer Goods and TV 11.9%
INDUSTRIES AND % OF TOTAL Services 13.7% Diversified
NET ASSETS Banks & Thrifts 12.6% Conglomerates 9.8%
Aerospace & Defense 8.0% Computer Services 9.0%
Hardware 7.1% Building Materials &
Construction 8.9%
Banks & Thrifts 8.5%
</TABLE>
2 THE OAKMARK FAMILY OF FUNDS
<PAGE>
................................................................................
<TABLE>
<CAPTION>
THE OAKMARK THE OAKMARK THE OAKMARK THE OAKMARK
SMALL CAP EQUITY AND INTERNATIONAL INTERNATIONAL
FUND INCOME FUND FUND SMALL CAP FUND
<S> <C> <C> <C> <C>
------------------------ ------------------------ -------------------- ------------------------
3 MONTHS 17.7% 10.5% 14.5% 28.2%
..................................................................................................................................
6 MONTHS -13.9% 2.9% -7.7% 6.4%
..................................................................................................................................
PERFORMANCE FOR:
1 YEAR -13.2% 12.4% -7.0% 9.2%
..................................................................................................................................
3 YEAR 19.5% 17.9% 7.1% 3.0%
..................................................................................................................................
5 YEAR N/A N/A 3.9% N/A
..................................................................................................................................
SINCE INCEPTION 19.6% 17.8% 10.5% 1.6%
VALUE OF $10,000 $17,620 $16,792 $18,688 $10,529
FROM INCEPTION DATE (11/1/95) (11/1/95) (9/30/92) (11/1/95)
- ----------------------------------------------------------------------------------------------------------------------------------
TOP FIVE HOLDINGS People's Bank of Lexmark International Tomkins plc 5.3% Haw Par Corporation,
AS OF DECEMBER 31, 1998 Bridgeport, CT 5.7% Group, Inc. 4.0% Cordiant Ltd. 5.4%
COMPANY AND % OF TOTAL U.S. Industries, DaimlerChrysler Communications Solution 6 Holdings
NET ASSETS Inc. 5.4% AG 3.8% Group plc 5.3% Limited 4.9%
Symantec Tele-Communications, Saatchi & Saatchi JCG Holdings Ltd. 4.7%
Corporation 4.6% Liberty Media 3.7% plc 5.2% Enix Corporation 4.7%
Catellus Development Electronic Data Systems Quilmes Industrial Steel & Tube Holdings
Corporation 4.6% Corporation 3.4% SA 4.9% Ltd. 4.3%
Department 56, Sybron International Fernz Corporation
Inc. 4.0% Corporation 3.4% Limited 4.8%
- ----------------------------------------------------------------------------------------------------------------------------------
TOP FIVE INDUSTRIES Other Industrial U.S. Government Other Industrial Retail 15.3%
AS OF DECEMBER 31, 1998 Goods & Bonds 24.9% Goods & Other Financial 11.1%
INDUSTRIES AND % OF TOTAL Services 12.9% Automotive 7.1% Services 15.3% Other Industrial
NET ASSETS Food & Beverage 10.2% Computer Marketing Goods &
Banks & Thrifts 8.9% Services 6.8% Services 10.5% Services 10.8%
Automotive 8.8% Banks & Thrifts 6.1% Banks 10.1% Other Consumer
Other Consumer Goods & Real Estate 5.8% Other Consumer Goods &
Services 7.8% Goods & Services 7.1%
Services 8.4% Computer Software 7.1%
Food &
Beverage 8.0%
</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 (12/31/98)
AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
The Oakmark Fund S & P 500
<S> <C> <C>
8/91 $10,000 $10,000
10/91 $12,100 $10,202
1/92 $13,910 $10,707
4/92 $14,660 $10,947
7/92 $15,910 $11,279
10/92 $17,110 $11,217
1/93 $19,913 $11,836
4/93 $20,136 $11,957
7/93 $22,052 $12,260
10/93 $24,504 $12,896
1/94 $25,648 $13,357
4/94 $24,855 $12,590
7/94 $25,321 $12,890
10/94 $26,653 $13,384
1/95 $26,480 $13,433
4/95 $28,846 $14,781
7/95 $30,883 $16,248
10/95 $32,397 $16,916
1/96 $36,091 $18,608
4/96 $36,823 $19,242
7/96 $35,559 $18,934
10/96 $38,252 $20,988
1/97 $43,112 $23,510
4/97 $44,197 $24,073
7/97 $51,606 $28,797
9/97 $52,009 $28,668
12/97 $54,132 $29,494
3/98 $59,517 $33,663
6/98 $57,909 $34,775
9/98 $49,899 $31,316
12/98 $56,155 $37,985
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
TOTAL RETURN*
THROUGH 12/31/98
TOTAL RETURN FROM FUND INCEPTION
12/31/98 NAV $35.82 LAST 3 MOS. 8/5/91
<S> <C> <C>
- ---------------------------------------------------------------------------------
THE OAKMARK FUND 12.5% 26.2%
Standard & Poor's 500 Stock Index w/inc** 21.3% 19.7%
Dow Jones Industrial Average w/ inc** 17.6% 19.1%
Value Line Composite Index** 14.1% 8.3%
</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 Industrial Average includes
only 30 big companies. The Value Line Index is an unweighted average of more
than 1,000 stocks. Past performance is no guarantee of future results.
PORTFOLIO UPDATE, OR WAITING FOR GODOT
Many of you have read Samuel Beckett's Absurdist play, "Waiting for Godot," in
which the tramps Vladimir and Estragon wait, and wait, and wait for Godot to
show up and relieve them of their misery. So it is for us, as we continue to
adhere to our disciplined value philosophy and wait, and wait, and wait for the
momentum market that has prevailed over the past three years to die a deserved
death. Where is Dr. Kevorkian when you need him?
In recent letters, I have described the investment climate and how narrow the
market's performance has been. The only stocks that seem to be doing well are
the 30 largest-capitalization stocks in the Standard & Poor's 500 (which
accounted for virtually all of that index's 28 percent gain in calendar 1998 and
the super-high-growth stocks, like any Internet company. The 100 largest
companies in the index were up 37 percent last year, while the smallest 100 were
flat. In 1998, the Vanguard Growth Stock index returned more than 27 points
above its Value Stock index. Your Fund owns only one of the thirty largest
companies and owns none of the high-flying growth stocks. The absence of stocks
in these sectors continues to adversely impact our Fund's relative performance.
We entered 1998 believing these stocks to be very overpriced. We enter 1999
believing these stocks to be extremely overpriced. While the trailing P/E ratio
of the S&P 500 is a lofty 30.3 times, the P/E ratio of the ten largest stocks is
40.3. As I have stated before, we will never try to anticipate market psychology
with your hard-earned (and heavily taxed!) money. We will always choose to own
an undervalued stock with no momentum rather than to own an overpriced albeit
"hot" stock.
The rationales justifying the levels of Internet companies are getting really
offbeat. One Wall Street analyst recently wrote a report on Amazon.com, the
on-line retailer. He produced an earnings model to the year 2004, for what it's
worth (i.e., not much). On his out-year estimate, the
4
THE OAKMARK FUND
<PAGE>
........................................................................
analyst slapped a 40 multiple--why not? Voila!--a $400 price target, up from the
analyst's prior $150. (And, as I write this, the stock has just pierced that
price target. Time to update that model!)
America OnLine, with revenues of $3 billion, is worth significantly more than
Disney, with ten times the revenues, and assets such as Disney World, the ABC
radio and TV network, the Disney studio and archives, and ESPN and A&E. Yahoo!
is worth more than a great business like Colgate, which has 60 times the
revenues. Amazon.com is worth more than J.P. Morgan, which has 45 times the
revenues. These facts boggle the mind, and remind us, that for all the
brain- and computer-power directed at today's markets, emotion and mass
psychology can drive prices now as much as any other time in history.
The "New York Times" recently had an article about the Wall Street analyst who
is the best known of the Internet analysts. At a meeting, she was asked if
Internet search engine company Yahoo! (which has a market cap. of $30B, and
revenues of $0.15B!) was overpriced at a certain level. "No," she said. What
about at twice the price? "No." What about at four times the price? "No," she
replied, "if I believe in the company, I buy the stock."
If every American used that logic to buy their cars (as I have written before),
we would only see Ferraris on the roadway. But--alas!--in the long run, price
always matters. Pebble Beach is a great golf course, perhaps the greatest, but
it has been proven that one can pay too much to own it. Yet, the stock market
right now seems to be thinking like that Wall Street analyst, with an irrational
preference for growth, and a corresponding indifference to valuation.
Many mutual fund investors, if not most, focus purely on the returns of an
investment or a fund, and do not care how those results were achieved. Many are
very impatient, and think the optimal way to grow their nest egg is to buy those
funds that have HAD the recent hot performance. Akin to driving while keeping
your eyes glued to the rear view mirror, it leads to a lot of accidents.
Unlike many mutual fund managers, we never ponder whether a stock is "going up."
Rather, we always populate our Fund with holdings that sell at the biggest
discount to their true intrinsic value and have owner-oriented managements.
Period. There are those that now say "Value is dead" or "The world has changed."
I disagree. In our experience, price and value always come together, and that
dynamic allows The Oakmark Fund to add value. Sometimes, as now, this process
takes longer than some would like. However, as an investor in the Fund and as
one who totally believes in our investment philosophy, I will never abandon our
approach. I know it works.
I empathize with those who wished they had earned the juicy returns generated by
the mega-caps and the growth stocks last year, and I sincerely appreciate the
support and patience you have shown. I have no idea when our Fund will start to
manifest its value, and we can do nothing to accelerate the process. In the
play, Godot never does show up. In the market, "he" will, and, since I believe
our Fund is more relatively attractive than it has ever been, when he does, our
outperformance should be significant.
