The Oakmark Global Fund

FELLOW SHAREHOLDERS:

We are pleased to present the first quarterly report of The Oakmark Global Fund! While the Fund's first two months were disappointing, we are extremely excited about the appreciation potential of our current portfolio. The recent weakness in share prices throughout most of the world's equity markets has given us the chance to buy into very high quality businesses at very attractive prices.

PHILOSOPHY

As investors in The Oakmark Family of Funds, you are well aware of our long-term, disciplined value philosophy. As this is our first direct communication we think it is important to clearly outline the process with which we will implement this philosophy with The Global Fund.

As with the other Oakmark Funds, we believe superior, long-term results are achieved by investing in quality companies purchased at significant discounts to their underlying business value. Equally important, we must have confidence that the priority of management is to make money for the owners — us. No matter how cheap the stock, we will never invest unless we believe management's top priority is to build the value of the business.

Inherent in our philosophy is the belief that, over time, a company's share price will increase and ultimately reflect underlying business value. It may take time for this gap to close, perhaps, if the short-term uncertainty that created the opportunity persists. It is our job as analysts to determine whether the current share price is properly compensating us for this uncertainty.

PORTFOLIO CONSTRUCTION

The portfolio of companies in The Global Fund is built from the bottom-up on a stock-by-stock basis. We will never allocate money, as many global investors do, based solely on macro-economic predictions of the various regions of the world. Too often this sort of top-down investing ignores valuation and, more important, the quality of the underlying companies in a particular economy. We will certainly consider macroeconomic factors in our investments, but will use them as important inputs to determining the underlying business value of a specific company.

The Fund's largest positions will be those we perceive to have the largest gaps between price and value. Before purchasing a single share of stock we establish a firm Sell Price for that business. Portfolio construction then becomes, in general, an optimization function. We want the most money invested in those businesses with the largest gap between the current price and our Sell Price. Of course we are also cognizant of other factors, including the amount invested in a particular industry or country, but the valuation gap will be the biggest driver of position size.

We like to characterize the construction process as "ideas battling their way into the portfolio on a stock-by-stock basis." Whether it is Dun & Bradstreet or Citizen Watch, each idea is judged strictly on appreciation potential, not whether it is a large cap or small cap, or whether it is located in Murray Hill, New Jersey or Tokyo, Japan.

As with the other Oakmark Funds, concentration is another important part of portfolio construction — we want our best ideas to have significant impact on the Fund's net asset value.

Currently, the Fund is invested in 34 companies, with 43% of the assets invested in the US market and 55% internationally. The international portion breaks down regionally as 32% Europe, 11% Asia, and 8% Latin America. The United Kingdom is far and away the largest country weighting overseas, representing around 19% of the portfolio.

FLEXIBILITY

As both managers and large personal investors, we feel flexibility is the most exciting aspect of The Global Fund. We are able to participate in the firm's best ideas regardless of where they are located. We are also able to invest in companies of any size capitalization, from small to large. This flexibility allows us to go wherever value takes us.

As value investors, short-term market volatility gives us an assist in implementing our investment philosophy — greater volatility affords us greater opportunities to purchase stocks trading at significant discounts to their perceived true business value. The fact that The Global Fund can invest regardless of company size, location, region, etc. gives it even more flexibility to seize these opportunities. We recognize that the value discipline inherent in our process is the most important element of success in using short-term fluctuations to the Fund's advantage.

At this time we see great opportunities worldwide in mid-size and smaller companies. The already large valuation gap has been widening between this sector and the large caps for a number of years throughout the world (the lone exception is Japan). We believe the size of this gap cannot persist.

We would like to thank you for your confidence in the newest fund in the Oakmark Family. We look forward to a long and prosperous future.

GREG JACKSON
Portfolio Manager
gjackson@oakmark.com

MICHAEL WELSH
Portfolio Manager
102521.2142@compuserve.com
October 7, 1999
 

THE OAKMARK GLOBAL FUND Global Diversification—September 30, 1999

 

THE OAKMARK GLOBAL FUND Schedule of Investments—September 30, 1999

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Represents a Global Depository Receipt.

(d) At September 30, 1999, net unrealized depreciation of $1,789,042, for federal income tax purposes, consisted of gross unrealized appreciation of $650,351 and gross unrealized depreciation of $2,439,393.

(e) Includes portfolio hedges.