THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (12/31/99) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX
12/31/99 NAV $18.42	Total Return Last 3 mos.	Average Annual Total Return* Through 12/31/99 From Fund Inception 11/1/96
The Oakmark Select Fund	6.9%	31.1%
Standard & Poor's 500 Stock Index w/inc**	14.9%	28.1%
Standard & Poor's MidCap 400 Index w/inc**	17.2%	22.7%
Value Line Composite Index**	3.2%	6.1%
*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 had a good year in 1999. The fund increased in value by 14.5%, which was not only a good absolute return, but it also placed the fund in the top quartile of Morningstar's Midcap Value Funds for the third consecutive year. For three years, your fund outperformed 98% of competing midcap value funds on both a pre-tax and tax-adjusted basis. But 1999 was a very difficult year for value investors. The top performing stocks were again the technology stocks. They appeared to us to have started 1999 at overvalued levels, and now appear even more overvalued. The performance gap between growth and value was most extreme in the fourth quarter when the Russell Midcap Growth Index outperformed the Russell Midcap Value Index by 35 percentage points, up 39% compared to up 4%. That performance differential was not only a historic high for a quarter, but it also exceeded the largest previous one-year gap. Matching the S&P Midcap's 14.5% return last year was a good accomplishment in an environment so hostile to our investment style.

At year-end, investors were still chasing positive price momentum, selling their value funds and reinvesting in top-performing growth funds. Over the long term, growth and value styles have achieved similar returns, but in the short run have performed quite differently from each other. That's why a portfolio balanced between growth and value funds is less risky than either a pure growth or a pure value portfolio. Due to the incredible recent performance of growth funds, investors who have not altered their fund holdings have seen their weightings in growth increase. This results in a less balanced portfolio and, therefore, higher risk. Even if you've grown tired of comments about the great opportunity our portfolio presents, which I still strongly believe, consider the benefit that value funds provide in terms of risk reduction. The crowd is going the other way, increasing its bet that momentum will continue to rule. Market history has certainly proved that in the long run, the crowd is rarely right.

During the quarter, positions were increased in Washington Mutual and Sterling Commerce—in the prior quarter, shares had been sold to realize tax-losses. The market continued to drive up prices of luxury goods companies, so we sold the last of our Gucci holdings. Our long-term holdings in Premark were sold with the remaining shares converted into its acquirer, Illinois Tool Works. The position in Host Marriott was also eliminated due to a weakening outlook for cash flow and declining prices in hotel transactions. While I still view Host Marriott as undervalued, I do not think it is as attractive as the other stocks in our portfolio. Last, an update on progress at Dun & Bradstreet. As you recall, in August we went public with our criticism of DNB management and called for action to increase value. During the past quarter, DNB's board accepted the resignation of their CEO, launched a plan to spin-off their highly successful Moody's division, and announced a search for a new CEO. The stock responded, up 25% from the day we went public, but remains undervalued relative to our estimated business value. We believe that Moody's and Dun & Bradstreet, as two separate companies, will likely trade at a higher combined price than DNB stock currently does. Also, with the two companies trading separately, the possibility of either being acquired increases. We commend the DNB board for taking these steps and anxiously await the naming of a new CEO who can maximize the value of the Dun & Bradstreet franchise.

Taxes

Mutual fund taxes have become such a hot topic that, last quarter, a manager of a newly launched "tax-sensitive" mutual fund said that the primary goal in managing his portfolio was to minimize tax distributions to shareholders. At The Oakmark Select Fund, our goal is to maximize long-term after-tax returns. Notice how this differs from the goal of minimizing taxes. Paying low taxes is easy; achieving a good after-tax return is much more challenging. We don't intentionally initiate transactions that hurt pre-tax returns; after all, many of our shareholders are tax-exempt. However, we take several actions to minimize the cost of taxes.

First, the long holding period associated with value investing is an advantage at tax time. Gains on stocks held longer than a year are generally taxed at just half the taxpayer's marginal tax rate. Over the life of The Oakmark Select Fund, 89% of our distributions have been from long-term gains. Second, when a fund sells some of its position in a stock, it must identify which shares were sold. While some funds use average cost or FIFO methodologies, we go a step further. By identifying the specific purchase lot we minimize the tax consequence of each sale. We also lower tax liability by selling stocks that have declined. Many value managers don't use this technique because they view stocks that have gone down as more attractive investments. We try to increase our position when the stock is most attractive yet still capture the tax loss. So we buy and sell partial positions with a 31-day interval that avoids violating IRS wash sale rules.

A recent example of the powerful effect of tax trading is Sterling Commerce. Your fund started acquiring Sterling in June at a price of $35.55. The stock hit a subsequent low in October of $18. We have bought and sold Sterling often since June, trying to increase the position when the price was low, and decrease the position when the price was high. When we sold, we identified our highest cost shares and thus offset some of the Fund's taxable gain. Sterling closed 1999 at $34, down 4% from our initial purchase. Although we were early, by owning more shares when it was down, Sterling has actually caused an 11¢ per share increase in the fund's NAV. And due to the tax-loss selling, the fund's distributable short-term gain was reduced by 20¢ per share.

Taxes can be a big annoyance to fund investors, especially in a year like 1999 when we had a tax distribution that was slightly larger than our NAV increase (due to selling stocks that increased NAV in prior years). But consider the effect our tax strategies have had on the Fund over a longer and thus more meaningful time period. An investor who put $10,000 into The Oakmark Select Fund at inception on November 1, 1996 had shares worth $23,557 at year-end—a gain of $13,557. Total taxable distributions would have been $5,058, on which a top bracket investor would have been required to pay only $1,119 in federal taxes. The after-tax return would be $12,438—and just 8% of the gain was lost to taxes. Year-round tax management is a little extra work, but because it increases your after tax returns, we believe it is definitely worth doing.

Thank you for your continued support.

William C. Nygren

Portfolio Manager
bnygren@oakmark.com

January 4, 2000

(a) Non-income producing security.

(b) Represents foreign domiciled corporation.