EATON CORPORATION
Eaton (ETN) is a recent addition to the portfolio, having been sourced and
followed by our Bill Jacobs, and I want to briefly explain why we own it. Eaton,
based in Cleveland, Ohio, is a diversified manufacturer of proprietary
industrial products. Key businesses include industrial controls, truck
transmissions, automotive components, hydraulics, and semiconductor equipment.
Common among the business lines are the above industry-average returns each
generates. This is a result of the company's long-term emphasis on Research and
Development, which produces innovative, highly engineered products that face
limited competition. Fully 80 percent of ETN's products have a #1 or #2 market
share. Another contributing factor is the diversity of its customer base. This
is unlike many industrial companies who are somewhat at the mercy of their very
few customers.
The financial figures validate our belief that ETN is an above-average business.
ETN has consistently earned returns on total capital in the mid-teens. Also, ETN
generates substantial free cash flow after its discretionary R&D spending.
Management's priority is to make acquisitions, with the goal of attaining
dominant scale in a given business and being recognized as the global leader.
The company also has a history of repurchasing its shares, and that is also a
possibility.
In any event, we trust this management team to direct its capital optimally. CEO
Stephen Hardis has a keen understanding of the global marketplace and has a
strong financial background.
THE OAKMARK FUND
5
<PAGE>
........................................................................
More important, he has an independent streak that makes him appropriately
skeptical of the Wall Street fad du jour. Management compensation aligns the
interests of management and outside shareholders. A meaningful portion of the
stock options granted over the past few years will not vest until the company
reaches an EPS target of $8 in 2000, with ten percent annual increases.
Employees own 15 percent of the shares outstanding, establishing an owner
mindset throughout the entire enterprise.
Last, and as always, most important, the valuation of ETN is extremely
attractive. Adding back the non-cash amortization, Bill estimates ETN will earn
$6.75 in 1999. This includes a loss in the semiconductor business, which is very
cyclical. Taking this business out of the mix and valuing it at a very
conservative one times revenue, ETN is trading at less than 10 times earnings.
This is much less than half the multiple on the S&P 500. It sells at a very
modest one times sales. This is a very cheap stock.
In summary, ETN is a solid, above-average business, has above-average
management, and yet sells at a far below-average valuation. Its $5 billion
market capitalization puts it squarely in the ignored, unloved, and under-
followed mid-cap category, and the stock has zero momentum. It is an exemplar of
the sort of holding that we believe will generate the performance we expect.
/s/ Robert J. Sanborn
ROBERT J. SANBORN
Portfolio Manager
[email protected]
January 6, 1999
6
THE OAKMARK FUND
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- ---------------------------------------------------------------------------------
COMMON STOCKS--96.2%
FOOD & BEVERAGE--15.3%
Philip Morris Companies Inc. 13,810,700 $ 738,872,450
H.J. Heinz Company 3,525,350 199,622,944
Nabisco Holdings Corporation, Class A 2,472,100 102,592,150
Gallaher Group Plc (b) 2,835,500 77,090,156
--------------
1,118,177,700
APPAREL--6.3%
Nike, Inc., Class B 11,457,100 $ 464,728,619
RETAIL--0.2%
GC Companies, Inc. (a) 397,000 $ 16,525,125
HARDWARE--7.1%
The Black & Decker Corporation 8,267,000 $ 463,468,687
The Stanley Works 2,059,700 57,156,675
--------------
520,625,362
OTHER CONSUMER GOODS & SERVICES--13.7%
H&R Block, Inc. 7,665,800 $ 344,961,000
Mattel, Inc. 13,439,400 306,586,312
Brunswick Corporation 7,280,800 180,199,800
Fortune Brands, Inc. 2,746,800 86,867,550
Polaroid Corporation 4,552,400 85,072,975
--------------
1,003,687,637
BANKS & THRIFTS--12.6%
Bank One Corporation 8,800,548 $ 449,377,982
Washington Mutual, Inc. 10,530,000 402,114,375
Mellon Bank Corporation 1,000,000 68,750,000
--------------
920,242,357
INSURANCE--1.3%
Old Republic International Corporation 4,122,930 $ 92,765,925
PUBLISHING--5.5%
Knight-Ridder, Inc. 7,216,100 $ 368,923,113
R. H. Donnelley Corporation 2,098,260 30,555,911
--------------
399,479,024
INFORMATION SERVICES--6.4%
The Dun & Bradstreet Corporation 10,491,300 $ 331,131,656
ACNielsen Corporation 4,764,000 134,583,000
--------------
465,714,656
COMPUTER SERVICES--4.9%
Electronic Data Systems Corporation 5,331,800 $ 267,922,950
First Data Corporation 2,873,200 91,044,525
--------------
358,967,475
</TABLE>
THE OAKMARK FUND
7
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--96.2% (CONT.)
MEDICAL CENTERS--4.6%
Columbia/HCA Healthcare Corporation 13,501,000 $ 334,149,750
MEDICAL PRODUCTS--1.2%
Sybron International Corporation (a) 3,135,600 $ 85,249,125
AUTOMOTIVE--0.8%
SPX Corporation (a) 875,200 $ 58,638,400
AEROSPACE & DEFENSE--8.0%
Lockheed Martin Corporation 3,625,000 $ 307,218,750
The Boeing Company 8,599,400 280,555,425
--------------
587,774,175
MACHINERY & INDUSTRIAL PROCESSING--5.4%
Eaton Corporation 4,065,800 $ 287,401,237
Cooper Industries, Inc. 2,287,400 109,080,388
--------------
396,481,625
BUILDING MATERIALS & CONSTRUCTION--0.3%
Juno Lighting, Inc. 1,085,000 $ 25,361,875
FORESTRY PRODUCTS--0.1%
Fort James Corporation 237,200 $ 9,488,000
MINING--1.1%
DeBeers Centenary AG (b) 6,546,000 $ 83,461,500
OTHER INDUSTRIAL GOODS & SERVICES--1.4%
Parker-Hannifin Corporation 1,222,600 $ 40,040,150
Bandag Incorporated, Class A (a) 1,104,100 38,505,488
The Geon Company 971,600 22,346,800
--------------
100,892,438
TOTAL COMMON STOCKS (COST: $6,116,428,491) 7,042,410,768
SHORT TERM INVESTMENTS--3.0%
U.S. GOVERNMENT BILLS--1.0%
United States Treasury Bills, 4.29%-5.03%
due 1/7/1999-1/21/1999 $ 75,000,000 $ 74,877,535
--------------
TOTAL U.S. GOVERNMENT BILLS (COST: $74,877,535) 74,877,535
</TABLE>
8
THE OAKMARK FUND
<PAGE>
THE OAKMARK FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--3.0% (CONT.)
COMMERCIAL PAPER--1.4%
Ford Motor Credit Corp., 5.35% due
1/7/1999-1/8/1999 $ 40,000,000 $ 40,000,000
General Electric Capital Corporation,
5.33%-5.35% due 1/11/1999-1/12/1999 60,000,000 60,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $100,000,000) 100,000,000
REPURCHASE AGREEMENTS--0.6%
State Street Repurchase Agreement, 4.50%
due 1/4/1999 $ 44,288,000 $ 44,288,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $44,288,000) 44,288,000
TOTAL SHORT TERM INVESTMENTS (COST: $219,165,535) 219,165,535
Total Investments (Cost $6,335,594,026)--99.2% $7,261,576,303
Other Assets In Excess Of Other Liabilities--0.8% 58,464,169
--------------
TOTAL NET ASSETS--100% $7,320,040,472
--------------
--------------
</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
(12/31/98) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK
SELECT FUND S & P 500
<S> <C> <C>
10/96 $10,000 $10,000
1/97 $12,500 $11,202
4/97 $12,250 $11,470
7/97 $15,290 $13,721
9/97 $16,340 $13,659
12/97 $17,704 $14,053
3/98 $20,078 $16,021
6/98 $20,462 $16,551
9/98 $16,936 $14,904
12/98 $20,575 $18,078
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 12/31/98
TOTAL RETURN FROM FUND INCEPTION
12/31/98 NAV $19.54 LAST 3 MOS. 11/1/96
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK SELECT FUND 21.5% 39.5%
Standard & Poor's 500 Stock
Index w/inc** 21.3% 31.4%
Standard & Poor's MidCap 400
Index w/ inc** 28.2% 26.6%
Value Line Composite Index** 14.1% 9.8%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions.
**Each of the three indexes or averages is an unmanaged group of stocks whose
composition is different from the Fund. The S&P 500 is a broad market-weighted
average dominated by blue-chip stocks. The S&P 400 consists of 400 domestic
stocks chosen for market size, liquidity, and industry group representation. The
Value Line Index is an unweighted average of more than 1,000 stocks. Past
performance is no guarantee of future results.
I'M GLAD 1999 IS HERE!!
We had a number of things to be proud of in 1998. The Oakmark Select Fund's
increase last quarter of 21.5% as well as the 16.2% for all of calendar year
1998 was far above long-term average stock market returns. We also did well
relative to our competitors: our increase for 1998 exceeded the average mutual
fund by several percentage points and we outperformed 97% of Morningstar's
midcap value funds. Here's a special thanks to our Research Department for
making those achievements possible. But it's hard to get too excited about our
performance when the market indices did so much better. Powered by Internet
provider America OnLine, the S&P 400 Midcap gained 28.2% in the quarter and
19.1% for the year, somewhat above your Fund. (AOL alone was responsible for
more than one-third of the index's full year increase.) Further, the S&P 500,
with high exposure to both technology and giant growth companies by far
outperformed the Midcap index, increasing 28.6% in 1998. It was a very
frustrating year with the market increase led by stocks we judged to be the most
overvalued. Being out-of-sync just isn't any fun.
The start of a new year provides a good opportunity to look forward, and I
believe our portfolio is very well positioned. The S&P 500 ended 1998 near its
all-time high and sells at 28 times projected 1999 earnings. In contrast, your
portfolio has an average P/E multiple just under 14 times projected 1999
earnings (excluding cable tv stocks, which aren't valued using P/E's). As you
rebalance your equity portfolios for 1999, I'd encourage you to consider
maximizing the weighting you give to small and midcap value funds. Their
underperformance in 1998 means that on a relative basis, you are now getting a
lot more for your money!
