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 (9/30/97) AS COMPARED TO THE STANDARD &
POOR'S 500 INDEX  |
| 9/30/97 NAV $41.21 |
Total
Return
Last 2 mos. |
Average
Annual Total Return*
Through 9/30/97
From Fund Inception
8/5/91
|
|
| The Oakmark Fund |
0.8% |
30.7% |
| Standard & Poor's 500
Stock Index w/inc** |
-0.4% |
18.7% |
| Dow Jones Industrial Average
w/inc** |
-3.1% |
20.1% |
| Value Line Composite Index** |
4.8% |
11.3% |
|
*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 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
success. |
|
ANNUAL PORTFOLIO UPDATE
A year ago (or, more exactly, eleven months ago), I wrote:
The Oakmark Fund's fiscal year ended October 31, 1996 was eerily
reminiscent of our 1995 fiscal year. As Yogi Berra might say, "It's déjà
vu all over again." A very similar macroeconomic environment—slow,
steady growth; continued low inflation, with the price of gold down again;
long-term interest rates down again—provided a good context for equities.
As in fiscal 1995, your Fund generated strong absolute returns but lagged behind
those of the Standard & Poor's 500.
In reviewing the 1997 fiscal year, I can only say, "Play it again,
Yogi." For, yet again, inflation continues to remain subdued, and the price
of gold declined again; long-term interest rates declined again, this time from
more than 6.7% to less than 6.4%. With the continuation of steady growth and
with companies increasingly being run for the benefit of their owners, the
context for US equities was (and remains) favorable. Your Fund generated strong
positive returns of 36.0%, about a half a percentage point less than the
Standard & Poor's 500.
Our patience in our cable investments—Tele-Communications Inc., U.S.
West Media Group, and TCI Liberty Media, Cl A—was well-rewarded. These
stocks were among our best performers, up 71%, 43%, and 74%, respectively. Other
standouts among our larger holdings include Mellon (+71%), Brunswick (+50%), and
Knight-Ridder (+48%). Among our worst performers were Black & Decker (-2%),
DeBeers (+2%), and Nabisco (+15%). Our largest holding, Philip Morris, slightly
outperformed the market despite its ubiquity in the media. 1998 looms as another
news-filled year for that company, but through it all we will continue to keep
our eyes on the long term.
In general, your portfolio businesses once again performed at least in line
with expectations. I can point to very few disappointments over the year. Part
of this is due to the overall strong economy, part is due to your Fund's current
preference for high-quality businesses, and part is due to our exceptional
research effort. While the "market" is up a lot, I continue to believe
that your portfolio represents very solid value. It will probably perform
relatively better in a less buoyant overall market, but is a good value in any
case.
Our portfolio turnover was low during the past year. We have added one new
significant holding, Columbia/HCA Healthcare, the hospital company that remains
in the news. As the stock declined dramatically due to revelations about its
business practices, we have established a large investment based on our
perceptions that the underlying value of the company's assets is worth far more
than the stock price, and that top management (in the form of CEO Tom Frist) is
very incentivised to maximize long-term value. We sold only one large holding,
Torchmark, over the course of the year.
Your Fund—like all of the funds in The Oakmark Family of Funds—remains
concentrated. Your twenty largest holdings comprise three-quarters of our
equities; our top ten comprise more than 50% of our equities. As fund companies
relentlessly attempt to exploit new marketing opportunities, one fad is
concentrated investing. Many firms are launching funds not necessarily because
they believe in concentrated investing, but because they perceive an opportunity
to attract assets. At Harris Associates and The Oakmark Family of Funds, we have
had concentrated portfolios in our separate accounts since 1976, and in each of
our Funds since inception. It is a core investment value firm-wide.
Contrasting our approach with that of other well-known funds is instructive.
For instance, the world's largest mutual fund has over 400 holdings, ten times
the number of holdings in your Fund. Its ten largest holdings constitute less
than 15% of its assets, whereas The Oakmark Fund's ten largest holdings approach
50% of the Fund. During the tenure of this other fund's prior portfolio manager,
annual turnover at that fund reached 155%, meaning the average stock was held
for about eight months. The Oakmark Fund's turnover is around 20%, meaning the
average stock is typically held for about five years. At The Oakmark Fund, we
make our positions large enough to matter, and we use a time horizon that is
consistent with the term "investor".
