The Oakmark Small Cap Fund
Report from Steven J. Reid, Portfolio Manager
The Oakmark Small Cap FundReport from Steven J. Reid, Portfolio Manager |
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| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/97) AS COMPARED TO THE RUSSELL 2000 INDEX | ||
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| 12/31/97 NAV $19.42 | Total Return Last 3 mos. |
Average Annual Total Return* Through 12/31/97 From Fund Inception 11/1/95 |
| The Oakmark Small Cap Fund | -0.3% | 38.6% |
| Lipper Small Cap Fund Index** | -5.4% | 16.1% |
| Russell 2000 w/inc** | -3.4% | 21.5% |
| S&P Small Cap 600 w/inc** | -3.1% | 24.5% |
| *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 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. | ||
HAPPY NEW YEAR!!!
December 31, 1997 marked the end of The Oakmark Small Cap Fund's first fiscal quarter. During the quarter the Fund declined 0.25%, which was less than the decline of the relevant indices. For the calendar year your Fund gained in excess of 40%. This surpassed the relevant indices by a significant margin. As a shareholder, I am pleased to note that The Oakmark Small Cap Fund is ranked by Lipper as the #5 fund out of 362 small cap funds over the last 2 years.
Notwithstanding this recent short-term success, as investors we should maintain a long-term investment horizon. Looking back at the September 30, 1997 report to shareholders, I committed a bit of a faux pas with the comment, "During the latter part of the fiscal year, the shares of small companies performed better than the shares of large companies." Well, this astute observation marked the end of that short-lived trend, probably deservedly so. The flaw in the observation I made last September is that it was a mere glimpse at a short-term event. As investors, we should evaluate the results of our investments over several years as opposed to several months. Investing is a marathon, not a sprint. The businesses we invest in are not created overnight, but over multi-year periods of developing the products or services that customers demand. Looking back on 1997, your Fund performed very well and we are delighted to be able to share the success of this past year with you. Happy New Year!!!
MUTUAL FUND INVESTING AND INVESTMENT PHILOSOPHY
I am frequently quizzed by shareholders, advisors, and consultants regarding a multitude of quantitative and qualitative attributes of The Oakmark Small Cap Fund. While it is important to be aware of the number of holdings in the portfolio or the cash position, nothing is more important than understanding the Fund's investment philosophy. The investment philosophy of The Oakmark Small Cap Fund is universally shared by the entire Oakmark Family of Funds and has been the foundation of Harris Associates for over twenty years. Our objective is to invest in the shares of companies that are selling at a significant discount to their economic value. We define economic value as what a rational business person would be willing to pay to own the entire company, the key word being rational. To that end, our internal staff of investment professionals is constantly looking at transactions of public and private companies or divisions of companies to determine benchmarks for valuing the companies in which we invest. This is complemented by a significant commitment of time which allows us to meet with managements of companies in which we invest, as well as their competitors. In this way, we gain greater insight into valuations of businesses as well as enhance our understanding of the industry.
We pay close attention to the managers of the companies in which we invest. These are people that are owner-oriented and have their incentives aligned with ours as shareholders. Very often their most significant personal asset is ownership in the shares of the company which they manage. This kind of alignment focuses management on allocating the financial capital of the company in the most economic and rational manner, which ultimately grows the value per share of the company. We believe that qualitative assessment of management and a company by company focus is far more valuable in making investment decisions than the predictions of various gurus looking at interest rates, the stock market, or the economy.
In regard to managing the portfolio, our long-term investment horizon should minimize the high costs of turnover, which include commissions, price impacts, and taxes. Unfortunately, we do not control stock prices and, at some point, the price of a company's shares will converge with its value per share. When this happens we will sell the shares and redeploy the proceeds in other more attractive investments. Another tenet of our style of investing is to avoid being overdiversified. The Oakmark Small Cap Fund has less than half the number of holdings of the average small cap fund. Last, and most important, is that our actions be consistent with our investment philosophy and we do not deviate from it.
UGLY DUCKLING....AN UGLY DUCKLING OR A BEAUTIFUL SWAN???
