THE OAKMARK FUND
Report from Bill Nygren and Kevin Grant,
Portfolio Managers
THE OAKMARK FUNDReport from Bill Nygren and Kevin Grant,
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| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (6/30/00) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX | ||
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| 6/30/00 NAV $25.40 |
Total Return Last 3 mos. |
Average Annual Total Return* Through 6/30/00 From Fund Inception 8/5/91 |
| The Oakmark Fund | 2.6% | 19.0% |
| Standard & Poor's 500 Stock Index w/inc** | -2.7% | 18.6% |
| Dow Jones Industrial Average w/inc** | -4.0% | 17.6% |
| Value Line Composite Index** | -4.8% | 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 Dow Jones Average includes only 30 big companies. The Value Line Index is an unweighted average of more than 1,000 stocks. Past performance is no guarantee of future results. |
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The Oakmark Fund increased in value by 2.6% for the quarter ended June 30. While we are pleased with that level of absolute gain, it was especially rewarding to achieve it during a quarter when most of the market averages went down. We have been saying for some time that the market would return to a focus on business values and the high level of risk investors assume when stocks are purchased at substantial premiums to underlying value. We believe this process began in March and has a long way to go before stock prices and business values are brought back into alignment. We continue to believe that our stocks will benefit from this shift.
Corporate investors have been responsible for some of the renewed focus on value. During the quarter, your Fund's performance was strongly benefited from takeover activity. In April, Union Pacific Resources (UPR) announced its sale to Anadarko Petroleum. Also in April, Nabisco Holdings' management decided to hold an auction for the company. The $55 per share bid by Philip Morris was an 88% premium to Nabisco Holdings' February low. Thanks to the managements of both UPR and Nabisco for making the difficult decision that their shareholders would be best served by selling the company. We believe that our portfolio continues to be extremely well positioned to benefit from an ongoing increase in merger and acquisition activity.
What's New
The unusually high volatility the stock market experienced last quarter allowed us to purchase an unusually high number of new stocks. Because of increased popularity of momentum investing, fewer investors now view stock price declines as buying opportunities. The result of this is that companies reporting disappointing news now drop in price much more than they used to. Most of our new holdings suffered severe price declines in response to news that we felt had little impact on long-term business values. Here's a brief explanation of each of them:
Carnival Cruise Lines (CCL—$20)
The leader in the cruise ship industry announced that this year's earnings would only increase slightly from 1999 because newly built ships increased industry capacity at a more rapid rate than demand. The stock fell from $48 in December to $19 in June, where it was below 10 times next year's earnings estimate.
Cendant (CD—$14)
This leader in franchise operations such as Ramada Inns, Avis Rental Cars and Century21 saw its growth cut by higher interest rates. In December, this stock traded at $27 per share following the purchase of a large interest in Cendant by Liberty Media. Last quarter, Liberty's highly regarded chairman, John Malone, joined Cendant's board and personally bought stock. Having fallen to $12 in June, Cendant was selling at about 10 times next year's earnings.
Chiron (CHIR—$48)
This biotech leader fell from $71 in February to $35 in May after reporting disappointing results from one of its many new drug trials. At this price, Chiron sold at a large discount to its traditional pharmaceutical peers (based on enterprise value divided by pre-R&D cash flow) despite having a much higher growth rate.
Electronic Data Systems (EDS—$41)
A leader in IT consulting and MIS outsourcing, EDS announced that second quarter sales would grow more slowly than expected. EDS stock, which traded at $72 in April, fell to $39. Based on our estimate of next year, EDS now sells at 14 times earnings, just over half the S&P 500 multiple.
Goodrich (GR—$34)
As the stock market lost interest in cyclicals, this aerospace and chemicals company watched its stock decline from $43 a year ago to $28 in April. We applaud management's reaction of putting the chemical business up for sale and committing to use much of the proceeds to repurchase stock. Goodrich currently trades at 9 times expected earnings.