Sometimes I read an article that reminds me that our approach, which seems
so logical to all of us, is not the industry norm. A recent article in The
Wall Street Journal "Heard on the Street" column on McDonald's
quoted a large institutional investor as saying he had cut his position in MCD
from 2% of his portfolio to 1%, and would not restore it back to 2% until he saw
some sign that results are improving. When we read this, we do not know where to
begin with critiquing this thought process. First, in our view, this investor is
taking MCD from a fairly insignificant position to a very insignificant
investment. Why have trivial investments? Second, by the time this company shows
improvements, its price will undoubtedly rise.
Many ask me what is the recipe for the success of all the funds in The
Oakmark Family of Funds. I think it is fairly simple. First, we have a
consistent investment philosophy throughout the entire firm. We all believe in
it, and we all speak the same language. Second, we continue to maintain, in a
business increasingly resembling the NBA with regard to loyalty, a stable group
of investment professionals. Third, we have an investment culture first and
foremost. I am biased, but I do not believe there is a better investment firm
than Harris Associates, or a better fund family than The Oakmark Family of
Funds.
Personally, I want to thank each of you for the support you have shown The
Oakmark Fund, and all our Funds.
ROBERT
J. SANBORN
Portfolio Manager
rsanborn@oakmark.com
October 13, 1997
Schedule of Investments—September 30, 1997
|
Shares Held |
Market Value |
|
Common Stocks—88.9%
|
|
| Food &
Beverage—16.6%
|
|
|
| Philip Morris Companies Inc. |
10,260,700 |
$ 426,460,344 |
| Anheuser-Busch Companies Inc. |
5,495,400 |
247,979,925 |
| H.J. Heinz Company |
4,007,250 |
185,084,860 |
| Nabisco Holdings Corporation |
3,572,100 |
152,037,506 |
| Gallaher Group Plc (a) (b) |
3,835,500 |
73,593,656 |
| CPC International, Inc. |
130,000 |
12,041,250 |
| M & F Worldwide Corp. (a) |
300,000 |
2,850,000 |
|
|
|
|
|
1,100,047,541 |
|
|
|
| Retail—0.6% |
|
|
| Carson Pirie Scott & Company (a) (c) |
1,000,000 |
$ 39,437,500 |
|
|
|
| Other Consumer
Goods & Services—17.8% |
|
|
| Columbia/HCA Healthcare Corporation |
9,210,000 |
$ 264,787,500 |
| The Black & Decker Corporation (c) |
7,034,200 |
262,023,950 |
| Polaroid Corporation (c) |
4,332,000 |
221,744,250 |
| Brunswick Corporation |
3,578,800 |
126,152,700 |
| Mattel, Inc. |
3,303,800 |
109,438,375 |
| Fortune Brands, Inc. |
2,560,500 |
86,256,844 |
| First Brands Corporation |
1,070,400 |
28,633,200 |
| Whitman Corporation |
957,500 |
26,091,875 |
| Juno Lighting, Incorporated (c) |
1,085,000 |
18,580,625 |
| GC Companies, Inc. (a) (c) |
397,000 |
17,071,000 |
| Arctic Cat, Inc. |
957,500 |
11,011,250 |
| Justin Industries |
601,500 |
8,082,656 |
|
|
|
|
|
1,179,874,225 |
|
|
|
| Banks—13.0% |
|
|
| Banc One Corporation |
8,273,226 |
$ 461,749,426 |
| Mellon Bank Corporation |
7,213,100 |
394,917,225 |
|
|
|
|
|
856,666,651 |
|
|
|
| Insurance—1.6% |
|
|
| Old Republic International Corporation |
2,748,620 |
$ 107,196,180 |
|
|
|
| Other Financial—5.1% |
|
|
| AMBAC, Inc (c) |
4,389,800 |
$ 178,609,987 |
| Fannie Mae |
3,307,500 |