WWW.OVERVALUED.COM
During the quarter, I received a letter from a shareholder asking if I was aware
of how much money was going into Internet stocks and suggesting that I consider
investing in them to "enhance performance." I am aware.
Internet stocks had an amazing year. AOL, Yahoo! and Amazon.com share prices
increased by over 500%. The nine best performing IPO's in 1998 were all Internet
stocks, each up over 300%. The resultant sky-high valuations required some fancy
footwork
10
THE OAKMARK SELECT FUND
<PAGE>
........................................................................
from analysts who wanted to recommend purchase of these stocks. A typical buy
recommendation from one of our analysts at Harris Associates goes something like
this: "My best guess of XYZ's full business value is $60 per share. I recommend
purchase below $36 with a sell target of $54." That simple logic didn't work for
Internet stocks so analysts got more creative. One report for an Internet
company selling at $188 read "we reiterate our buy rating AND $175 TARGET." A
target price below the current price yet a buy rating! Another tried to justify
a target price modestly above the current price by making the most optimistic
five-year earnings forecast they could imagine, then applied a 100 TIMES P/E to
that estimate. I think every stock in The Oakmark Select Fund would go up at
least ten-fold with those assumptions. But my favorite was the firm stating "our
price targets...don't appear to make sense relative to current stock prices."
So, do they suggest selling the stocks? No. "As such, WE ARE REMOVING THE PRICE
TARGETS from our weekly table." When all else fails, abandon the discipline. And
so far, they've been right.
Would we consider buying Internet stocks to "enhance performance?" In a word,
No! Our investment approach identifies stocks at substantial discounts to
current business value, where we are confident business values grow with time,
and where we believe managements will get rich only if the outside shareholders
do. The Internet names fail on all measures. Current prices for Internet stocks
are ridiculously high relative to any rational estimates of business value. Over
time, the total underlying value of Internet companies will certainly increase
as Internet commerce grows. But will today's e-retailers be category killers
like Wal-Mart and Home Depot? A report on the Internet written by a well-known
brokerage firm in 1995 identified nine "notable websites" for shopping. Today
only one would be listed in the Top 10 e-retail sites! It is also interesting to
see how quickly price competition has hit Internet retailing. Last Christmas, it
was fun to buy books 30% cheaper at Amazon.com than at Borders. This Christmas,
a competing website ran an ad in THE WALL STREET JOURNAL with bestseller pricing
25% below Amazon! Lastly, consider management focus. Top managers of most
Internet companies have net worths in the hundreds of millions, if not billions
of dollars, all in stock they fear is grossly overvalued. Not only has there
been heavy insider selling, but the lineup for secondary offerings is getting
long. The way they get rich is not by growing long-term business value, but by
selling their stock.
Another fact investors may be overlooking is how significant the Internet
activities are for many traditional companies. In your portfolio, Peoples' Bank
is a leader in on-line banking, EDS and First Data are strong players in
settlement of on-line transactions, Dun & Bradstreet has made its reports
available via the Internet, Amgen has used the Internet for direct marketing to
potential users of its drugs, Cablevision is rapidly hooking up subscribers to
amazingly quick Internet access through existing cable wires, and Liberty Media
has interests in popular websites CNN, Discovery, FoxSports, and QVC. All of
these companies will benefit as Internet usage grows, yet none are priced like
the pure-play Internet stocks that are sure to be deflated when (not if) the
Internet bubble bursts. And just in case you're still tempted to goose your
performance by owning Internet stocks for a few weeks, look at the December 14
BUSINESSWEEK cover "AMAZON.COM THE WILD WORLD OF E-COMMERCE." Buyer beware, they
don't ring the bell any louder.
Thank you for your continuing support and best wishes for a happy and prosperous
New Year.
/s/ William C. Nygren
WILLIAM C. NYGREN
Portfolio Manager
[email protected]
January 6, 1999
TOP TEN REASONS
TO SELL INTERNET STOCKS
10. Newly issued stocks quadrupling during their first month isn't normal.
9. Shopping.com has prices 25% below Amazon.com, which is 30% below the corner
bookstore, which isn't a good business.
8. Rational price targets weren't high enough, so brokerage firms stopped using
price targets.
7. P/E's over 100 times on next century earnings seem a bit high.
6. Catching up by buying hot performers wins less often than the Chicago Bears
do.
5. Leading Internet retailers from 1995 spent less time at the top than
"Godzilla" did.
4. Insiders are selling stock to finance the move from pocket protectors to
Ferraris.
3. The line for a new Internet IPO is longer than the line to buy Furby.
2. Yahoo! market cap exceeds that of CBS (producer of The Late Show).
1. Amazon.com is on the cover of BUSINESSWEEK.
THE OAKMARK SELECT FUND
11
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--92.2%
APPAREL--3.2%
Liz Claiborne, Inc. 1,397,400 $ 44,105,438
RETAIL--8.0%
Gucci Group (b) 2,283,900 $ 111,054,637
OTHER CONSUMER GOODS & SERVICES--1.7%
Ralston Purina Group 727,000 $ 23,536,625
BANKS & THRIFTS--8.5%
Washington Mutual, Inc. 1,730,000 $ 66,064,375
People's Bank of Bridgeport, Connecticut 1,877,000 51,852,125
--------------
117,916,500
INSURANCE--8.3%
PartnerRe Ltd. (c) 2,522,600 $ 115,408,950
BROADCASTING & CABLE TV--11.9%
Cablevision Systems Corporation, Class A
(a) 3,286,100 $ 164,921,144
TV PROGRAMMING--3.9%
Tele-Communications, Liberty Media, Class A
(a) 1,178,550 $ 54,286,959
INFORMATION SERVICES--4.1%
The Dun & Bradstreet Corporation 1,818,600 $ 57,399,563
COMPUTER SERVICES--9.0%
First Data Corporation 2,100,000 $ 66,543,750
Electronic Data Systems Corporation 1,160,900 58,335,225
--------------
124,878,975
MEDICAL PRODUCTS--4.1%
Amgen, Inc. (a) 550,000 $ 57,509,375
MACHINERY & INDUSTRIAL PROCESSING--3.1%
Thermo Electron Corporation (a) 2,556,400 $ 43,299,025
BUILDING MATERIALS & CONSTRUCTION--8.9%
USG Corporation 2,440,800 $ 124,328,250
OTHER INDUSTRIAL GOODS & SERVICES--3.5%
Premark International, Inc. 1,428,800 $ 49,472,200
</TABLE>
12
THE OAKMARK SELECT FUND
<PAGE>
THE OAKMARK SELECT FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--92.2% (CONT.)
REAL ESTATE--4.2%
Host Marriott Corporation (a) 3,940,100 $ 54,422,631
Crestline Capital Corporation (a) 255,010 3,729,521
--------------
58,152,152
DIVERSIFIED CONGLOMERATES--9.8%
U.S. Industries, Inc. 7,314,000 $ 136,223,250
TOTAL COMMON STOCKS (COST: $1,055,266,723) 1,282,493,043
SHORT TERM INVESTMENTS--7.5%
U.S. GOVERNMENT BILLS--2.2%
United States Treasury Bills, 4.27%-5.03%
due 1/7/1999-1/28/1999 $30,000,000 $ 29,944,100
--------------
TOTAL U.S. GOVERNMENT BILLS (COST: $29,944,100) 29,944,100
COMMERCIAL PAPER--4.0%
American Express Credit Corp., 6.00% due
1/4/1999 $15,000,000 $ 15,000,000
Ford Motor Credit Corp., 5.35% due
1/7/1999-1/8/1999 10,000,000 10,000,000
General Electric Capital Corporation,
4.70%-5.33% due 1/4/1999-1/13/1999 30,000,000 30,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $55,000,000) 55,000,000
REPURCHASE AGREEMENTS--1.3%
State Street Repurchase Agreement, 4.50%
due 1/4/1999 $18,435,000 $ 18,435,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $18,435,000) 18,435,000
TOTAL SHORT TERM INVESTMENTS (COST: $103,379,100) 103,379,100
Total Investments (Cost $1,158,645,823)--99.7% $1,385,872,143
Other Assets In Excess Of Other Liabilities--0.3% 4,776,348
--------------
TOTAL NET ASSETS--100% $1,390,648,491
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Represents a foreign domiciled corporation.
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 (12/31/98) AS COMPARED TO THE RUSSELL 2000 INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK
SMALL CAP FUND RUSSELL 2000
<S> <C> <C>
10/95 $10,000 $10,000
1/96 $10,180 $10,684
4/96 $12,180 $11,841
7/96 $11,830 $10,772
10/96 $13,190 $11,661
1/97 $15,180 $12,708
4/97 $15,170 $11,848
7/97 $18,730 $14,369
9/97 $20,340 $15,774
12/97 $20,290 $15,245
3/98 $21,732 $16,779
6/98 $20,467 $15,997
9/98 $14,976 $12,774
12/98 $17,620 $14,857
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 12/31/98
TOTAL RETURN FROM FUND INCEPTION
12/31/98 NAV $14.77 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK SMALL CAP FUND 17.7% 19.6%
Lipper Small Cap Fund Index** 18.4% 10.3%
Russell 2000 w/ inc** 16.3% 13.3%
S&P Small Cap 600 w/inc** 17.6% 15.7%
</TABLE>
*Total return includes change in share prices and in each case includes
reinvestment of any dividends and capital gain distributions.
**Each of the three indexes or averages is an unmanaged group of stocks 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.
WHAT'S OLD
1998 is over, and I will not miss it. While the mega-cap and super-high-growth
stocks continued to soar, the marketplace largely ignored small cap stocks.