Newell (NWL—$26)
This manufacturer of a broad range of consumer goods sold at $48 in May of 1999. After acquiring Rub-bermaid and realizing the "Newellization" process would take a few months more than expected, the stock sunk to $25 in June. Newell currently sells at 10 times our estimate of cash earnings.
Sungard Data Systems (SDS—$31)
Sungard is a highly successful e-processing company offering investor support systems as well as disaster recovery systems. Despite seeing earnings grow 20% over the last year, Sungard stock fell 25% from its $41 high in March 1999. Sungard now sells at less than 17 times our earnings estimate for next year, despite expected annual growth of 20%
Xerox (XRX—$21)
Xerox sold at $64 last May and fell below $20 in June. Earnings growth stalled due to difficulties in emerging markets as well as dislocations caused by a realignment of the domestic sales force. At a price below 10 times next year's earnings, we feel the market is ignoring the strength of Xerox's new printing products as well as the significant profit potential from the transition from black-and-white to color copying and printing.
As we manage the portfolio, we will continue to take advantage of opportunities created by excessive volatility. These wide price swings give us the opportunity to buy positions in stocks we feel are extremely undervalued and reduce positions in stocks we believe are selling closer to their intrinsic value. It's what value investing is all about.
Thank you for your continued support.
William C. Nygren, CFA
Portfolio Manager
bnygren@oakmark.com
Kevin G. Grant, CFA
Portfolio Manager
kgrant@oakmark.com
July 6, 2000
| THE OAKMARK FUND Schedule of Investments—June 30, 2000 (Unaudited) |
| Shares Held | Market Value | |
| Common Stocks—93.2% | ||
| Food & Beverage—7.7% | ||
| Nabisco Holdings Corporation, Class A | 1,522,100 | $79,910,250 |
| H.J. Heinz Company | 1,125,000 | 49,218,750 |
| Philip Morris Companies Inc. | 1,160,700 | 30,831,094 |
| 159,960,094 | ||
| Apparel—3.2% | ||
| Nike, Inc., Class B | 984,000 | $39,175,500 |
| Jones Apparel Group, Inc. (a) | 1,157,000 | 27,189,500 |
| 66,365,000 | ||
| Retail—6.2% | ||
| The Kroger Company | 2,200,000 | $48,537,500 |
| Toys 'R' Us, Inc. (a) | 3,000,000 | 43,687,500 |
| Tricon Global Restaurants, Inc. (a) | 1,350,000 | 38,137,500 |
| 130,362,500 | ||
| Household Products—6.0% | ||
| Newell Rubbermaid Inc. | 1,700,000 | $43,775,000 |
| Fort James Corporation | 1,400,000 | 32,375,000 |
| Energizer Holdings, Inc. (a) | 1,500,000 | 27,375,000 |
| The Dial Corporation | 2,052,900 | 21,298,838 |
| 124,823,838 | ||
| Household Appliances—2.1% | ||
| Maytag Corporation | 1,160,400 | $42,789,750 |
| Office Equipment—1.6% | ||
| Xerox Corporation | 1,650,000 | $34,237,500 |
| Hardware—4.5% | ||
| The Black & Decker Corporation | 1,672,200 | $65,738,363 |
| The Stanley Works | 1,224,900 | 29,091,375 |
| 94,829,738 | ||
| Other Consumer Goods & Services—17.4% | ||
| Fortune Brands, Inc. | 3,515,200 | $81,069,300 |
| Brunswick Corporation | 4,127,800 | 68,366,687 |
| Mattel, Inc. | 4,964,400 | 65,468,025 |
| H&R Block, Inc. | 1,275,300 | 41,287,837 |
| Galileo International, Inc. | 1,539,500 | 32,137,063 |
