The Oakmark International Fund

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

   

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK INTERNATIONAL FUND FROM ITS INCEPTION (9/30/92) TO PRESENT (9/30/98) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX

9/30/98 NAV $10.42

Total Return
Last 3 mos.

Average Annual Total Return* Through 9/30/98
From Fund Inception
9/30/92

The Oakmark International Fund

-19.4%

8.5%

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

-14.7%

8.6%

Morgan Stanley EAFE w/inc**

-14.2%

8.6%

Lipper Analytical International Fund Index**

-15.8%

10.3%

*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 Morgan Stanley World ex U.S. Index includes 19 country sub-indexes. The Morgan Stanley EAFE Free Index refers to Europe, Asia and the Far East and includes 18 country sub-indexes. The Lipper International Fund Index includes 30 mutual funds that invest in securities whose primary markets are outside the United States. Past performance is no guarantee of future results.

FELLOW SHAREHOLDERS,

Disappointingly, your Fund dropped by 19.4% in the third quarter as turmoil in the world equity markets intensified. As you can see by the comparative indices, all were greatly negative with the MS EAFE falling by 14.2% and the Lipper International Fund Index dropping by 15.8%. Virtually no market in the world was unscathed with just two exceptions: Korea, up 11.8% and Thailand up 6.6%.

DON'T LET THE PUNDITS SCARE YOU!

As a result of the sharp drop in share price, the global market gurus are predicting that the gloom and doom will last forever and one should avoid exposure to the world equity markets, especially those in Latin America and Asia. To us, this is just another reason why one should be adding to ones positions at these levels. Consider some of their past statements:

"The USA has a severe problem with structurally high inflation." This was the mantra of the media economists in the early 1980's. Certainly if you would have believed that conventional wisdom, you would have avoided the bond market thereby missing one of the greatest rallies in history.

"The USA has a severe problem with structurally high unemployment." This was conventional wisdom of the late 80's/early 90's. Remember Robert Reich? Of course, this statement appears nonsensical now that the United States has the lowest unemployment rate in the developed world.

"We need to be more like Japan and Germany." This consensus began to build in the late 1980's. Even presidential candidate Bill Clinton preached this static opinion along with the pundit choir in the election of 1992. Luckily, we did not become more like them because Japan's bubble burst and Germany is struggling with genuinely high structural unemployment. And, remember all of the late 80's fear-mongering over Japanese ownership of USA assets? Popular authors like Michael Crichton and closed-minded politicians believed that, from Rockefeller Center to Nebraska farmland to the Pebble Beach golf club, the entirety of the United States would be bought up by the invincible Japanese. If you believed this and invested in Japanese stocks in the late 80's-early 90's you would be broke! By the way, has anyone seen Lester Thurow lately? In 1992, you couldn't turn on a television set without seeing this most zealous promoter of the Japanese economic model. He has become remarkably scarce over the past few years.

"US Dollar has lost its reserve status. It is most assuredly on its way toY50 and DM1.00." Most tel-economists and media-friendly strategists proclaimed this as the dollar was crashing to new lows in 1995-1996. How wrong they were! The dollar today is at Y120 and DM1.60 and seems to be the world's only safe haven. Again, following the advice of conventional wisdom would have taken a considerable chunk of your net worth.

"One should have at least 10% of your personal net worth in emerging markets. I am maximum bullish on China and Asia." This was the attitude of the day at the end of 1993 when most emerging markets were up over 50%. Again, more of the same by our global experts who, as you can see, earn their wages by telling you what just happened, amplifying it and assuming the new amplified version will carry on into perpetuity. By the way, long-term shareholders of Oakmark International might remember that we had only 5% of the Fund's assets in Asia at the height of this mania, given the lack of investments that met our value criteria.

AND, HERE ARE TODAY'S SAMPLES...

"The Japanese Yen is in terminal decline. Expect it to decline to Y200." Maybe...but maybe not. The important thing to note is that for the first time in years we are finding Japanese companies that fit our value criteria and have business formulas designed to succeed regardless of the direction of the Yen.

"Emerging markets should be avoided...they are just too risky and volatile." Again, reporting rather than analysis. To us, this sounds like perfect bottom-speak and probably indicates that long-term investors should seriously consider increasing exposure to this asset class.

"Foreign stocks should be avoided...they are just too risky and volatile compared to the US market." As mentioned above, all of these experts seem to be able to do is to "report" via the rear-view mirror, that is, to tell us what has already happened. Given what has happened in terms of price drops, one should be adding, not cutting international holdings.