However, as we enter 1999 on the eve of the millennium, there are several
reasons to be optimistic. It takes a strong imagination to conjure up a list of
headlines that would top the events of 1998. Last year was rife with real and
imagined financial and political crises. Although the share price of the
companies we own do not reflect it, in general, our holdings continued to grow
their underlying value. Our Fund trades at a large discount to its underlying
value. The Oakmark Small Cap Fund's first fiscal quarter ended on December 31,
1998. Results for the quarter were encouraging; your Fund appreciated 17.65%,
which was in line with the relevant indices.
CONSISTENCY AND CONFIRMATION OF VALUE: THE IMPORTANCE OF BEING THERE
We manage your Fund with a very consistent investment philosophy, regardless of
the overall market environment. We do not try to guess the price direction of
our holdings, but simply buy those holdings with good managements that sell at
the largest discount to their underlying value. Sometimes it takes a long time
to close the gap between price and value and sometimes--as with the case of
First Brands (FBR)--it can happen overnight.
In early July, First Brands announced a slowdown in their business which led to
lower net income in the June quarter. The market reacted negatively to the
announcement and the shares declined in price as many holders headed for the
exits. The problems FBR faced were very short-term in nature and the near-term
fundamentals were actually very favorable. Investments should be made with a
forward-looking vision, not with one's eyes focused on the rear view mirror. I
took advantage of this price drop and purchased additional shares for
14
THE OAKMARK SMALL CAP FUND
<PAGE>
........................................................................
The Oakmark Small Cap Fund and FBR became one of our larger holdings.
As it happens, we were not the only ones sensing this opportunity. On October
19, Clorox (CLX) announced it would acquire FBR for $39 per share, a significant
premium over the price FBR was trading in the market (as well as our cost). This
confirmed two things: one, that we had correctly assessed that FBR was
undervalued and, two, that management's interest was aligned with shareholders.
In other words, our investment rationale was utterly validated.
This is also a great example of the importance of a forward-looking perspective
to investing. Had we sold FBR on the news that the past quarter's earnings would
not meet expectations, we would merely be a part of the legion of shortsighted
lemmings. Obviously, an event such as CLX's acquisition of FBR is an
instantaneous confirmation of value. It was our long-term investment horizon and
discipline in the face of a difficult market environment that allowed us to be
there for such an event.
WHAT'S NEW
Declining share prices represent a two-way street. On the one hand, a price
decline does impact the short-term value of your portfolio. On the other hand,
if the investment rationale and intrinsic value are still intact, a price
decline represents an opportunity. (Of course, when lettuce is selling at
2-for-1 in the supermarket, it can lead one to search for brown spots). The
broad-based decline in small cap companies, particularly those that fit a
value-oriented investment philosophy, has created a number of new investment
opportunities for the Fund. I believe that our Fund sells at the biggest
discount to underlying value in its short history.
In fact, more new names were added to the portfolio through this past year's
market decline than at any other time during the Fund's short history. During
the past quarter, a number of new companies were added to the portfolio. One of
those, Paymentech Inc. (PTI), was a former holding of the Fund. PTI is a
processor of credit card transactions. It is also the closest thing we have to
an Internet company. One of the attractive attributes of Paymentech is that it
is a large processor of Internet credit card transactions. However, unlike most
Internet companies, PTI has revenues, earnings, and an operating history that
goes back years instead of months.
Another addition to the portfolio is the Mony Group (MNY). Mony is probably
better recognized as the old Mutual of New York. During November, MNY converted
from a mutual insurance company (owned by its policyholders) to a publicly
traded insurance company (owned by its shareholders). While the company is
attractively priced, we believe that, over the long term, management will be
able to improve the operating returns significantly. A much more recognizable
addition to the portfolio is Reebok International Ltd. (RBK). Reebok is a bit of
a turnaround situation, having stepped on its own shoelaces during the past two
years. After a recent visit with management at their headquarters, we believe
management has what it takes to revitalize the company's lackluster product line
and financial performance. We believe that Reebok's current share price poses
little risk versus upside potential if they can execute their plan to improve
results.
REDEMPTIONS, DISTRIBUTIONS, AND RE-OPENING... PART II
In the annual report last quarter, I discussed a brief explanation of some of
the events of this year. In the January issue of "Smart Money" magazine, Tom
Lauricella wrote a lengthy article entitled "Caught in the Crossfire," which
portrays an accurate, but slightly dramatized picture of how The Oakmark Small
Cap Fund and I operate. Since the article was published, I have received
numerous comments, phone calls, and e-mails regarding Tom's article. If you have
the opportunity, take a look at the article and let me know your thoughts. Those
who have read it overwhelmingly appreciated it.
Once again, I would like to thank everyone involved, especially our
shareholders, for your support of The Oakmark Small Cap Fund.
/s/ Steven J. Reid
STEVEN J. REID
Portfolio Manager
[email protected]
January 13, 1999
THE OAKMARK SMALL CAP FUND
15
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENT--DECEMBER 31, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCKS--94.9%
FOOD & BEVERAGE--10.2%
Ralcorp Holdings, Inc. (a) 1,213,500 $ 22,146,375
Triarc Companies, Inc. (a) 1,250,000 20,000,000
Vlasic Foods International Inc. (a) 500,000 11,906,250
International Multifoods Corporation 400,000 10,325,000
M & F Worldwide Corp. (a) 750,000 7,546,875
--------------
71,924,500
APPAREL--2.1%
Reebok International Ltd. 1,000,000 $ 14,875,000
RETAIL--5.3%
Department 56, Inc. (a) 750,000 $ 28,171,875
Ugly Duckling Corporation (a) 1,750,000 8,093,750
The Great Atlantic & Pacific Tea Company,
Inc. 28,400 841,350
--------------
37,106,975
OTHER CONSUMER GOODS & SERVICES--7.8%
Libbey, Inc. 750,000 $ 21,703,125
Scotsman Industries, Inc. 835,200 17,173,800
Barry (R.G.) Corporation (a) 900,000 9,900,000
P.H. Glatfelter Company 500,000 6,187,500
--------------
54,964,425
BANKS & THRIFTS--8.9%
People's Bank of Bridgeport, Connecticut 1,450,000 $ 40,056,250
BankAtlantic Bancorp, Inc., Class A 1,000,001 6,437,506
Northwest Bancorp Inc. 600,000 5,850,000
Niagara Bancorp Inc. (a) 417,500 4,383,750
PennFed Financial Services, Inc. 260,000 3,380,000
Finger Lakes Financial Corp. 188,000 2,162,000
--------------
62,269,506
INSURANCE--2.4%
The MONY Group Inc. (a) 543,600 $ 17,021,475
OTHER FINANCIAL--5.9%
ARM Financial Group, Inc., Class A 1,000,000 $ 22,187,500
Duff & Phelps Credit Rating Co. 350,000 19,184,375
--------------
41,371,875
BROADCASTING & CABLE TV--1.6%
Ascent Entertainment Group, Inc. (a) 1,500,000 $ 11,062,500
COMPUTER SERVICES--6.8%
Symantec Corporation (a) 1,500,000 $ 32,625,000
Paymentech, Inc. (a) 800,000 14,800,000
--------------
47,425,000
</TABLE>
16
THE OAKMARK SMALL CAP FUND
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENT--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS--94.9% (CONT.)
COMPUTER SYSTEMS--2.2%
Micron Electronics, Inc. (a) 600,000 $ 10,387,500
Sequent Computer Systems, Inc. (a) 400,000 4,825,000
--------------
15,212,500
MANAGED CARE SERVICES--1.4%
First Health Group Corp. (a) 600,000 $ 9,937,500
AUTOMOTIVE--8.8%
SPX Corporation (a) 400,000 $ 26,800,000
Stoneridge, Inc. (a) 1,000,000 22,875,000
Standard Motor Products, Inc. 500,000 12,125,000
--------------
61,800,000
TRANSPORTATION SERVICES--3.2%
Teekay Shipping Corporation (b) 1,000,000 $ 18,812,500
Air Express International Corporation 180,000 3,915,000
--------------
22,727,500
MACHINERY & INDUSTRIAL PROCESSING--2.6%
Graco, Inc. 250,000 $ 7,375,000
Northwest Pipe Company (a) 400,000 6,450,000
DT Industries, Inc. 300,000 4,725,000
--------------
18,550,000
FORESTRY PRODUCTS--1.0%
Schweitzer-Mauduit International, Inc. 450,000 $ 6,946,875
OTHER INDUSTRIAL GOODS & SERVICES--12.9%
Ferro Corporation 860,700 $ 22,378,200
H.B. Fuller Company 400,000 19,250,000
Columbus McKinnon Corporation 967,500 17,415,000
MagneTek, Inc. (a) 1,500,000 17,343,750
Watts Industries, Inc. 600,000 9,975,000
Binks Sames Corporation 275,000 4,537,500
--------------
90,899,450
REAL ESTATE--6.4%
Catellus Development Corporation (a) 2,250,000 $ 32,203,125
Prime Hospitality Corp. (a) 1,200,000 12,675,000
--------------
44,878,125
DIVERSIFIED CONGLOMERATES--5.4%
U.S. Industries, Inc. 2,050,000 $ 38,181,250
TOTAL COMMON STOCKS (COST: $653,829,697) 667,154,456
</TABLE>
THE OAKMARK SMALL CAP FUND
17
<PAGE>
THE OAKMARK SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENT--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--3.8%
COMMERCIAL PAPER--2.1%
General Electric Capital Corporation, 4.70%
due 1/4/1999 $ 15,000,000 $ 15,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $15,000,000) 15,000,000
REPURCHASE AGREEMENTS--1.7%
State Street Repurchase Agreement, 4.50%
due 1/4/1999 $ 11,854,000 $ 11,854,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $11,854,000) 11,854,000
TOTAL SHORT TERM INVESTMENTS (COST: $26,854,000) 26,854,000
Total Investments (Cost $680,683,697)--98.7% $ 694,008,456
Other Assets In Excess Of Other Liabilities--1.3% 9,219,383
--------------
TOTAL NET ASSETS--100% $ 703,227,839
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents a foreign domiciled corporation.
