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 (12/31/97) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
12/31/97 NAV $17.52	Total Return Last 3 mos.	Average Annual Total Return* Through 12/31/97 From Fund Inception 11/1/96
The Oakmark Select Fund	8.3%	63.1%
Standard & Poor's 500 Stock Index w/inc**	2.9%	33.9%
Standard & Poor's MidCap 400 Index w/inc**	0.8%	33.3%
Value Line Composite Index**	-2.8%	22.9%
*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.

PERFORMANCE UPDATE

In the quarter ended December 31, The Oakmark Select Fund gained 8.3% compared to 2.9% for the S&P 500 and 0.8% for the S&P Midcap. Continued strength in our cable holdings was the biggest reason for superior performance. For calendar year 1997, your Fund gained 55%, far above the benchmark indices. In fact, that 1997 performance had your Fund ranked number one among over 800 mutual funds tracked by Lipper that have growth in capital as their primary objective. In some ways, I hated to see 1997 end!

Several of you have told me that The Oakmark Select Fund's continuing outstanding performance is undermining credibility in my quarterly attempt to reduce expectations to reasonable levels. I would love to tell you that we expect to repeat our 1997 performance, but I know better and so do you. Our firm's long-term success has come from a few homeruns, fewer strikeouts, and a lot of singles and doubles. By focusing on limiting our downside, we expect to deliver above-average performance more often than below-average performance. But while our approach has only occasionally led to top-rated short-term performance, it has allowed us to consistently achieve excellent long-term results. Excellent long-term performance is our goal, and long-term performance with annual returns a few percentage points above the market indices has been achieved by only a handful of competing funds.

GUCCI NEVER GOES ON SALE!

One of last quarter's most frequently asked questions was, "What did you do when the market declined in October?" The answer was that we did the same thing we do every other day: opportunistically add to our existing holdings and try to identify new stock ideas that are more attractive than the stocks we already own. When negative psychology is pushing the market down, slightly negative news often creates major stock price declines. Such appears to have been the case with your Fund's newest holding, Gucci.

All along Michigan Avenue, the signs in the windows show each store's sale-dejour and the percentage markdown being offered. Many value-oriented shoppers wisely time their purchases to take advantage of these sales. But shoppers quickly learn that the strongest brands don't need to play the markdown game. Walking past the Gucci store I overheard one bargain hunter's lament, "It's too bad, but Gucci never goes on sale!"

Fortunately for The Oakmark Select Fund, that's not the case in the stock market. A little over a year ago, investors, recognizing the world-wide strength of Gucci's brand name, priced Gucci stock at $80. That price, at 20 times then-expected 1998 earnings per share of $4.00, wasn't cheap, but it certainly wasn't ridiculous relative to the overall market. Last quarter, analysts lowered their estimates of 1998 earnings to about $3.00 because of the recent turmoil in Asian economies and the popularity of Gucci products in Asia. How did the market react to a 25% reduction in 1998 earnings estimates? In October, Gucci stock hit a low of $29, down 64%! Predictably, most analysts who recommended Gucci at $80 removed their buy recommendations. You can't buy Gucci products at 60% off, but we could buy the company there! Like many other successful investors, we believe that the knowledge we have as consumers can be useful for making investment decisions.

In a meeting with Gucci's CFO, I was able to confirm that management's largest incentives are stock options, and that unlike many of their free-spending competitors, Gucci quantitatively evaluates each capital expenditure opportunity and selects only those expected to achieve returns well above their cost-of-capital. Further, the company is taking advantage of the recent stock-price weakness by using its cash to reduce the number of outstanding shares. The rebound in Gucci's price helped your Fund last quarter, and although the short-term results are hard to predict, I expect the long-term performance of Gucci to be also excellent.

LONG-TERM?

In all the communication to our shareholders and potential shareholders, The Oakmark Family of Funds stresses our long-term time frame and encourages our investors to use a similar long-term approach to their investments. Because short-term traders are disruptive and increase fund expenses, we discourage them from becoming shareholders in our funds. Last month, I was talking to an "investor" who had been in and out of The Oakmark Select Fund several times within the last year, and I was explaining why we weren't allowing them back into the Fund. When I said we didn't want short-term traders in the Fund, the reply was, "But, I am a long-term investor—once I held a fund for three months!" Investors measure the long term in years, not months! From your notes and e-mails, I'm glad to know that unlike that trader, most of our shareholders are following a well thought-out long-term investment plan. Thanks for your continuing support.

BILL NYGREN
Portfolio Manager
bnygren@oakmark.com
January 5, 1998

(a) Non-income producing security.

(b) American Depository Receipt.