THE OAKMARK SELECT FUND
Report from Bill Nygren and Henry Berghoef,
Portfolio Managers
THE OAKMARK SELECT FUNDReport from Bill Nygren and Henry Berghoef,
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| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (9/30/00) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX | ||
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| 9/30/00 NAV $21.45 |
Total Return Last 3 mos. |
Average Annual Total Return* Through 9/30/00 From Fund Inception 11/1/96 |
| The Oakmark Select Fund | 12.8% | 29.4% |
| Standard & Poor's 500 Stock Index w/inc** | -1.0% | 21.7% |
| Standard & Poor's MidCap 400 Index w/inc** | 12.2% | 24.2% |
| Value Line Composite Index** | 2.9% | 4.2% |
| *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 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. |
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Review of 2000 Performance
Fiscal 2000 was another good year for The Oakmark Select Fund. In the last quarter, the Fund increased in value by 12.8%, bringing the gain for the fiscal year to 24.5%. That gain again placed The Oakmark Select Fund in the top quartile of funds classified by Morningstar as Midcap Value Funds. Since inception of The Oakmark Select Fund, not quite four years ago, the Fund has increased in value by 174%, outperforming all of our benchmark indices (S&P 500,116%; S&P 400 Midcap,134%; Value Line Composite,18%). Not many funds have accomplished that, especially funds that utilize an approach similar to ours, namely, value investing.
We want to thank the research department of Harris Associates for finding the stocks that have performed so well and, just as importantly, helping us avoid those that haven't performed well. Our investment process relies on extensive analysis of any company in which we consider investing. Just as in the TV ads for one of our competitors, our analysts aren't glued to their desks: they spend a great deal of time performing on-site visits, interviewing managements, and polling customers and competitors. We rely heavily on our analysts because we think they are the best in the business, and we could not have achieved these results without them.
Looking back over the past year, our Fund's largest holding, Washington Mutual, was a strong performer, gaining 40% as interest rates stabilized in the second half. Acquisitions also had a positive effect on our performance. Corporate buyers purchased Sterling Commerce and Times Mirror at substantial premiums to their market prices. In addition, stocks of Chiron, Energizer and Thermo Electron significantly added to our Fund's results. Those positive results were somewhat offset by declines in USG, US Industries, and Reynolds & Reynolds. All three of these businesses, not just the stocks, performed below our expectations. Because of this, we have allowed their portfolio weightings to decrease, although we continue to believe each stock is undervalued.
Total
Returns |
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| 3 Months | 12.8% |
| 6 Months | 6.9% |
| 1 Year | 24.5% |
Average
Annual Total Returns |
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| 3 Year | 18.8% |
| 5 Year | N/A |
| Since inception | 29.4% |
The end of this quarter marked an end and a new beginning for one of our investments, Dun & Bradstreet. It was just over a year ago that Dun & Bradstreet reported poor operating results and we lost confidence in its top management. With the stock below $24 last August, we began a very public debate with Dun & Bradstreet about how to maximize its value. After their CEO resigned, we applauded the board's new plan to split the company in two, separating the high growth Moody's bond rating agency from the declining credit information business. That split-up went into effect October 2 this year. The old Dun & Bradstreet ended its corporate life with a stock price of $36, up 50% from last August.
We are now very pleased with the management and outlook for both Moody's and "new Dun & Bradstreet," and you can see that we added to our holdings in the new Dun & Bradstreet shares. Their database of corporate credit histories is unparalleled and new CEO Allan Loren plans to make that database more profitable. In addition to cutting expenses, revenue can grow as D& B moves from just selling data to selling decisions — helping its customers decide whether or not their potential customers are credit-worthy. The stock market is pricing D&B as if this turnaround will fail — we think the market is wrong.
Highlights |
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Trivia Time
What company is the largest Internet retailer? That's about as easy as a $100 question on "Who Wants to be a Millionaire?" With estimated sales this year of nearly $3 billion, the distant leader in e-tailing is Amazon.com. The stock market has certainly rewarded Amazon for this leadership. The company currently loses lots of money, and even the bulls don't expect it to have a profitable quarter until late 2002. Yet, the market value of Amazon.com's stock is $13 billion, over 4 times this year's expected revenue!
Now, without phoning-a-friend, who is the second largest Internet retailer? The questions are getting tougher! The battle for second place is more competitive, but we believe the second largest Internet retailer, with sales reaching a run-rate by year-end of $1 billion, is Office Depot. Surprised? So were we. But, as the largest office supply company, Office Depot has had a large catalog business for some time. The fulfillment infrastructure for an on-line business was basically in place before the terms B2B and B2C were invented. Transitioning the existing catalog and telephone orders to the Internet was a natural move, and the reach of the Internet allowed for dramatic growth. Considering that Office Depot has "bricks and mortar" sales of nearly $11 billion, it's not so surprising that Internet sales are reaching $1 billion. And, unlike Amazon.com, Office Depot makes a profit on Internet sales!