One of the more recent investments in your Fund is Ugly Duckling Corp. (the Duck). The Duck is a retailer and financier of used cars. During 1997, this industry experienced radical change, including the bankruptcy of several large competitors of the Duck. This upheaval caused even strong companies like the Duck to experience significant share price declines. Our analysis concluded that the fundamentals of the Duck's business and the industry were intact. After a meeting with management at their headquarters in Phoenix, my colleague, Jim Benson, and I concluded that despite near-term volatility, the long-term outlook was favorable. Several shareholders have noticed that our initial purchases of the shares were at prices higher than the current share price. We are convinced that the value per share has not declined, thus we continued to buy more shares during the quarter. This is a prime example of a relatively unknown industry and company that have fallen out of favor with both Wall Street and the Duck's investment bankers in Arlington, Virginia. It is reminiscent of the depressed bank and thrift stock prices of the early nineties. We believe the long-term prospects for this investment are very attractive. Some day the Duck will fly again.
OUTLOOK
As you know, we don't make predictions regarding the stock market or share prices. It is reasonable to expect that some companies will be affected by cross currents in the economy. We try to take advantage of the volatility of share prices in our endeavor to do better than the market. If we don't, we can use this year's universal scapegoat. El Niño.
Once again, I would like to thank everyone involved, especially our shareholders, for your support of The Oakmark Small Cap Fund.
STEVEN J. REID
Portfolio Manager
sreid@oakmark.com
January 8, 1998
THE OAKMARK SMALL CAP FUND
|
| Shares Held | Market Value | |
| Common Stocks—94.3% | ||
| Food & Beverage—6.1% | ||
| Ralcorp Holdings, Inc. (a) | 3,000,000 | $ 50,812,500 |
| International Multifoods Corporation | 1,084,900 | 30,716,231 |
| M & F Worldwide Corp. (a) | 917,600 | 9,003,950 |
| 90,532,681 | ||
| Retail—3.5% | ||
| Cole National Corporation (a) | 1,250,000 | $37,421,875 |
| Ugly Duckling Corporation (a) | 1,750,000 | 14,875,000 |
| 52,296,875 | ||
| Other Consumer Goods & Services—9.7% | ||
| Triarc Companies, Inc. (a) | 1,750,000 | $47,687,500 |
| First Brands Corporation | 1,000,000 | 26,937,500 |
| Scotsman Industries, Inc. | 1,041,500 | 25,451,656 |
| GC Companies, Inc. (a) | 310,000 | 14,686,250 |
| Standard Motor Products, Inc. | 511,400 | 11,538,462 |
| Barry (R.G.) Corporation (a) | 650,000 | 7,556,250 |
| Libbey, Inc. | 190,000 | 7,196,250 |
| Justin Industries | 207,400 | 2,825,825 |
| P.H. Glatfelter Company | 55,300 | 1,029,963 |
| 144,909,656 | ||
| Banks—10.3% | ||
| People's Bank of Bridgeport, Connecticut | 3,000,000 | $114,000,000 |
| BankAtlantic Bancorp, Inc., Class A | 926,700 | 15,116,794 |
| Northwest Savings Bank | 590,000 | 8,333,750 |
| Pocahontas Federal Savings and Loan Association | 140,000 | 6,230,000 |
| PennFed Financial Services, Inc. | 130,000 | 4,485,000 |
| Harbor Federal Savings Bank | 45,000 | 2,981,250 |
| Savings Bank of the Finger Lakes | 94,000 | 2,914,000 |
| 154,060,794 | ||
| Insurance—13.5% | ||
| RenaissanceRe Holdings Limited. | 1,650,000 | $72,806,250 |
| Financial Security Assurance Holdings Ltd. | 871,700 | 42,059,525 |
| PXRE Corporation | 1,186,000 | 39,360,375 |
