The Oakmark International Small Cap Fund

Report from David G. Herro and Michael J. Welsh, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (6/30/98) AS COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX

6/30/98 NAV $8.30

Total Return
Last 3 mos.

Average Annual Total Return* Through 3/31/98
From Fund Inception
11/1/95

The Oakmark International Small Cap Fund

-13.5%

-.4%

Morgan Stanley World ex U.S. w/inc.**

.8%

11.9%

Lipper Analytical International Small Cap Fund Average**

3.3%

13.8%

Micropal International Small Co. Fund Index**

3.6%

13.8%

*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 indexes or funds whose composition is different from the Fund. The Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Lipper International Small Cap Fund Average includes 56 mutual funds that invest in securities whose primary markets are outside the United States. The Micropal Int'l Small Co. Fund Index sector average is an unweighted index comprised of all funds within the international small company fund sector. Past performance is no guarantee of future results.

FELLOW SHAREHOLDERS,

Your Fund had a tough 2nd quarter, giving back a lot of the strong gains achieved in the first quarter. For the period ended June 30, 1998, your Fund was down 13.5% versus 3.6% and 3.3% for the Micropal and Lipper international indices respectively. The largest factor impacting your Fund's performance is its 50% exposure to the Pacific Rim, whereas most of our peers invest approximately 15-20% in this region. Though the region has been in crisis since last summer, we believe it offers the greatest investment opportunity anywhere.

WE ARE VERY BULLISH ON ASIA...

The ''old'' news is that starting last summer, currencies and equity markets dramatically dropped across Asia. There were a few major causes of this event. First, most Asian currencies were pegged to the dollar. This resulted in overvalued currencies and current account deficits, thus pressuring the ''peg'' and eventually causing it to fail. Secondly, ''crony capitalism'' in the region meant that companies didn't make economic decisions based on economic risk/return analysis. Social and political implications seemed to guide decisions and economics were left out. This was possible because of the closed and opaque nature of the typical Asian economy. The end result was that resources flowed to areas where they were not needed, and those areas that actually needed resources were starved of capital and investment. Though Asia was not totally void of sensibility, bad practice advanced faster than good and today we see the results.

 ...AS REAL CHANGE IS TAKING PLACE.

Having said the above, the ''new'' news is that Asia is changing faster than anyone would imagine. Economies are opening up and the discipline of the marketplace is replacing ''crony capitalism''. It is not occurring at the same speed everywhere, but it is noticeable. It is most evident in South Korea. Newly elected President Kim Dae Jung in six months transformed the Korean economy from one of the world's most closed and protected to an open one. As an example, prior to Kim's election, foreign investors had been limited to just a small fraction of a company's ownership. Today a foreign company or individual can make a hostile bid for a Korean company. This is exactly the type of change needed to put Korean business in a ''shape-up or ship-out'' mode. In the past, in Kim's words, the government protected big business. Today, all protections are being removed and Korean companies are starting to shape-up out of necessity.

Across Asia, ''micro-economic reform'' is taking place. China and Thailand are moving swiftly in the right direction. Singapore was always, and still is, fine. Malaysia is still debating change and a populist revolution has occurred in Indonesia. Though it's still very early, the new leadership in Jakarta seems to be acting responsibly. Japan remains a stumbling block but it is hard to imagine that they can dodge economic forces forever. The concern of Chinese economic supremacy will ultimately move them.

What this means is that the economies of Asia will be well positioned for longer and more stable post recession growth. The basic positive economic fundamentals that have propelled Asia over the last decade are still in place and are now made more potent with the new reforms. These fundamentals include high government and individual savings rates, very sound intellectual and physical infrastructure, productive work forces, strong families, and the ''Asian Intangible''....the ability of people in the greater Asian region to adapt, overcome and improvise. In a few years, this intangible will become more evident to the world than it already is.

WE ARE NOT THE ONLY BULLS!

