Last 3 mos.
Through 7/31/97
From Fund Inception
11/1/95
| THE VALUE OF A $10,000
INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT
(7/31/97) AS COMPARED TO THE RUSSELL 2000 | ||
| 7/31/97 NAV $18.73 | Total
Return Last 3 mos. |
Average Annual Total Return* Through 7/31/97 From Fund Inception 11/1/95 |
|
| ||
| The Oakmark Small Cap Fund | 23.5% | 43.1% |
| Lipper Small Cap Fund Index** | 24.9% | 18.3% |
| Russell 2000 w/inc** | 21.3% | 23.0% |
| S&P Small Cap 600 w/inc** | 24.0% | 27.0% |
| *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 whose composition is different from the Fund. The Lipper Small Cap Fund Index is comprised of 30 Small Cap Funds. The Russell 2000 Index measures the performance of smaller companies, and represents approximately 10% of the total value of publicly traded companies in the U.S. The S&P 600 Index measures the performance of selected U.S. stocks with a small market capitalization. Past performance is no guarantee of future results. | ||
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THE QUARTER
The Oakmark Small Cap Fund's third fiscal quarter ended on July 31, 1997. The third quarter benefited from an unusually strong period for the overall stock market and particularly for small companies. During this period your Fund gained 23.5 percent. This is comparable to the relevant indices. For the nine month period, your Fund gained 42%. The indices to which your Fund is compared did not perform as well.
A number of unusual, but very significant events occurred during the quarter that are worth noting. In the early part of May, Logicon Inc., a producer of defense electronics, agreed to be acquired by Northrop Grumman Corp. in exchange for shares of Northrop. In early July, prior to the closing of the merger, Northrop agreed to be acquired by Lockheed Martin. In each case the acquirer paid a significant premium over the acquiree's most recent share price. An event such as this is not likely to be repeated, but as shareholders of the Fund it can be savored.
It is very rare that your Fund is a buyer of stock in the initial public offering (IPO) of a company's shares. In general we have found the shares of companies selling stock in an IPO to be unattractive for a variety of reasons. Essex International Inc., a manufacturer of wire and cable, is an exception. Essex possessed the same traits we look for in any company in which the Fund invests. We were able to purchase shares at an attractive valuation, in a company that is well managed and possesses a niche position within its industry. While Essex's business may seem to be mundane to many investors, its shares have risen from the IPO price of $17 to slightly over $33.
The Fund's best performing stock during the quarter was Cablevision Systems Corp. In the latter part of 1996 through the spring of this year companies that owned and operated cable TV systems and programming were the dogs of Wall Street. As long-term value investors, we make an effort not to follow the herd and think independently. However, we are very willing to visit those areas where the herd has been and since moved on. Such was the case with Cablevision. The Fund purchased shares at attractive prices when the herd was selling. Just at the point when the industry had been virtually written off by investors, several significant transactions were announced highlighting the undervaluation in the industry. Cablevision's shares rose over 85% in the quarter. We have to be thankful for the opportunities that other investors give us.
THE QUERIES
In March of this year we announced that steps might be taken to restrict the flow of money into The Oakmark Small Cap Fund. On June 20, 1997 such steps were taken (see prospectus for details). We have received numerous inquiries about what this means for the Fund and its shareholders.
Q: Why were steps taken to restrict the flow of money into the Fund?
A: The Fund has a limited universe in which to invest its assets. The decision to restrict inflows is based on both art and science. We continue to see opportunities in which to invest the assets of the Fund, but must be conscious of future growth which is not predictable. We chose not to shutter the Fund completely to new money due to the damage that can be caused by redemptions. During the difficult market period of March and April gross redemptions were over $175 million; had the Fund not had inflows, the forced selling of stocks would have hurt shareholders who share our long-term investment horizon. Another reason to continue to allow some inflow of new money is to capitalize on the investment opportunities we see without forcing the premature sale of existing holdings. This helps to keep us on our toes seeking new investment opportunities.
Q: Has the Fund's investment philosophy or objectives changed?
A: No. The Fund is committed to its long-term value-oriented investment philosophy and will remain consistent with that philosophy. The investment objectives are also unchanged. The Oakmark Small Cap Fund is not overdiversified. Currently the Fund owns less than half the number of stocks of the average mutual fund. The Fund continues to invest in small capitalization stocks. As of the end of this quarter, the mean and median market cap of the Fund's portfolio is less than those of the S&P Small Cap 600 Index. However, as the holdings in the Fund appreciate, there will be an upward drift in market capitalization. We do not intend to sell the shares of companies based on market capitalization, but when we see the value per share and the share price converge, the shares will be sold. Keeping turnover as low as possible is in the best interest of shareholders.
