The Oakmark Small Cap Fund
Report from Steven J. Reid, Portfolio Manager
The Oakmark Small Cap FundReport from Steven J. Reid, Portfolio Manager |
|
| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (3/31/98) AS COMPARED TO THE RUSSELL 2000 INDEX | ||
 |
||
| 3/31/98 NAV $20.80 | Total Return Last 3 mos. |
Average Annual Total Return* Through 3/31/98 From Fund Inception 11/1/95 |
| The Oakmark Small Cap Fund | 7.1% | 37.9% |
| Lipper Small Cap Fund Index** | 10.7% | 19.0% |
| Russell 2000 w/inc** | 10.1% | 23.9% |
| S&P Small Cap 600 w/inc** | 11.1% | 27.2% |
| *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 or funds 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 small market capitalization. Past performance is no guarantee of future results. | ||
HALFTIME
The Oakmark Small Cap Fund's second fiscal quarter ended on March 31, 1998. During the quarter the Fund gained 7.1%, closing at an all-time high. For the second quarter the Fund's investment results did not match those of the relevant indices. Although The Oakmark Small Cap Fund has significantly outperformed the relevant indices since its inception, the short-term results are a minor disappointment. I have received numerous inquiries regarding the Fund's recent relative performance. Quite honestly, a 7% return in three months is a desirable outcome. As investors, we should focus on long-term results, but human nature tends to not let us forget about what happened yesterday, what's happening today, or what might happen tomorrow.
Returns in the small cap universe were dominated by growth stocks as opposed to value stocks during the quarter. A precise definition of a growth stock, as well as a value stock, cannot be "written in stone." Let it suffice that the indices' returns were driven by technology and health care stocks, areas in which your Fund has very little exposure. This lack of exposure is a function of our investment philosophy. We have not found value in these areas. It is worth noting the time line of this quarter's performance was composed of three parts. During January, the Fund declined 4.5%, by the end of February performance was almost break-even, and in March all of the gains were made.
Another concern of many shareholders is what changes are being made in the way the Fund is managed. The answer is none. Our mandate is to be consistent with our investment philosophy and not deviate from it. Over time we believe our value-oriented style of investing will produce the results we seek to meet our investment objectives. We are encouraged by the investment opportunities available in the marketplace.
FIRST HALF HIGHLIGHTS
During the quarter there were several positive events. Zurn Industries Inc. (ZRN) and U.S. Industries Inc. (USI), both holdings of your Fund, agreed to merge in a tax-free exchange of stock. ZRN, a producer of plumbing fixtures and supplies will be combined with USI's well known division, Jacuzzi. While we are certainly pleased by the 50% appreciation of our ZRN shares, the merged businesses are an equally exciting event. We, as well as management, believe that the combined companies will have greater presence in the marketplace and the opportunity to generate increased revenues and income. This combination could best be described as a situation where one plus one does not equal two, but probably at least two and one-half. We are confident that management can truly add value to this situation. Since payment for the purchase will be in the form of USI shares, our ownership of USI will increase.
Another bright spot in the quarter was the 37% gain in the shares of Cablevision Systems Corporation (CVC). This is the second time in the last year that CVC has been one of the top-performing stocks in The Oakmark Small Cap Fund. It was also about one year ago that Wall Street viewed CVC as if it were on the verge of bankruptcy. Since then there have been several transactions confirming the value of cable TV systems and programming. Management has also taken steps that highlight and increase the value of the company.
