THE OAKMARK FUND

Report from Robert J. Sanborn, Portfolio Manager 
Goodbye, First USA

During the past quarter, Banc One and First USA announced an agreement under which Banc One would acquire First USA for stock. This is bittersweet for us because it culminates a spectacular investment for The Oakmark Fund, an investment that comes along rarely in one’s career (kudos to our own Steve Reid, who is the manager of The Oakmark Small Cap Fund, for this idea!). First USA has been one of your Fund’s largest holdings for years. We started buying the stock at $2.38 per share and have an average cost less than $15 per share; we will be receiving about $50 per share in Banc One stock (based on today’s price).

Our investment in First USA illustrates many aspects of our value approach. First, many shareholders have questioned me over the years about how First USA can possibly be a value investment when the stock has gone up so much. My answer has always been that underlying value—believe it or not!—had risen faster. Bank One’s offer validates this response.

Second, First USA did not have many of the characteristics generally associated with value. It never sported a low price/earnings ratio. It traded at a large premium to its book value. It had a minuscule dividend yield. So, First USA lacked the three financial characteristics that most investors associate with “value”: a low P/E, a low P/Book, and a high yield. Here at Harris Associates, and at all of The Oakmark Funds, we find all three numbers to be essentially meaningless. When one owns a business, the value of that business is the present value of the stream of cash you will take out of the business. This is what represents the yardstick of value to us, and I am sure that is what Banc One considered when it made its bid for First USA.

Third, First USA was a quintessential Oakmark idea. The business was better than generally considered by investors. Generally Accepted Accounting Principles masked the company’s true earnings power. Most important, management, led by John Tolleson and Dick Vague, was as good as any we have encountered. Business, valuation, and management are the sacred triad of our investment approach.

This transaction has presented us with an issue. If we were to sell our First USA right now (or our Banc One in the near future), most shareholders would face a very large capital gains tax. While most investors (and the fund rating services such as Morningstar) focus on pretax returns, I think this is a big mistake. Most investors should focus on the after-inflation, after-tax returns of a fund, because that is what you can ultimately spend. On the other hand, it is clear to us that tax-driven investing is almost always a mistake. However, I think it is also a mistake to ignore tax consequences.

We would like to congratulate John, Dick, and everyone at First USA for their accomplishments, and wish them well in all future endeavors.

The Nifty Fifty Redux?

Let us go back in time to when yours truly was a toddler. In the early 1960s, the typical money manager went to the right schools, dined at the right clubs, and wore the right uniform courtesy of Brooks Brothers. They did not care about their performance because their goal was to invest in the same bluechip stocks that all their brethren owned. This typical money manager was in his 60s, and had been tempered by The Great Depression (virtually no one went to Wall Street between 1930 and 1950). Performance did not matter, because these gray souls viewed their task as participating in the long-term growth of America. This was the environment when Warren Buffett’s partnership earned much of its outsized returns. He focused on investments generally shunned by his competitors.

Then came the go-go years.

A new generation of money managers reframed the investment process as not merely owning the hundred biggest companies in America, but in owning stocks that “went up.” There was no real philosophy except making money. Funds like The Dreyfus Fund and the Fidelity Capital Fund (managed by legendary gunslinger Gerry Tsai) bought growth stocks like Polaroid, IBM, Xerox, and Revlon (the so-called “nifty fifty”). Their purchases attracted other buyers, who continued the cycle. These stocks are bullet-proof and can never go down, was the creed.

In 1969, Buffett, increasingly uneasy with the new religion, decided to liquidate his partnership. He wrote to his partners, “ . . . it seems to me that a swelling interest in investment performance has created an increasingly short-term-oriented and (in my opinion) more speculative market.” Of course, the next several years witnessed an obliteration of the nifty fifty universe, and the go-go managers became no-go.

Are we in a similar environment? I think so.

Today’s can’t-go-down growth stocks are generally technology stocks. The funds which own them—Microsoft, Intel, and Cisco, among others—attract publicity, which attracts hot new money, which goes into the same stocks, and so on. Business analysis, particularly the difficulty of these businesses’ sustaining their growth, is forsaken. The managers keep telling themselves that they will have “loads of time to sell before they stop going up” (as I heard a manager recently tell an audience).

This, of course, is not The Oakmark Way, not for The Oakmark Fund or any of our funds. We believe in our discipline and know that it will show the way in the long run. We take great pleasure not owning these stocks.



Robert J. Sanborn
Portfolio Manager
harjs@aol.com
February 4, 1997

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (1/31/97) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX 

1/31/97 NAV $34.16 Average Annual Total Return*
Through 1/31/97
Total Return 
Last 3 mos.  		From Fund 
Inception 8/5/91 
THE OAKMARK FUND  12.7% 30.5%
Standard &Poor’s 500 w/inc Stock Index** 12.0% 16.8%
DowJones Industrial Average w/inc**  13.6%  19.1%
Value Line Composite Index** 8.0%  8.9%
*Total return includes change in share prices and in each case, except the Value Line Index, includes reinvestment of any dividends, interest and capital gain distributions.

**Each of the three indexes or averages is an unmanaged group of stocks whosecomposition is different from the Fund. The S&P 500 is a broad marketweighted average dominated by bluechip stocks. The DowJones 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.

