The Oakmark Select Fund

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/99) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
9/30/99 NAV $20.92	Total Return Last 3 mos.	Average Annual Total Return* Through 9/30/99 From Fund Inception 11/1/96
The Oakmark Select Fund	-10.0%	31.1%
Standard & Poor's 500 Stock Index w/inc**	-6.2%	24.7%
Standard & Poor's MidCap 400 Index w/inc**	-8.4%	18.3%
Value Line Composite Index**	-10.3%	5.5%
*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.

For fiscal 1999, The Oakmark Select Fund increased in value by 30.1%. This performance somewhat exceeded the 25.5% gain in the S&P MidCap 400, and the 27.8% gain in the S&P 500. Your fund also outperformed 95% of the other funds classified by Morningstar as midcap value funds. I want to thank our research department for another year of outstanding contribution. Their hard work and insights are the foundation for the results we have achieved. The chart below shows that, unlike the full year, the fourth fiscal quarter was somewhat disappointing as the fund's NAV declined by more than the relevant indices.

I continue to believe that the valuation of The Oakmark Select Fund makes it a very attractive alternative to a popular market index like the S&P 500. At quarter's end, the S&P 500 sold above 23x estimated year 2000 earnings. The average P/E ratio on year 2000 estimates for The Oakmark Select Fund was 11x— less than half the market multiple. When the market will "discover" our stocks is anyone's guess. But, while we wait, most of our companies are aggressively repurchasing their own shares, increasing the remaining shares' value. One of our holdings, Premark, found a corporate buyer. Illinois Tool Works agreed with us that Premark stock was a bargain and offered to purchase it for a 60% premium. Congratulations to Premark's Jim Ringler for an outstanding job of maximizing value for Premark's owners. Thanks also to Gucci's Dominico DeSole for fighting off a hostile attempt to acquire Gucci at a bargain price and his speedy demonstration that Gucci could maximize its value by remaining a public company.

Managers like these are great to have working for us. They accept the obligation to their owners to evaluate what the business is worth and to have a strategic plan that will see that value recognized in the public market. They also understand that selling the company above that value benefits shareholders. We strive to be aligned with this type of management in all our stocks. When management acts contrary to this thought process, we will usually sell our stock and move on. In extreme cases of undervaluation, we will encourage the board of directors to adopt our perspective. We took such a step last quarter with the board of Dun & Bradstreet, urging them to solicit offers for the company. This effort will continue as we work toward having the strong Dun & Bradstreet franchise value reflected in its stock price.

This quarter was another relatively quiet one for your portfolio with only one new addition, Chiron. As a leading biotechnology company selling at 45x this year's earnings, Chiron is hardly a typical holding for a value fund. Chiron's earnings are depressed by heavy R&D spending. This spending provides no current benefit but is very important for Chiron's long-term growth. Unlike manufacturing companies that capitalize and depreciate their growth expenditures, R&D spending is fully expensed as incurred. In our opinion, the result is an understatement of Chiron's earnings. We faced the same accounting issue when we bought Amgen two years ago, so the measure we used to compare it to other drug companies was enterprise value divided by pre-tax, pre-R&D cashflow. On that measure, Chiron sells at about 8x, while other biotech and drug companies average over 15x. Acquisition prices have also confirmed that 15x multiple. We believe new management at Chiron now has the company focused on growing business value and expect they will be successful attaining that goal.

THE ILLUSION OF CERTAINTY

The financial media today is full of forecasts by prognosticators. Magazines for investors, stock market Internet sites and shows on CNBC all provide forums for professional investors to share their views on their favorite stocks. The well-articulated reasons why certain stocks are favorites make it sound nearly impossible that the pundits could be wrong. This illusion of certainty is in direct conflict with the reality that most professional investors, including mutual fund managers, underperform the market. This is a dangerous misperception. The most obvious danger is that naïve users of these forecasts may take inappropriate risks believing the forecasters are right. The more subtle danger is that portfolio managers, believing their clients or shareholders want them to be infallible, become incapable of admitting and correcting their mistakes.

A great long-term track record is one that exceeds the market's return by just a couple of percentage points annually. The truth is that even great long-term records include many, many mistakes. In fact, if our stock picks are right a little more often than they are wrong, and the magnitude of the winners exceeds the magnitude of the losers, the results will be outstanding. One of the most powerful tools in acheiving that goal is the ability to unemotionally re-assess our successes and failures and to reposition the portfolio in response to new information and changed share prices.

With that as background, I'd like to look back at our performance in fiscal 1999. During the year, The Oakmark Select Fund held positions in a total of 24 stocks. Of those, 18 moved our relative performance by more than 50 basis points, or one-half percent. Ten of these were positive, eight were negative. The largest winner, Gucci, added more to our performance than the largest loser, Washington Mutual, subtracted. Looking at the ten biggest movers, six were successes (Gucci, Cablevision, First Data, Premark, Weatherford, Amgen) and, as you should expect, our exposure to that group of stocks has decreased. Our exposure to the four biggest failures (Washington Mutual, PartnerRe, Host Marriott, Sterling Commerce) has also declined over the last couple quarters, but that has more to do with tax-loss selling than any change in my conviction.

Although I wish we had not owned Washington Mutual last year, the best we can do now is re-assess the situation and react accordingly. Washington Mutual ended the quarter at a price of $29. It sells at less than 8x our estimate of next year's earnings. A growing customer base and intelligent use of excess capital should allow for continued double-digit EPS growth. Further, Washington Mutual has established a very strong West Coast franchise, has top-notch management and is using every dollar of excess capital to repurchase their shares. I was early in purchasing Washington Mutual and, although I could be wrong, I remain convinced that it will make a strong positive contribution to our future results. We will continue to re-evaluate our Washington Mutual holding as new information becomes available, but at this point, I believe Washington Mutual is one of the most attractive stocks in our portfolio and intend to increase our commitment to it.

Thank you for your support.

WILLIAM C. NYGREN
Portfolio Manager
bnygren@oakmark.com
October 8, 1999

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Represents foreign domiciled corporation.

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

(e) At September 30, 1999, net unrealized appreciation of $24,656,664, for federal income tax purposes, consisted of gross unrealized appreciation of $187,822,431 and gross unrealized depreciation of $163,165,767.