We are pleased to present the combined annual reports for the Oakmark Family of Funds. The current report contains the fiscal 1995 information for the Oakmark and Oakmark International Funds. Subsequent annual reports will include the newly launched Oakmark Small Cap, Balanced and International Emerging Value Funds. These new Funds were available November 1, 1995.
For the fourth quarter ended October 31, 1995 and the year as a whole, the U.S. stock market was the place to be. Oakmark Fund's returns continued to be robust, up 4.9%* in the quarter, even without participation in the technology sector. In contrast, the money flows out of foreign stocks created a challenging environment in which the Oakmark International Fund lost (5.5)%*. This decline has created some of the most compelling values we have witnessed and the performance of Oakmark International in the month following the quarter-end has us cautiously optimistic (up 3.2% from 10/31/95 to 11/29/95).
'Tis the season for holiday cheer and investment decisions! For those of you thinking about your 1995 IRA contributions, remember these contributions can be made until April 15, 1996.
From all of us at The Oakmark Family of Funds, we wish you a happy, healthy and prosperous new year!
| Sincerely, |
|
| Victor A. Morgenstern President |
*The Oakmark Fund's average annual total return for the twelve months ended September 30, 1995 and for the period August 5, 1991 (inception) through September 30, 1995 was 23.2% and 33.1% respectively. The Oakmark International Fund's average annual total return for the twelve months ended September 30, 1995 and for the period September 30, 1992 (inception) through September 30, 1995 was 1.5% and 15.8% respectively. The Funds' past performance is no guarantee of future results. Share prices and investment returns will vary, so you may have a gain or loss when you sell shares.
| |
3 mo. |
6 mo. |
1 Year |
3 Years |
Since Inception |
| The Oakmark Fund | 4.9 % |
12.3% |
21.55 % |
23.70% |
32.00%(1) |
| The Oakmark International Fund | (5.5)% |
1.8% |
(3.06)% |
14.40% |
13.20%(2) |
(1) Inception Date was August 5, 1991
(2) Inception Date was September 30, 1992
| Company |
% of Total Net Assets |
Phillip Morris Companies, Inc. |
6.30% |
Mellon Bank Corporation |
6.04% |
Lockheed Martin Corporation |
5.67% |
First USA, Inc. |
4.30% |
Anheuser-Busch Companies, Inc. |
3.90% |
| Industry |
% of Fund |
Food & Beverage |
16.10% |
Other Consumer Goods & Services |
11.30% |
Broadcasting & Publishing |
9.40% |
Other Financial |
8.80% |
Aerospace & Defense |
8.20% |
| Company |
% of Total Net Assets |
Lion Nathan Limited (New Zealand) |
5.00% |
Kvaerner (Norway) |
4.62% |
AB Volvo (Sweden) |
4.24% |
YPF Sociedad Anonima (Argentina) |
3.61% |
Cordiant PLC (Great Britain) |
3.59% |
| Industry |
% of Fund |
Banks |
13.70% |
Other Industrial Goods & Services |
9.40% |
Food |
7.50% |
Aerospace |
7.40% |
Transportation |
5.80% |
Past performance is no guarantee of future performance.
The value of a $10,000 investment in the Oakmark Fund from its inception (8/5/91) to present (10/31/95) as compared to the Standard & Poor's 500 Index.
10/31/95 NAV $28.47
| Average Annual
Total Return* Through 10/31/95 |
||||
| Total Return* Last 3 mos. |
Total Return* Last 6 mos. |
From 10/31/94 |
From Fund Inception 8/5/91 |
|
| THE OAKMARK FUND | 4.9% |
12.3% |
21.6% |
32.0% |
| Standard & Poor's 500 Stock Index* | 4.1% |
14.4% |
26.3% |
13.2% |
| Dow-Jones Industrial Average* | 1.6% |
11.4% |
24.8% |
14.4% |
| Value Line Composite Index* | (1.8)% |
6.6% |
10.1% |
6.6% |
*Total return includes change in share prices and in each case included reinvestment of any dividends and capital gain distributions. Each of the three indexes or averages is an unmanaged group of stocks whose composition is different from the Fund. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. The Dow-Jones Average includes only 30 big companies. The Value Line index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future performance.
Report from Robert J. Sanborn, Portfolio Manager
Dear Fellow Shareholders:
The Oakmark Fund's fiscal year ended October 31, 1995 was a good one. The most significant macroeconomic factor in the strong performance of equities was the dramatic decline in long-term interest rates, driven by continued low levels of inflation. This is confirmed by the price action of the planet's two most important commodities—gold and oil—both of which declined in price over the year.
While our Fund generated large absolute returns, its performance lagged behind that of the Standard and Poor's 500. (As Dickens wrote, ''It was the best of times, it was the worst of times.'') This relative underperformance is due to our Fund's lack of high technology holdings. These sectors were among the best-performing in the market during the past year; software, semiconductor, and biotechnology stocks were up an average of fifty-five (!) percent in the past twelve months. As I indicated in my letter last quarter, these stocks do not meet our investment criteria.