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 (12/31/98) AS COMPARED TO THE LIPPER BALANCED
FUND INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK LIPPER BALANCED
EQUITY & INCOME FUND FUND INDEX
<S> <C> <C>
10/95 $10,000 $10,000
1/96 $10,290 $10,662
4/96 $10,630 $10,778
7/96 $10,660 $10,665
10/96 $11,290 $11,449
1/97 $12,255 $12,197
4/97 $12,429 $12,244
7/97 $14,289 $13,909
9/97 $14,810 $14,005
12/97 $14,941 $14,243
3/98 $16,233 $15,370
6/98 $16,320 $15,599
9/98 $15,191 $14,701
12/98 $16,792 $16,392
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 12/31/98
TOTAL RETURN FROM FUND INCEPTION
12/31/98 NAV $15.03 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK EQUITY & INCOME
FUND 10.5% 17.8%
Lipper Balanced Fund Index** 11.5% 16.9%
Lehman Govt./ Corp. Bond** 0.1% 8.0%
S&P 500 w/ inc** 21.3% 29.0%
</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.
GOODBYE TO 1998
Your Fund closed out the calendar year at a record high price (adjusted for the
effect of November's dividend). Unfortunately, the portfolio took eight months
to reach a new high, and it was disappointing returns of smaller and mid-cap
stocks in the period which retarded portfolio progress. The Oakmark Equity and
Income Fund is not oriented to small cap or mid cap equities--it is very much
value oriented. And, of course, at any given time at least 35% of the portfolio
is invested in fixed income securities. It is an interesting fact, however, that
the S&P midcap index achieved its two peaks in 1998 on the same two days as the
Fund. We, like most other value investors, have primarily discovered value
outside of the 50 or so stocks which have dominated S&P 500 returns.
For value investors, 1998 was an incredibly frustrating year. Value investing is
founded on the observation that price and value come together often enough to be
profitably exploited. The corollary of this premise is that price and value will
periodically diverge, creating the value opportunities on which value investors
feast. Never in my 21-year career have divergences been as pronounced as we saw
in 1998. For quite some time the stock market has discriminated in favor of
larger capitalization companies. In fact, 1998 witnessed the largest difference
in return ever recorded between the Russell 2000 index (smaller company stocks)
and the S&P 500: 31%! Stock market volatility increased in 1998, and investors
responded by moving to more liquid securities. As a rule, the market always
overpays for liquidity, and we believe that the experience of 1998 will not
prove to be an exception.
THE FRUITS OF A LIQUIDITY PANIC
Oftentimes the greatest value opportunities develop when the stock market
experiences a period of momentary panic. A good example occurred early last
quarter on October 8. Shortly after the market opened that day, one of our
THE OAKMARK EQUITY AND INCOME FUND
19
<PAGE>
........................................................................
traders called me to describe the trading picture in Heller International, a
finance company which we had monitored for some time. The stock had closed the
night before at a price of $19.50. A brokerage firm called our trading desk with
the news that they had a client with 100,000 shares to sell. I was wary of the
market environment at that moment and told the trader to keep me informed should
the price drop.
Wariness proved to be the correct attitude as the market took a dive that
morning. Heller's price initially fell to $17.50 with few shares having traded.
I decided to put in a $15.50/share bid for the block, just to make our interest
known. Two other buyers eventually showed up at that level, and within the hour
the block had traded at $15.50-- down more than 20% on the day! Since October 8,
Heller has made several favorable announcements, and the stock closed out the
quarter at $29.375, an 84% increase over the Fund's average purchase price.
As value investors we prefer to buy securities when the seller is motivated to
sell by reasons having nothing to do with any proprietary knowledge of the
issue. (This explains why we rarely participate in initial public offerings.)
When the market as a whole panics, many "informationless" trades take place. It
is my job, as Fund Manager, to take advantage of this sort of situation for the
benefit of The Fund.
THE SECOND PRESSING OF THE DUCK
I noted above that the Fund's equity holdings are not oriented to any size of
company. DaimlerChrysler and Juno Lighting both happily inhabit the same
portfolio. This is not the case for the Fund's corporate fixed income
investments. The degree of efficiency in pricing corporate debt is a direct
function of the size of the issue, so our search for undervalued securities
generally leads us to more obscure regions.
Steve Reid holds shares of Ugly Duckling Corporation (the Duck) in The Oakmark
Small Cap Fund. In October, Steve informed me that the Duck had initiated an
unusual exchange offering for its shareholders: $6.50 of a new issue of 5-year
debentures for each share of common stock tendered. The 12% interest rate on the
debentures would have been enough to capture my attention, but the kicker was
the fact that the stock was trading around $5.00.
Steve wrote about this company and its management last January (the first
pressing). Our respect for both has only deepened over the last twelve months.
Ernie Garcia, CEO, owns nearly 30% of the company, and my appetite for high
yield debt is always enhanced when management is heavily committed. I purchased
shares for your Fund at an average price of $4.75 per share. The company
accepted all shares tendered into the exchange offering. The annualized yield to
maturity if held to term exceeds 20% given the Fund's cost. This figure could
even go higher if the company calls the debentures in ahead of schedule, as we
expect.
This story illustrates how the different activities of our funds' group support
each other. Steve had no interest in owning the Duck debenture in Small Cap but
immediately recognized the value it would have for the Equity and Income Fund
portfolio. And, the Duck debenture is a perfect example of inefficient pricing
in the small cap sector of the fixed income market.
As always, I welcome your e-mails.
/s/ Clyde S. McGregor
CLYDE S. MCGREGOR
Portfolio Manager
[email protected]
January 8, 1999
20
THE OAKMARK EQUITY AND INCOME FUND
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
SHARES HELD MARKET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------
EQUITY AND EQUIVALENTS--60.3%
FOOD & BEVERAGE--1.8%
UST Inc. 35,000 $ 1,220,625
OFFICE EQUIPMENT--3.9%
Lexmark International Group, Inc., Class A
(a) 26,000 $ 2,613,000
OTHER CONSUMER GOODS & SERVICES--3.3%
H&R Block, Inc. 33,000 $ 1,485,000
National Presto Industries, Inc. 17,000 724,625
--------------
2,209,625
BANKS & THRIFTS--1.8%
Bank One Corporation 23,674 $ 1,208,854
INSURANCE--2.9%
PartnerRe Ltd. (b) 23,000 $ 1,052,250
Old Republic International Corporation 38,250 860,625
--------------
1,912,875
OTHER FINANCIAL--2.2%
Heller Financial, Inc. 50,000 $ 1,468,750
TV PROGRAMMING--3.7%
Tele-Communications, Liberty Media, Class A
(a) 52,800 $ 2,432,100
PUBLISHING--2.1%
Lee Enterprises, Inc. 43,900 $ 1,382,850
INFORMATION SERVICES--3.1%
The Dun & Bradstreet Corporation 65,000 $ 2,051,562
COMPUTER SERVICES--6.8%
Electronic Data Systems Corporation 45,000 $ 2,261,250
First Data Corporation 70,000 2,218,125
--------------
4,479,375
DATA STORAGE--3.3%
Imation Corp. (a) 125,000 $ 2,187,500
MEDICAL PRODUCTS--3.4%
Sybron International Corporation (a) 83,000 $ 2,256,562
AUTOMOTIVE--7.1%
DaimlerChrysler AG 26,187 $ 2,515,589
Lear Corporation (a) 56,000 2,156,000
--------------
4,671,589
</TABLE>
THE OAKMARK EQUITY AND INCOME FUND
21
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
EQUITY AND EQUIVALENTS--60.3% (CONT.)
TRANSPORTATION SERVICES--1.2%
Tidewater Inc. 35,000 $ 811,563
BUILDING MATERIALS & CONSTRUCTION--2.7%
Juno Lighting, Inc. 76,300 $ 1,783,513
OTHER INDUSTRIAL GOODS & SERVICES--3.0%
Premark International, Inc. 56,500 $ 1,956,312
REAL ESTATE--5.8%
Amli Residential Properties Trust 90,000 $ 2,002,500
Catellus Development Corporation (a) 127,728 1,828,107
--------------
3,830,607
DIVERSIFIED CONGLOMERATES--2.2%
U.S. Industries, Inc. 78,000 $ 1,452,750
TOTAL EQUITY AND EQUIVALENTS (COST: $30,379,837) 39,930,012
FIXED INCOME--33.4%
PREFERRED STOCK--5.1%
BANKS & THRIFTS--4.3%
Pennfed Capital Trust, Preferred, 8.90% 27,500 $ 701,250
PennFirst Capital Trust 1, Preferred,
8.625% 70,000 682,500
BBC Capital Trust I, Preferred, 9.50% 28,000 665,000
Fidelity Capital Trust I, Preferred, 8.375% 43,500 424,125
RBI Capital Trust I, Preferred, 9.10% 42,500 403,750
--------------
2,876,625
BROADCASTING & CABLE TV--0.8%
MediaOne Finance Trust III, Preferred,
9.04% 20,000 $ 512,500
TOTAL PREFERRED STOCK (COST: $3,470,738) 3,389,125
CORPORATE BONDS--2.9%
OTHER CONSUMER GOODS & SERVICES--0.8%
Ugly Duckling Corporation, 12.00% due
10/15/2003, Subordinated Debenture $650,000 $ 525,000
AEROSPACE & AUTOMOTIVE--0.3%
Coltec Industries, Inc., 9.75% due 4/1/2000 150,000 $ 159,562
Coltec Industries, Inc., 9.75% due
11/1/1999 25,000 26,594
--------------
186,156
</TABLE>
22
THE OAKMARK EQUITY AND INCOME FUND
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
FIXED INCOME--33.4% (CONT.)
