The Oakmark Select Fund

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (6/30/99) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
6/30/99 NAV $23.25	Total Return Last 3 mos.	Average Annual Total Return* Through 6/30/99 From Fund Inception 11/1/96
The Oakmark Select Fund	7.5%	40.0%
Standard & Poor's 500 Stock Index w/inc**	7.1%	30.5%
Standard & Poor's MidCap 400 Index w/inc**	14.2%	24.2%
Value Line Composite Index**	13.8%	10.5%
*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 S&P 400 consists of 400 domestic stocks chosen for market size, liquidity, and industry group representation. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results.

The Oakmark Select Fund increased in value 7.5% for the quarter ended June 30. As shown in the chart below, that gain slightly exceeded the gain in the S&P 500, but trailed the S&P Midcap 400 Index, which I consider a better benchmark for your fund. For the nine month fiscal year-to-date, your fund has increased in value by 44.6% versus gains of 37.0% for the S&P Midcap and 36.3% for the S&P 500.

Although Austin Powers would say, "Yeah, baby!," I would caution, as I have in past quarters, that both the absolute returns and the amount by which your fund outperformed the indices are historically unusual and are unsustainable. Over long periods of time, the stock market has achieved returns of only a few percentage points above long-term bonds, and top performing funds have been only a couple of percentage points above the market. With long-term interest rates of 6%, investors should expect that only the best performing funds would achieve double-digit long-term annual returns.

A STERLING IDEA

The quarter just ended was a quiet one for your portfolio. Unlike last quarter, when I wrote about the unusually high turnover, this quarter saw just one change in the portfolio. As expected, US Filter shares were tendered, and we used the cash to add a new investment, Sterling Commerce (SE–$25). Sterling is a leading global provider of software and services for business-to-business electronic commerce, both on and off the Internet. Sterling stock has declined this year, (including a very sharp decline today, which we are using to increase our holdings) due to a small earnings shortfall as their customers are deferring new software installations until next year because MIS departments are pre-occupied with Y2K issues. We view most of this disappointment as a short-term issue and we have not significantly decreased our estimate of Sterling's intrinsic business value.

As of year-end, 482 of the Fortune 500 companies were Sterling customers. This existing customer base gives Sterling an important competitive advantage because the easiest way to communicate with a business whose computers already use Sterling software is to also use Sterling software. With its entrenched leadership position, Sterling stands to benefit from the continued rapid growth in business-to-business e-commerce. Most experts expect that Internet-based business-to-business e-commerce will be a much larger market than the retail e-commerce business that the stock market has priced so high. Unlike most Internet-related companies, not only is Sterling already profitable, but it sells at a low-teens multiple based on our estimate of next year's earnings, about half the multiple of the S&P 500; this, despite a 25% earnings growth rate and a cash-rich balance sheet. Some might say that Sterling sounds more like a "growth stock" than a "value stock." Clearly, Sterling's business characteristics appear quite similar to the rapid growth companies that generally are priced too high for us. People sometimes assume that as value investors we dislike growth. The truth is, we love growth, we just don't like paying for it! Sometimes a growth company does sell at a value price, and it doesn't get any better than that.

REDEMPTION FEES

The Oakmark Select Fund (as well as the other specialized funds in the Oakmark Family) has decided to impose a redemption fee. Effective August 16, when newly issued shares (it doesn't apply to shares you already own) are sold within 90 days of purchase, 2% of the proceeds will be paid back to the fund in the form of a redemption fee. Shares held longer than 90 days will not be charged any fee. I'd like to explain why this should please you. Your first thought is probably about the old joke concerning the world's three biggest lies: The check is in the mail; I'm from the government and I'm here to help; and We increased fund fees for your benefit! So, I'd like you to consider that when a new investor buys and sells shares in your fund, there are several costs to the fund. First, there are direct administrative costs to process the transactions and send statements. Second, when we use newly invested money to buy stocks and when we raise cash for departing shareholders by selling stocks, there are commission costs and possibly market impact costs because you can't always trade at the last sale price. Finally, there are tax consequences to our sales of stocks in the Fund because, typically, the stocks we want to sell are the ones that have gone up and their sale triggers a capital gain.

In a perfect world, where long-term investors hold all of the fund's shares, trading costs are not a big number, and are fairly shared by all holders. But in the real world, the 80/20 rule applies, in this case, over 80% of the trading activity is caused by less than 20% of our holders. In the real world, long-term holders of mutual funds unfairly share in the excessive costs caused by the in-and-out traders. That is why the Oakmark Family has always discouraged short-term traders from buying any of our funds, and in fact, has barred numerous active traders from investing in our fund family.

However, the number of short-term traders in specialty mutual funds continues to grow and, despite our best efforts, they do trade our funds. These traders, who often stay in the fund for only a day or two, exploit trading strategies where each trade has a high probability of success, but produces a very small return. Examples include buying an international fund on days the US market is up, buying small-cap funds on days when big caps rally in the afternoon, or buying a concentrated fund on days it is up. (The Oakmark Select Fund's NAV has been 20% more likely to go up following an up day than following a down day.) Any single trade has an expected return of just a fraction of a percent and, in fact, wouldn't be profitable if the trader was directly buying stocks because trading costs would exceed the strategy's return. But in funds where shareholders pay no transaction costs, some active traders (who, using multiple funds, can be in-and- out over 50 times a year) can make high returns at the expense of long-term investors.

We believe the most effective way to prevent this exploitation of our loyal shareholders is to charge an appropriate fee to short-term traders which, in effect, reimburses the fund for the costs they create. By charging 2% of assets to traders who redeem shares purchased less than 90 days ago, we will prevent their potentially damaging effects on your Fund's performance.

To our long-term shareholders, I would like to add: this fee does not apply to shares you already own and will not apply to shares you receive from reinvesting your dividends. The fee will, however, apply to newly purchased shares, so as we've always told you, don't buy if you expect to sell within 90 days! To the short-term traders who expect to sell in less than 90 days, our Fund should no longer be attractive to you. But, if you do continue to trade with us, our long-term holders will no longer be penalized by your activity and will, in fact, almost certainly benefit.

Thank you for your continuing support.

Sincerely,

WILLIAM NYGREN
Portfolio Manager
bnygren@oakmark.com
July 7, 1999

THE OAKMARK SELECT FUND Schedule of Investments—June 30, 1999 (Unaudited)

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Represents foreign domiciled corporation.