The Oakmark Fund

Report from Robert J. Sanborn, Portfolio Manager

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (7/31/97) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
7/31/97 NAV $40.89	Total Return Last 3 mos.	Average Annual Total Return* Through 7/31/97 From Fund Inception 8/5/91
THE OAKMARK FUND	16.8%	31.5%
Standard & Poor's 500 w/inc Stock Index**	19.6%	19.3%
Dow Jones Industrial Average w/inc**	17.8%	21.3%
Value Line Composite Index**	18.7%	10.8%
*Total return includes change in share prices and in each case, except for 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 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.

PORTFOLIO UPDATE... AND A NOTE ON CASH

Wow! What a quarter, we're going to the moon, Alice!

A half-point decline in long-term interest rates, powered by the continuation of subdued inflation, is the primary reason for the 19.6 percent advance in the Standard & Poor's 500. The Oakmark Fund returned about 17 percent, and our stocks alone were up over 20 percent.

In general, the companies in our portfolio are performing well. However, more of our holdings are approaching their sell targets than are approaching their buy targets. With our having limited success finding new investments that meet our criteria, cash continues to be at a historically high percentage. I want to reiterate that this is not a market-timing decision. It reflects simply that we will not own stocks that do not offer us acceptable risk-adjusted expected returns.

Personally, I find the case for even lower interest rates to be compelling. With inflation at less than 2 percent (and overstated at that!) and the long bond yielding close to 6.5 percent, one can earn a real spread that is much higher than the historical average. With the bond market very sensitive to any hint that the Fed is less vigilant to resisting inflation and with increasingly global labor and supplier markets, the case for continued low inflation and a diminution of real spreads over time strikes me as a strong one.

However, it is important for you to realize that we never ever invest your money based on my or any of my colleagues' speculations about the future directions of interest rates or "the market." We believe that it is nearly impossible to add value over the long term acting on such speculations, and leave this activity to others.

There were very few substantive changes in the portfolio since last quarter. We have substantially increased our position in long-time holding Lockheed Martin due to our positive assessment of its merger with Northrop Grumman. Also, some of you may notice that Banc One's acquisition of First USA was completed during the quarter. I have decided to retain Banc One shares in the Fund.

... AND FROM YOURS TRULY: OOPS!

Each of the funds in The Oakmark Family invests in companies with owner-oriented managements. We specifically prefer managements whose financial incentives, preferably in outright stock ownership but more often in the form of stock options, are aligned with those of outside investors like ourselves.

We also expect the shareholders in our funds to hold us to the same owner-orientation standard. Consequently, we pay annual firm-wide bonuses in the form of fund shares and the fund trustees receive partial compensation in the form of fund shares. All the individual fund managers have very significant investments in the funds which they manage, and in The Oakmark Fund Family in general.

In any event, a colleague reminded me that three years ago in a report to shareholders I said that I would not buy individual stocks but would only invest in mutual fund shares. Well, I had forgotten that statement, and the fact of the matter is that since then I have purchased shares in three companies, which were also owned by the Fund. The Fund had already completed all of the purchases of those shares that it was contemplating. I intend to hold these investments indefinitely, and under our code of ethics I cannot sell them until after the Fund has completed any sales that it is contemplating.

I continue to maintain a very large investment in The Oakmark Fund (and in our other funds), have never sold a share, and continue to make regular additional investments. Like that weekly hoops game at the Y, I'm calling this one on myself.

MISCELLANY

The "Forbes" magazine list of the 400 richest Americans offers a lot of insight into America, most particularly the dynamism of our economy. I have written that what separates the US economy is our prodigious ability to generate new technologies, new services, and new wealth. The 1996 "Forbes 400" highlights this.

Only 39 of the 400 are wealthy via inheritance, down from 85 on the 1982 list. More than 90 percent of the richest Americans achieved this wealth on their own, generally through equity in successful companies that employ increasing numbers of people. Is there any other country on earth where one can achieve so much in one generation?

The most significant changes in categories between 1982 and 1996 are the large decrease in those whose wealth was generated by natural resources, and the large increase in software and computer entrepreneurs. Wealth can be very ephemeral.

The recent policy discussions on the capital gains tax, unfortunately, focused on the direct "winners and losers" from a cut. Those opposed argued how "fair" can a tax cut be when the biggest "winner" would be, say, Bill Gates. This sort of argument tends to resonate with the public.

However, such static analysis ignores the effects on the system as a whole. If, for example, you tax capital more, you will have less of it. The less capital per worker employed in the economy, the less production we will have, and consequently, wages will be lower.

Robert J. Sanborn

ROBERT J. SANBORN
Portfolio Manager
rsanborn@oakmark.com
August 3, 1997

THE OAKMARK
Book Club

It's time again for another episode in the Oakmark Book Club, which I note was started long before Oprah's!

Here are the books that I have read that those of you who are interested in investing, finance, business, and economics might find stimulating:

The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency, by Robert Kanigel (Viking Penguin, 1997); an exhaustive study of the father of the assembly line and "efficiency";

The Truth About the National Debt: Five Myths and One Reality, by Francis X. Cavanaugh (Harvard Business School Press, 1996); the bottom line: our obsession with the national debt is wholly misplaced, and what should be our obsession is the relative efficacy of government spending vs. private spending;

Monster, by John Gregory Dunne (Random House, 1997); a mordant look inside the movie industry from a screenwriter's perspective, specifically how a project dealing with the self-abusive, grim life of Jessica Savitch morphed over time into the feel-good Pfeiffer-Redford fluff vehicle "Up Close and Personal"; the Armani-clad suits provide great humor, such as one who wants to do "Odyssey", "... based on the epic poem";

A Zebra in Lion Country, by Ralph Wanger, (Simon & Schuster, 1997); a very accessible and well-written investment guide by an ex-colleague;

Showing America a New Way Home, by James Johnson (Jossey-Bass, 1996); the CEO of Oakmark holding Fannie Mae gives a thorough overview of the US housing market, and how Fannie Mae meets its charter of making home ownership attainable for most Americans;

Creating Shareholder Value: the New Standard for Business Performance, by Alfred Rappaport (The Free Press, 1986); an academic look at the corporate mission: not necessarily to increase earnings, but to increase shareholder value.

Notes:

(a) Non-income producing security.

(b) Represents an American Depositary Receipt.