THE OAKMARK EQUITY AND INCOME FUND
Report from Clyde S. McGregor and Edward A. Studzinski,
Portfolio Managers
THE OAKMARK EQUITY AND INCOME FUNDReport from Clyde S. McGregor and Edward A. Studzinski,
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| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (9/30/00) AS COMPARED TO THE LIPPER BALANCED FUND INDEX | ||
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| 9/30/00 NAV $16.50 |
Total Return Last 3 mos. |
Average Annual Total Return* Through 9/30/00 From Fund Inception 11/1/95 |
| The Oakmark Equity & Income Fund | 9.9% | 16.0% |
| Lipper Balanced Fund Index** | 2.0% | 13.4% |
| Lehman Govt./Corp. Bond** | 2.9% | 6.1% |
| S& P 500 w/inc.** | -1.0% | 22.2% |
| *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 Balanced Fund Index Composite is comprised of 30 balanced funds. The Lehman Govt./Corp. Bond Index includes the Lehman Government and Lehman Corporate indices. The S&P 500 is a broad market-weighted average dominated by blue-chip stocks. Past performance is no guarantee of future results. |
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Quarter and Annual Review
After a slow start, fiscal 2000 proved quite rewarding for The Oakmark Equity and Income Fund. The return for the 12 months was 18.5%, 7.4% better than the return which the Lipper Balanced Fund Index, our primary standard of comparison, registered. The result for the quarter ended September 30 was 9.9%, a handsome absolute return in any three month period but, in this case, well in excess of relevant competitive indices. While returns to the Fund's stocks were generally strong in the quarter, it was the financial stocks that blossomed in the period, an apparent outcome of the end of the Federal Reserve's effort to increase short term interest rates.
As the Fund draws near to its five-year anniversary, it is satisfying to note that the annualized rate of return has been 16%. This means that $10,000 invested in the Fund at inception is now worth approximately $21,000 (ignoring taxes). And, this return has been achieved with less volatility than would be present in an all-stock portfolio.
Mighty Oaks Awards
In October, we hand out awards to members of our firm's research team for their important efforts in crafting the fiscal year's outcome. This task is particularly happy in a strong year like 2000. Successful ideas were plentiful, making the choice of award winners somewhat arbitrary. The final list is quite diverse. It includes "old economy" issues as well as new, the smallest market capitalization name in the portfolio as well as the largest, a company created by spinoff during the year, and a pure technology company. The list should also include Catellus Development which Edward Studzinski follows. Ed, having put on the portfolio manager mantle during the year, is no longer eligible to receive the honor, but we thought it appropriate to point out the important role Catellus played in the Fund's fiscal 2000 success.
Kevin Grant, of our research department and a manager of The Oakmark Fund, wins an award for two ideas. Sterling Commerce proved to be the largest contributor to Fund returns in the fiscal year, though it left the portfolio six months ago by way of a takeover. At Harris Associates, we all often labor under the misguided notion that, as value managers, we do not consider technology companies for investment. Our routine response to this comment is that we will consider investing in any industry as long as we can do it on terms that are biased to favor our shareholders. Our "eclecticness" is limited only by the willingness of the market to mis-price securities.
Total
Returns |
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| 3 Months | 9.9% | ||
| 6 Months | 9.7% | ||
| 1 Year(a) | 18.5% | ||
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Average
Annual Total Returns |
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| 3 Year | 11.9% | ||
| 5 Year | N/A | ||
| Since inception | 16.0% | ||
Sterling is a prototypical example of what can become available to us in technology. After the company's earnings disappointed investors, we were able to acquire a position in the stock for a modest multiple of earnings. The fact that the company's balance sheet had cash equal to more than one-quarter of the share price gave us great comfort. Eventually, SBC Communications agreed with our assessment and purchased Sterling at a substantial premium to our acquisition price.
Highlights |
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Kevin's second highly successful idea for the Fund was Energizer, the battery company, which Ralston Purina spun off to its shareholders in April. Always a reticent company, Ralston spun off Energizer without spoon-feeding earnings guidance to Wall Street analysts. Soon thereafter Energizer surprised investors with its first report, and the stock swooned. We took advantage of this opportunity to initiate a position and were pleased to find out later that company insiders had aggressively increased their holdings at the same time. We do not expect that the recent rebound in the stock presages a similar rosy future for the company; the consumer spending environment is simply too chancy at present. We do believe, however, that the stock price had declined to a level that was significantly below absolute value and offered opportunity absent an economic depression.