| Cendant Corporation (a) | 2,100,000 | 29,400,000 |
| Ralston Purina Group | 1,450,000 | 28,909,375 |
| American Greetings Corporation, Class A | 866,500 | 16,463,500 |
| 363,101,787 | ||
| Banks & Thrifts—5.7% | ||
| Washington Mutual, Inc. | 2,680,000 | $77,385,000 |
| Bank One Corporation | 1,550,548 | 41,186,431 |
| 118,571,431 | ||
| Insurance—2.5% | ||
| Old Republic International Corporation | 1,843,830 | $30,423,195 |
| MGIC Investment Corporation | 475,000 | 21,612,500 |
| 52,035,695 | ||
| Other Financial—2.0% | ||
| SLM Holding Corporation | 1,100,000 | $41,181,250 |
| Information Services—7.6% | ||
| ACNielsen Corporation (a) | 3,053,500 | $67,177,000 |
| The Dun & Bradstreet Corporation | 2,107,500 | 60,327,187 |
| Equifax Inc. | 1,200,000 | 31,500,000 |
| 159,004,187 | ||
| Computer Services—5.4% | ||
| First Data Corporation | 850,000 | $42,181,250 |
| Electronic Data Systems Corporation | 1,000,000 | 41,250,000 |
| SunGard Data Systems Inc. (a) | 940,800 | 29,164,800 |
| 112,596,050 | ||
| Telecommunications—1.9% | ||
| Citizens Communications Company | 2,350,000 | $40,537,500 |
| Publishing—1.8% | ||
| Knight Ridder, Inc. | 692,000 | $36,805,750 |
| Pharmaceuticals—1.1% | ||
| Chiron Corporation (a) | 495,000 | $23,512,500 |
| Medical Products—2.1% | ||
| Sybron International Corporation (a) | 2,173,600 | $43,064,450 |
| Automobiles—2.0% | ||
| DaimlerChrysler AG (b) | 800,000 | $41,650,000 |
| Aerospace & Defense—2.9% | ||
| Lockheed Martin Corporation | 1,300,000 | $32,256,250 |
| The B.F. Goodrich Company | 820,000 | 27,931,250 |
| 60,187,500 | ||
| Machinery & Industrial Processing—4.4% | ||
| Cooper Industries, Inc. | 1,798,400 | $58,560,400 |
| Eaton Corporation | 511,700 | 34,283,900 |
| 92,844,300 | ||
| Building Materials & Construction—1.7% | ||
| Masco Corporation | 1,933,000 | $34,914,813 |
| Chemicals—0.8% | ||
| The Geon Company | 956,600 | $17,697,100 |
| Utilities—1.3% | ||
| TXU Corp. | 900,000 | $26,550,000 |
| Recreation & Entertainment—1.3% | ||
| Carnival Corporation | 1,425,000 | $27,787,500 |
| Total Common Stocks (Cost: $1,963,247,573) | 1,945,410,233 | |
| Par Value | Market Value | |
| Short Term Investments—6.4% | ||
| U.S. Government Bills—1.2% | ||
| United States Treasury Bills, 6.10% due 11/24/2000 | 25,000,000 | $24,411,000 |
| Total U.S. Government Bills (Cost: $24,381,528) |
24,411,000 | |
| Commercial Paper—3.3% | ||
| American Express Credit Corporation, 6.75% due 7/5/2000 | 10,000,000 | $10,000,000 |
| Ford Motor Credit Corp., 6.72%-6.81% due 7/3/2000-7/6/2000 | 20,000,000 | 20,000,000 |
| General Electric Capital Corporation, 6.80% due 7/3/2000 | 40,000,000 | 40,000,000 |
| Total Commercial Paper (Cost: $70,000,000) | 70,000,000 | |
| Repurchase Agreements—1.9% | ||
| State Street Repurchase Agreement, 6.25% due 7/3/2000 | 39,164,000 | $39,164,000 |
| Total Repurchase Agreements (Cost: $39,164,000) | 39,164,000 | |
| Total Short Term Investments (Cost: $133,545,528) | 133,575,000 | |
| Total Investments (Cost $2,096,793,101)—99.6% | $2,078,985,233 | |
| Other Assets In Excess Of Other Liabilities—0.4% | 7,342,590 | |
| Total Net Assets—100% | $2,086,327,823 | |
(a) Non-income producing security.
(b) Represents foreign domiciled corporation.