THE OAKMARK FUND

Schedule of Investments—January 31, 1997 (Unaudited)

Shares Held/
Principal Value  		Market Value
Common Stocks—92.3%
Food & Beverage—17.7%
Philip Morris Companies Inc. 2,670,400  $317,443,800
H.J. Heinz Company 4,007,250 161,291,812
AnheuserBusch Companies Inc. 3,538,200  150,373,500
Nabisco Holdings Corp. 2,422,100 92,645,325
CPC International 843,100  64,813,313
786,567,750
Retail—0.6%
Carson Pirie Scott & Co. (a) 1,000,000 $26,750,000
Telecommunications—4.1%
U.S. West Media Group 9,918,400 $184,730,200
Other Consumer Goods & Services—13.4%
The Black & Decker Corporation 5,925,000 $198,487,500
Polaroid 3,691,900 162,443,600
American Brands, Inc. 2,435,500 124,210,500
First Brands Corporation 940,400 25,390,800
Whitman Corporation 957,500  22,022,500
Brunswick Corporation 779,700 19,589,962
GC Companies, Inc. (a) 397,000 14,540,125
Juno Lighting Inc. 885,000 13,606,875
Arctic Cat, Inc. 957,500 9,993,906
Justin Industries, Inc. 601,500 6,541,312
596,827,080
Banks—6.1%
Mellon Bank Corporation 3,606,550 $269,138,794
Insurance—4.4%
Torchmark Corporation 1,855,200  $96,006,600
Old Republic International 2,328,620  62,581,663
American Financial Group, Inc. 684,700 24,734,788
Acordia, Inc. 501,300  13,973,737
197,296,788
Other Financial—13.1%
First USA, Inc. 7,096,000  $359,235,000
AMBAC Inc. 2,194,900  147,058,300
Fannie Mae 1,464,500  57,847,750
Fund American Enterprises Holdings, Inc. 204,400  20,440,000
584,581,050
Broadcasting & Publishing—13.1%
Knight-Ridder, Inc. 4,348,800 $166,885,200
Dun & Bradstreet Corporation 5,750,000  138,000,000
Tele-Communications, Inc. Class A (a) 9,179,179 122,197,820
ACNielsen Corporation 4,764,000  78,010,500
Tele-Communications, Liberty Media Class A 3,657,741 69,497,079
TCI Satellite Entertainment, Inc. Class A (a) 917,917  7,458,076
582,048,675
Managed Care Services—1.4% 
Foundation Health Corporation (a) 1,813,700 $60,305,525
Medical Products—0.9%
Sybron Corporation (a) 1,297,800  $40,069,575
Aerospace & Defense—4.9%
Lockheed Martin Corporation 1,235,000 $113,620,000
McDonnell Douglas Corporation 1,220,000  82,045,000
Logicon, Inc. 654,800 22,672,450
218,337,450
Building Materials & Construction—0.1%
USG Corporation (a) 175,000  $6,234,375
Other Industrial Goods & Services—5.3%
James River Corporation 2,839,100 $91,206,088
Bandag Incorporated, Class A 1,104,100 51,616,675
SPX Corporation 967,900 39,320,938
The Geon Company 971,600 18,217,500
Great Lakes Chemical Corporation  318,700 13,743,937
UCAR International Inc. (a) 303,500 11,381,250
Premark International, Inc. 328,400 7,553,200
Bandag Incorporated 26,300 1,249,250
234,288,838
Commercial Real Estate—1.0%
Host Marriott Corporation (a) 2,261,700 $38,448,900
Catellus Development Corporation (a) 585,700 8,053,375
46,502,275
Foreign Securities—6.2%
DeBeers Consolidated Mines Ltd. ADR (b) 3,246,000 $101,031,750
YPF Sociedad Anonima (b) 3,276,500 91,332,437
Unilever NV 416,000 68,432,000
EVC International NV 547,700 15,261,083
276,057,270
Total Common Stocks (Cost: $2,929,801,653) 4,109,735,645
ShortTerm Investments—7.4%
Commercial Paper—4.6%
American Express Credit Corporation, 5.27% due 2/7/1997 $10,000,000 $10,000,000
American Express Credit Corporation, 5.30% due 2/7/1997 10,000,000 10,000,000
Ford Motor Credit Corporation, 5.32% due 2/6/1997  25,000,000 25,000,000
Ford Motor Credit Corporation, 5.31% due 2/10/1997 20,000,000 20,000,000
Ford Motor Credit Corporation, 5.28% due 2/18/1997 25,000,000 25,000,000
Ford Motor Credit Corporation, 5.30% due 2/24/1997 10,000,000 10,000,000
Ford Motor Credit Corporation, 5.30% due 3/3/1997  20,000,000 20,000,000
Ford Motor Credit Corporation, 5.29% due 3/10/1997 10,000,000 10,000,000
Ford Motor Credit Corporation, 5.30% due 3/10/1997  25,000,000 25,000,000
General Electric Capital Corporation, 5.31% due 2/3/1997  50,000,000 50,000,000
Total Commercial Paper 205,000,000
Repurchase Agreements—2.8%
State Street Repurchase Agreement, 5.47% due 2/3/1997 Collateralized by US Treasury Securities $122,662,000 $122,662,000
Total Repurchase Agreements 122,662,000
Total ShortTerm Investments (Cost: $327,662,000) 327,662,000
Total Investments (Cost $3,257,463,653)—99.7% $4,437,397,645
Other assets, less other liabilities—0.3%  14,930,120
Total Net Assets—100% $4,452,327,765
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Notes:
(a) Nonincome producing security.
(b) Represents an American Depositary Receipt.