Greg Jackson, of our research department and a manager of The Global Fund, wins an award for his recommendation of Ceridian. Ceridian is in three businesses, the smaller two of which have been doing well but the largest, payroll processing, has suffered through a difficult period. We expect the company to restructure while the payroll division fixes its problems. Apparently the stock market agrees with our assessment as the strong return to the stock gives evidence.
Top Five Industries |
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Last, but not least, is Jim Benson, an analyst and manager of The Small Cap Fund. Jim scored with a very small manufacturer, Alamo Group, and a very large financial company, Washington Mutual. At this time last year, Alamo was a classic smaller value situation as the stock sold for less than book value and carried a low P/E ratio on depressed earnings. As well, an energetic new CEO came on board in mid-1999. All that happened over the last 12 months is a gradual return to historic trends in earnings, but the rebound in the stock has been substantial. Washington Mutual (WM) is the nation's largest savings and loan with operations extending from Florida to Washington state. During the first part of the Fund's fiscal 2000, WM experienced a substantial decline in stock price. The rationale appeared to be that investors forecasted a limitless series of Federal Reserve moves to hike interest rates with the outcome that thrift institutions would see diminishing profit margins. Six months ago, the market began to sense the end of the series of interest rate hikes with the effect that WM has nearly doubled from its low.
Top Five Holdings |
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In closing, we would like to take this opportunity to thank our shareholders for their interest and support. In particular, we would like to thank our investors who have been with us from inception. While we are pleased with the cumulative outcome of the last five years, our effort is to ensure that the best is yet to come. As always, we welcome your e-mailed questions or comments.
Clyde S. McGregor, CFA
Portfolio Manager
mcgregor@oakmark.com
Edward A. Studzinski, CFA
Portfolio Manager
estudzinski@oakmark.com
October 6, 2000
| THE OAKMARK EQUITY
AND INCOME FUND Schedule of Investments—September 30, 2000 |
| Shares Held | Market Value | |
| Equity and Equivalents—62.2% | ||
| Food & Beverage—2.9% | ||
| UST Inc. | 68,900 | $1,576,088 |
| Retail—4.3% | ||
| Office Depot, Inc. (a) | 200,000 | $1,562,500 |
| J. C. Penney Company, Inc. | 67,500 | 797,344 |
| 2,359,844 | ||
| Household Products—3.6% | ||
| Energizer Holdings, Inc. (a) | 80,000 | $1,960,000 |
| Other Consumer Goods & Services—2.3% | ||
| H&R Block, Inc. | 34,500 | $1,278,656 |
| Banks & Thrifts—3.4% | ||
| Washington Mutual, Inc. | 47,000 | $1,871,187 |
| Other Financial—2.6% | ||
| Heller Financial, Inc. | 50,000 | $1,428,125 |
| Educational Services—1.2% | ||
| ITT Educational Services, Inc. (a) | 25,000 | $678,125 |
| Information Services—8.0% | ||
| Ceridian Corporation (a) | 80,000 | $2,245,000 |
| NOVA Corporation (a) | 125,000 | 2,140,625 |
| 4,385,625 | ||
| Computer Services—3.4% | ||
| Electronic Data Systems Corporation | 30,000 | $1,245,000 |
| SunGard Data Systems Inc. (a) | 15,000 | 642,187 |
| 1,887,187 | ||
| Computer Software—4.2% | ||
| The Reynolds and Reynolds Company, Class A | 117,500 | $2,335,312 |
| Telecommunications—2.6% | ||
| Citizens Communications Company (a) | 105,000 | $1,410,938 |
| Medical Products—5.4% | ||
| Sybron International Corporation (a) | 70,000 | $1,680,000 |
| Edwards Lifesciences Corporation (a) | 60,000 | 1,308,750 |
| 2,988,750 | ||
| Automotive—1.7% | ||
| Borg-Warner, Inc. | 27,900 | $924,188 |
| Transportation Services—3.9% | ||