BUILDING MATERIALS & CONSTRUCTION--0.2%
USG Corporation, 9.25% due 9/15/2001,
Senior Notes Series B $150,000 $ 158,063
UTILITIES--0.3%
Midland Funding Corporation, 11.75% due
7/23/2005 150,000 $ 172,125
OTHER INDUSTRIAL GOODS & SERVICES--1.3%
Scotsman Industries, Inc., 8.625% due
12/15/2007, Senior Subordinated Note 565,000 $ 552,287
UCAR Global Enterprises Inc., 12.00% due
1/15/2005, Senior Subordinated Note 300,000 308,250
--------------
860,537
TOTAL CORPORATE BONDS (COST: $1,898,939) 1,901,881
GOVERNMENT AND AGENCY SECURITIES--25.4%
U.S. GOVERNMENT BONDS--24.9%
United States Treasury Notes, 7.875% due
11/15/2004 6,000,000 $ 6,948,600
United States Treasury Notes, 7.50% due
5/15/2002 6,000,000 6,518,280
United States Treasury Notes, 6.25% due
2/15/2007 2,750,000 3,023,185
--------------
16,490,065
U.S. GOVERNMENT AGENCIES--0.5%
Federal Home Loan Bank, 6.405% due
4/10/2001, Consolidated Bond 300,000 $ 309,612
TOTAL GOVERNMENT AND AGENCY SECURITIES (COST: $16,170,654) 16,799,677
TOTAL FIXED INCOME (COST: $21,540,331) 22,090,683
SHORT TERM INVESTMENTS--5.8%
COMMERCIAL PAPER--3.8%
American Express Credit Corp., 5.35% due
1/4/1999 $1,000,000 $ 1,000,000
Ford Motor Credit Corp., 5.60% due 1/5/1999 500,000 500,000
General Electric Capital Corporation, 4.70%
due 1/4/1999 1,000,000 1,000,000
--------------
TOTAL COMMERCIAL PAPER (COST: $2,500,000) 2,500,000
</TABLE>
THE OAKMARK EQUITY AND INCOME FUND
23
<PAGE>
THE OAKMARK EQUITY AND INCOME FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
PRINCIPAL VALUE MARKET VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
SHORT TERM INVESTMENTS--5.8% (CONT.)
REPURCHASE AGREEMENTS--2.0%
State Street Repurchase Agreement, 4.50%
due 1/4/1999 $1,337,000 $ 1,337,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $1,337,000) 1,337,000
TOTAL SHORT TERM INVESTMENTS (COST: $3,837,000) 3,837,000
Total Investments (Cost $55,757,168)--99.5% $ 65,857,695
Other Assets In Excess Of Other Liabilities--0.5% 303,069
--------------
TOTAL NET ASSETS--100% $ 66,160,764
--------------
--------------
</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 (12/31/98) COMPARED TO THE MORGAN STANLEY
WORLD EX U.S. INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK M.S. WORLD EX
INTERNATIONAL FUND U.S. INDEX
<S> <C> <C>
9/92 $10,000 $10,000
10/92 $9,800 $9,505
1/93 $10,833 $9,621
4/93 $12,105 $11,764
7/93 $12,608 $12,233
10/93 $14,454 $12,981
1/94 $16,488 $13,786
4/94 $15,382 $13,664
7/94 $15,195 $13,899
10/94 $15,122 $14,265
1/95 $13,698 $13,124
4/95 $14,399 $14,437
7/95 $15,507 $14,911
10/95 $14,659 $14,248
1/96 $16,248 $15,312
4/96 $18,162 $16,144
7/96 $17,635 $15,471
10/96 $18,310 $15,843
1/97 $19,909 $15,761
4/97 $21,149 $16,114
7/97 $22,960 $18,426
9/97 $23,283 $18,027
12/97 $20,097 $16,637
3/98 $22,994 $19,083
6/98 $20,253 $19,233
9/98 $16,322 $16,404
12/98 $18,688 $19,759
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 12/31/98
TOTAL RETURN FROM FUND INCEPTION
12/31/98 NAV $10.91 LAST 3 MOS. 9/30/92
<S> <C> <C>
- ------------------------------------------------------------------------------
THE OAKMARK INTERNATIONAL FUND 14.5% 10.5%
Morgan Stanley World ex U.S.
w/inc.** 20.5% 11.5%
Morgan Stanley EAFE w/ inc** 20.7% 11.5%
Lipper Analytical
International Fund Index** 15.5% 12.4%
</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,
Your Fund achieved a 4th quarter return of +14.5%. Though acceptable on an
absolute basis, relatively we trailed our peers Lipper International Index by 1%
and The EAFE Index by approximately 6%. Since inception, your Fund has generated
an average annual rate of return of 10.5% compared to the Lipper Index return of
12.4% and The EAFE Index of 11.5%.
1998......WHY SUB-PAR?
The Oakmark International Fund was down 7% for calendar 1998 while the average
international fund gained 12.6%. Why the divergence in performance?
Our disciplined style of value investing means that we maintain our exposure in
markets while others flee. Last year, Hong Kong (down 3%), Brazil (down 44%),
Argentina (down 27%) and even New Zealand (down 25%) all provided for a fairly
rough 1998. Add to this our under weighting of the continental European markets
and our overweight position in sluggish United Kingdom and the result was
underperformance. But why keep our positions in these markets, which have been
greatly sold off? The answer is simply VALUE. It is the same reason why we
avoided the hot European companies, which have done so well in 1998.
Though they have hurt us in the short run, we added to or maintained our
positions in companies such as UNIBANCO (Brazil), QUILMES (Argentina) and
GIORDANO (Hong Kong). Unibanco trades at 60% of its book value, is highly
profitable, has great growth prospects due to its strong
THE OAKMARK INTERNATIONAL FUND
25
<PAGE>
........................................................................
franchises, and is extremely conservatively run. More stagnant, less profitable
European banks trade at a whopping 2-4x's book! Quilmes is the dominant brewer
in the southern cone of South America. It is truly a world class company in
terms of operating efficiency and profitability and is partially owned by
Heineken. Yet, Quilmes trades at a significant discount to Heineken and other
Western brewers. Giordano is a Hong Kong based pan-Asian clothing retailer. It
has built its cash position, even in a recession, increased same store sales in
many of its markets and continues to offer great growth potential. All of this
at a bargain basement price.
All of the above, and others like them, significantly underperformed in 1998
causing havoc to our total return. However, as we have seen many times before,
we remain confident that price and value will ultimately converge and that our
portfolio of stocks will reflect this.
1998 WINNERS...
UNITED OVERSEAS BANK, located in Singapore, has added 2.4 percentage points to
our total return. We purchased United Overseas Bank early in the summer of '98
when the market hit its lows because of its quality and what we believed to be a
strong over-reaction by the market. It should continue to be a good Asia
recovery stock.
SEDGWICK PLC, a United Kingdom based insurance broker, was taken over in 1998 at
a very acceptable price. We have owned Sedgwick for a while, arguing that it was
an extremely underpriced asset. Though it sat quiet for a few years, one of its
competitors did not and decided that it was worth paying up for the quality
business which Sedgwick built. It contributed almost 2% of total return last
year.
SAATCHI AND SAATCHI PLC, a company we have been involved with for a long time,
is finally starting to pay off and the company continues to perform well. One of
the strongest advertising companies in the world, Saatchi continues to win
additional business from new and existing clients and profits should continue to
grow at a good pace. It provided over 1% of total return to the Fund.
AND THE LOSERS...
TELEBRAS, the Brazilian phone company now broken up into smaller operating
companies, has cost our Fund nearly 4%. With trouble in Asia spreading to Russia
and eventually to Brazil, Telebras was an easy target for speculators to sell.
However, the Telebras companies now have new managements as a result of the
privatization process and are the cheapest phone companies in the world.
BLADEX is a Latin American bank involved with trade finance. This stock cost our
Fund 3.2% of total return. Again, the selling of this stock has been way
overdone as its p/e ratio is now below its dividend yield. It trades at only 5
times earning and yields close to 6%; this is at a time when the company can
actually grow its earnings. Most of its loans are extremely secure. We think the
"market" is irrationally pricing this quality financial institution.
WE REMAIN CONFIDENT GOING FORWARD
Though 1998 has been tough for the Fund, we believe our future looks excellent.
The stocks that have been hit hard are good businesses that have been panic sold
and are selling at bargain basement prices. This is not sustainable and should
mean a bright future for your Fund. A significant percentage of our net worth is
in this Fund so we remain committed to our long-term, value approach.
/s/ David Herro
DAVID HERRO
Portfolio Manager
[email protected]
/s/ Michael Welsh
MICHAEL WELSH
Portfolio Manager
[email protected]
26
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
INTERNATIONAL DIVERSIFICATION--DECEMBER 31, 1998
........................................................................
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Pacific Rim 39.9%
Japan 11.7%
Singapore 8.6%
Hong Kong 7.8%
Korea 6.9%
New Zealand 4.8%
Malaysia 0.1%
Europe 41.4%
Great Britain 21.8%
France 9.5%
Finland 5.2%
Italy 2.8%
Netherlands 1.3%
Norway 0.8%
Latin America 16.7%
Brazil 8.4%
Argentina 4.9%
Panama 3.4%
</TABLE>
THE OAKMARK INTERNATIONAL FUND
27
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--98.0%
CONSUMER NON-DURABLES--6.0%
Citizen Watch Co. (Japan) Watch Manufacturer and Retailer 3,916,000 $ 23,554,887
Fila Holding S.p.A. (Italy), (b) Athletic Footwear Manufacturing 2,649,800 20,535,950
--------------
44,090,837
FOOD & BEVERAGE--8.0%
Quilmes Industrial SA (Argentina), (b) Brewer 3,877,800 $ 36,112,013
Tate & Lyle PLC (Great Britain) Sugar Producer & Distributor 1,330,638 7,405,943
Lotte Chilsung Beverage Company Manufacturer of Soft Drinks, Juices, &
(Korea) Sport Drinks 123,000 5,418,953
Pernod Ricard (France) Manufactures Wines, Spirits, & Fruit 80,579 5,231,654
Juices
Lotte Confectionery Company (Korea) Confection Manufacturer 65,270 4,937,298
--------------
59,105,861
HOUSEHOLD PRODUCTS--2.5%
Amway Japan Limited (Japan) Marketing of Household Products 1,630,300 $ 18,603,158
RETAIL--1.7%
Giordano International Limited (Hong East Asian Clothing Retailer &
Kong) Manufacturer 69,304,000 $ 12,970,571
OTHER CONSUMER GOODS & SERVICES--8.4%
Canon, Inc. (Japan) Office and Video Equipment 1,197,000 $ 25,570,588
Mandarin Oriental International Hotel Management
Limited (Singapore) 30,539,000 19,239,570
Sankyo Company, Ltd. (Japan) Pachinko Machine Manufacturer 1,026,800 17,166,316
--------------
61,976,474
BANKS--10.1%
Uniao de Bancos Brasileiros S.A. Major Brazilian Bank
(Brazil), (c) 1,866,900 $ 26,953,369
Banco Latinoamericano de Multinational Bank
Exportaciones, S.A., Class E
(Panama), (b) 1,525,100 25,354,787
United Overseas Bank Ltd., Foreign Commercial Banking
Shares (Singapore) 3,489,000 22,400,606
--------------
74,708,762
</TABLE>
28
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--98.0% (CONT.)