Although many international portfolio managers seem to have pulled out of Asia, direct investors and businesses looking for bargains are going on a buying binge. From steel to financial services to electronics, Western businesses like Volvo, MetLife, Coca-Cola, GECapital, LSI Logic and Interbrew are spending hundreds of millions of dollars on acquiring Asian companies. It's a sign of the confidence that long-term, ''direct'' investors have in Asia. We are in complete agreement with their view and, as long-term value investors, feel that patience today will yield lucrative results. We continue to believe that investment success over time is derived from a simple axiom—buying low and selling high. We will continue to do this no matter what the crowd is doing.

Finally, we would like to thank our fellow shareholders for continuing to show confidence in our abilities as stewards to your savings. We will continue to work hard to achieve satisfactory results.

DAVID G. HERRO
Portfolio Manager
72242.772@compuserve.com

 

MICHAEL J. WELSH
Portfolio Manager
102521.2142@compuserve.com

July 7, 1998

THE OAKMARK INTERNATIONAL SMALL CAP FUND
International Diversification—June 30, 1998

% of Fund
Net Assets

% of Fund
Net Assets

Pacific Rim

48.9%

Europe

34.3%

Japan

15.0%

Great Britain

23.2%

Australia

7.0%

Germany

3.8%

New Zealand

6.9%

France

3.7%

Hong Kong

6.5%

Netherlands

2.4%

Korea

5.4%

Italy

1.2%

Thailand

3.2%

Singapore

2.5%

Philippines

2.4%

Latin America

6.9%

Other

1.9%

Brazil

6.2%

Canada

1.9%

Panama

0.7%

THE OAKMARK INTERNATIONAL SMALL CAP FUND
Schedule of Investments—June 30, 1998 (Unaudited)

 

Description

Shares Held

Market Value

Common Stocks—92.0%

Consumer Non-Durables—2.9%

Royal Doulton plc (Great Britain)

Tableware and Giftware

440,000

$1,608,923

Designer Textiles (NZ) Limited (New Zealand)

Knit Fabrics

2,960,000

385,059

 

 

 

1,993,982

Food & Beverage—9.0%

Matthew Clark plc (Great Britain)

Spirits & Drinks

1,054,000

$3,299,745

Alaska Milk Corporation (Philippines), (a)

Milk Producer

36,372,000

1,622,348

Hite Brewery Company (Korea)

Brewer

165,010

853,293

Souza Cruz S/A (Brazil)

Tobacco Products

55,000

408,975

 

 

 

6,184,361

Household Products—0.5%

WMF (Germany)

Tableware and Kitchenware

1,753

$315,908

 

 

 

 

Retail—10.8%

Carpetright plc (Great Britain)

Carpet Retailer

495,000

$2,157,169

Somerfield plc (Great Britain)

Food Retailer

261,000

1,666,903

Daimon (Japan)

Liquor Retailer & Distributor

612,200

1,505,373

Paris Miki Inc. (Japan)

Optical Supplies Retailer

80,600

1,061,493

Giordano International Limited (Hong Kong)

East Asian Clothing Retailer & Manufacturer

3,112,000

630,594

Jusco Stores (Hong Kong) Co., Limited (Hong Kong)

Department Stores

2,996,000

406,014

 

 

 

7,427,546

Other Consumer Goods & Services—7.1%

Sanford Limited (New Zealand)

Fisheries

1,689,240

$2,575,459

CeWe Color Holding AG (Germany)

Photo Equipment & Supplies

11,150

2,318,473

 

 

 

4,893,932

Banks—1.0%

Banco Latinoamericano de Exportaciones, S.A., Class E (Panama), (b)

Multinational Bank

15,300

$470,475

Shinhan Bank (Korea)

Commercial Bank

47,764

158,634

Kookmin Bank (Korea)

Commercial Bank

11,351

42,163

 

 

 

671,272

Other Financial—10.1%

Lambert Fenchurch Group plc (Great Britain)

Insurance Broker

1,871,000

$3,202,109

JCG Holdings Ltd. (Hong Kong)

Investment Holding Company

7,711,000

2,139,733

Ichiyoshi Securities (Japan)

Stock Broker

1,245,000

1,575,721

 

 

 

6,917,563

Computer Software—5.9%

Enix Corporation (Japan)

Entertainment Software

133,400

$2,604,903

Koei (Japan)

