The Oakmark Fund

Report from Robert J. Sanborn, Portfolio Manager


THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (6/30/99) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
6/30/99 NAV $39.76

 Total Return
Last 3 mos.		 Average Annual
Total Return*
Through 6/30/99
From Fund Inception
8/5/91
The Oakmark Fund 11.5% 26.0%
Standard & Poor's 500 Stock Index w/inc** 7.1% 20.2%
Dow Jones Industrial Average w/inc** 12.5% 20.6%
Value Line Composite Index** 13.8% 8.7%

*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 Dow Jones Average includes only 30 big companies. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results.

PORTFOLIO UPDATE

We have always viewed the investment process as a continuum. Nevertheless, here at the mid-point of the calendar year, it is a good time to discuss our Fund.

The year began with the US 30-year bond yielding about 5.3%, and it now yields about 6.3%. Despite this, both The Oakmark Fund and the Standard & Poor's 500 have returned in excess of ten percent year-to-date. Consequently, in general, opportunities are not as ample as they were at the beginning of the year and surely not as ample as about a year ago, when anxiety over the global economy—particularly Russia and Southeast Asia—drove stock prices to attractive levels. Thus, since we are having a marginally tougher time finding individual securities selling at significant discounts to value, cash in The Oakmark Fund is now at around ten percent of assets. As I have stated before, we are never, ever market-timers; however, we will only hold stocks in the Fund that offer satisfactory risk-adjusted expected returns.

During calendar year 1999, I have made only minor adjustments to our Fund. I have eliminated a couple of large holdings as they attained our sell targets (typically 90% of our estimate of underlying value). Generally, I have not found compelling reasons to make major changes in our portfolio.

I remain quite confident of our Fund's relative attractiveness compared to the Standard & Poor's 500. While the superior performance your Fund generated in the past quarter is gratifying, I continue to believe that its holdings are as undervalued to the broader market as they have EVER been. The growth stocks that dominate the S&P 500 continue to remain extremely overvalued and we continue to avoid them.

I also remain quite confident that the Internet stocks, which now have a market value over one trillion dollars (!!), remain in mega-bubble mode. Recent articles outlining the huge Internet successes of noted investor (and would-be money manager!) Barbra Streisand are typical of the illusion of quick and easy wealth that continues to entice investors (and has enticed investors for centuries). The spate of IPOs in this sector continues at a torrid pace. Just last week, eleven of the fourteen biggest IPOs were Internet companies. As long as investors continue to view these deals as "easy money," sellers and their friendly underwriters will continue to provide them. Watching CNBC, I note a growing chorus of individual investors clamoring for "their fair share" of IPOs. Of course, the fact that over time IPOs have proven to be below-average performers does not enter into investors' calculus at this time.

Looking into the future, I can envision a flood of lawsuits down the line that will make today's euphoria a very hazy memory. I can even envision legislators enacting "The Internet Investors' Security Act of 1999" in response to all the sad tales of family savings having been squandered by day-trading Internet stocks. After all, as Mrs. Ned Flanders always cries out on "The Simpsons," "What about the children?"—this is the perfect way to advance any governmental program in this age.

So, as we sit here in the middle of summer, I am very confident that our Fund will prove its value, especially relative to the broader market. In general, the companies that comprise your portfolio are performing well in a brutally competitive landscape.

ROBERT SANBORN
Portfolio Manager
rsanborn@oakmark.com
July 7, 1999

THE OAKMARK
    BOOK CLUB

Another summer has rolled around and it is time again for another installment of The Oakmark Book Club. Here are the books that I have read that I recommend for those interested in investing, finance, business, and economics:

Devil Take the Hindmost: A History of Financial Speculation, by Edward Chancellor (Farrar, Straus and Giroux, 1999): a fascinating look at financial manias throughout history, from tulip mania in 1630s Holland to the Internet bubble of 1999; common to all is a deeply popular yearning for (financial) freedom to counter the dull rationalism of economic systems; all day traders should read this book before it is too late.

The Age of Spiritual Machines: When Computers Exceed Human Intelligence, by Ray Kurzweil (Viking, 1999): What will happen when computers are smarter than human beings? By 2020, Kurzweil forecasts, a $1,000 desktop PC will have computing power equal to a human brain; by 2060, the same desktop PC will have the computational power of every human brain on earth. Ultimately, the merging of human beings and computers will produce, he soberly forecasts, a golden age on earth.

Morgan: American Financier, by Jean Strouse (Random House, 1999): an exhaustive, highly readable biography of one of the most significant figures in American finance.