MARKETING SERVICES--10.5%
Cordiant Communications Group plc Advertising Services
(Great Britain) 21,997,578 $ 39,105,181
Saatchi & Saatchi plc (Great Britain) Advertising Services 16,857,578 38,510,001
--------------
77,615,182
BROADCASTING & PUBLISHING--6.6%
Singapore Press Holdings Ltd. Newspaper Publisher
(Singapore) 2,086,000 $ 22,110,842
Europe 1 Communication (France) Television Production 74,020 17,277,070
Schibsted ASA (Norway) Newspaper Publisher 474,200 5,991,077
Woongjin Publishing Company (Korea) Publisher 148,410 2,294,619
South China Morning Post (Holdings) Newspaper Publisher
Ltd. (Hong Kong) 2,700,000 1,385,268
--------------
49,058,876
TELECOMMUNICATIONS--3.7%
SK Telecom Co. Ltd. (Korea) Telecommunications 10,395 $ 5,815,324
Telesp Participacoes S.A. (Brazil), Telecommunications
(a) 441,100,000 5,658,404
Telesp Celular Participacoes S.A. Telecommunications
(Brazil), (a) 1,167,700,000 5,025,275
Embratel Participacoes S.A. (Brazil), Telecommunications
(a) 401,100,000 3,485,517
Tele Centro Sul Participacoes S.A. Telecommunications
(Brazil), (a) 501,100,000 3,317,719
Tele Sudeste Celular Participacoes Telecommunications
S.A. (Brazil), (a) 862,600,000 2,427,245
Telemig Celular Participacoes S.A. Telecommunications
(Brazil), (a) 1,205,300,000 847,890
Technology Resources Industries Berhad Telecommunications
(Malaysia) 1,485,000 541,492
--------------
27,118,866
</TABLE>
THE OAKMARK INTERNATIONAL FUND
29
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--98.0% (CONT.)
AEROSPACE--5.0%
Rolls-Royce plc (Great Britain) Jet Engines 5,378,552 $ 22,205,851
Hong Kong Aircraft Engineering Company Commercial Aircraft Overhaul &
Ltd. (Hong Kong) Maintenance 11,096,900 15,182,397
--------------
37,388,248
OIL & NATURAL GAS--1.1%
ISIS (France), (a) Oil Services 112,000 $ 7,992,846
CHEMICALS--6.3%
Fernz Corporation Limited (New Agricultural & Industrial Chemical
Zealand) Producer 11,446,299 $ 35,235,134
European Vinyls Corporation PVC Manufacturer
International N.V. (Netherlands) 1,212,299 9,614,763
Nagase & Co., Ltd. (Japan) Chemical Wholesaler 569,000 1,947,837
--------------
46,797,734
COMPONENTS--2.7%
Varitronix International Limited (Hong Liquid Crystal Displays
Kong) 10,758,000 $ 20,134,106
MACHINERY & METAL PROCESSING--3.6%
The Rauma Group (Finland) Pulp Machinery 1,043,343 $ 15,141,671
Outokumpu Oyj (Finland) Metal Producer 1,235,000 11,335,164
--------------
26,476,835
MINING AND BUILDING MATERIALS--1.8%
Keumkang Ltd. (Korea) Building Materials 560,460 $ 13,044,788
OTHER INDUSTRIAL GOODS & SERVICES--15.3%
Tomkins plc (Great Britain) Industrial Management Company 8,390,768 $ 39,451,526
Chargeurs SA (France) Wool Production Holding Company 535,025 29,569,438
Charter plc (Great Britain) Welding Products Manufacturer 2,706,014 14,656,265
Kone Corporation, Class B (Finland) Elevators 103,870 12,018,690
Groupe Legris Industries SA (France) European Crane Manufacturer 217,815 10,670,636
Dongah Tire Industry Company (Korea), Tire Manufacturer
(a) 166,290 6,648,835
--------------
113,015,390
</TABLE>
30
THE OAKMARK INTERNATIONAL FUND
<PAGE>
THE OAKMARK INTERNATIONAL FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--98.0% (CONT.)
STEEL--2.0%
USIMINAS (Brazil), (a) Steel Production 6,476,370 $ 14,310,939
Pohang Iron & Steel Company Ltd. Manufactures Steel Products
(Korea) 14,000 750,624
--------------
15,061,563
DIVERSIFIED CONGLOMERATES--2.7%
Tae Young Corporation (Korea) Heavy Construction 518,300 $ 12,278,928
First Pacific Company Ltd. (Hong Kong) Diversified Operations 16,448,000 7,855,026
--------------
20,133,954
TOTAL COMMON STOCKS (COST: $975,791,442) 725,294,051
SHORT TERM INVESTMENTS--0.4%
REPURCHASE AGREEMENTS--0.4%
State Street Repurchase Agreement, 4.50% due 1/4/1999 $ 3,182,000 $ 3,182,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $3,182,000) 3,182,000
TOTAL SHORT TERM INVESTMENTS (COST: $3,182,000) 3,182,000
Total Investments (Cost $978,973,442)--98.4% $ 728,476,051
Foreign Currencies (Proceeds $928,919)--0.1% 665,026
Other Assets In Excess Of Other Liabilities--1.5% (d) 11,347,697
--------------
TOTAL NET ASSETS--100% $ 740,488,774
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Represents a Global Depositary Receipt.
(d) Includes portfolio and transaction hedges.
THE OAKMARK INTERNATIONAL FUND
31
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
REPORT FROM DAVID G. HERRO AND MICHAEL J. WELSH, PORTFOLIO MANAGERS
........................................................................
[PHOTO] [PHOTO]
- --------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK
INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95)
TO PRESENT (12/31/98) AS COMPARED TO THE MORGAN STANLEY
WORLD EX U.S. INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE OAKMARK INTERNATIONAL M.S. WORLD EX
SMALL CAP FUND U.S. INDEX
<S> <C> <C>
10/95 $10,000 $10,000
1/96 $10,530 $10,747
4/96 $11,340 $11,331
7/96 $11,040 $10,858
10/96 $11,410 $11,120
1/97 $12,142 $11,062
4/97 $12,152 $11,310
7/97 $13,253 $12,933
9/97 $12,672 $12,652
12/97 $9,642 $11,677
3/98 $11,429 $13,394
6/98 $9,892 $13,499
9/98 $8,211 $11,513
12/98 $10,529 $13,868
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN*
THROUGH 12/31/98
TOTAL RETURN FROM FUND INCEPTION
12/31/98 NAV $8.62 LAST 3 MOS. 11/1/95
<S> <C> <C>
- ----------------------------------------------------------------------------
THE OAKMARK INTERNATIONAL
SMALL CAP FUND 28.2% 1.6%
Morgan Stanley World ex U.S.
w/inc.** 20.5% 10.9%
Lipper Analytical
International Small Cap Fund
Average** 12.4% 9.7%
Micropal International Small
Co. Fund Index** 13.4% 9.4%
</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 69 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 achieved a very strong return of 28.2% in the final quarter of 1998.
This compares quite favorably with the Lipper International Small Cap Average at
12.4% and with the Micropal International Small Cap index at 13.4%. Following
our tradition, this letter will discuss the top winners and losers of 1998. For
calendar year 1998, the Fund's total percentage gain for the calendar year was
9.2%. According to Lipper Analytical, your fund was the top performing
international small cap fund for the 4th quarter of 1998. Returns were driven by
a recovery in Asia-Pacific share prices. Lead by South Korea, this area appears
to be poised for recovery after a 15-month period of extremely weak equity
market conditions. Your Fund has approximately 60% of its assets in Asia Pacific
and should benefit from a continued resurgence.
A BIT ABOUT SOUTH KOREA
Throughout the crisis in Asia, your Fund tried to maintain its weightings in
South Korea. While stock prices dropped, we increased share positions while
adding one new name. We pursued this strategy because we felt strongly that
these companies were high quality, extremely over-sold and, therefore,
represented excellent value. Korean brewer, HITE, is a good example of this
excellent value. We describe this company below in greater detail. In December
1997, pundits declared Korea unfixable and called for a 5-year recovery.
However, newly elected president D.J. Kim aggressively pursued reform and
brought about dramatic
32
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
........................................................................
change. In 1998, the Korean market achieved a return of greater then 100% in
U.S. dollar terms. We would call it the return paid to independent thinkers.
FIRST THE WINNERS...
ENIX, currently the Fund's fourth largest holding, is a Japanese maker of video
games software. It is an extremely well-run, shareholder-focused company (rare
in Japan) which contributed nearly 2% of total return. As it continues to
develop new hits and its valuation remains at a reasonable level, we believe
that Enix will deliver positive returns.
