The Oakmark Select Fund

Report from Bill Nygren, Portfolio Manager

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/97) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
9/30/97 NAV $16.34	Total Return Last 2 mos.	Total Return* Through 9/30/97 From Fund Inception 11/1/96

The Oakmark Select Fund	6.9%	63.4%
Standard & Poor's 500 Stock Index w/inc**	-0.4%	36.6%
Standard & Poor's MidCap 400 Index w/inc**	5.6%	38.7%
Value Line Composite Index**	4.8%	30.8%
Total return includes change in share prices and in each case includes 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 S&P 400 consists of 400 domestic stocks chosen for market size, liquidity, and industry group representation. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results.

THE OAKMARK SELECT FUND

The Oakmark Select Fund increased in value by 6.9% for our transitional two month quarter ending September 30. That gain was slightly above the S&P Midcap's 5.6% gain, and well ahead of the S&P 500's 0.4% loss. In the last two quarters, your fund has benefited from its large exposure to midcap stocks. Earlier this year, after several years of outperformance by the largest companies, articles began appearing about long-term structural advantages possessed by giants like Coke and Intel. Unfortunately, investors had priced those stocks so high that even their large earnings gains were viewed as disappointing. The stock market usually finds a way to defy conventional wisdom!

For its fiscal year (actually eleven months) The Oakmark Select Fund increased in value by 63.4%. That gain far exceeded gains in the S&P Midcap, 38.7% and the S&P 500, 36.6%. Again, I want to caution against unreasonable expectations. The return on the market indices as well as the amount by which your Fund outperformed those indices are both highly unusual. Although we expect the stock market and The Oakmark Select Fund to provide good long-term returns, it is unlikely that their upward paths will be as straight as we have recently become accustomed.

As you know, we expect The Oakmark Select Fund to typically hold 20 or fewer stocks and to have half the value in its top five positions. As of September 30, your Fund held 16 stocks and the five largest accounted for 50% of the assets. Additionally, we have told you that the Fund would be a long-term investor. On September 30, only 16% of the fund's assets were invested in stocks the fund did not own on its first day of operation. I believe this shows we are acting consistently with our long-term investment philosophy.

BET AGAINST THE COVER

In August of 1979 with double-digit inflation, double-digit government bond yields and the US economy declining in worldwide significance, Business Week ran a cover story proclaiming "The Death of Equities." Over the following eighteen years, as our economy staged a remarkable turnaround, a $1000 investment in the stock market (reinvesting dividends) increased in value to $17,000! Like the Sports Illustrated jinx, "The Death of Equities" story gave Business Week the dubious reputation of being a contrary indicator. It's not really fair to single out Business Week. The media reports about what has happened and what is expected to happen. The stock market moves based on how the actual events differ from market expectations. By the time a news story is deserving of being placed on the cover, a turning point has often been reached.

Last October as we were preparing to launch The Oakmark Select Fund, Business Week ran a cover story titled "Cable TV, The Looming Crisis." In 1996, cable stocks had very disappointing returns because investors were expecting large subscriber losses to competing telephone and satellite companies. We disagreed with the consensus and thought intrinsic value would grow as competing providers failed to meet their optimistic projections. We also thought most cable stocks had owner-oriented managements and were selling at large discounts to intrinsic value. As long-term value investors, we look for those situations where negative short-term sentiment creates buying opportunities. For these reasons, The Oakmark Select Fund placed its largest single bet on the cable industry, nearly 25% of your fund was invested in three cable stocks: Liberty Media, Cablevision Systems and US West Media Group.

A year ago, I told my colleagues that in The Oakmark Select Fund's first annual report, I would write about cable stocks and the Business Week cover indicator. From November 1, 1996 through September 30, 1997: US West Media was up 43%, Liberty Media was up 74% and Cablevision increased by 102%! The Business Week cover indicator came through again!

What do we think about our cable holdings today? Private transactions are occurring at cashflow multiples well above where public stocks are trading and Liberty Media and US West Media are still repurchasing shares. Cablevision just recently exchanged stock for subscribers from industry leader Tele-Communications, Inc. Cablevision stock is trading at $63, but that transaction only makes sense for Tele-Communications, Inc. if Cablevision stock is worth in excess of $100 per share. To us, that's a pretty strong vote of confidence by a knowledgable investor in the same industry. We're sticking with our cable holdings and expect that when we review next year's performance, these stocks will have again added to our returns.

At the close of this short year, I want to say thank you to all of my colleagues who have so greatly contributed to our strong results. Most importantly I want to thank you, our shareholders, for your support and for making this great start possible. As I wrote in the first quarterly, I'll wait to measure the fund's success by using its ten-year record, but so far so good!

BILL NYGREN

Portfolio Manager
bnygren@oakmark.com

October 6, 1997