| GATX Corporation | 38,000 | $1,591,250 |
| Nordic American Tanker Shipping Limited | 25,000 | 540,625 |
| 2,131,875 | ||
| Agricultural Equipment—3.7% | ||
| Alamo Group Inc. | 159,150 | $2,019,216 |
| Instruments—1.1% | ||
| Rockwell International Corporation | 20,000 | $605,000 |
| Machinery & Industrial Processing—0.5% | ||
| Gardner Denver Inc. (a) | 16,000 | $260,000 |
| Real Estate—6.2% | ||
| Catellus Development Corporation (a) | 116,728 | $2,042,740 |
| The St. Joe Company | 50,000 | 1,387,500 |
| 3,430,240 | ||
| Total Equity (Cost: $26,552,422) | 33,530,356 | |
| Convertible Preferred Stock—1.2% | ||
| Telecommunications—1.2% | ||
| Metromedia International Group, Inc., Convertible Preferred, 7.25% | 28,600 | $650,650 |
| Total Convertible Preferred Stock (Cost: $808,041) | 650,650 | |
| Total Equity and Equivalents (Cost: $27,360,463) | 34,181,006 | |
| Shares Held/ Par Value |
Market Value | |
| Fixed Income—35.2% | ||
| Preferred Stock—3.1% | ||
| Banks & Thrifts—2.0% | ||
| Pennfed Capital Trust, Preferred, 8.90% | 27,500 | $598,125 |
| Fidelity Capital Trust I, Preferred, 8.375% | 43,500 | 372,469 |
| BBC Capital Trust I, Preferred, 9.50% | 6,000 | 114,000 |
| 1,084,594 | ||
| Telecommunications—0.9% | ||
| MediaOne Finance Trust III, Preferred, 9.04% | 20,000 | $503,750 |
| Shares Held/ Par Value |
Market Value | |
| Real Estate—0.2% | ||
| Host Marriott Corporation, Preferred Class B, 10.00% | 6,000 | $141,750 |
| Total Preferred Stock (Cost: $1,847,110) | 1,730,094 | |
| Corporate Bonds—3.5% | ||
| Retail—1.1% | ||
| Ugly Duckling Corporation, 12.00% due 10/15/2003, Subordinated Debenture | $650,000 | $585,000 |
| Building Materials & Construction—1.4% | ||
| Juno Lighting, Inc., 11.875% due 7/1/2009, Senior Subordinated Note | $750,000 | $630,000 |
| USG Corporation, 9.25% due 9/15/2001, Senior Notes Series B | 150,000 | 152,062 |
| 782,062 | ||
| Utilities—1.0% | ||
| Midland Funding Corporation, 11.75% due 7/23/2005 | $500,000 | $556,875 |
| Total Corporate Bonds (Cost: $1,931,691) | 1,923,937 | |
| Government and Agency Securities—28.6% | ||
| U.S. Government Notes—24.9% | ||
| United States Treasury Notes, 6.50% due 10/15/2006 | $3,000,000 | $3,082,500 |
| United States Treasury Notes, 5.25% due 8/15/2003 | 2,500,000 | 2,453,125 |
| United States Treasury Notes, 6.50% due 2/15/2010 | 2,000,000 | 2,082,500 |
| United States Treasury Notes, 6.50% due 2/28/2002 | 2,000,000 | 2,009,376 |
| United States Treasury Notes, 5.25% due 5/15/2004 | 2,000,000 | 1,956,876 |
| United States Treasury Notes, 9.125% due 5/15/2009 | 1,000,000 | 1,095,625 |
| United States Treasury Notes, 7.875% due 8/15/2001 | 1,000,000 | 1,013,438 |
| 13,693,440 | ||
| U.S. Government Agencies—3.7% | ||
| Federal Home Loan Bank, 6.75% due 5/1/2002 | $2,000,000 | $2,007,832 |
| Total Government and Agency Securities (Cost: $15,489,609) | 15,701,272 | |
| Total Fixed Income (Cost: $19,268,410) | 19,355,303 | |
| Short Term Investments—3.8% | ||
| Commercial Paper—1.8% | ||
| General Electric Capital Corporation, 6.69% due 10/2/2000 | $1,000,000 | $1,000,000 |
| Total Commercial Paper (Cost: $1,000,000) | 1,000,000 | |
| Repurchase Agreements—2.0% | ||
| State Street Repurchase Agreement, 6.42% due 10/2/2000 | $1,058,000 | $1,058,000 |
| Total Repurchase Agreements (Cost: $1,058,000) | 1,058,000 | |
| Total Short Term Investments (Cost: $2,058,000) | 2,058,000 | |
| Total Investments (Cost $48,686,873)—101.2% (b) | 55,594,309 | |
| Other Liabilities In Excess Of Other Assets—(1.2)% | (658,472) | |
| Total Net Assets—100% | $54,935,837 | |
| (a) | Non-income producing security. |
| (b) | At September 30, 2000, net unrealized appreciation of $6,907,435, for federal income tax purposes, consisted of gross unrealized appreciation of $7,676,838 and gross unrealized depreciation of $769,403. |