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 (3/31/98) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
3/31/98 NAV $44.43	Total Return Last 3 mos.	Average Annual Total Return* Through 3/31/98 From Fund Inception 8/5/91
The Oakmark Fund	10.0%	30.7%
Standard & Poor's 500 Stock Index w/inc**	14.0%	20.0%
Dow Jones Industrial Average w/inc**	11.7%	20.4%
Value Line Composite Index**	10.0%	11.5%
*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 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.

PORTFOLIO UPDATE

As we once again reach the mid-point of our fiscal year, it is my custom to review the portfolio and assess how we are doing. The temptation is to copy last year's semi-annual letter—that is how similar the environment is. On an absolute basis, your Fund has returned 10%, a few points behind the returns of the Standard & Poor's 500. While I (and you!) would love to "beat the market" all the time—an impossible goal—my attitude towards the year to date is the same as that of movie mogul Samuel Goldwyn after viewing one of his studio's releases: "I was very pleasantly disappointed."

These remain the most benign of times in which to own US stocks. During the last six months, long-term interest rates continued their decline, from 6.5 percent at the end of September to under 6.0 percent today. Even the Asian economic crisis has a beneficial impact in dampening any inflationary pressures. As I have written many times, the direction of inflation is the most important determinant of the direction of the prices of financial assets. Earnings continue strong, consumer confidence is at an all-time high, and so on. We're going to the moon, Alice!

The continued appreciation of stock prices in the past year presents us with a problem, however. Our cash level is at twelve percent, our typical holding is closer to our sell target than our buy target, and we are having increasing difficulty finding holdings that meet our criteria. Buyers of entire companies apparently agree, as the dollar percentage of acquisitions done for stock (as opposed to cash) doubled in 1997 over 1996. Corporate chieftains are more comfortable trading one possibly over-valued stock for another.

Over the past six months, we have made some fairly substantial changes to our portfolio. U.S. West Media Group attained our price target (90 percent of our estimate of value) and we have sold it. We have trimmed our other cable holdings, also. Our weighting in this industry has declined from 9.2 percent to less than 2.0 percent over the past six months. I should note that when we were last buying these holdings, psychology towards the group was extremely negative between re-regulation, satellites, and other competitive threats, its future to Wall Street appeared bleak. However, the consensus has done a complete turn and is now extremely positive. While we are not overt contrarians—specifically selling the hot stocks and buying the cold ones—we are closet contrarians, in that positive psychology towards a stock tends to drive it towards our sell target and negative psychology tends to drive a stock towards our buy target.

As an example of the latter, we have increased our investments in Lockheed Martin and Boeing during the first half of the fiscal year, as short-term problems pushed both stocks to attractive valuation levels. Also, I have made large commitments to two franchise businesses, Mattel (now our third-largest holding), and Nike (discussed in last quarter's letter, and our fourth-largest position). While controversial to be sure, I regard both as very good businesses, with strong managements, and at attractive prices for the long term (buckle up for short-term turbulence, though!).

While it is enticing to extrapolate the last few years of huge returns, we need to tell you that it is not possible to sustain them over the long term. With the "easy money" available in stocks, many investors forget about the downside. As value investors, we always focus on the downside. Your task is to review your entire portfolio and to assess whether it meets your risk/return parameters. Also, remind yourself that the money you have invested in equity investments such as The Oakmark Fund should: 1) not be needed for at least five years, and 2) can decline by, say, 30 percent at any given time without its affecting your lifestyle. It is far better to do this now than to do it when a decline does occur.

MEDIA POTPOURRI

I have read many articles over the last few months that highlight how we at The Oakmark Funds do things differently from so many of our competitors. Thus, I will summarize a few—without using names so as to protect the innocent—and give a brief response to each.

• Many of you have read about the group of sweet, mature women from small-town Illinois whose investment club seemingly generated huge, market-beating returns. A shrewd marketing campaign made them into a veritable multi-media industry. You, too, can beat the market using the ladies' tried-and-true methods!! Well, a reporter verifying the group's claims discovered that the actual annual returns of the ladies for the ten years ending 1993 was not 23.4 percent, but a market-trailing 9.1 percent. Once again, the lesson is: if it seems too good to be true, it probably is.

