THE OAKMARK SMALL CAP FUND
Report from James P. Benson and Steven J. Reid, Portfolio Managers
THE OAKMARK SMALL CAP FUNDReport from James P. Benson and Steven J. Reid, Portfolio Managers |
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| The value of a $10,000 investment in The Oakmark Small Cap Fund from its inception (11/1/95) to present (12/31/99) as compared to the Russell 2000 Index | ||
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| 12/31/99 NAV $13.60 |
Total Return Last 3 mos. |
Average Annual Total Return* Through 12/31/99 From Fund Inception 11/1/95 |
| The Oakmark Small Cap Fund | -2.0% | 12.3% |
| Lipper Small Cap Fund Index** | 32.7% | 17.2% |
| Russell 2000 w/inc** | 18.4% | 15.2% |
| S&P Small Cap 600 w/inc** | 12.5% | 14.9% |
| * 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 or funds whose composition is different from the Fund. The Lipper Small Cap Fund Index is comprised of 30 Small Cap Funds. The Russell 2000 Index measures the performance of smaller companies, and represents approximately 10% of the total value of publicly traded companies in the U.S. The S&P 600 Index measures the performance of selected U.S. stocks with small market capitalization. Past performance is no guarantee of future results. |
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The 1999 calendar year is now history and it was a great year for the two "T's"—technology and telecommunications. For most other industry groups it was not much of a bull market. The massive diversion of capital to the two "T's" and away from almost all other stocks caused a significant widening in the valuation discrepancy between growth and value stocks. The Oakmark Small Cap Fund's first fiscal quarter ended on December 31, 1999 and results for this quarter were disappointing, as your Fund declined by 2.0%, which was below the relevant indices. While some people boldly talk about the Internet economy fundamentally changing the economics of valuing companies, we do not believe any company, regardless of its industry, can grow indefinitely while generating negative cash flow. Our focus remains in finding undervalued companies with positive business and cash flow characteristics, regardless of industry.
As we enter 2000, there are numerous reasons to be optimistic. We are now past the Y2K computer issues that could have caused significant economic disruptions and, as we look forward, we can find many undervalued companies in which to invest. Although the share prices of the companies we own do not currently reflect it, we estimate that our holdings continued to grow their underlying value. Our Fund trades at a large discount to our estimate of its underlying value and yet we can continue to upgrade the Fund's holdings, as many other small cap stocks represent even better value than a few of our current holdings. We will pursue upgrading the portfolio with vigor over the forthcoming months given how many bargains exist in the small cap area.
What Is A Share Of Stock?
The foregoing headline may seem self-explanatory, but we would like investors to ponder the following: suppose you had about $135 billion in your bank account and you were presented with the opportunity of either spending the entire amount to buy Yahoo! or you could buy 100% of Ford Motor Company, Washington Mutual, Inc., Safeway, Inc., Electronic Data Systems Corp. and Nike, Inc. If you buy Yahoo! you will be getting a fast growing company with annual revenues approaching $600 million and $140 million in estimated 1999 net profits. If you decide to buy the basket of five leading companies you will assemble a firm with estimated revenues of $230 billion and 1999 net profits of $10.95 billion. Further, assume your basket of five grows net profits at 12% annually while Yahoo! grows at a very rapid 50% compounded annually. Over the next five years your net profits in Yahoo! would be approximately $2.77 billion versus $77.9 billion (or 2,712% more) with the basket of five. We believe that under most scenarios the investment in the basket of five companies is likely to yield superior economic returns vis-a-vis Yahoo! despite Yahoo!'s very rapid growth. We utilize this example to demonstrate the simple principle that a share of stock is a percentage ownership interest in a company. If you are not willing to buy the entire company at its current stock price, then you should not be willing to buy a single share of that same company's stock. This common sense discipline is key to avoiding fads in the stock market.
Portfolio Update
The broad-based decline in small cap companies, particularly those that fit a value-oriented investment philosophy, has created a number of new investment opportunities for the Fund. Fortunately, a few of our investments, such as Symantec Corp. and Duff & Phelps Credit Rating Co., have performed very well and have recently been used as sources of funds to reposition the portfolio into stocks that have higher expected future returns based upon current stock prices.
Companies that we have added to the portfolio over the past quarter include: Hanger Orthopedic Group, the nation's leading company specializing exclusively in practice management for orthotics and prosthetics; NovaMed Eyecare, a company focused on laser vision correction; Superior Consultant Holdings, an integrated healthcare management and information technology consulting firm; and Veterinary Centers of America, the largest U.S. operator of animal hospitals and laboratories. While each of these four companies has unique aspects that make them attractive investments, as a group, we view these companies as a way to invest in growing and dynamic healthcare companies. Strong underlying growth for these firms is aided by the demographic push provided by aging populations of both humans and pets.
Co-Portfolio Managers
In November, 1999 Jim Benson was added to the management team for your Fund. Jim has been an investment analyst for sixteen years, with over four years as the Director of Research for a brokerage firm. Jim brings a variety of skills to the management of your Fund, including an in-depth understanding of technology thanks to an undergraduate degree in Computer Science. We look forward to a successful collaboration.
Once again, we would like to thank everyone involved, especially our shareholders, for your support of The Oakmark Small Cap Fund.