The companies in our portfolio generally experienced very good business results in the past year. Of our top twenty holdings of a year ago, only one had results that were significantly less than our expectations. Despite the strong performance of our Fund, lower interest rates and the growth in underlying value of our holdings lead me to conclude that the value in our Fund is as good today as it was a year ago. As I have written before, we spend our time monitoring and analyzing the businesses of which all of us are part owners, not in trying to anticipate stock price changes.
Two large sectors—consumer brands and financial services—constitute almost half of our Fund's value. Our larger consumer brand stocks—Philip Morris, Knight Ridder, Anheuser-Busch, Black & Decker, American Brands, Heinz—are all very high-quality, high-return, high-barrier-to-entry businesses with dominant market positions, very loyal end-users, and (to varying degrees) tremendous international opportunities. These companies are prime beneficiaries of the unfolding globalization of the economy. Yet, the market continues to place valuations on them that do not sufficiently differentiate them from more average companies in more competitive businesses.
Our large financial services holdings—First USA, Mellon, Torchmark, and AMBAC—have strong niche businesses and benefit from the ongoing consolidation of the financial services industry. We believe that this consolidation is a win/win proposition for the buyers and sellers (a dynamic we have experienced in our defense industry investments). Yet, they each sell at modest valuations at steep discounts to their underlying value.
We continue to frame, and will always frame, the investment process as buying an ownership piece of a business for the long term, not as buying merely a piece of paper for the short term. We sold only one of our ten largest holdings of a year ago. Eli Lilly reached our estimate of value and we sold the stock. Trading is expensive—there are commissions, price impacts, and capital gains taxes—and we attempt to minimize our trading activity. Our Fund's turnover is one-seventh that of the typical equity fund. I believe that the largest edge we have is our long-term investment time-frame.
What's ahead for 1996? While we do not base any of our investment decisions on predicting macroeconomic variables, let me cite two that are positive for the equity market. The first is the all-time high level of merger and acquisition activity. Many public companies continue to be acquired at substantial premium to public market prices. The globalization of the economy and the efficacy of technology within companies will continue to drive this process. The second factor is the political revolution that is in its early stages in the USA. There is broad consensus that our federal government is too big, too inefficient, and too expensive. The inevitable downsizing of the government—more than 40 percent of our GDP is spent by local, state, and federal governments!—should result in lower interest rates in the medium term (which will have a positive impact on equity valuations). In the long term, a rationalization of our tax system, perhaps in the form of a flat tax regime, will unleash the tremendous potential of our economy. This process will have a very significant impact on all aspects of our economy.
I believe that we at Harris Associates have a time-tested investment philosophy, great people, and a nonbureaucratic culture. These attributes should allow us to continue to add value. We remain focused on generating results that will continue to allow you (and us!!) to realize your financial goals.
On a personal note, I cannot believe we are in our fifth year. On behalf of everyone at Harris Associates, I thank you for your support. Managing your hard-earned money remains a great challenge and a great honor.
A Primer on Goodwill
As I write this, we are in the midst of the season of goodwill to all people. Yet, in the financial world, goodwill has a far different meaning. Goodwill usually results when a company acquires another company at a price greater than the acquiree's book value. Book value is a balance sheet item that represents the retained book earnings of a company. It has little relation to the true economic value of a company and, therefore is a number we ignore.
Goodwill affects the income statement through the accounting process of amortization. Amortization refers to the gradual write-downs of the goodwill, generally over forty years. The word amortization itself is derived from the Latin word for death, and means to ''kill off the goodwill.'' This amortization reduces reported earnings for the entire time period. However, it is important to recognize that it is a non-cash reduction in earnings that has no effect on the intrinsic value of a company.
Let me give an example from one of our holdings, Philip Morris (MO). As of 12/30/94, MO had goodwill totalling $19.7 billion, which represented over 37 percent of its total book assets. Most of this was incurred through its purchase of Kraft in 1988. This goodwill resulted in the amortization of $600 million in the year 1994, which reduced reported earnings per share (EPS) by $0.58 (compared to total net EPS of $5.45). Yet, MO can use this $600 million to make an acquisition, repurchase its own shares, or do any number of things to grow shareholder value.
A patient shareholder is probably by now muttering. ''What's with this goodwill, why is he boring me with this stuff?'' Well, seven of our ten largest holdings have meaningful amounts of goodwill that reduce reported EPS. In our view, the market tends to ignore the economic value of the goodwill. For instance, a leading Wall Street brokerage firm recently issued a report on MO that concludes that MO should sell at its historical relative P/E ratio of 75 percent of the market. This, of course, ignores the fact that MO's earnings are artificially reduced by the amortization charge.
We evaluate our investments, and all potential investments, as if we were buying the entire business. Thus, we tend to regard some financial parameters (i.e., cash flow) more highly than others regarded more highly by the investment community (i.e., reported EPS). Since we firmly believe that market price and value ultimately converge, our approach is intellectually coherent and, we believe, gives us an edge.
Billy Johnson Update
An E-mailing shareholder from California writes, ''Who the heck is Billy ''White Shoes'' Johnson?'' Well, he was a wide receiver for the Houston Oilers and was an early pioneer of in-your-face touchdown celebrations. Some of you may remember my allusion to Johnson in last quarter's letter. I wrote that, when my prediction on the likely under-performance of high technology stocks comes to fruition, I will do some similar in-your-face crowing.
