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 (12/31/98) COMPARED TO THE MORGAN STANLEY WORLD EX U.S. INDEX

12/31/98 NAV $10.91

Total Return
Last 3 mos.

Average Annual
Total Return*
Through 12/31/98
From Fund
Inception
9/30/92

The Oakmark International Fund

14.5%

10.5%

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

20.5%

11.5%

Morgan Stanley EAFE w/inc**

20.7%

11.5%

Lipper Analytical International Fund Index**

15.5%

12.4%

*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 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,

Your Fund achieved a 4th quarter return of +14.5%. Though acceptable on an absolute basis, relatively we trailed our peers Lipper International Index by 1% and The EAFE Index by approximately 6%. Since inception, your Fund has generated an average annual rate of return of 10.5% compared to the Lipper Index return of 12.4% and The EAFE Index of 11.5%.

1998......WHY SUB-PAR?

The Oakmark International Fund was down 7% for calendar 1998 while the average international fund gained 12.6%. Why the divergence in performance?

Our disciplined style of value investing means that we maintain our exposure in markets while others flee. Last year, Hong Kong (down 3%), Brazil (down 44%), Argentina (down 27%) and even New Zealand (down 25%) all provided for a fairly rough 1998. Add to this our under weighting of the continental European markets and our overweight position in sluggish United Kingdom and the result was underperformance. But why keep our positions in these markets, which have been greatly sold off? The answer is simply value. It is the same reason why we avoided the hot European companies, which have done so well in 1998.

Though they have hurt us in the short run, we added to or maintained our positions in companies such as Unibanco (Brazil), Quilmes (Argentina) and Giordano (Hong Kong). Unibanco trades at 60% of its book value, is highly profitable, has great growth prospects due to its strong franchises, and is extremely conservatively run. More stagnant, less profitable European banks trade at a whopping 2-4x's book! Quilmes is the dominant brewer in the southern cone of South America. It is truly a world class company in terms of operating efficiency and profitability and is partially owned by Heineken. Yet, Quilmes trades at a significant discount to Heineken and other Western brewers. Giordano is a Hong Kong based pan-Asian clothing retailer. It has built its cash position, even in a recession, increased same store sales in many of its markets and continues to offer great growth potential. All of this at a bargain basement price.

All of the above, and others like them, significantly underperformed in 1998 causing havoc to our total return. However, as we have seen many times before, we remain confident that price and value will ultimately converge and that our portfolio of stocks will reflect this.

1998 WINNERS...

United Overseas Bank, located in Singapore, has added 2.4 percentage points to our total return. We purchased United Overseas Bank early in the summer of '98 when the market hit its lows because of its quality and what we believed to be a strong over-reaction by the market. It should continue to be a good Asia recovery stock.

Sedgwick Plc, a United Kingdom based insurance broker, was taken over in 1998 at a very acceptable price. We have owned Sedgwick for a while, arguing that it was an extremely underpriced asset. Though it sat quiet for a few years, one of its competitors did not and decided that it was worth paying up for the quality business which Sedgwick built. It contributed almost 2% of total return last year.

Saatchi and Saatchi Plc, a company we have been involved with for a long time, is finally starting to pay off and the company continues to perform well. One of the strongest advertising companies in the world, Saatchi continues to win additional business from new and existing clients and profits should continue to grow at a good pace. It provided over 1% of total return to the Fund.

AND THE LOSERS...

Telebras, the Brazilian phone company now broken up into smaller operating companies, has cost our Fund nearly 4%. With trouble in Asia spreading to Russia and eventually to Brazil, Telebras was an easy target for speculators to sell. However, the Telebras companies now have new managements as a result of the privatization process and are the cheapest phone companies in the world.

Bladex is a Latin American bank involved with trade finance. This stock cost our Fund 3.2% of total return. Again, the selling of this stock has been way overdone as its p/e ratio is now below its dividend yield. It trades at only 5 times earning and yields close to 6%; this is at a time when the company can actually grow its earnings. Most of its loans are extremely secure. We think the "market" is irrationally pricing this quality financial institution.

WE REMAIN CONFIDENT GOING FORWARD

Though 1998 has been tough for the Fund, we believe our future looks excellent. The stocks that have been hit hard are good businesses that have been panic sold and are selling at bargain basement prices. This is not sustainable and should mean a bright future for your Fund. A significant percentage of our net worth is in this Fund so we remain committed to our long-term, value approach.

DAVID HERRO
Portfolio Manager
72242.772@compuserve.com

 

MICHAEL WELSH
Portfolio Manager
102521.2142@compuserve.com
 

THE OAKMARK INTERNATIONAL FUND
International Diversification—December 31, 1998

 

THE OAKMARK INTERNATIONAL FUND
Schedule of Investments—December 31, 1998 (Unaudited)

 

 

Description

Shares Held 

Market Value

Common Stocks—98.0%

Consumer Non-Durables—6.0%

Citizen Watch Co. (Japan)

Watch Manufacturer and Retailer

3,916,000

$23,554,887

Fila Holding S.p.A. (Italy), (b)

Athletic Footwear Manufacturing

2,649,800

20,535,950

 

 

 

44,090,837

Food & Beverage—8.0%

Quilmes Industrial SA (Argentina), (b)

Brewer

3,877,800

$36,112,013

Tate & Lyle PLC (Great Britain)

Sugar Producer & Distributor

1,330,638

7,405,943

Lotte Chilsung Beverage Company (Korea)

Manufacturer of Soft Drinks, Juices, & Sport Drinks

123,000

5,418,953

Pernod Ricard (France)

Manufactures Wines, Spirits, & Fruit Juices

80,579

5,231,654

Lotte Confectionery Company (Korea)

Confection Manufacturer

65,270

4,937,298

 

 