SOMERFIELD PLC is a United Kingdom grocer. When we first purchased the shares it
was on everyone's sell list and had woefully underperformed its sector and the
market. One of our analysts, Dan O'Keefe, recognized the low valuations. He met
with the new management, correctly assessed their ability to turn around the
company and create a new business plan. After Dan's assessment of the company,
we decided to invest. The stock more then doubled in a year's time and actually
hit our sell target. Though we no longer own the stock, it contributed over 1.5%
of total return in 1998.
HITE BREWING is the largest South Korean brewing company. Its shares were
demolished, along with the rest of the Korean stock market during the crisis
period. However, we saw the company's strong market position, ability to
generate free cashflow, and relatively low indebtedness as reasons to buy more
company shares during the crisis. The stock returned over 90% in the 4th quarter
of 1998 and contributed close to 1.4% of total return.
MATTHEW CLARK PLC was another company unloved by the "street". Matthew Clark is
a UK-based manufacturer of alcoholic cider and boxed wine and the largest
distributor of spirits in England. We no longer own Matthew Clark shares because
it was taken over, which allowed us to profit nicely from our investment. It
provided 1.3% of total return and demonstrates that if the equity markets do not
correctly reflect the value of a business the "trade" will.
AND NOW, THE LOSERS...
ROYAL DOULTON PLC is a UK based maker of tableware and gifts. Its share price
was hit hard as it came up with disappointing earnings and announced further
restructuring. Originally a spin-off of UK "blue-chip" Pearson Plc, it had
difficulty operating as an independent company. As the share price tumbled, we
looked at it and determined that we liked the new management, the brand
franchise and the valuation. Because we were a bit early, it cost the Fund
around 2.1% in total return in 1998. However, we think this stock continues to
have a HUGE upside and are extremely happy with our existing position. We
wouldn't be at all surprised if it ends up on the winner list for '99.
EVC INTERNATIONAL is a European based PVC company. Though a commodity producer,
management seemed to be able to navigate the tough waters by continual cost
cutting. Unfortunately, the market for PVC never quite recovered and the company
has been unable to stay ahead of all of the pricing pressures with cost cuts. We
have sold a majority of the stock and it is now a minimal position of the Fund.
In 1998, it cost the Fund just 2% of return.
OPTIMISTIC FOR '99
Based on the quality and value of investments in your Fund, along with a strong
4th quarter, we are extremely optimistic for 1999 and future years in
International markets. We thank you, our shareholders, for your continued
support and patience while we pledge to work hard to achieve better than average
returns going forward.
/s/ David Herro
DAVID HERRO
Portfolio Manager
[email protected]
/s/ Michael J. Welsh
MICHAEL J. WELSH
Portfolio Manager
[email protected]
THE OAKMARK INTERNATIONAL SMALL CAP FUND
33
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
INTERNATIONAL DIVERSIFICATION--DECEMBER 31, 1998
........................................................................
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Pacific Rim 65.5%
Japan 17.2%
Hong Kong 10.2%
Korea 9.1%
New Zealand 8.1%
Australia 8.0%
Singapore 5.4%
Thailand 3.9%
Philippines 3.6%
Europe 26.7%
Great Britain 19.0%
Germany 2.8%
France 2.2%
Switzerland 1.7%
Netherlands 0.6%
Poland 0.4%
Latin America 4.2%
Brazil 4.2%
Other 1.3%
Canada 1.3%
</TABLE>
34
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED)
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--97.7%
CONSUMER NON-DURABLES--6.5%
Royal Doulton plc (Great Britain) Tableware and Giftware 1,780,000 $ 2,336,269
TAG Heuer International SA Watch Manufacturer
(Switzerland), (b) 154,700 1,102,237
Designer Textiles (NZ) Limited (New Knit Fabrics
Zealand) 2,960,000 700,905
Dickson Concepts International Limited Jewlery Wholesaler and Retailer
(Hong Kong) 20,000 15,489
--------------
4,154,900
FOOD & BEVERAGE--6.2%
Alaska Milk Corporation (Philippines), Milk Producer
(a) 39,327,000 $ 2,305,027
Hite Brewery Company (Korea) Brewer 165,010 1,673,418
--------------
3,978,445
RETAIL--15.3%
Carpetright plc (Great Britain) Carpet Retailer 720,000 $ 2,679,515
Daimon (Japan) Liquor Retailer & Distributor 435,200 1,770,827
D.F.S. Furniture Company plc (Great Furniture Retailer & Manufacturer
Britain) 470,000 1,471,922
House Of Fraser Plc (Great Britain) Department Store 1,440,000 1,244,061
Dylex Limited (Canada) Specialty Retail Operator 275,000 827,609
Giordano International Limited (Hong East Asian Clothing Retailer &
Kong) Manufacturer 4,312,000 807,011
Paris Miki Inc. (Japan) Optical Supplies Retailer 27,000 620,964
Jusco Stores (Hong Kong) Co., Limited Department Stores
(Hong Kong) 4,802,000 402,873
--------------
9,824,782
OTHER CONSUMER GOODS & SERVICES--7.1%
CeWe Color Holding AG (Germany) Photo Equipment & Supplies 10,150 $ 1,796,622
Sanford Limited (New Zealand) Fisheries 919,840 1,742,488
CDL Hotels International Limited (Hong Hotel Operator
Kong) 4,096,691 1,052,250
--------------
4,591,360
BANKS--0.6%
Shinhan Bank (Korea) Commercial Bank 52,540 $ 401,802
</TABLE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
35
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
DESCRIPTION SHARES HELD MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--97.7% (CONT.)
OTHER FINANCIAL--11.1%
JCG Holdings Ltd. (Hong Kong) Investment Holding Company 9,461,000 $ 3,052,881
Ichiyoshi Securities (Japan) Stock Broker 1,607,000 2,146,457
Lambert Fenchurch Group plc (Great Insurance Broker
Britain) 1,451,000 1,928,560
--------------
7,127,898
COMPUTER SOFTWARE--7.1%
Enix Corporation (Japan) Entertainment Software 93,100 $ 3,038,824
Koei (Japan) Computer Software 211,000 1,511,809
--------------
4,550,633
COMPUTER SYSTEMS--4.9%
Solution 6 Holdings Limited Systems Design & Consulting
(Australia), (a) 4,150,893 $ 3,179,494
MARKETING SERVICES--4.0%
Cordiant Communications Group plc Advertising Services
(Great Britain) 1,428,500 $ 2,539,450
BROADCASTING & PUBLISHING--6.4%
Matichon Public Company Limited, Newspaper Publisher
Foreign Shares (Thailand) 2,038,900 $ 2,524,085
Woongjin Publishing Company (Korea) Publisher 102,796 1,589,365
Matichon Public Company Limited Newspaper Publisher
(Thailand) 600 743
--------------
4,114,193
TELECOMMUNICATIONS--0.7%
SK Telecom Co. Ltd. (Korea) Telecommunications 803 $ 449,226
CHEMICALS--0.6%
European Vinyls Corporation PVC Manufacturer
International N.V. (Netherlands) 49,125 $ 389,611
MACHINERY & METAL PROCESSING--1.5%
Denyo Co., Ltd. (Japan) Welding Machines & Power Generators 184,000 $ 992,835
MINING AND BUILDING MATERIALS--3.0%
Parbury Limited (Australia) Building Products 11,369,712 $ 1,950,805
</TABLE>
36
THE OAKMARK INTERNATIONAL SMALL CAP FUND
<PAGE>
THE OAKMARK INTERNATIONAL SMALL CAP FUND
- --------------------------------------------------------------
SCHEDULE OF INVESTMENTS--DECEMBER 31, 1998 (UNAUDITED) CONT.
........................................................................
<TABLE>
<CAPTION>
SHARES HELD/
DESCRIPTION PRINCIPAL VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS--97.7% (CONT.)
OTHER INDUSTRIAL GOODS & SERVICES--10.8%
Elevadores Atlas, SA (Brazil) Elevator Manufacturer 253,200 $ 2,724,158
Dongah Tire Industry Company (Korea), Tire Manufacturer
(a) 43,900 1,755,270
Yip's Hang Cheung Ltd. (Hong Kong) Paint & Solvent Manufacturer 28,502,000 1,250,797
Nishio Rent All Company (Japan) Construction Equipment Rental 147,700 999,474
Polifarb Cieszyn- Wroclaw S.A. Paint & Varnish Manufacturer
(Poland) 100,000 237,892
--------------
6,967,591
PRODUCTION EQUIPMENT--2.2%
NSC Groupe (France) Manufacturer of Textile Equipment 11,532 $ 1,423,194
STEEL--4.3%
Steel & Tube Holdings Ltd. (New Produces and Distributes Steel
Zealand) 2,944,400 $ 2,788,845
DIVERSIFIED CONGLOMERATES--5.4%
Haw Par Corporation Ltd. (Singapore) Healthcare and Leisure Products 3,113,000 $ 3,488,219
TOTAL COMMON STOCKS (COST: $75,745,144) 62,913,283
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
SHORT TERM INVESTMENTS--2.2%
REPURCHASE AGREEMENTS--2.2%
State Street Repurchase Agreement,
4.50% due 1/4/1999 $1,415,000 $ 1,415,000
--------------
TOTAL REPURCHASE AGREEMENTS (COST: $1,415,000) 1,415,000
TOTAL SHORT TERM INVESTMENTS (COST: $1,415,000) 1,415,000
Total Investments (Cost $77,160,144)--99.9% $ 64,328,283
Foreign Currencies (Proceeds $75,720)--0.1% 75,412
Other Assets In Excess Of Other Liabilities--0.0% (c) 19,111
--------------
TOTAL NET ASSETS--100% $ 64,422,806
--------------
--------------
</TABLE>
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) Includes portfolio and transaction hedges.
THE OAKMARK INTERNATIONAL SMALL CAP FUND
37
<PAGE>
[LOGO]
38
THE OAKMARK FAMILY OF FUNDS
<PAGE>
[LOGO]
THE OAKMARK FAMILY OF FUNDS
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)
or 617-328-5000
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>
[LOGO]
P.O. BOX 8510
BOSTON, MA 02266-8510