Well, as I write this on November 28, Netscape (NSCP) is trading at $138, up more than 75 percent from just last quarter. So, Billy is bruised, but he knows that we are early in the first quarter, and all that matters is who wins the game.
I had the pleasure of making a presentation recently with a very nice guy who manages a pure technology hedge fund. His fund was up over 80 percent this year. He gave very compelling background on the growth of the Internet and how useful technology is, and so forth. Then, some curmudgeon in the crowd, (perhaps a shareholder of The Oakmark Fund), broke the balloon, and asked about the ''ridiculous'' valuations of these stocks. The manager's sole justification was that technology currently represents ''only'' thirteen percent of the value of the Standard & Poor's 500, and he saw no reason why it could not get as high as thirty percent. After all, the energy sector got that high in 1980.
Shareholders, that is not an intellectually coherent investment approach. If that is the best reason to own technology stocks, Billy will be celebrating soon.
Oak Leaf Cluster
We award the Oak Leaf Cluster to that individual whose input into our Fund had the greatest positive impact on performance. This year the coveted honor goes to our very own John Raitt for his work on the defense stocks. Since these stocks go back to the early days of the Fund, it represents sort of a Lifetime Achievement Award. Lockheed Martin has more than doubled from our cost and McDonnell Douglas has appreciated more than 67 percent. Congratulations, John! On behalf of all shareholders, we like you, we like you!
Robert J. Sanborn
Portfolio Manager
harjs @aol.com
November 28, 1995
| Shares Held |
Common Stocks |
Market Value |
| COMMON STOCKS—93.1% | ||
| FOOD & BEVERAGE—16.1% | ||
| 2,106,500 | Philip Morris Companies Inc. | $ 177,999,250 |
| 1,669,100 | Anheuser-Busch Companies, Inc. | 110,160,600 |
| 1,619,100 | H.J. Heinz Company | 75,288,150 |
| 1,420,800 | Nabisco Holdings Corp. | 38,184,000 |
| 1,571,900 | Interstate Bakeries | 33,599,362 |
| 430,000 | The Quaker Oats Company | 14,673,750 |
| 200,000 | International Dairy Queen, Inc. (a) | 4,250,000 |
454,155,112 |
||
| APPAREL—.3% | ||
388,500 |
K-Swiss Inc. | 4,419,188 |
620,600 |
J. Baker Inc. | 3,568,450 |
7,987,638 |
||
| RETAIL—4.4% | ||
2,920,000 |
Federated Department Stores, Inc. (a) | 74,095,000 |
1,600,000 |
Zale Corporation (a) | 23,600,000 |
1,000,000 |
Carson Pirie Scott & Co. (a) | 16,875,000 |
600,000 |
Cole National Corporation (a) | 7,350,000 |
777,500 |
Best Products Co., Inc. (a) | 3,838,906 |
53,800 |
Rex Stores Corporation (a) | 914,600 |
126,673,506 |
||
OTHER CONSUMER GOODS & SERVICES—11.3% |
||
1,982,800 |
American Brands, Inc. | 85,012,550 |
2,437,900 |
The Black & Decker Corporation | 82,583,861 |
477,700 |
The Clorox Company | 34,274,975 |
957,500 |
Whitman Corporation | 20,346,875 |
440,200 |
First Brands Corporation | 20,139,150 |
583,800 |
GC Companies, Inc. (a) | 18,827,550 |
400,000 |
Stanhome Inc. | 12,200,000 |
750,000 |
Arctco Inc. | 8,437,500 |
575,000 |
JUNO Lighting Inc. | 8,337,500 |
601,500 |
Justin Industries, Inc. | 6,015,000 |
281,500 |
Rollins, Inc. | 5,911,500 |
395,000 |
Mikasa, Inc. (a) | 5,135,000 |
257,600 |
Paragon Trade Brands, Inc. (a) | 4,089,400 |
100,000 |
Alberto-Culver Company | 2,700,000 |
225,525 |
Rauch Industries, Inc. | 2,227,059 |
51,500 |
Polaroid | 2,201,625 |
107,000 |
Armor All | 1,765,500 |
304,000 |
Drypers Corporation (a) | 798,000 |
321,003,045 |
||
OIL—.4% |
||
270,000 |
Murphy Oil Corporation | 10,226,250 |
BANKS—6.1% |
||
3,406,550 |
Mellon Bank Corporation | 170,753,319 |
340,000 |
River Bank America (a) | 2,465,000 |
173,218,319 |
||
INSURANCE—6.5% |
||
2,496,400 |
Torchmark Corporation | 103,600,600 |
984,700 |
American Financial Group, Inc. | 27,571,600 |
928,200 |
Old Republic International | 26,569,725 |
501,300 |
Acordia, Inc. | 13,785,750 |
331,930 |
MAIC Holdings, Inc. (a) | 10,123,865 |
85,000 |
Meridian Insurance Group | 1,168,750 |
182,820,290 |
||
OTHER FINANCIAL—8.8% |