Q: Various queries have been made about my personal commitment to The Oakmark Small Cap Fund.
A: First, not only am I a significant shareholder of the Fund, but so are the many people that contribute to the success of The Oakmark Small Cap Fund. Our interests are aligned with all shareholders. Second, I have a great job and work with an outstanding group of investment professionals. With their help I intend to manage the Fund until just before advanced senility really sets in. Third, I don't know how to do anything else.
QUID PRO QUO
Congratulations to the Chicago Bulls on their fifth NBA Championship. Besides having perhaps the greatest player in the game in Michael Jordan, the Bulls have a cast of outstanding players and coaches that come together as a team. Their cohesiveness and teamwork have produced an outstanding success story. While The Oakmark Small Cap Fund does not have a Michael Jordan, nor the long-term record of the Bulls, we do employ a team approach and strive for consistency. Elsewhere in Chicago, on the southside of town, the White Sox pursued a completely different strategy. Trailing the Cleveland Indians by 3 1/2 games and with a good bit of the season left, the Sox traded away the heart of their pitching staff. This virtually ensures the Sox won't be a contender this year. Meanwhile, the Blackhawks continue to pursue their strategy to get close, but not too close to the path of greatness. The Cubs and Bears look like they're primed to repeat, unfortunately their past performances aren't the desired outcome. The mercurial nature of Chicago's sports teams make for an ever changing environment. This leads me to my quarterly comment on the weather. My advice is don't follow me. I recently bestowed myself upon New England and am taking full responsibility for the re-energizing of Tropical Storm Danny.
Once again, I would like to thank everyone involved, especially our shareholders, for your support.
STEVEN J. REID
Portfolio Manager
sreid@oakmark.com
August 5, 1997
THE OAKMARK SMALL CAP FUND |
| Shares Held | Market Value | |
|
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| Common Stocks—92.6% | ||
| Food & Beverage—7.3% | ||
| Ralcorp Holdings, Inc. (a) | 3,000,000 | $ 54,375,000 |
| International Multifoods Corporation | 816,700 | 23,071,775 |
| M & F Worldwide Corp. (a) | 917,600 | 8,201,050 |
|
| ||
| 85,647,825 | ||
| Retail—4.3% | ||
| Cole National Corporation (a) | 500,000 | $ 21,593,750 |
| Carson Pirie Scott & Company (a) | 511,500 | 16,975,406 |
| Zale Corporation (a) | 523,900 | 11,394,825 |
|
| ||
| 49,963,981 | ||
| Other Consumer Goods & Services—7.3% | ||
| Triarc Companies, Inc. (a) | 1,155,700 | $ 26,292,175 |
| Scotsman Industries, Inc. | 857,900 | 23,270,538 |
| First Brands Corporation | 1,000,000 | 21,187,500 |
| USA Detergents, Inc. (a) | 398,200 | 5,425,475 |
| Barry (R.G.) Corporation (a) | 309,800 | 4,027,400 |
| Justin Industries | 207,400 | 2,851,750 |
| GC Companies, Inc. (a) | 56,300 | 2,322,375 |
|
| ||
| 85,377,213 | ||
| Banks—8.1% | ||
| People's Bank of Bridgeport, Connecticut | 2,500,000 | $ 70,625,000 |
| BankAtlantic Bancorp, Inc., Class A | 611,500 | 9,860,438 |
| Northwest Savings Bank | 295,000 | 5,199,375 |
| Harbor Federal Savings Bank | 112,000 | 5,012,000 |
| Pocahontas Federal Savings and Loan Association | 140,000 | 3,080,000 |
| Savings Bank of the Finger Lakes | 94,000 | 1,645,000 |
|
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| 95,421,813 | ||
| Insurance—11.2% | ||
| RenaissanceRe Holdings Limited | 1,145,400 | $ 49,466,962 |
| PXRE Corporation | 960,000 | 29,580,000 |
| Chartwell Re Corporation | 825,000 | 27,431,250 |
| Highlands Insurance Group, Inc. (a) | 1,100,000 | 24,681,250 |
|
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| 131,159,462 | ||
| Other Financial—3.4% | ||
| Financial Security Assurance Holdings Ltd. | 740,000 | $ 30,895,000 |