155,452,500 |
|
|
|
|
|
334,062,487 |
| Broadcasting &
Publishing—14.5% |
|
|
| Tele-Communications, Inc., Class A (a) |
13,379,179 |
$ 274,273,169 |
| Knight-Ridder, Inc. (c) |
4,650,000 |
254,006,250 |
| Dun & Bradstreet Corporation |
6,841,300 |
194,121,888 |
| ACNielsen Corporation (a) (c) |
4,764,000 |
114,336,000 |
| Tele-Communications, Liberty Media, Class A
(a) |
3,657,741 |
109,503,621 |
| TCI Satellite Entertainment, Inc., Class A (a) |
1,217,917 |
9,210,497 |
|
|
|
|
|
955,451,425 |
|
|
|
| Telecommunications—3.4% |
|
|
| U.S. West Media Group (a) |
10,085,400 |
$ 225,030,488 |
|
|
|
| Managed Care
Services—1.6% |
|
|
| Foundation Health Systems, Inc. (a) |
3,323,510 |
$ 106,352,320 |
|
|
|
| Medical
Products—1.0% |
|
|
| Sybron International Corporation (a) |
1,567,800 |
$ 67,317,413 |
|
|
|
| Aerospace &
Defense—4.4% |
|
|
| Lockheed Martin Corporation |
1,935,000 |
$ 206,319,375 |
| The Boeing Company |
1,586,000 |
86,337,875 |
|
|
|
|
|
292,657,250 |
|
|
|
| Other
Industrial Goods & Services—4.1% |
|
|
| Fort James Corporation |
2,894,100 |
$ 132,585,956 |
| Bandag Incorporated, Class A |
1,104,100 |
56,723,138 |
| SPX Corporation (c) |
875,200 |
51,308,600 |
| The Geon Company |
971,600 |
19,917,800 |
| Premark International, Inc. |
328,400 |
10,508,800 |
|
|
|
|
|
271,044,294 |
|
|
|
| Foreign
Securities—5.2% |
|
|
| DeBeers Consolidated Mines Limited ADR (b) |
4,071,000 |
$ 119,840,063 |
| YPF Sociedad Anonima (b) |
3,025,600 |
111,569,000 |
| Unilever NV (b) |
476,000 |
101,209,500 |
| European Vinyls Corporation International N.V. |
547,700 |
12,933,678 |
|
|
|
|
|
345,552,241 |
|
|
|
| Total Common Stocks (Cost:
$3,861,010,117) |
5,880,690,015 |
|
Principal Value |
Market Value |
|
Short Term Investments—11.4%
|
|
| U.S. Government Bills—2.2% |
|
|
| United States Treasury Bills, 5.07%5.40%
due 10/16/19971/29/1998 |
$150,000,000 |
$ 148,839,664 |
|
|
|
| Total U.S. Government Bills |
|
148,839,664 |
|
|
|
| Commercial
Paper—8.8% |
|
|
| American Express Credit Corp., 5.49%5.58%
due 10/1/199711/4/1997 |
$175,000,000 |
175,000,000 |
| Ford Motor Credit Corp., 5.48%6.15% due
10/1/199710/22/1997 |
175,000,000 |
175,000,000 |
| General Electric Capital Corporation, 5.50%6.38%
due 10/1/199711/3/1997 |
230,000,000 |
230,000,000 |
|
|
|
| Total Commercial Paper |
|
580,000,000 |
|
|
|
| Repurchase
Agreements—0.4% |
|
|
| State Street Repurchase Agreement, 5.95% due
10/1/97 |
$23,456,000 |
$ 23,456,000 |
|
|
|
| Total Repurchase Agreements |
|
23,456,000 |
|
|
|
| Total Short Term Investments
(Cost: $752,289,548) |
752,295,664 |
|
|
|
| Total Investments (Cost $
4,613,299,665)—100.3%(d) |
6,632,985,679 |
| Other liabilities in excess of other assets—(0.3)% |
|
(18,037,051) |
|
|
|
| Total Net Assets—100% |
|
$ 6,614,948,628 |
|
|
|
|
|
|
|
(a) Non-income producing security.
(b) Represents an American Depository Receipt.
(c) See footnote number six in the Notes to Financial Statements regarding
transactions in affiliated issuers.
(d) At September 30, 1997, net unrealized appreciation of $2,019,686,014,
for federal income tax purposes consisted of
gross unrealized appreciation
of $2,077,648,280 and gross unrealized depreciation of $57,962,266.
|
See accompanying notes to financial
statements.