Dear Fellow Shareholders,
World markets continued their remarkable rebound in the third quarter. From its lows in early March, the S&P 500 Index has now risen by almost 60%, and international markets have rebounded even more strongly. For the quarter, all of our equity Funds once again produced returns that exceeded the market averages. Importantly, for The Oakmark Funds’ fiscal year ended 9/30/09, all of our Funds had positive returns—in sharp contrast to losses in most of the broader market indexes.
Perspective
The wild up and down ride in the stock markets over the past two years is only one of many extreme swings to hit the world during this period. The economy, credit markets, home prices and government deficits have all seen historic shifts. After so many dramatic changes, many investors and Fund shareholders no doubt wonder if they shouldn’t be reassessing their exposure to equities. At such times, we suggest that it is best to focus on fundamentals—the economy and equity valuations—in the context of a long-term strategy.
Economic signposts in our view have become increasingly positive over the past quarter. Global financial markets still face substantial risks, and some sectors continue to slide. However, fundamental economic data suggest to us that the massive worldwide stimulus efforts are fostering recovery, and we believe that the current programs intended to stabilize financial institutions should also help markets heal.
Although some might conclude that the recent market rebound has left equities fairly valued, we still find overall stock market valuation to be attractive when one considers long-term earnings power. This is confirmed at the micro level, as the average stock in our portfolios still sells at a larger than typical discount to value. Of course, it is impossible to predict the market’s short-term direction, but we believe that buying equities (or equity mutual funds) when they sell at discounted values will lead to superior long-term returns.
2009 Capital Gains Distributions
We try to minimize the taxes that Oakmark shareholders pay in order to maximize their after-tax returns. As Bill Nygren describes in his quarterly commentary, our portfolio managers pay close attention to taxable capital gains and losses, and they try to minimize any required tax distributions. Although last year’s volatile market made Fund management more challenging, it also provided us with expanded opportunities to manage taxes. We are pleased to report that we do not expect to make capital gains distributions for any of our Funds this year. In fact, all of our Funds should end the year with a capital loss carry-forward that helps shelter future gains. We will, of course, pay income distributions (on interest and dividend income) for each of the Funds in mid-December and will post estimates on Oakmark.com in advance of these Fund payouts.
Quarterly Report Mailings
At Oakmark, we believe that thoughtful, timely and frequent communication with our shareholders is important. Our quarterly reports are probably our most important vehicle for this communication. We emphasize these communications because of our conviction that an informed shareholder is able to achieve better long-term investment results. We also believe in watching Fund expenses closely. With this in mind, beginning with our FY 2010 First Quarter Report (quarter ended 12/31), we will no longer print our first and third quarter reports and will only post them on-line. Doing so will provide meaningful savings in shareholder operating expenses and also save more than a few trees! If you wish to receive an e-mail each quarter letting you know when the quarterly reports are available, please sign up for e-mail updates located in the top right corner of this page. This service will give you faster access to our managers’ perspective on the most recent quarter’s events. We hope that you find this change to be a convenient way to stay informed about Fund performance and the investment marketplace. We will continue to provide printed copies of our second quarter (Semi-Annual) reports and fourth quarter (Annual) reports to all shareholders, as regulations require.
We are extremely grateful for our shareholders’ continued loyalty and confidence through these remarkably difficult times. We thank you for your patience and support, and we will continue to work hard to keep your trust. As always, we welcome your comments and questions. You can reach us via e-mail at: ContactOakmark@oakmark.com.
John R. Raitt
President and CEO of The Oakmark Funds
President and CEO of Harris Associates L.P.
The performance data quoted represents past performance. The above performance information for the Funds does not reflect the imposition of a 2% redemption fee on shares of all Funds, other than The Oakmark Equity & Income Fund, held for 90 days or less. If reflected, the fee would reduce the performance quoted. Past performance does not guarantee future results. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain most recent month-end performance data, view it here.
The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors cannot actually make investments in this index.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
The discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds' investment adviser, at the time of this letter, and are subject to change without notice.