| Duff & Phelps Credit Rating Company | 296,800 | 9,052,400 |
|
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| 39,947,400 | ||
| Broadcasting & Publishing—7.3% | ||
| Cablevision Systems Corporation (a) | 650,000 | $ 38,593,750 |
| TCI Satellite Entertainment, Inc., Class A (a) | 3,000,000 | 20,437,500 |
| Lee Enterprises, Inc. | 500,000 | 12,812,500 |
| Granite Broadcasting Corporation (a) | 800,000 | 9,300,000 |
| Ascent Entertainment Group, Inc. (a) | 403,000 | 4,886,375 |
|
| ||
| 86,030,125 | ||
| Data Storage—0.3% | ||
| Imation Corporation (a) | 150,000 | $ 3,684,375 |
| Aerospace & Defense—2.5% | ||
| Tracor, Inc. (a) | 1,083,000 | $ 29,647,125 |
| Machinery & Metal Processing—7.8% | ||
| Gardner Denver Machinery, Inc. (a) | 900,000 | $ 30,600,000 |
| The Carbide/Graphite Group, Inc. (a) | 800,000 | 23,200,000 |
| Atchison Casting Corporation (a) | 710,400 | 13,675,200 |
| Matthews International Corporation, Class A | 333,500 | 13,381,688 |
| Northwest Pipe Company (a) | 520,000 | 11,050,000 |
|
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| 91,906,888 | ||
| Building Materials & Construction—1.9% | ||
| NVR Inc. (a) | 1,000,000 | $ 17,312,500 |
| Triangle Pacific Corporation (a) | 146,100 | 4,748,250 |
|
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| 22,060,750 | ||
| Oil & Natural Gas—2.1% | ||
| Titan Exploration, Inc. (a) | 2,525,000 | $ 24,303,125 |
| Other Industrial Goods & Services—15.4% | ||
| SPX Corporation | 900,000 | $ 46,800,000 |
| MagneTek, Inc. (a) | 1,970,000 | 40,261,875 |
| Essex International, Inc. (a) | 948,000 | 31,521,000 |
| Zurn Industries, Inc. | 551,000 | 16,288,937 |
| Columbus McKinnon Corporation | 801,400 | 15,927,825 |
| Dal-Tile International Inc. (a) | 711,800 | 12,767,912 |
| Binks Sames Corporation | 222,000 | 9,546,000 |
| Premark International, Inc. | 225,000 | 7,101,563 |
| Wynn's International, Inc. | 34,600 | 1,038,000 |
|
| ||
| 181,253,112 | ||
| Commercial Real Estate—7.2% | ||
| Catellus Development Corporation (a) | 3,000,000 | $ 61,500,000 |
| Castle & Cooke, Inc. (a) | 1,423,600 | 22,777,600 |
|
| ||
| 84,277,600 | ||
| Diversified Conglomerates—6.5% | ||
| U.S. Industries, Inc. (a) | 1,900,000 | $ 76,593,750 |
| Total Common Stocks (Cost: $872,933,354) | 1,087,274,544 | |
| Principal Value | Market Value | |
|
| ||
| Fixed Income—0.2% | ||
| Corporate Bonds—0.2% | ||
| Recreation & Entertainment—0.2% | ||
| Harrah's Jazz Bonds, 14.25% due 11/15/2001 (b) | 6,700,000 | $ 2,395,250 |
| Total Fixed Income (Cost: $3,304,413) | 2,395,250 | |
| Short-Term Investments—7.0% | ||
| U.S. Government Bills—1.2% | ||
| United States Treasury Bills, 5.04% due 10/9/1997 | 5,000,000 | $ 4,951,700 |
| United States Treasury Bills, 5.34% due 10/23/1997 | 5,000,000 | 4,938,384 |
| United States Treasury Bills, 5.17% due 11/28/1997 | 5,000,000 | 4,914,551 |
| Total U.S. Government Bills (Cost: $14,804,635) | 14,804,635 | |
| Commercial Paper—4.7% | ||
| American Express Credit Corp., 5.555.65% due 8/18/4/1997 | 15,000,000 | $ 15,000,000 |
| Ford Motor Credit Corp., 5.555.56% due 8/48/5/1997 | 15,000,000 | 15,000,000 |
| General Electric Capital Corporation, 5.505.85% due 8/18/6/1997 | 25,000,000 | 25,000,000 |
| Total Commercial Paper (Cost: $55,000,000) | 55,000,000 | |
| Repurchase Agreements—1.1% | ||
| State Street Repurchase Agreement, 5.76% due 8/1/97 | 12,484,000 | $ 12,484,000 |
| Total Repurchase Agreements (Cost: $12,484,000) | 12,484,000 | |
| Total Short-Term Investments (Cost: $82,288,635) | 82,288,635 | |
| Total Investments (Cost $958,526,402)—99.8% | 1,171,958,429 | |
| Other assets in excess of other liabilities—0.2% | 1,977,967 | |
|
| ||
| Total Net Assets—100% | $1,173,936,396 | |
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Notes:
(a) Non-income producing security.
(b) This bond is currently in default and the fund is no longer accruing interest.