James P. Benson
Portfolio Manager
jbenson@oakmark.com
Steven J. Reid
Portfolio Manager
sreid@oakmark.com
January 4, 2000
| THE OAKMARK SMALL
CAP FUND Schedule of Investments—December 31, 1999 (Unaudited) |
| Shares Held |
Market Value | |
| Common Stocks—94.6% | ||
| Food & Beverage—7.7% | ||
| Del Monte Foods Company (a) | 1,000,000 | $12,312,500 |
| Ralcorp Holdings, Inc. (a) | 465,000 | 9,270,937 |
| International Multifoods Corporation | 200,000 | 2,650,000 |
| M & F Worldwide Corp. (a) | 300,000 | 1,518,750 |
| 25,752,187 | ||
| Apparel—0.5% | ||
| Reebok International Ltd. (a) | 220,000 | $1,801,250 |
| Retail—9.1% | ||
| Ugly Duckling Corporation (a) | 1,750,000 | $12,031,250 |
| The Great Atlantic & Pacific Tea Company, Inc. | 380,000 | 10,592,500 |
| Michaels Stores, Inc. (a) | 280,000 | 7,980,000 |
| 30,603,750 | ||
| Hardware—1.0% | ||
| Jore Corporation (a) | 430,000 | $3,359,375 |
| Other Consumer Goods & Services—6.7% | ||
| Department 56, Inc. (a) | 660,000 | $14,932,500 |
| Harman International Industries, Incorporated | 75,000 | 4,209,375 |
| Barry (R.G.) Corporation (a) | 900,000 | 3,543,750 |
| 22,685,625 | ||
| Banks & Thrifts—10.2% | ||
| People's Bank of Bridgeport, Connecticut | 480,000 | $10,140,000 |
| Golden State Bancorp Inc. (a) | 500,000 | 8,625,000 |
| BankAtlantic Bancorp, Inc., Class A | 1,150,001 | 4,743,754 |
| Hudson City Bancorp, Inc. (a) | 300,000 | 4,031,250 |
| PennFed Financial Services, Inc. | 260,000 | 3,932,500 |
| Finger Lakes Financial Corp. | 184,500 | 1,383,750 |
| Northwest Bancorp, Inc. | 185,000 | 1,283,438 |
| 34,139,692 | ||
| Insurance—6.1% | ||
| The MONY Group Inc. (a) | 365,000 | $10,653,437 |
| The PMI Group, Inc. | 200,000 | 9,762,500 |
| 20,415,937 | ||
| Other Financial—2.6% | ||
| Duff & Phelps Credit Rating Co. | 100,000 | $8,893,750 |
| Educational Services—3.4% | ||
| ITT Educational Services, Inc. (a) | 750,000 | $11,578,125 |
| Information Services—5.4% | ||
| National Data Corporation | 475,000 | $16,120,313 |
| Superior Consultant Holdings Corporation(a) | 133,000 | 1,895,250 |
| 18,015,563 | ||
| Computer Services—4.5% | ||
| Symantec Corporation (a) | 260,000 | $15,242,500 |
| Computer Systems—2.5% | ||
| Micron Electronics, Inc. (a) | 750,000 | $8,343,750 |
| Medical Centers—1.0% | ||
| Veterinary Centers of America, Inc. (a) | 200,000 | $2,575,000 |
| NovaMed Eyecare, Inc. (a) | 125,000 | 843,750 |
| 3,418,750 | ||
| Managed Care Services—2.5% | ||
| First Health Group Corp. (a) | 310,000 | $8,331,250 |
| Medical Products—1.0% | ||
| Hanger Orthopedic Group, Inc. (a) | 350,000 | $3,500,000 |
| Automotive—6.1% | ||
| SPX Corporation (a) | 130,000 | $10,505,625 |
| Standard Motor Products, Inc. | 380,000 | 6,127,500 |
| Stoneridge, Inc. (a) | 250,000 | 3,859,375 |
| 20,492,500 | ||
| Transportation Services—2.2% | ||
| Teekay Shipping Corporation (b) | 461,200 | $7,350,375 |
| Machinery & Industrial Processing—4.4% | ||
| Columbus McKinnon Corporation | 540,000 | $5,467,500 |
| MagneTek, Inc. (a) | 510,000 | 3,920,625 |
| Sames Corporation | 245,800 | 3,748,450 |
| Northwest Pipe Company (a) | 110,000 | $1,540,000 |
| 14,676,575 | ||
| Chemicals—4.5% | ||
| H.B. Fuller Company | 145,000 | $8,110,938 |
| Ferro Corporation | 315,000 | 6,930,000 |
| 15,040,938 | ||
| Real Estate—9.0% | ||
| Catellus Development Corporation (a) | 1,360,000 | $17,425,000 |
| Prime Hospitality Corp. (a) | 800,000 | 7,050,000 |
| Trammell Crow Company (a) | 500,000 | 5,812,500 |
| 30,287,500 | ||
| Diversified Conglomerates—4.2% | ||
| U.S. Industries, Inc. | 1,000,000 | $14,000,000 |
| Total Common Stocks (Cost: $333,400,557) | 317,929,392 | |
| Par Value | Market Value | |
| Short Term Investments—3.1% | ||
| Commercial Paper—0.6% | ||
| Ford Motor Credit Corp., 6.01% due 1/3/2000 | 2,000,000 | $2,000,000 |
| Total Commercial Paper (Cost: $2,000,000) | 2,000,000 | |
| Repurchase Agreements—2.5% | ||
| State Street Repurchase Agreement, 3.25% due 1/3/2000 | 8,577,000 | $8,577,000 |
| Total Repurchase Agreements (Cost: $8,577,000) | 8,577,000 | |
| Total Short Term Investments (Cost: $10,577,000) | 10,577,000 | |
| Total Investments (Cost $343,977,557)—97.7% | $328,506,392 | |
| Other Assets In Excess Of Other Liabilities—2.3% | 7,750,937 | |
| Total Net Assets—100% | $336,257,329 | |
(a) Non-income producing security.
(b) Represents foreign domiciled corporation.