THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK EQUITY AND INCOME FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/00) AS COMPARED TO THE LIPPER BALANCED FUND INDEX20
12/31/00 NAV9 $15.96	Total Return Last 3 months*	Average Annual Total Return10 Through 12/31/00 From Fund Inception 11/1/95
The Oakmark Equity & Income Fund	4.63%	16.18%
Lipper Balanced Fund Index	-1.32%	12.38%
Lehman Govt./Corp. Bond21	4.37%	6.66%
S&P 500 w/inc.1	-7.82%	19.09%
*Not annualized.

"We learn from history that we do not learn from history." Hegel

Our Results

The Oakmark Equity and Income Fund increased 4.63% for the quarter ended December 31, bringing the calendar-year gain to 19.89%⁶. For both the quarter and the calendar year, the Fund significantly outperformed both the market averages and our primary benchmark, the Lipper Balanced Fund Index, which lost 2.39% for the year. We are pleased with both our relative and absolute performance for the year. At the same time we recognize that while good relative performance is intellectually rewarding, in the final analysis real positive returns (the nominal return less the rate of inflation) are what preserve purchasing power and compound capital. After all, it is not on a relative basis that one purchases food or gasoline. Our goal remains to compound your (and our) investment in the Fund through achieving consistent above-average real rates of return over the long-term while undertaking considerably less risk than the market as a whole. This focus on risk and real rates of return takes on additional significance in light of the NASDAQ Composite² losing 39.29% for the year, thus vaporizing billions of dollars of U.S. household wealth and convincing many (the hard way) that buying on the dips was not the quick and easy way to fame and fortune.

Tulips and Dot.coms

What a difference a year makes! Only a short twelve months ago we were being told by the various talking heads on cable networks that value investing was dead. Its practitioners were consigned to the scrapheap of investment management, a group of dinosaurs who could not adapt to new valuation methodologies such as discounting projected cash flows from non-existent revenues or attributing a valuation multiple tied to the number of daily hits on a website. We were also being told that this time it really was different since new era companies were supposedly immune to the effects of changes in interest rates or the cost of energy. In the end like all investment bubbles, this one burst and will now take its place in history.

For value investors, calendar year 2000 represented a period of opportunity to invest at bargain prices. Our best performing stocks for the quarter were Electronic Data Systems (EDS), Rockwell International (ROK), and Washington Mutual (WM). All three of these companies have characteristics we like including shareholder-oriented managements, market leadership positions as real companies in real businesses, and valuation gaps that became too great to be ignored.

Our Research Process—Tigers Still Have Stripes

Finding and exploiting such valuation gaps continues to be a focus that underpins much of our investment research efforts. It would be ideal to invest only in issues where, due to market inefficiencies, there is a substantial discrepancy between our estimate of intrinsic value and the current market price AND there is a visible catalyst that will narrow that gap. Unfortunately today information flows so rapidly that often any valuation gap narrows by the time a catalyst becomes visible. For that reason we spend a great deal of time on our assessment of intrinsic value so as to allow ourselves a considerable margin of safety supported by a real rather than illusory valuation gap. At the same time, we look to avoid those investments that are cheap but deserve to be because the business value is deteriorating or where the assessment of business value can change very quickly as a result of the pricing, supply and demand of commodities.

Perhaps one of the more important but less understood issues this past year was the adoption of Regulation FD by the SEC.²² The rule was intended to level the playing field between the large Wall Street investment banking firms with their herds of analyst/cheerleaders and everyone else in terms of perceived selective early disclosure of material corporate information. After all, who wouldn't be willing to pay more in commissions for early warning indicators on such information? In the long and the short run we think the change will be a positive one. In the short run it will probably increase volatility (much as the changes for accounting for currency translation did back in 1973-74). Earnings reports will now be new information in the market rather than serving as a mere addendum to so-called "whisper numbers" which had miraculously made their way into the hearts and minds of the anointed in the past. In the end, it will increase the opportunities for investment firms that still do real analysis.

How will it impact us and will it change the way we do things at The Oakmark Equity and Income Fund? To paraphrase the inimitable Mike Ditka, in the investment world there are Smiths and Grabowskis. We are quite comfortable with the fact that we are Grabowskis (and the Fund is in many ways intended for Grabowskis, their spouses, children, and grandchildren). Kicking tires and rooting around in the weeds is what built this firm and it is still what we do best. We prefer to do our own spadework and develop our own sources of industry and company information. We relish the opportunity to seek out the statistical anomaly that others have ignored or not found, which many times can spell the difference between the true value investment opportunity and the destruction of capital. We feel that we have a considerable competitive advantage with a team in place that has been approaching investment research and management that way for all of their professional careers.

As this letter is being written, the Federal Reserve has cut interest rates. What impact this will ultimately have upon both the domestic and global economies and financial markets is not predictable, although capable of consuming vast amounts of otherwise productive time and thought. The increased volatility that we have seen in the market continues to present us, on a daily basis, with an ever-increasing menu of choices in which to invest at bargain prices. Looking at that menu in detail is we think the best use of our time. We thank you for your continued support of the Fund and we look forward to reporting to you, our partners, at the end of the next quarter.

Clyde S. McGregor, CFA

Portfolio Manager
mcgregor@oakmark.com

Edward A. Studzinski, CFA

Portfolio Manager
estudzinski@oakmark.com

January 5, 2001