KUDOS
What do R.G. Barry Corporation, Campbell Soup Company, and Whirlpool Corporation have in common? All three were named Vendor of the Year by Wal-Mart International. Although not a household name, many of R.G. Barry's slipper brand names such as EZ feet, Dearfoams and Angel Treads are widely known by consumers. Our congratulations go out to Barry's management team led by Chairman Gordon Zacks on being named Soft-Lines Vendor of the Year by the largest retailer in the world. Over the past few years Barry has demonstrated significant growth in sales and profits as they expanded into new markets and improved manufacturing efficiency. Despite Barry's success with slippers, the company is relatively unknown by Wall Street. This lack of visibility has allowed us to purchase these shares at a significant discount to the typical valuation that other consumer products companies sell for in the stock market. In addition, Barry has been developing several innovative new thermal retention products that are designed to keep products at constant temperatures without the need of an external power supply. As an example, the company has developed a pizza container that allows for the home delivery of fresh, hot pizza. Current products in the market only insulate the pizza. Barry's product, because it provides heat, is able to offer a superior delivery system. While not yet widely used we hope over the next year or two to highlight the benefits from Barry's success with these products. At the current valuation of the shares of R.G. Barry we have not paid a premium for these products.
OUTLOOK
Despite the recent El Nino-like volatility of The Oakmark Small Cap Fund, we continue to see very attractive investment opportunities in small cap stocks. There continues to be a broad divergence in valuation between large and small cap stocks with the shares of small companies trading at significant discounts to their larger brethren.
Once again, I would like to thank everyone involved, especially our shareholders, for your support of The Oakmark Small Cap Fund.
Go Bulls!
STEVEN J. REID
Portfolio Manager
sreid@oakmark.com
April 3, 1998
THE OAKMARK SMALL CAP FUND
|
| Shares Held | Market Value | |
| Common Stocks—95.1% | ||
| Food & Beverage—6.3% | ||
| Ralcorp Holdings, Inc. (a)(b) | 2,500,000 | $51,875,000 |
| International Multifoods Corporation (b) | 1,000,000 | 29,937,500 |
| M & F Worldwide Corp. (a) | 917,600 | 8,315,750 |
| 90,128,250 | ||
| Retail—4.7% | ||
| Cole National Corporation (a)(b) | 1,250,000 | $48,281,250 |
| Ugly Duckling Corporation (a)(b) | 1,750,000 | 18,921,875 |
| 67,203,125 | ||
| Other Consumer Goods & Services—9.6% | ||
| Triarc Companies, Inc. (a)(b) | 1,600,000 | $42,000,000 |
| Scotsman Industries, Inc. (b) | 1,000,000 | 28,750,000 |
| First Brands Corporation | 1,000,000 | 24,937,500 |
| GC Companies, Inc. (a) | 300,000 | 15,693,750 |
| Barry (R.G.) Corporation (a)(b) | 800,000 | 11,000,000 |
| P.H. Glatfelter Company | 420,900 | 7,602,506 |
| Libbey, Inc. | 190,000 | 7,077,500 |
| 137,061,256 | ||
| Banks—10.6% | ||
| People's Bank of Bridgeport, Connecticut | 3,000,000 | $113,906,250 |
| BankAtlantic Bancorp, Inc., Class A | 1,125,001 | 15,398,451 |
| Northwest Bancorp Inc. | 550,000 | 9,246,875 |
| PennFed Financial Services, Inc. | 260,000 | 4,712,500 |
| Pocahontas Federal Savings and Loan Association (b) | 100,000 | 4,475,000 |
| Savings Bank of the Finger Lakes (b) | 188,000 | 3,666,000 |
| 151,405,076 | ||
| Insurance—12.7% | ||
| RenaissanceRe Holdings Limited. (b) | 1,500,000 | $75,000,000 |