||
2,640,500 |
First USA, Inc. | 121,463,000 |
2,194,900 |
AMBAC Inc. | 92,460,163 |
620,000 |
Capital One Financial Corporation | 15,190,000 |
204,400 |
Fund American Enterprises Holdings, Inc. (a) | 14,103,600 |
330,000 |
Duff & Phelps Corporation | 3,588,750 |
102,200 |
White River Corporation (a) | 3,551,450 |
250,356,963 |
||
BROADCASTING & PUBLISHING—9.4% |
||
6,329,179 |
Tele-Communications, Inc. Class A (a) | 107,596,043 |
1,715,400 |
Knight-Ridder, Inc. | 95,204,700 |
1,432,294 |
TCI Communications, Inc. (a) | 35,270,240 |
400,000 |
Gannett | 21,750,000 |
500,000 |
Adelphia Communications Corp. (a) | 4,375,000 |
200,000 |
Jones Intercable, Inc. (a) | 2,500,000 |
266,695,983 |
||
COMPUTER SYSTEMS—.5% |
||
1,014,000 |
Control Data Systems, Inc. (a) | 13,435,500 |
210,000 |
InaCom Corporation (a) | 2,100,000 |
15,535,500 |
||
| PHARMACEUTICAL—3.1% | ||
975,000 |
American Home Products Corporation | 86,409,375 |
| MANAGED CARE SERVICES—3.4% | ||
1,740,000 |
Foundation Health Corporation (a) | 73,732,500 |
420,000 |
Physicians Health Services, Inc. (a) | 13,965,000 |
500,000 |
Laboratory Corporation of America Holdings | 4,250,000 |
270,000 |
Right CHOICE Managed Care, Inc. (a) | 3,442,500 |
95,390,000 |
||
MEDICAL PRODUCTS—2.4% |
||
648,900 |
Sybron Corporation (a) | 27,578,250 |
502,000 |
St. Jude Medical, Inc. (a) | 26,731,500 |
550,000 |
Spacelabs Medical, Inc. (a) | 14,162,500 |
68,472,250 |
||
AEROSPACE & DEFENSE—8.2% |
||
2,351,750 |
Lockheed Martin Corporation | 160,212,969 |
610,000 |
McDonnell Douglas Corporation | 49,867,500 |
779,600 |
Logicon, Inc. | 17,833,350 |
54,200 |
Alliant Techsystems, Inc. (a) | 2,520,300 |
230,434,119 |
||
FURNITURE & TEXTILES—0% |
||
363,000 |
Forstmann & Company, Inc. (a) | 113,438 |
MACHINERY AND METAL PROCESSING—.1% |
||
237,500 |
Encore Wire Corporation (a) | 2,493,750 |
OTHER INDUSTRIAL GOODS & SERVICES—4.6% |
||
1,699,700 |
The Geon Company | 42,280,038 |
508,000 |
Great Lakes Chemical Corporation | 34,099,500 |
550,000 |
OM Group, Inc. | 15,950,000 |
191,200 |
Bandag, Incorporated Class A | 9,536,100 |
554,200 |
SPX Corporation | 8,590,100 |
190,000 |
USG Corp. (a) | 5,533,750 |
170,000 |
UCAR International Inc. (a) | 4,845,000 |
175,000 |
American Home Star Corporation (a) | 2,800,000 |
182,600 |
Amtrol Inc. | 2,784,650 |
60,200 |
Exide | 2,641,275 |
50,000 |
Griffon Corporation (a) | 418,750 |
71,300 |
Detrex Corporation (a) | 409,975 |
129,889,138 |
||
COMMERCIAL REAL ESTATE—1.0% |
||
1,957,200 |
Host Marriott Corporation (a) | 24,220,350 |
585,700 |
Catellus Development Corporation (a) | 3,221,350 |
27,441,700 |
||
FOREIGN SECURITIES—6.5% |
||
2,650,000 |
DeBeers Consolidated Mines Limited ADR (b) | 72,875,000 |
3,276,500 |
YPF Sociedad Anonima (b) | 56,110,062 |
888,200 |
Telefonos de Mexico, S.A. de C.V. (b) | 24,425,500 |
547,700 |
EVC International NV | 17,182,881 |
697,500 |
Scitex Corporation Limited | 12,119,063 |
182,712,506 |
||
| TOTAL COMMON STOCKS (Cost: $2,133,912,975) | 2,632,028,882 |
|
COMMERCIAL PAPER—7.1% |
||
| American Express Credit Corp., 5.70% due 11/22/95 | 6,000,000 |
|
| American Express Credit Corp., 5.70% due 11/24/95 | 5,000,000 |
|
| American Express Credit Corp., 5.70% due 11/30/95 | 8,000,000 |
|
| American Express Credit Corp., 5.70% due 12/13/95 | 5,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/01/95 | 5,000,000 |
|
| Ford Motor Credit Corp., 5.71% due 11/01/95 | 4,000,000 |
|
| Ford Motor Credit Corp., 5.76% due 11/02/95 | 6,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/03/95 | 8,000,000 |
|
| Ford Motor Credit Corp., 5.69% due 11/13/95 | 9,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/17/95 | 5,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/20/95 | 6,000,000 |
|