Computer Software

196,000

1,474,217

 

 

 

4,079,120

Computer Systems—3.8%

Solution 6 Holdings Limited (Australia), (a)

Systems Design & Consulting

4,150,893

$2,576,666

 

 

 

 

Marketing Services—5.8%

Cordiant Communications Group plc (Great Britain)

Advertising Services

1,808,500

$4,001,039

 

 

 

 

Broadcasting & Publishing—4.7%

Matichon Public Company Limited, Foreign Shares (Thailand)

Newspaper Publisher

1,969,100

$2,099,751

Woongjin Publishing Company (Korea)

Publisher

134,076

1,069,288

Matichon Public Company Limited (Thailand)

Newspaper Publisher

70,400

66,730

 

 

 

3,235,769

Telecommunications—0.4%

SK Telecom Co. Ltd. (Korea)

Telecommunications

803

$250,316

 

 

 

 

Pharmaceutical—1.2%

Recordati (Italy)

Pharmaceuticals

84,500

$798,987

 

 

 

 

Chemicals—2.4%

European Vinyls Corporation International N.V. (Netherlands)

PVC Manufacturer

93,100

$1,625,901

 

 

 

 

Machinery & Metal Processing—1.1%

Denyo Co., Ltd. (Japan)

Welding Machines & Power Generators

144,000

$718,594

Mining and Building Materials—3.2%

Parbury Limited (Australia)

Building Products

11,119,712

$2,208,819

 

 

 

 

Other Industrial Goods & Services—12.3%

Elevadores Atlas, SA (Brazil)

Elevators

229,200

$3,864,425

Nishio Rent All Company (Japan)

Construction Equipment Rental

163,900

1,327,605

Dongah Tire Industry Company (Korea), (a)

Tire Manufacturer

43,900

1,183,030

Yip’s Hang Cheung Ltd. (Hong Kong)

Paint & Solvents

23,708,000

1,178,056

Groupe Legris Industries SA (France)

European Crane Manufacturer

17,400

814,496

Lamex Holdings Ltd. (Hong Kong)

Office Furniture Supplier

2,110,000

81,699

 

 

 

8,449,311

Production Equipment—4.4%

NSC Groupe (France)

Manufacturer of Textile Equipment

11,562

$1,738,402

Skyjack Inc. (Canada), (a)

Producer of Elevating Platforms & Lifts

88,700

1,304,988

 

 

 

3,043,390

Steel—2.9%

Steel & Tube Holdings Ltd. (New Zealand)

Produces and Distributes Steel

2,615,400

$1,769,201

Pohang Iron & Steel Company Ltd. (Korea)

Manufactures Steel Products

6,580

185,946

 

 

 

1,955,147

Diversified Conglomerates—2.5%

Haw Par Corporation Ltd. (Singapore)

Healthcare and Leisure Products

1,653,000

$1,736,386

 

 

 

 

Total Common Stocks (Cost: $82,218,226)

63,084,009

 

 

 

 

Description

Principal Value

Market Value

Short Term Investments—4.9%

Commercial Paper—2.2%

American Express Credit Corporation, 5.51% due 7/6/1998

 

$500,000

$500,000

General Electric Capital Corporation, 5.57% due 7/7/1998— 7/8/1998

 

1,000,000

1,000,000

Total Commercial Paper (Cost: $1,500,00)

1,500,000

Repurchase Agreements—2.7%

State Street Repurchase Agreement, 5.65% due 7/1/1998

$1,870,000

$ 1,870,000

Total Repurchase Agreements (Cost: $1,870,000)

1,870,000

 

 

 

Total Short Term Investments (Cost: $3,370,000)

3,370,000

 

 

 

Total Investments (Cost $85,588,226)—96.9%

 

$66,454,009

Foreign Currencies (Proceeds $23,911)—0.0%

 

26,254

Other Assets In Excess Of Other Liabilities—3.1% (c)

 

2,121,394

 

 

Total Net Assets—100%

$68,601,657

(a) Non-income producing security.

(b) Represents an American Depositary Receipt.

(c) Includes transaction hedges.