The Oakmark International Fund

Report from David G. Herro and Michael J. Welsh, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (7/31/97) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX
7/31/97 NAV $18.51	Total Return Last 3 mos.	Average Annual Total Return* Through 7/31/97 From Inception 9/30/92
Oakmark International	8.6%	18.8%
Morgan Stanley World ex U.S. w/inc**	14.4%	13.5%
Morgan Stanley EAFE w/inc**	14.2%	13.3%
Lipper Analytical International Fund
Average**	14.2%	15.7%
*Total return includes change in share prices and in each case includes reinvestment of any dividends, interest 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 Average 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:

The performance of The Oakmark International Fund continues to be satisfactory. Average annual returns from inception have been 18.8 percent versus the Morgan Stanley EAFE of 13.3 percent and The Lipper Analytical 15.7 percent. Year-to-date, the Fund is up 18.1 percent versus 13.0 percent for Morgan Stanley EAFE and 17.6 percent for Lipper. The major influence on performance continues to be stock picking. However, the recent strength of the dollar versus its foreign counterparts has generally been a negative influence on returns over the shorter term.

OUR TOP HOLDINGS... WHY?

Given that we typically run a very concentrated portfolio, we think it is important for you to hear about the top holdings of your Fund. The top five stocks amount to close to 20 percent of assets. The thread that runs through the entire list is that all are substantially undervalued and are run by solid managements. Of note is that three out of the five are domiciled in the United Kingdom. This is pure coincidence, as we never specifically target geographical regions.

Cordiant plc (4.7% of portfolio) — formerly called Saatchi and Saatchi plc, is run by advertising professionals with a renewed sense of purpose and enthusiasm. They have worked hard over the last two years to build a solid and financially sound advertising group of companies. The share price has rebounded over 100 percent in local market terms since its low point in October of 1995. We still believe the group represents excellent value both on an absolute basis and relative to its peer group. In an act that we see unlocking underlying value and spurring agency competitiveness, the group will be split into two separately-listed agencies later this year.

Tomkins plc. (4.3%) — Tomkins is a position we added earlier this year. It is a company that very clearly represents our investment style in that it is undervalued relative to its true worth and managed by people that are good at both running businesses and allocating capital. Though Tomkins is a conglomerate, it is also a store of value. They have a proven record of making value-enhancing acquisitions and have soundly managed their purchases. Now that the company has critical mass in its key business areas, management will be using surplus cash (and this company makes a lot of it) for smaller acquisitions, as well as repurchasing shares.

Volvo (3.6%) — This Swedish maker of cars, trucks and buses has a strong franchise in its name and is leveraging it well across the globe. Furthermore, the company has radically restructured over the last three years. It turned itself into a company focused solely on motor vehicles from one that was an overdiversified owner of every business under the sun. The results have been excellent as management has divested non-related businesses at huge profits and is reinvesting the proceeds in their main motor vehicle business. At the same time, Volvo is returning capital to shareholders with higher dividends, stock buybacks and asset spin-offs.

Though we have owned the stock for several years and it has performed well, there is still plenty of upside. Margins on both the car and truck business should continue to expand and their brand continues to do well globally.

Sedgwick Group plc (3.6%) — Sedgwick is one of the top insurance brokerage firms in the world. It has a natural advantage being located in London where much of the world's insurance is underwritten. Though well-run and a leader in its field, it is selling at a substantial discount to its peer group. Yielding close to 7 percent and selling at under 10 times current earnings, this stock is a great value considering the company's attractive long-term business prospects. One of Sedgwick's major U.S. competitors sells at 23 times '97 earnings and yields under 2 percent. It is a perfect example of why we are so bullish on foreign stocks.

Usiminas (3.5%) — One of Latin America's largest steel makers, Brazil-based Usiminas is a low cost producer with an excellent reputation. Customers praise the company for its superior steel and extraordinary service—very important qualities in Latin America where just-in-time inventory systems are taking root. The company operates in an area of fast demand growth with little new supply on the horizon. Usiminas sells for under 10 times earnings and yields close to 6%.

DON'T CHANGE THIS CHANNEL...

Many foreign markets, especially in U.S. dollar terms, have underperformed the domestic market. Ideally, this should focus investor attention more on international opportunities. However, we have noticed since the Fund began nearly five years ago that during these periods in which international markets lag the U.S. or are weak, little new cash comes into the Fund and some shareholders actually sell shares of the Fund. We understand this tendency to buy high (when recent returns have been strong) and sell low (when recent returns have been weak). However, it is important to always remember the nature of the assets in which the Fund is invested: pieces of business enterprises which are very long-term in nature. With this in mind, the best strategy for investing in the Fund is the same as ours for investing in companies—for the long-term. If one wants to behave in a short-term manner and speculate, our advice is to make a wager that is sound: The Green Bay Packers repeating as Super Bowl Champs this season!

DAVID G. HERRO
Portfolio Manager
72242.772@compuserve.com

MICHAEL J. WELSH
Co-Portfolio Manager
102521.2142@compuserve.com
August 5, 1997