To put it into perspective, $100 invested for the ten years would have generated $239 for the ladies, $313 for the Dow, and $819 if the ladies had actually earned what they claimed. As Agent 86 Maxwell Smart used to say, "Missed it by thaaaaaat much."

• An advertisement in the "New York Times" has the following headline: "X Fund Managers Plan To Manage The Fund For At Least Five Years—Would Invest Own Money In Fund." In the news-article-style ad, one of the partners of X Fund's management company states that reports that he and his partner are looking to sell the company are true, and "...[I]n connection with any possible transaction, as a measure of our confidence in the future prospects of the X Fund, we would invest a significant amount of our own money in the Fund."

Where to begin? In this age of "Preserve Wiggle Room," the key word above is "would." Would???? Does this mean that they "would not" invest in the fund if the company is NOT sold and "do not" currently? Here at The Oakmark Funds, we seek out owner-oriented managements who own their own stock and are motivated to grow its value. In turn, we assume our shareholders expect the same of us. Every fund manager of The Oakmark Funds has a large amount invested in his Fund, and firmwide ownership of our funds is very substantial and has been from day one.

• There was a "Wall Street Journal" article about a "onetime star manager" at a fund company (whose parent is a holding of your Fund!). Apparently, the star's recent performance has been weak and the fund company has, according to a company spokesperson, "taken a number of steps to improve performance." According to the spokesperson, these "steps" included selling some "riskier" stocks and "shifting to stocks with better short-term performance."

The portfolio managers of The Oakmark Funds are not judged on short-term performance. We are not required to buy stocks with "better near-term prospects." We all know that stocks with these prospects are generally priced to reflect these positives. When marketing imperatives trump the investing side, that's a sorry day.

AND A LESSON IN RATIONAL EXPECTATIONS

Do you remember George Carlin's Hippy Dippy Weatherman? He would make the earth-shattering prediction that, say, in Chicago, it would get warm in the summer and then get cold in the winter. Well, duh.

I think of him when I get letters questioning our controversial holdings. Your Fund has several holdings whose problems and challenges tend to earn mention in newspapers and other general interest publications. The letters go like this: "Why do we own Stock Y? Everyone knows Y is having a lot of problems right now. Why don't you buy stocks with better prospects?"

Rational expectations refers to many economic or financial situations in which the outcome depends significantly upon what people EXPECT to happen. As an absurd example, take those TV ads for commodities that go like this: "As we enter the winter heating season, we expect demand for fuel to increase. This should cause heating oil prices to rise. A leveraged bet on this could yield $100,000 on an initial investment of $5,000." Now, I assume some people say: Wow, that sounds easy, I'm going to invest everything I've got in that.

Now, back to the hippy-dippy weatherman. When everyone knows something—i.e., it gets cold in the winter—the opportunity for systematic profit potential disappears. In recurrent situations, the future tends to unfold pretty similarly compared to the past, and people adjust their forecasts to this reality. The concept of rational expectations asserts that outcomes do not differ systematically from expectations, and stems from the standard economic assumption that people act in ways that maximize their utility (or, happiness). Rational expectations play a key role in the theory of hyperinflation, efficient markets theory (which holds that stock prices reflect all public information), the permanent income hypothesis (which argues that people base their consumption not only on their income but on their expectations of future income), and in the design of macroeconomic policy.

Now, back to the letters. When general interest publications reveal "problems" at a company, they have long been known in the professional investment community. (Wags often assert that when "Business Week" proclaims a problem, it's time to bet the other way). By the time you have read about them, we have long since factored them into our expectations. It does not mean that we won't ever be wrong, but that our analysis was educated.

ROBERT J. SANBORN
Portfolio Manager
rsanborn@oakmark.com
April 3, 1998

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers.

(d) At March 31, 1998, net unrealized appreciation of $2,391,715,022, for federal income tax purposes consisted of gross unrealized appreciation of $2,406,539,553 and gross depreciation of $14,824,531.