| Financial Security Assurance Holdings Ltd. | 900,000 | 49,162,500 |
| Highlands Insurance Group, Inc. (a)(b) | 1,150,000 | 30,906,250 |
| PRE Corporation (b) | 750,000 | 23,250,000 |
| Chartwell Re Corporation | 110,000 | 3,726,250 |
| 182,045,000 | ||
| Other Financial—1.0% | ||
| Duff & Phelps Credit Rating Co. (b) | 296,800 | $14,951,300 |
| Broadcasting & Cable TV—9.8% | ||
| Cablevision Systems Corporation (a) | 1,669,400 | $109,763,050 |
| Ascent Entertainment Group, Inc. (a)(b) | 2,000,000 | 20,625,000 |
| Granite Broadcasting Corporation (a)(b) | 800,000 | 9,250,000 |
| 139,638,050 | ||
| Publishing—1.1% | ||
| Lee Enterprises, Inc. | 450,000 | $15,103,125 |
| Telecommunications—0.2% | ||
| ROHN Industries, Inc. | 500,000 | $2,812,500 |
| Automotive—2.1% | ||
| Stoneridge, Inc. (a)(b) | 1,500,000 | $30,000,000 |
| Aerospace & Defense—2.8% | ||
| Tracor, Inc. (a) | 1,250,000 | $40,078,125 |
| Machinery & Metal Processing—4.3% | ||
| The Carbide/Graphite Group, Inc. (a)(b) | 815,000 | $24,450,000 |
| DT Industries, Inc. | 472,000 | 18,113,000 |
| Northwest Pipe Company (a)(b) | 600,000 | 13,050,000 |
| Wolverine Tube, Inc. (a) | 140,800 | 5,649,600 |
| 61,262,600 | ||
| Oil & Natural Gas—2.0% | ||
| Titan Exploration, Inc. (a)(b) | 3,000,000 | $24,375,000 |
| Nuevo Energy Company (a) | 100,000 | 3,581,250 |
| 27,956,250 | ||
| Other Industrial Goods & Services—15.0% | ||
| SP Corporation (a)(b) | 700,000 | $53,418,750 |
| MagneTek, Inc. (a)(b) | 2,500,000 | 47,031,250 |
| Ferro Corporation | 961,500 | 28,244,062 |
| Columbus McKinnon Corporation (b) | 876,900 | 24,114,750 |
| Gardner Denver Machinery, Inc. (a) | 750,000 | 22,218,750 |
| Zurn Industries, Inc. | 312,500 | 14,804,688 |
| Binks Sames Corporation (b) | 247,000 | 11,979,500 |
| Standard Motor Products, Inc. | 600,000 | 11,512,500 |
| Binks Sames Corporation, Restricted Shares (b) | 28,000 | 1,195,040 |
| 214,519,290 | ||
| Commercial Real Estate—5.5% | ||
| Catellus Development Corporation (a) | 4,000,000 | $74,250,000 |
| Wellsford Real Properties Inc. (a) | 341,500 | 4,951,750 |
| 79,201,750 | ||
| Diversified Conglomerates—7.4% | ||
| U.S. Industries, Inc. | 3,500,000 | $105,218,750 |
| Total Common Stocks (Cost: $1,012,013,842) | 1,358,584,447 | |
| Short Term Investments—5.2% | ||
| U.S. Government Bills—0.7% | ||
| United States Treasury Bills, 5.02% due 4/2/1998 | $10,000,000 | $9,998,606 |
| Total U.S. Government Bills (Cost: $9,998,606) | 9,998,606 | |
| Commercial Paper—3.5% | ||
| American Express Credit Corp., 5.52%-5.53% due 4/2/1998-4/9/1998 | $15,000,000 | $15,000,000 |
| Ford Motor Credit Corp., 5.53%-5.54% due 4/3/1998-4/7/1998 | 15,000,000 | 15,000,000 |
| General Electric Capital Corporation, 6.02% due 4/1/1998 | 20,000,000 | 20,000,000 |
| Total Commercial Paper (Cost: $50,000,000) | 50,000,000 | |
| Repurchase Agreements—1.0% | ||
| State Street Repurchase Agreement, 5.75% due 4/1/1998 | $15,244,000 | $15,244,000 |
| Total Repurchase Agreements (Cost: $15,244,000) | 15,244,000 | |
| Total Short Term Investments (Cost: $75,242,606) | 75,242,606 | |
| Total Investments (Cost $1,087,256,448)—100.3% (c) | $1,433,827,053 | |
| Other Liabilities In Excess Of Other Assets—(0.3)% | (4,865,029) | |
| Total Net Assets—100% | $1,428,962,024 | |
(a) Non-income producing security.
(b) See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers.
(c) At March 31, 1998, net unrealized appreciation of $346,570,605, for federal income tax purposes consisted of gross unrealized appreciation of $360,943,813 and gross depreciation of $14,373,208.