Fellow Shareholders,

We are pleased to present the quarterly report of The Oakmark Global Fund. For the three-month period ending December 31st, 1999 the Fund increased in value by 8.7%. This compares to a gain of 16.9% for the MSCI World Index and 23.2% for the Lipper Global Fund Index.

Market Sentiment & Psychology

In today's market environment, investors are more fanatical toward some sectors and more hostile toward other sectors than ever before. Stock prices seem to move wildly upward and downward without regard to true underlying business fundamentals. As we said in our previous letter, as long-term 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. To us, risk is not defined as short-term price volatility, but rather the potential for permanent loss of capital.

Ben Graham described how long-term investors should behave in regard to short- term market conditions in Chapter 8 of The Intelligent Investor.

As long as the earnings power of his holdings remains satisfactory, he [the investor] can give as little attention as he pleases to the vagaries of the stock market. More than that, at times he can use these vagaries to play the master game of buying low and selling high...The investor who permits himself to be stampeded or unduly worried by the unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage...Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.

Our research efforts are geared toward minimizing true risk (permanent loss of capital) while maximizing the gap between true business value and current stock prices. Therefore, when the market's short-term psychology is unduly negative and provides opportunities (large discounts to underlying value), we will look to take advantage of these situations.

The Fund's Largest Positions

We would like to take this opportunity to acquaint you with your Fund's two largest holdings:

Department 56—DFS is a leading designer, importer and distributor of fine quality collectibles and other specialty giftware sold through gift and home accessory retailers. The company is best known for its series of collectible ceramic and porcelain houses, buildings and related accessories in The Original Snow Village Collection and The Heritage Village Collection. The DFS share price performance is a reflection of the market's overly pessimistic attitude toward a short-term problem at the company.

In 1999, DFS implemented a new Y2K-compliant company-wide computer system, which caused major problems in ordering, shipping and documentation for the company. These computer problems will cause DFS to report flat year-over-year earnings per share for 1999. The market reacted to the lack of one-year growth by marking DFS' stock price down 50% over the course of this year. Given the company's many strengths (highly differentiated products, recognized brand name, loyal and devoted customer base, and tremendous profitability and cashflow), we felt the price decline was a gross over-reaction to a short-term, fixable problem and began to buy shares. Despite DFS's many computer-related problems, the company continued to repurchase shares aggressively in 1999 and bought back 2.75 million shares or 15% of shares outstanding. Going into the year 2000, DFS has announced another $75 million share repurchase authorization to be completed within the year. The additional $75 million share repurchase is the equivalent of receiving a $4.75 dividend or a 20% dividend yield. In late December, DFS gave us an update on the new computer system and stated that the company believes the major issues faced in 1999 (ordering, shipping, and documentation) have been resolved and should not impact 2000. At the current stock price ($22.625), we calculate DFS is trading for less than half of its intrinsic value.

House of Fraser—House of Fraser is the third-largest department store chain in the United Kingdom. Until a new management team came aboard in 1997, the Company was a retailing relic without many of the modern inventory, sales and computer-operating systems that are necessary to maximize profits and financial returns. The new management began to implement changes with much success, and it wasn't long before the market was singing songs of restructuring praise, driving House of Fraser's stock price from 150p to 250p in less than a year. Unfortunately, last year's slowdown in the UK economy sent investors fleeing from just about every retailer. House of Fraser's stock plunged to 50p and is currently at 74p. Your fund has been accumulating shares at these levels.

Despite the 80% drop in the stock price, not much has changed for House of Fraser. While sales growth has been difficult to come by in a slow retail environment, the management team continues to make significant progress restructuring the business. Sales mix, gross profit margins, and inventory improve each reporting period. As a result of the improvements, we believe that House of Fraser's profit margins could double over the next few years. But because retail stocks are currently out of favor, this potential remains unrecognized by the market—all of which is fine with us. With virtually no debt, offering a safe 7.5% dividend yield, and trading at a 30% discount to book value, we are very comfortable patiently waiting for the market to rediscover House of Fraser.

Looking Forward

These two companies give you a small taste as to why we are so optimistic about our current positions and future prospects. Further, we have not seen a valuation gap this large between the intrinsic value of our current portfolio of companies and the market since the early 1990's. It may take time for this gap to close but we are as confident as ever in the future outlook of our companies.

Once again, we would like to thank you for your confidence in the newest Fund in the Oakmark Family.

Greg Jackson

Portfolio Manager
gjackson@oakmark.com

Michael Welsh

Portfolio Manager
102521.2142@compuserve.com

January 4, 2000
 

(a) Non-income producing security.

(b) Represents an American Depository Receipt.

(c) Represents a Global Depository Receipt.

PLEASE NOTE: In the Annual Report dated September 30, 1999 there were two errors in the footnotes to the table entitled "Financial Highlights" on page 68. In note (a), the date on which the Fund's shares were first offered for sale to the public should have been August 4, 1999. In note (b), the ratio of net income (loss) to average net assets if the Fund had paid all of its expenses and there had been no expense reimbursement should have been .51% (not 1.45%).