| Highlands Insurance Group, Inc. (a) | 1,150,000 | 32,631,250 |
| Chartwell Re Corporation | 432,200 | 14,586,750 |
| 201,444,150 | ||
| Other Financial—0.8% | ||
| Duff & Phelps Credit Rating Company | 296,800 | $12,057,500 |
| Broadcasting & Cable TV—7.2% | ||
| Cablevision Systems Corporation (a) | 834,700 | $79,922,525 |
| Ascent Entertainment Group, Inc. (a) | 1,915,000 | 19,868,125 |
| Granite Broadcasting Corporation (a) | 800,000 | 7,250,000 |
| 107,040,650 | ||
| Publishing—1.0% | ||
| Lee Enterprises, Inc. | 500,000 | $14,781,250 |
| Telecommunications—0.2% | ||
| ROHN Industries, Inc. | 500,000 | $2,578,125 |
| Data Storage—1.9% | ||
| Imation Corporation (a) | 1,800,000 | $28,800,000 |
| Automotive—1.6% | ||
| Stoneridge, Inc. (a) | 1,500,000 | $24,000,000 |
| Aerospace & Defense—2.5% | ||
| Tracor, Inc. (a) | 1,236,000 | $37,543,500 |
| Machinery & Metal Processing—5.6% | ||
| The Carbide/Graphite Group, Inc. (a) | 800,000 | $27,000,000 |
| DT Industries, Inc. | 462,000 | 15,708,000 |
| Matthews International Corporation, Class A | 300,000 | 13,200,000 |
| Northwest Pipe Company (a) | 520,000 | 12,480,000 |
| Atchison Casting Corporation (a) | 710,400 | 11,544,000 |
| Wolverine Tube, Inc. (a) | 140,800 | 4,364,800 |
| 84,296,800 | ||
| Building Materials & Construction—0.3% | ||
| Triangle Pacific Corporation (a) | 146,100 | $4,949,138 |
| Oil & Natural Gas—2.0% | ||
| Titan Exploration, Inc. (a) | 3,100,000 | $29,450,000 |
| Other Industrial Goods & Services—13.4% | ||
| MagneTek, Inc. (a) | 2,500,000 | $48,750,000 |
| SPX Corporation | 700,000 | 48,300,000 |
| Gardner Denver Machinery, Inc. (a) | 1,249,200 | 31,620,375 |
| Zurn Industries, Inc. | 668,000 | 21,000,250 |
| Columbus McKinnon Corporation | 808,400 | 19,603,700 |
| Ferro Corporation | 775,000 | 18,842,187 |
| Binks Sames Corporation | 247,000 | 10,435,750 |
| Binks Sames Corporation, Restricted Shares | 28,000 | 1,041,040 |
| 199,593,302 | ||
| Commercial Real Estate—7.6% | ||
| Catellus Development Corporation (a) | 4,000,000 | $80,000,000 |
| Castle & Cooke, Inc. (a) | 1,423,300 | 24,018,187 |
| Wellsford Real Properties Inc. (a) | 466,900 | 7,295,313 |
| Trammell Crow Company (a) | 60,000 | 1,545,000 |
| 112,858,500 | ||
| Diversified Conglomerates—7.1% | ||
| U.S. Industries, Inc. | 3,500,000 | $105,437,500 |
| Total Common Stocks (Cost: $1,137,244,707) | 1,406,630,421 | |
| Principal Value | Market Value | |
| Short Term Investments—5.4% | ||
| U.S. Government Bills—0.6% | ||
| United States Treasury Bills, 4.94%5.14% due 1/8/19983/5/1998 | $10,000,000 | $9,950,747 |
| Commercial Paper—4.5% | ||
| American Express Credit Corp., 6.00% 6.65% due 1/2/1998 1/6/1998 | $32,000,000 | $32,000,000 |
| Ford Motor Credit Corp., 5.80% 5.95% due 1/2/1998 1/7/1998 | 20,000,000 | 20,000,000 |
| General Electric Capital Corporation, 5.81% 5.83% due 1/6/1998 1/9/1998 | 15,000,000 | 15,000,000 |
| Total Commercial Paper (Cost: $67,000,000) | 67,000,000 | |
| Repurchase Agreements—0.3% | ||
| State Street Repurchase Agreement, 6.00% due 1/2/1998 | $4,560,000 | $4,560,000 |
| Total Repurchase Agreements (Cost: $4,560,000) | 4,560,000 | |
| Total Short Term Investments (Cost: $81,510,222) | 81,510,747 | |
| Total Investments (Cost $1,218,754,929)—99.7% | 1,488,141,168 | |
| Other Assets in Excess of Other Liabilities—0.3% | 4,018,264 | |
| Total Net Assets—100% | $1,492,159,432 | |
(a) Non-income producing security.