The Lexus and the Olive Tree, Thomas Friedman (Farrar Straus & Giroux, 1999): a broad, anecdotal look at the globalization of the economy; the Lexus of the title represents the material and technological marvels after which most of the world lusts, and the olive tree symbolizes the Arab-Israeli conflict and other conflicts that prevent their populations from fully entering the global economy.

Alexander Hamilton, American, by Richard Brookhiser, (Free Press, 1999): a concise assessment of the nation's first Secretary of the Treasury and advocate of the national economic system.

The Future and its Enemies, by Virginia Postrel (Free Press, 1998): a libertarian manifesto that paints a battle between stasists, generally elites who want to control change, and dynamists, who embrace a future formed by an infinite number of individual decisions made privately; she convincingly argues that if we embrace the future while respecting individual liberty, the future is bright!

Numbered Account, by Christopher Reich (Delacorte Press, 1998): in a weak field—financial thrillers—this is a satisfactory beach book set in the rarified world of Swiss banking.

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

Shares Held

Market Value

Common Stocks—90.0%
Food & Beverage—9.2%
Philip Morris Companies Inc. 11,110,700 $446,511,256
Nabisco Holdings Corporation, Class A 2,372,100 102,593,325
    549,104,581
Apparel—5.8%
Nike, Inc., Class B 5,432,100 $343,919,831
     
Retail—0.2%
GC Companies, Inc. (a) 331,400 $11,847,550
     
Hardware—7.3%
The Black & Decker Corporation 5,563,700 $351,208,562
The Stanley Works 2,524,900 81,270,219
    432,478,781
Other Consumer Goods & Services—17.8%
Mattel, Inc. 12,614,400 $333,493,200
H&R Block, Inc. 6,465,500 323,275,000
Brunswick Corporation 7,280,800 202,952,300
Fortune Brands, Inc. 4,861,100 201,128,012
    1,060,848,512
Banks & Thrifts—9.1%
Bank One Corporation 4,600,548 $274,020,140
Washington Mutual, Inc. 7,480,000 264,605,000
    538,625,140
Insurance—1.2%
Old Republic International Corporation 4,122,930 $71,378,226
     
Publishing—5.7%
Knight Ridder, Inc. 5,966,100 $327,762,619
R. H. Donnelley Corporation 665,000 13,009,062
    340,771,681
Information Services—7.7%
The Dun & Bradstreet Corporation 8,901,300 $315,439,819
ACNielsen Corporation (a) 4,764,000 144,111,000
    459,550,819
Computer Services—2.4%
First Data Corporation 2,873,200 $140,607,225
     
Medical Centers—3.8%
Columbia/HCA Healthcare Corporation 9,901,000 $225,866,563
     
Medical Products—1.4%
Sybron International Corporation (a) 2,935,600 $80,912,475
     
Aerospace & Defense—10.1%
The Boeing Company 7,499,400 $331,379,738
Lockheed Martin Corporation 7,250,000 270,062,500
    601,442,238
Machinery & Industrial Processing—7.3%
Eaton Corporation 2,679,600 $246,523,200
Cooper Industries, Inc. 3,558,400 185,036,800
    431,560,000
Building Materials & Construction—0.0%
Juno Lighting, Inc. 64,015 $1,216,285
     
Other Industrial Goods & Services—1.0%
The Geon Company 971,600 $31,334,100
Bandag Incorporated, Class A 1,104,100 31,052,813
    62,386,913

 

 

 
Total Common Stocks (Cost: $4,412,075,065) 5,352,516,820
     

Par Value

Market Value

Short Term Investments—9.1%
U.S. Government Bills—0.8%
United States Treasury Bills, 4.51%–4.52% due 10/7/1999–10/14/1999 50,000,000 $49,345,210
Total U.S. Government Bills (Cost: $49,386,042) 49,345,210
     
Commercial Paper—6.8%
American Express Credit Corp., 4.83%–4.95% due 7/1/1999–7/9/1999 140,000,000 $140,000,000
Ford Motor Credit Corp., 4.86%–5.26% due 7/6/1999–7/19/1999 120,000,000 120,000,000
General Electric Capital Corporation, 4.96%–5.70% due 7/1/1999–8/5/1999 140,000,000 140,000,000
Total Commercial Paper (Cost: $400,000,000) 400,000,000
     
Repurchase Agreements—1.5%
State Street Repurchase Agreement, 4.75% due 7/1/1999 90,297,000 $90,297,000
Total Repurchase Agreements (Cost: $90,297,000) 90,297,000
     
Total Short Term Investments (Cost: $539,683,042) 539,642,210
     
Total Investments (Cost $4,951,758,107)—99.1% $5,892,159,030
Other Assets In Excess Of Other Liabilities—0.9% 52,810,956
Total Net Assets—100% $5,944,969,986

(a) Non-income producing security.