 

59,105,861

Household Products—2.5%

Amway Japan Limited (Japan)

Marketing of Household Products

1,630,300

$18,603,158

 

 

 

 

Retail—1.7%

Giordano International Limited (Hong Kong)

East Asian Clothing Retailer & Manufacturer

69,304,000

$12,970,571

 

 

 

 

Other Consumer Goods & Services—8.4%

Canon, Inc. (Japan)

Office and Video Equipment

1,197,000

$25,570,588

Mandarin Oriental International Limited (Singapore)

Hotel Management

30,539,000

19,239,570

Sankyo Company, Ltd. (Japan)

Pachinko Machine Manufacturer

1,026,800

17,166,316

 

 

 

61,976,474

Banks—10.1%

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

Major Brazilian Bank

1,866,900

$26,953,369

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

Multinational Bank

1,525,100

25,354,787

United Overseas Bank Ltd., Foreign Shares (Singapore)

Commercial Banking

3,489,000

22,400,606

 

 

 

74,708,762

Marketing Services—10.5%

Cordiant Communications Group plc (Great Britain)

Advertising Services

21,997,578

$39,105,181

Saatchi & Saatchi plc (Great Britain)

Advertising Services

16,857,578

38,510,001

 

 

 

77,615,182

Broadcasting & Publishing—6.6%

Singapore Press Holdings Ltd. (Singapore)

Newspaper Publisher

2,086,000

$22,110,842

Europe 1 Communication (France)

Television Production

74,020

17,277,070

Schibsted ASA (Norway)

Newspaper Publisher

474,200

5,991,077

Woongjin Publishing Company (Korea)

Publisher

148,410

2,294,619

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

Newspaper Publisher

2,700,000

1,385,268

 

 

 

49,058,876

Telecommunications—3.7%

SK Telecom Co. Ltd. (Korea)

Telecommunications

10,395

$5,815,324

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

Telecommunications

441,100,000

5,658,404

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

Telecommunications

1,167,700,000

5,025,275

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

Telecommunications

401,100,000

3,485,517

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

Telecommunications

501,100,000

3,317,719

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

Telecommunications

862,600,000

2,427,245

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

Telecommunications

1,205,300,000

847,890

Technology Resources Industries Berhad (Malaysia)

Telecommunications

1,485,000

541,492

 

 

 

27,118,866

Aerospace—5.0%

Rolls-Royce plc (Great Britain)

Jet Engines

5,378,552

$22,205,851

Hong Kong Aircraft Engineering Company Ltd. (Hong Kong)

Commercial Aircraft Overhaul & Maintenance

11,096,900

15,182,397

 

 

 

37,388,248

Oil & Natural Gas—1.1%

ISIS (France), (a)

Oil Services

112,000

$7,992,846

 

 

 

 

Chemicals—6.3%

Fernz Corporation Limited (New Zealand)

Agricultural & Industrial Chemical Producer

11,446,299

$35,235,134

European Vinyls Corporation International N.V. (Netherlands)

PVC Manufacturer

1,212,299

9,614,763

Nagase & Co., Ltd. (Japan)

Chemical Wholesaler

569,000

1,947,837

 

 

 

46,797,734

Components—2.7%

Varitronix International Limited (Hong Kong)

Liquid Crystal Displays

10,758,000

$20,134,106

 

 

 

 

Machinery & Metal Processing—3.6%

The Rauma Group (Finland)

Pulp Machinery

1,043,343

$15,141,671

Outokumpu Oyj (Finland)

Metal Producer

1,235,000

11,335,164

 

 

 

26,476,835

Mining and Building Materials—1.8%

Keumkang Ltd. (Korea)

Building Materials

560,460

$13,044,788

 

 

 

 

Other Industrial Goods & Services—15.3%

Tomkins plc (Great Britain)

Industrial Management Company

8,390,768

$39,451,526

Chargeurs SA (France)

Wool Production Holding Company

535,025

29,569,438

Charter plc (Great Britain)

Welding Products Manufacturer

2,706,014

14,656,265

Kone Corporation, Class B (Finland)

Elevators

103,870

12,018,690

Groupe Legris Industries SA (France)

European Crane Manufacturer

217,815

10,670,636

Dongah Tire Industry Company (Korea), (a)

Tire Manufacturer

166,290

6,648,835

 

 

 

113,015,390

Steel—2.0%

USIMINAS (Brazil), (a)

Steel Production

6,476,370

$14,310,939

Pohang Iron & Steel Company Ltd. (Korea)

Manufactures Steel Products

14,000

750,624

 

 

 

15,061,563

Diversified Conglomerates—2.7%

Tae Young Corporation (Korea)

Heavy Construction

518,300

$12,278,928

First Pacific Company Ltd. (Hong Kong)

Diversified Operations

16,448,000

7,855,026

 

 

 

20,133,954

Total Common Stocks (Cost: $975,791,442)

725,294,051

 

 

 

 

 

Description

Principal 
Value 

Market Value

Short Term Investments—0.4%

Repurchase Agreements—0.4%

State Street Repurchase Agreement, 4.50% due 1/4/1999

$3,182,000

$3,182,000

Total Repurchase Agreements (Cost: $3,182,000)

3,182,000

 

 

 

 

Total Short Term Investments (Cost: $3,182,000)

3,182,000

 

 

 

 

Total Investments (Cost $978,973,442)—98.4%

$728,476,051

Foreign Currencies (Proceeds $928,919)—0.1%

665,026

Other Assets In Excess Of Other Liabilities—1.5% (d)

11,347,697

Total Net Assets—100%

$740,488,774

(a) Non-income producing security.

(b) Represents an American Depositary Receipt.

(c) Represents a Global Depositary Receipt.

(d) Includes portfolio and transaction hedges.