"Asia is destroyed, it will be years before it will recover economically." We don't think the pundits understand Asia at all. Yes, it's tough there and will continue to be for a while. However, the area has numerous fundamental strengths that will prove the pundits wrong: solid physical and intellectual infrastructure, low economy-wide debt levels with high rates of individual savings, extremely flexible regulatory structures, generally a strong work ethic and literacy rates, and an important intangible, a fierce "we can do it" attitude. Investors also must keep in mind that with the unprecedented declines in most of these markets, a great deal of economic instability has already been discounted in the prices they are paying for businesses.

THE OAKMARK WAY...

To us, "pundit speak" is nothing more than distracting, random noise. Instead, we focus on something that is concrete and analyzable: the value of a business. To the greatest extent possible, we try hard to take advantage of the volatility that exists in times like these by buying shares of companies that have become undervalued. We are certain that these conditions are not permanent and that when things appear most bleak, it is usually a good time to invest. However, we also realize this is the time when it is most difficult to remain steadfast as a shareholder. In this regard, it is important for you to hear how extremely excited we are about the composition of The Oakmark International Fund. It is full of quality businesses selling at uniquely low prices. We believe this will eventually move the Fund to a strong future performance. Until this time, we would like to again thank our fellow shareholders for their continued patience.

DAVID HERRO
Portfolio Manager
72242.772@compuserve.com

 

MICHAEL WELSH
Portfolio Manager
102521.2142@compuserve.com
October 5, 1998

THE OAKMARK INTERNATIONAL FUND
International Diversification—September 30, 1998

 

THE OAKMARK INTERNATIONAL FUND
Schedule of Investments—September 30, 1998

Description

Shares
Held

Market Value

Common Stocks—94.3%

Consumer Non-Durables—5.7%

Fila Holding S.p.A. (Italy), (b)(e)

Athletic Footwear Manufacturing

2,574,800

$21,885,800

Citizen Watch Co. (Japan)

Watch Manufacturer and Retailer

3,166,000

21,438,086

 

 

43,323,886

Food & Beverage—10.1%

Quilmes Industrial SA (Argentina), (b)

Brewer

4,724,300

$38,680,206

Pernod Ricard (France)

Manufactures Wines, Spirits, & Fruit Juices

228,579

16,837,894

Tate & Lyle PLC (Great Britain)

Sugar Producer & Distributor

2,665,700

14,774,171

Lotte Chilsung Beverage Company (Korea) (e)

Manufacturer of Soft Drinks, Juices, & Sport Drinks

123,000

3,095,452

Lotte Confectionery Company (Korea)

Confection Manufacturer

65,270

2,933,219

 

 

76,320,942

Household Products—1.6%

Amway Japan Limited (Japan)

Marketing of Household Products

1,630,300

$11,934,409

 

 

 

Retail—1.2%

Giordano International Limited (Hong Kong) (e)

East Asian Clothing Retailer & Manufacturer

69,304,000

$9,391,028

 

 

 

Other Consumer Goods & Services—6.8%

Canon, Inc. (Japan)

Office and Video Equipment

1,007,000

$20,419,383

Sankyo Company, Ltd. (Japan)

Pachinko Machine Manufacturer

1,234,800

16,722,520

Mandarin Oriental International Limited (Singapore)

Hotel Management

30,539,000

14,353,330

 

 

51,495,233

Banks—8.2%

Uniao de Bancos Brasileiros S.A. (Brazil), (c)

Major Brazilian Bank

1,834,900

$24,771,150

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

Multinational Bank

1,316,500

21,146,282

United Overseas Bank Ltd., Foreign Shares (Singapore)

Commercial Banking

5,443,000

15,864,668

 

 

61,782,100

Other Financial—3.4%

Sedgwick Group plc (Great Britain)

Insurance Broker, Financial Services

7,510,000

$25,343,973

 

 

 

Marketing Services—9.5%

Cordiant Communications Group plc (Great Britain) (e)

Advertising Services

21,997,578

$40,015,927

Saatchi & Saatchi plc (Great Britain), (e)

Advertising Services

17,757,578

31,699,125

 

 

71,715,052

 

Broadcasting & Publishing—5.3%

Singapore Press Holdings Ltd. (Singapore)

Newspaper Publisher

2,740,000

$22,725,119

Europe 1 Communication (France)

Television Production

74,020

14,804,529

Woongjin Publishing Company (Korea) (e)

Publisher

148,410

1,259,204

South China Morning Post (Holdings) Ltd. (Hong Kong)

Newspaper Publisher

3,130,000

1,231,997

 

 

40,020,849

Telecommunications—2.8%

Telesp Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

$6,293,357

Embratel Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

3,315,855

SK Telecom Co. Ltd. (Korea)

Telecommunications

10,395

3,146,716

Tele Centro Sul Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

2,233,127

Tele Norte Leste Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

2,030,115

Telesp Celular Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

$1,691,763

Tele Sudeste Celular Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

676,705

Technology Resources Industries Berhad (Malaysia)

