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 (12/31/97) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
12/31/97 NAV $40.41	Total Return Last 3 mos.	Average Annual Total Return* Through 12/31/97 From Fund Inception 8/5/91
The Oakmark Fund	4.1%	30.1%
Standard & Poor's 500 Stock Index w/inc**	2.9%	18.4%
Dow Jones Industrial Average w/inc**	0.0%	19.2%
Value Line Composite Index**	-2.8%	10.4%
*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 results.

NIKE, INC.

As many of you know, our investment philosophy rests on the premise that a stock is an ownership piece of a business, not merely a piece of paper. We are true long-term investors, tend to make major changes infrequently, and our portfolio turnover is far less than that of the average equity fund. During the "typical'' year, I may add only a couple new names to your Fund's ten largest holdings. When we find one and accumulate our position, I like to tell you about it and so I want to discuss our newest holding, one which our Bill Jacobs recommended and follows: Nike, Inc.

The three pillars of our analysis of any investment are the business, the management, and, most important, valuation. Let's discuss each of these in turn.

Nike is one of the best businesses and one of the best-managed businesses in the marketplace. The proof is in the numbers. In 1984, NKE had revenues of only $919 million and net income of $40 mm. In 1997, NKE had revenues of over $9 billion and net of almost $800 mm. These represent extraordinary annual growth rates of 19 percent and 26 percent. During this time period, NKE developed a full international presence (a platform which should produce significant future growth), spent a fortune reinforcing its brand name, and greatly expanded its product offerings. Despite all this investment spending by NKE, it earned a phenomenal 22.5 percent return on its assets during this period. Even more remarkable, NKE achieved this without issuing any debt or equity! NKE is a great business.

Nike Founder and CEO Phil Knight may be one of the most underrated businesspeople ever. Reading his excellent letters in the company's annual reports reveals a visionary leader who exemplifies all that we look for in a company's management: strong identification with shareholders and the stock price, competitiveness, a profound understanding of his business, running the business for long-term value growth and not for the Wall Street fad du jour (in fact, I can cite no other CEO who so colorfully and accurately debunks Wall Street conventional wisdom). NKE management is first-rate.

During the last few years, NKE's lofty valuation kept us from making an investment in the company. However, NKE's dramatic stock underperformance over the past year finally gave us an opportunity to buy the stock at an attractive price. What caused this underperformance was an unexpected pause in NKE's growth rate. Extrapolating the last few years growth led to an over-estimation of sales and a subsequent build-up of inventory that NKE needs to work off. NKE experienced this before, in 1987 and 1993. It is part of the business. As Knight wrote in the 1988 Annual Report: "This business involves a fast-moving market with a much slower development process. This combination dictates against steady annual earnings increases...it doesn't mean it is not a good business to be in, but it causes periodic earnings downturns.'' At current prices, NKE sells at 9.5 times next year's pre-tax economic earnings and 1.2 times revenues. These represent significant discounts to the overall market and attractive valuations to us.

Please allow a digression, for we had previously owned NKE in your Fund in 1993, when NKE had experienced a similar inventory build-up. The stock traded at a very modest valuation, similar to that bestowed on footwear companies, which the market correctly regards as a lousy business. The stock did well, and we sold it as a fully-priced footwear company. However, we had a queasy feeling that we were mis-framing NKE as a footwear company, when, in fact, it was a dominant consumer brand company (and, thus, deserving of a premium valuation). Since that time, we have followed the company intensively and reconsidered our thinking. Now, we do regard the company as a great consumer brand business, albeit one with pronounced cycles, the most recent one having provided us an opportunity to again initiate an investment in NKE.

The biggest misconception about this business is that it is a fashion business. What differentiates Nike from, say, Polo or Calvin Klein is its connections with sports and fitness, and its identification with an ever-renewable stable of athletes who use, wear, and endorse the company's products. Out goes Bo Jackson, in comes Michael Jordan. Out goes Nolan Ryan, in comes the Brazilian soccer star, Ronaldo. Then Tiger Woods. And so on. Because of the worldwide ubiquity of its brand and its market dominance, NKE has a competitive advantage over its competition in aligning itself with those athletes who will convey what the Swoosh means in the future.

I am very excited about the long-term (the short-term is far more uncertain) potential of this investment. As I write this, it is your Fund's fourth largest investment. Globally, NKE has only scratched the surface. I agree with Nike's statement in the 1997 Annual Report: "The "Swooshification of the world' should more appropriately be deemed the Sportsification of the world. We will mature with the inexorable penetration of sports into the global psyche.'' Long term, NKE the stock should benefit both from growth in operating earnings per share (and volumes and revenues) that are greater than the average company and from the market's placing a premium valuation on these parameters. The road will be bumpy, but the long term—which is all that matters to us—should be rewarding.

ROBERT J. SANBORN
Portfolio Manager
rsanborn@oakmark.com
January 8, 1998

(a) Non-income producing security.

(b) American Depository Receipt.