Top Five Industries |
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Top Five Holdings |
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Office Depot has an enterprise value (market capitalization plus debt) of less than $3 billion — 3 times its Internet revenue, but only 25% of its total revenue. Earnings this year are expected to be around 80¢ per share. Because earnings haven't grown for two years, Office Depot stock has fallen from $26 last year to just $6. So, for less than 10 times earnings and about book value, we have taken a position in a large and rapidly growing e-tailer. New CEO Bruce Nelson, who came to Office Depot with their Viking Office Products acquisition in 1998, has a great track record of making sure his company provides exceptional customer service, while keeping expenses tightly controlled. Bruce personally bought more Office Depot stock this summer, shortly before we did. We are confident he will measure his success the same way we will, by looking at the stock price.
Thank you for your support.
William C. Nygren, CFA
Portfolio Manager
bnygren@oakmark.com
Henry R. Berghoef, CFA
Portfolio Manager
berghoef@oakmark.com
October 5, 2000
| THE OAKMARK SELECT
FUND Schedule of Investments—September 30, 2000 |
| Shares Held | Market Value | |
| Common Stocks—92.4% | ||
| Apparel—3.6% | ||
| Liz Claiborne, Inc. | 1,648,600 | $63,471,100 |
| Retail—16.7% | ||
| Toys 'R' Us, Inc. (a) | 9,048,500 | $147,038,125 |
| Tricon Global Restaurants, Inc. (a) | 2,615,400 | 80,096,625 |
| Office Depot, Inc. (a) | 9,046,000 | 70,671,875 |
| 297,806,625 | ||
| Household Products—4.2% | ||
| Energizer Holdings, Inc. (a) | 3,089, 200 | $75,685,400 |
| Other Consumer Goods & Services—7.6% | ||
| H&R Block, Inc. | 1,956,000 | $72,494,250 |
| Mattel, Inc. | 5,600,000 | 62,650,000 |
| 135,144,250 | ||
| Banks & Thrifts—14.9% | ||
| Washington Mutual, Inc. | 6,679,800 | $265,939,537 |
| Other Financial—1.9% | ||
| MBIA, Inc. | 465,800 | $33,130,025 |
| Information Services—11.8% | ||
| Dun & Bradstreet Corporation | 3,143,600 | $108,257,725 |
| Ceridian Corporation | 3,284,500 | 92,171,281 |
| Dun & Bradstreet Corporation, When Issued (a) | 536,400 | 9,118,800 |
| 209,547,806 | ||
| Computer Services—7.6% | ||
| First Data Corporation | 1,810, 200 | $70,710,938 |
| Electronic Data Systems Corporation | 1,545,000 | 64,117,500 |
| 134,828,438 | ||
| Computer Software—6.7% | ||
| The Reynolds and Reynolds Company, Class A (b) | 5,979,700 | $118,846,538 |
| Pharmaceuticals—1.7% | ||
| Chiron Corporation (a) | 668,900 | $30,100,500 |
| Automotive—3.5% | ||
| Visteon Corporation | 4,128,900 | $62,449,613 |
| Machinery & Industrial Processing—4.9% | ||
| Thermo Electron Corporation (a) | 3,369,000 | $87,594,000 |
| Building Materials & Construction—4.9% | ||
| USG Corporation (b) | 3,474,900 | $87,089,681 |
| Diversified Conglomerates—2.4% | ||
| U.S. Industries, Inc. (b) | 4,286,800 | $42,600,075 |
| Total Common Stocks (Cost: $1,457,018,607) | 1,644,233,588 | |
| Par Value | Market Value | |
| Short Term Investments—7.4% | ||
| U.S. Government Bills—1.1% | ||
| United States Treasury Bills, 6.10% due 11/24/2000 | $20,000,000 | $19,817,000 |
| Total U.S. Government Bills (Cost: $19,817,000) |
19,817,000 | |
| Commercial Paper—3.4% | ||
| American Express Credit Corporation, 6.51% due 10/2/2000 | $20,000,000 | $20,000,000 |
| Ford Motor Credit Corp., 6.56% due 10/4/2000 | 10,000,000 | 10,000,000 |
| General Electric Capital Corporation, 6.69% due 10/2/2000 | 30,000,000 | 30,000,000 |
| Total Commercial Paper (Cost: $60,000,000) | 60,000,000 | |
| Repurchase Agreements—2.9% | ||
| State Street Repurchase Agreement, 6.42% due 10/2/2000 | $51,597,000 | $51,597,000 |
| Total Repurchase Agreements (Cost: $51,597,000) | 51,597,000 | |
| Total Short Term Investments (Cost: $131,414,000) | 131,414,000 | |
| Total Investments (Cost $1,588,432,607)—99.8% (c) | $1,775,647,588 | |
| Other Assets In Excess Of Other Liabilities—0.2% | 3,088,886 | |
| Total Net Assets—100% | $1,778,736,474 | |
| (a) | Non-income producing security. |
| (b) | See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. |
| (c) | At September 30, 2000, net unrealized appreciation of $187,214,980, for federal income tax purposes, consisted of gross unrealized appreciation of $302,941,071 and gross unrealized depreciation of $115,726,091. |