| Ford Motor Credit Corp., 5.69% due 11/21/95 | 2,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/27/95 | 10,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/28/95 | 4,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 11/29/95 | 4,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/01/95 | 7,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/04/95 | 7,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/05/95 | 10,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/06/95 | 3,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/07/95 | 6,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/08/95 | 6,000,000 |
|
| Ford Motor Credit Corp., 5.70% due 12/11/95 | 6,000,000 |
|
| Ford Motor Credit Corp., 5.71% due 12/12/95 | 4,000,000 |
|
| General Electric Capital Corp., 5.68% due 11/02/95 | 7,000,000 |
|
| General Electric Capital Corp., 5.65% due 11/06/95 | 5,000,000 |
|
| General Electric Capital Corp., 5.67% due 11/07/95 | 7,000,000 |
|
| General Electric Capital Corp., 5.67% due 11/08/95 | 9,000,000 |
|
| General Electric Capital Corp., 5.67% due 11/09/95 | 6,000,000 |
|
| General Electric Capital Corp., 5.67% due 11/10/95 | 10,000,000 |
|
| General Electric Capital Corp., 5.70% due 11/14/95 | 7,000,000 |
|
| General Electric Capital Corp., 5.70% due 11/15/95 | 6,000,000 |
|
| General Electric Capital Corp., 5.71% due 11/16/95 | 4,000,000 |
|
| General Electric Capital Corp., 5.70% due 12/13/95 | 4,000,000 |
|
| TOTAL COMMERCIAL PAPER (Cost: $201,000,000) | 201,000,000 |
|
| Total Investments—100.2% (Cost: $2,334,912,975) | 2,833,028,882 |
|
| Other liabilities, less other assets (.2)% | (5,959,863) | |
| TOTAL NET ASSETS—100% | $ 2,827,069,019 |
|
Notes:
(a) Non-income producing security.
(b) Represents an American Depositary Receipt.
(c) At October 31, 1995, net unrealized appreciation of $498,115,907 for federal income
tax purposes consisted of gross unrealized appreciation of $553,289,304 and gross
unrealized depreciation of $55,173,397. Cost for federal income tax purposes was
$2,334,912,975.
See accompanying notes to financial statements.
| Assets | ||
| Investments, at value (cost: $2,334,912,975) | $ 2,833,028,882 |
|
| Cash | 545,778 |
|
| Receivable for: | ||
| Securities Sold | 4,853,140 |
|
| Fund Shares Sold | 5,749,257 |
|
| Dividends and Interest | 4,713,433 |
15,315,830 |
| Other Assets | 28,583 |
|
2,848,919,073 |
||
| Liabilities and Net Assets | ||
| Payable for: | ||
| Securities Purchased | 18,076,273 |
|
| Fund shares redeemed | 900,361 |
|
| Due to Adviser | 2,377,099 |
|
| Other | 496,321 |
|
| Total liabilities | 21,850,054 |
|
| Net assets applicable to Fund shares outstanding | $ 2,827,069,019 |
|
| Fund Shares Outstanding | 99,284,171 |
|
| Pricing of Shares | ||
| Net asset value per share | $28.47 | |
| Analysis of Net Assets | ||
| Paid in Capital | $ 2,218,201,560 | |
| Accumulated undistributed net realized gain on sale of investments and foreign currency transactions | 87,367,855 | |
| Net unrealized appreciation of investments | 498,115,907 | |
| Accumulated undistributed net investment income | 23,383,697 | |
| Net assets applicable to Fund shares outstanding | $ 2,827,069,019 |
|
See accompanying notes to financial statements.
| Year Ended October 31, 1995 |
|
| Investment Income: | |
| Dividends (net of withholding of $354,146) | $ 42,140,243 |
| Interest | 10,886,088 |
| Total investment income | 53,026,331 |
| Expenses: | |
| Investment advisory fee | 21,215,738 |
| Transfer and dividend disbursing agent fees and expenses | 3,144,790 |
| Custodian and accounting fees and expenses | 268,307 |
| Legal fees and expenses | 70,564 |
| Audit fees and expenses | 27,850 |
| Trustees fees and expenses | 29,837 |
| Registration and blue sky expenses | 165,178 |
| Reports to shareholders | 334,371 |
| Amortization of organization cost | 34,675 |
| Other—net | 162,098 |
| Total expenses | 25,453,408 |
| Net investment income | 27,572,923 |
| Net realized and unrealized gain on investments | |
| Net realized gain on sale of investments | 87,157,237 |
| Net realized gain (loss) on foreign currency transactions | (37,102) |
| Net change in unrealized appreciation | 320,305,458 |
| Net realized and unrealized gain on investments | 407,425,593 |
| Net increase in net assets resulting from operations | $434,998,516 |
See accompanying notes to financial statements.