Telecommunications

1,485,000

472,855

Tele Celular Sul Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

304,517

Tele Centro Oeste Celular Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

213,162

Telemig Celular Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

179,327

Tele Nordeste Celular Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

172,560

Tele Leste Celular Participacoes (Brazil), (a)

Telecommunications

401,100,000

111,656

Tele Norte Celular Participacoes S.A. (Brazil), (a)

Telecommunications

401,100,000

84,588

Telecomunicacoes Brasileiras S.A. (Brazil)

Telecommunications

401,100,000

84,588

 

 

21,010,891

Aerospace—6.0%

Rolls-Royce plc (Great Britain)

Jet Engines

9,228,552

$31,928,037

Hong Kong Aircraft Engineering Company Ltd. (Hong Kong) (e)

Commercial Aircraft Overhaul & Maintenance

11,096,900

13,175,134

 

 

45,103,171

Airlines—2.2%

Qantas Airways Limited (Australia)

International Airline

10,798,714

$16,828,789

 

 

 

Oil & Natural Gas—0.5%

ISIS (France), (a)

Oil Services

57,000

$3,867,995

 

 

 

Chemicals—6.7%

Fernz Corporation Limited (New Zealand) (e)

Agricultural & Industrial Chemical Producer

13,373,250

$33,797,841

European Vinyls Corporation International N.V. (Netherlands) (e)

PVC Manufacturer

1,212,299

15,126,783

Nagase & Co., Ltd. (Japan)

Chemical Wholesaler

569,000

2,032,663

 

 

50,957,287

 

Components—3.4%

Varitronix International Limited (Hong Kong)

Liquid Crystal Displays

13,421,000

$26,066,752

 

 

 

Machinery & Metal Processing—2.2%

Outokumpu Oyj (Finland)

Metal Producer

1,235,000

$10,250,172

The Rauma Group (Finland)

Pulp Machinery

544,300

6,155,423

 

 

16,405,595

 

Mining and Building Materials—0.7%

Keumkang Ltd. (Korea) (e)

Building Materials

560,460

$4,956,792

Asia Cement Manufacturing Company Ltd. (Korea)

Cement Producer

10,500

42,581

 

 

4,999,373

 

Other Industrial Goods & Services—13.7%

Tomkins plc (Great Britain)

Industrial Management Company

9,065,000

$42,496,931

Chargeurs SA (France) (e)

Wool Production Holding Company

524,387

25,752,067

Kone Corporation, Class B (Finland)

Elevators

103,870

10,418,665

Charter plc (Great Britain)

Welding Products Manufacturer

1,884,100

10,250,102

Groupe Legris Industries SA (France)

European Crane Manufacturer

217,815

9,720,341

Dongah Tire Industry Company (Korea), (a)(e)

Tire Manufacturer

166,290

4,603,390

 

 

103,241,496

 

Steel—2.9%

USIMINAS (Brazil), (e)

Steel Production

7,401,370

$21,852,288

Pohang Iron & Steel Company Ltd. (Korea)

Manufactures Steel Products

14,000

443,933

 

 

22,296,221

 

Diversified Conglomerates—1.4%

First Pacific Company Ltd. (Hong Kong)

Diversified Operations

19,948,000

$5,856,610

Tae Young Corporation (Korea) (e)

Heavy Construction

518,300

4,770,261

Lamex Holdings Ltd. (Hong Kong) (e)

Office Furniture Supplier

14,040,000

322,517

 

 

10,949,388

 

Total Common Stocks (Cost: $1,061,918,399)

713,054,430

 
 

Principal Value

Market Value

Short Term Investments—3.5%

 

Commercial Paper—2.0%

General Electric Capital Corporation, 5.70% due 10/1/1998

$15,000,000

$15,000,000

Total Commercial Paper (Cost: $15,000,000)

15,000,000

 

Repurchase Agreements—1.5%

State Street Repurchase Agreement, 5.30% due 10/1/1998

$11,121,000

$11,121,000

Total Repurchase Agreements (Cost: $11,121,000)

11,121,000

 

Total Short Term Investments (Cost: $26,121,000)

26,121,000

Total Investments (Cost $1,088,039,399)—97.8% (f)

$739,175,430

Foreign Currencies (Proceeds $1,367,998)—0.2%

1,367,813

Other Assets In Excess Of Other Liabilities—2.0% (d)

15,561,065

Total Net Assets—100%

$756,104,308

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Represents a Global Depository Receipt.

(d) Includes portfolio and transaction hedges.

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

(f) At September 30, 1998, net unrealized depreciation of $348,863,969, for federal income tax purposes consisted of gross unrealized appreciation of $42,503,436 and gross unrealized depreciation of $391,367,405.