| |
Year Ended October 31, 1995 |
Year Ended October 31, 1994 |
| From Operations: | ||
| Net investment income | $ 27,572,923 |
$ 16,288,352 |
| Net realized gain on sale of investments | 87,157,237 |
96,029,651 |
| Net realized gain (loss) on foreign currency transactions | (37,102) |
— |
| Net change in unrealized appreciation | 320,305,458 |
386,607 |
| Net increase in net assets from operations | 434,998,516 |
112,704,610 |
| Distributions to shareholders from: | ||
| Net investment income (per share $.231 in Fiscal Year 1995 and $.23 in Fiscal Year 1994) | (15,107,181) |
(10,879,838) |
| Net realized short-term gain (per share $.7277 in Fiscal Year 1995 and $.41 in Fiscal Year 1994) | (47,575,398) |
(19,428,508) |
| Net realized long-term gain (per share $.7411 in Fiscal Year 1995 and $.36 in Fiscal Year 1994) | (48,452,482) |
(17,059,178) |
(111,135,061) |
(47,367,524) |
|
| From Fund share transactions: | ||
| Reinvestment of dividends and capital gains distributions | 106,504,973 |
45,046,719 |
| Proceeds from shares sold | 1,384,343,262 |
1,168,751,822 |
| Payments for shares redeemed | (664,894,744) |
(708,888,845) |
| Net increase in net assets from Fund share transactions | 825,953,491 |
504,909,696 |
| Total increase in net assets | 1,149,816,946 |
570,246,782 |
| Net assets: | ||
| Beginning of period | 1,677,252,073 |
1,107,005,291 |
| End of period (including undistributed net investment income of $23,383,697 and $10,917,955, respectively) | $ 2,827,069,019 |
$ 1,677,252,073 |
See accompanying notes to financial statements.
1. Significant Accounting Policies
The following are the significant accounting policies of The Oakmark Fund (''the Fund''), a series of the Harris Associates Investment Trust (a Massachusetts business trust).
Security valuation—
Investments are stated at current value. Securities traded on securities exchanges and securities traded on the NASDAQ National Market are valued at the last sales price on the day of valuation, or if lacking any reported sales that day, at the most recent bid quotation. Over-the-counter securities not so traded are valued at the most recent bid quotation. Money market instruments having a maturity of 60 days or less from the date of valuation are valued on an amortized cost basis which approximates market value. Securities for which quotations are not readily available are valued at a fair value as determined by the Trustees.
Security transactions and investment income—
Security transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. Interest income and expenses are recorded on the accrual basis.
Fund shares are sold and redeemed on a continuing basis at net asset value. Net asset value per share is determined daily as of the closing of regular trading on the New York Stock Exchange on each day the Exchange is open for trading by dividing the total value of the Fund's investments and other assets, less liabilities, by the number of Fund shares outstanding.
Federal income taxes, dividends and distributions to shareholders—
No provision is made for Federal income taxes since the Fund elects to be taxed as a ''regulated investment company'' and make such distributions to its shareholders as to be relieved of all Federal income taxes under provisions of current Federal tax law.
2. Transactions with affiliates
The Fund has an investment advisory agreement with Harris Associates L.P. (Adviser). For management services and facilities furnished, the Fund pays the Adviser monthly fees at the annual rate of 1% of the first $2.5 billion of net assets, .95% on the next $2.5 billion of net assets and .90% of the net assets of the fund in excess of $5 billion as determined at the end of each preceding calendar month. The investment advisory agreement of the Fund provides that the Adviser will reimburse the Fund to the extent that its annual expenses, excluding certain expenses, exceed the applicable limits prescribed by any state in which the Fund's shares are offered for sale.
In connection with the organization of the Fund, expenses of approximately $146,500 were advanced to the Fund by the Adviser. These expenses are being reimbursed to the Adviser and amortized by the Fund on a straight line basis through July, 1996.
The Fund's initial shareholder has agreed that, if any of the initial shares are redeemed during the first 60 months of the Fund's operations, the proceeds of redemption will be reduced by the pro rata share of the unamortized expenses as of the date of redemption, to the extent the Fund is obligated to reimburse such expenses to the Adviser. The pro rata share by which the redemption proceeds shall be reduced shall be derived by dividing the number of original shares redeemed by the total number of original shares outstanding at the time of redemption.
Certain officers and trustees of the Fund are also executives and employees of the Adviser. The Fund makes no direct payments to its officers who are affiliated with the Adviser. The Fund paid trustees fees of $29,837 in 1995 and $16,000 in 1994 to trustees of the Fund not affiliated with the Adviser.
During the periods ended October 31, 1995 and October 31, 1994 the Fund incurred brokerage commissions of $2,100,849 and $2,286,161, respectively, of which $389,339 and $244,055 were paid to an affiliate of the Adviser.
3. Fund share transactions
Proceeds and payments on Fund shares as shown in the statement of changes in net assets are in respect of the following number of shares (in thousands):
| |
Year ended October 31, 1995 |
Year ended October 31, 1994 |
| Shares issued in reinvestment of dividend and capital gain distributions | 4,782 |
1,948 |
| Shares sold | 54,044 |
48,461 |
| Less shares redeemed | (26,065) |
(29,668) |
| Net increase in shares outstanding | 32,761 |
20,741 |
4. Investment transactions
| |
Year ended October 31, 1995 |
Year ended October 31, 1994 |
| Investment securities (excluding short term securities) in thousands: | ||
Purchases |
$ 1,085,381 | $ 733,331 |
Proceeds from sales |
359,990 |
366,527 |
| Year ended October 31, | Period ended | ||||
| |
1995 |
1994 |
1993 |
1992 |
Oct. 31, 1991(a) |
| Net Asset Value, Beginning of Period | $25.21 |
$24.18 |
$17.11 |
$12.10 |
$10.00 |
| Income From Investment Operations: | |||||
| Net Investment Income (Loss) | 0.30 |
0.27 |
0.17 |
(0.03)(d) |
(0.01) |
| Net Gains or Losses on Securities (both realized and unrealized) | 4.66 |
1.76 |
7.15 |
5.04 |
2.11 |
| Total From Investment Operations | 4.96 |
2.03 |
7.32 |
5.01 |
2.10 |
| Less Distributions: | |||||
| Dividends (from net investment income) | (0.23) |
(0.23) |
(0.04) |
— |
— |
| Distributions (from capital gains) | (1.47) |
(0.77) |
(0.21) |
— |
— |
| Total Distributions | (1.70) |
(1.00) |
(0.25) |
— |
— |
| Net Asset Value, End of Period | $28.47 | $25.21 | $24.18 | $17.11 | $12.10 |
| Total Return | 21.55% |
8.77% |
43.21% |
41.40% |
87.10%* |
| Ratios/Supplemental Data: | |||||
| Net Assets, End of Period ($ million) | $2,827.1 |
$1,677.3 |
$1,107.0 |
$ 114.7 |
$ 4.8 |
| Ratio of Expenses to Average Net Assets | 1.17% |
1.22% |
1.32% |
1.70% |
2.50%(b)* |
| Ratio of Net Income (Loss) to Average Net Assets | 1.27% |
1.19% |
0.94% |
(0.24)% |
(0.66)%(c)* |
| Portfolio Turnover Rate | 18% |
29% |
18% |
34% |
0% |
*Ratios for the period have been determined on an
annualized basis.
(a) From August 5, 1991, the date on which Fund shares were first offered for sale to the
public.
(b) If the Fund had paid all of its expenses and there had been no reimbursement by the
Adviser, this annualized ratio would have been 4.92% for the period.
(c) Computed giving effect to the Adviser's expense limitation undertaking.
(d) Based on average month-end shares outstanding.
The value of a $10,000 investment in the Oakmark International Fund from its inception (9/30/92) to present (10/31/95) as compared to The Morgan Stanley World ex U.S. Index.
| 10/31/95 NAV $12.97 | Average Annual
Total Return* Through 10/31/95 |
|||
| Total Return* Last 3 mos. |
Total Return* Last 6 mos. |
From 10/31/94 |
From Inception 9/30/92 |
|
| OAKMARK INTERNATIONAL | (5.5)% |
1.8% |
(3.1)% |
13.2% |
| Morgan Stanley World ex U.S.* | (4.5)% |
(1.3)% |
(0.1)% |
12.2% |
| Morgan Stanley EAFE* | (4.6)% |
(1.6)% |
(0.4)% |
12.3% |
| Lipper Analytical International Fund Average* | (2.1)% |
4.7% |
(0.6)% |
12.6% |
*Total return includes change in share prices and in each case included 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 Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Morgan Stanley EAFE Free Index refers to Europe, Asia and the Far East and includes 18 country sub-indexes. The Lipper International Fund Average includes 106 mutual funds that invest in securities whose primary markets are outside the United States. Past performance is no guarantee of future performance.
Report from David G. Herro, Portfolio Manager
Dear Fellow Shareholders:
A large ship that carries cargo across the ocean will no doubt encounter many types of conditions on its journey; anything from clear skies and still water to the occasional storm at sea. But to an experienced crew with a good ship, the weather really doesn't make much difference. They've made the trip many times before and always deliver the goods to port.
In many ways the Oakmark International Fund is experiencing this type of journey. The past year has been turbulent, to say the least. Most foreign markets have been weak since the peso crisis of last year, and our Fund has not escaped the consequences. On a relative basis it's been particularly difficult to compete against the booming U.S. market. But our results are positive, and as I write this (December 1, 1995) our Fund is now up 7.25%* since January 1, 1995.
THE GLOBAL PICTURE
The Fund's performance in recent months can be traced to three factors: geographic exposure, industry focus and global money flows. First, the Fund's Latin American investments (particularly Mexico) have significantly underperformed. These markets continue to be buffeted by currency and political speculation. Second, investors concerned with the declining rate of worldwide industrial growth, have avoided many of the cyclical companies we find extremely undervalued. Lastly, the flow of investment funds is running against us. We have heard from the large global brokerage firms that there continues to be strong flows of money into the U.S. market and out of foreign markets, generally causing downturns and price volatility in the foreign markets.
So, like our ocean freighter analogy, while we have hit some rough water and our speed has slowed, we continue to proceed toward our destination. The most recent weeks indicate we may see smoother water ahead.
I remain extremely optimistic about the prospects for both the Fund and foreign makets. The companies we own are strong and diverse, and most importantly, they are selling at bargain basement prices. Consider the following:
Telemex (4% of the portfolio)
Current Situation: Down 13.5% in the four weeks through October 31, 1995 yet up 21.5% for the month of November.
Reason for Optimism: Telemex will generate more than $1 billion (U.S. dollars) a year in free cash with just a trace of debt. The company has been actively buying back stock and has proposed buying even more. All of this has occurred during a harsh recession in Mexico. The stock sells at a price less than 10 times earnings and long-term prospects are bright.
Volvo (4% of the portfolio)
Current Situation: Down 12% in the four weeks through October 31, 1995, and down 9% for the month of November.
Reason for Optimism: The company has recognized its problems, replaced management and is attacking costs. With planned asset sales, by 1997 half of the current share price will be in cash on the balance sheet. Management has pledged to use this cash to bolster shareholder value. On an adjusted basis, the stock sells at just 3 times earnings.
Asia Pulp and Paper (3% of the portfolio)
Current Situation: Down 15.4% in the four weeks through October 31, 1995, yet up 1.2% for the month of November. The stock was down due to fears of weaker pulp prices. The fears are overdone! There is little new pulp capacity on the horizon, and thus prices will soon stabilize. The company is one of the world's lowest cost producers and is located in the world's fastest growing region.
Reason for Optimism: It's clear that fears of paper and pulp prices collapsing have been overdone. These prices are supply driven and there is little new capacity coming on stream. The company sells at 4 times normal earnings and below book value.
These are just few examples in overseas markets where current share prices do not come close to reflecting true value. This is the nature of equity market investment; over short periods of time price and value seldom match. We believe patient investors will be rewarded, because over the longer term share prices tend to reflect value. Just as storms at sea eventually subside, value and price converge.
TRAVELLER'S LOG...AUSTRALASIA
In my last quarterly letter I briefly mentioned the differences between the Australian and New Zealand economies. They can be as opposite as night and day, yet they share some similarities as well. For example, both countries seem to be keenly aware of good corporate governance and have responsible, owner-oriented managements. However, the macroeconomic environment of the two countries are quite distinctive.
New Zealand
Macro: During the past 10 years New Zealand has completely deregulated and embraced just about every free market reform imaginable. The results are stunning: huge budget surpluses, surging productivity, very low unemployment, strong economic growth and low inflation.
Micro: We have been able to find a number of examples of strong, competitive companies, though most have proven to be too small for the Fund. Our lone New Zealand position is Lion Nathan, which brews Steinlager and other drinks brands. Lion has close to 50% of the Australasian beer market and is a franchisee for both Pepsi and Gatorade. In addition, the company has opened up brewing operations in China that already are profitable. Lion has wisely used its free cash flow to pay down debt, increase dividends and make intelligent investments.
Australia
Macro: The country has archaic collective bargaining agreements and is not as open as it should be. As one might predict, Australia has lagged behind New Zealand in productivity and employment growth while suffering a higher rate of inflation. They are still running huge ''normalized'' budget deficits as well.
Micro: Despite the macro picture, we have found good values in Australia. Pioneer International is an excellent example of an extremely well-run, global company. Pioneer has global building materials businesses (concrete, aggregates, cement, etc.) that are well positioned for the continuing boom in global infrastructure development. On top of this, they have prudently used cash to pay down debt and expand their global franchises to the fast growing regions of the world.
Ideally, over time Australia will adopt policies similar to New Zealand, adding a positive new element to the Australasian economic environment!
David G. Herro
Portfolio Manager
OAKIX @aol.com
72242. 772@COMPUSERV.COM
December 1, 1995
| Shares Held |
Description |
Market Value |
|
| COMMON STOCKS—94.5% | |||
| CONSUMER NON-DURABLES—4.4% | |||
90,210,000 |
Yue Yuen Industrial (Holdings) Limited (Hong Kong) | Athletic Footwear Manufacturing | $ 23,626,790 |
61,533 |
Chargeurs S.A. (France) | Entertainment & Wool Production Holding Company | 12,658,676 |
36,285,466 |
|||
| FOOD—7.5% | |||
18,069,300 |
Lion Nathan Limited (New Zealand) | New Zealand Brewer | 41,031,350 |
4,939,000 |
Leong Hup Holdings Berhad (Malaysia) | Major Poultry Operation in Malaysia and KFC Operator | 7,463,896 |
3,300,265 |
Burns, Philp & Company Limited (Australia) | Yeast and Spices | 7,390,904 |
36,970 |
Lotte Chilsung Beverage (Korea) | Manufacturer of Soft Drinks, Juices, & Sport Drinks | 5,314,906 |
61,201,056 |
|||
| HOUSEHOLD PRODUCTS—3.5% | |||
2,017,853 |
Reckitt & Colman PLC (Great Britain) | Household Cleaners and Air Fresheners | 21,470,594 |
3,430,600 |
London International Group PLC (Great Britain) | Latex Products | 7,105,274 |
28,575,868 |
|||
| RETAIL—4.9% | |||
24,995,000 |
Giordano Holdings Limited (Hong Kong) | East Asian Clothing Retailer & Manufacturer | 20,689,887 |
462,900 |
|||