THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (12/31/00) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX1
12/31/00 NAV9 $21.65	Total Return Last 3 months*	Average Annual Total Return10 Through 12/31/00 From Fund Inception 11/1/96
The Oakmark Select Fund	8.04%	29.76%
Standard & Poor's 500 Stock Index w/inc	-7.82%	17.93%
Standard & Poor's MidCap 400 Index w/inc14	-3.85%	21.41%
Lipper MidCap Value Fund Index15	2.10%	11.61%
*Not annualized.

1st Quarter, 2001

The Oakmark Select Fund gained 8.04% last quarter, bringing the calendar year increase to 25.81%. For both the quarter and the year, our Fund significantly outperformed the market averages. Our largest position, Washington Mutual, gained 33% and led the strong quarter. Although we have sold some shares in Washington Mutual to prevent the position size from growing too large (now 14% of the portfolio), we believe the stock continues to be a great value. Compared to its financial services peers, Washington Mutual grows more rapidly and has a lower-risk loan portfolio, yet it sells at a lower P/E ratio⁸. In addition, with the Fed lowering interest rates, analysts' current earnings estimates are probably too low.

Careful readers of this report will notice that we ended 2000 with 21 equity holdings. Since we have said the Fund will typically own 15-20 stocks we want to explain what happened. We are currently facing an unusual combination of issues. There is one stock we are waiting to sell until it goes long-term, there is another position that is in the process of being sold, and there is another stock that would have been sold except for our belief that tax-loss selling was artificially depressing the price. We have not changed our diversification strategy. We expect that by the next quarterly report, we will be back to 15-20 holdings.

Math Test

Our children have reached the point in their education where dealing with negative numbers no longer poses much of a challenge. If asked, "What is the average of +100% and -50%?" they would no doubt answer +25%.

That answer would be absolutely correct when looking at the effect in a portfolio of owning a big winner and a big loser. Going into 2000, our portfolio's two largest positions were Washington Mutual and USG Corporation. Washington Mutual was up just over 100% last year and USG declined by just over 50%. Combined, their impact on the portfolio was a very respectable gain of about 25%. This example shows that even in a concentrated portfolio, diversification may reduce risk. It also shows the danger in listening to portfolio managers, including us, talk about their favorite ideas. That's why we encourage purchase of our Fund rather than purchase of any individual stock the Fund owns.

Part two in the math test: What is the average annual return for a fund that is up 100% one year and down 50% the next? Many in the financial press would answer the same as the first question, +25%. They would conclude that The Oakmark Select Fund, with a 14.49% return in 1999 and a 25.81% return in 2000, had a respectable, though lower average return of 19.99%. But, averaging negative numbers when looking at compound returns (geometric averaging) is different from averaging returns in a portfolio within a single time period (arithmetic averaging). Investors in many aggressive growth funds learned that an investment that gained 100% in 1999 and then lost 50% in 2000 produced a total two-year return of zero — and thus an "average" return of not 25%, but 0%. Multi-period returns that include large loss years will always be less than implied by the arithmetic average. In comparison, The Oakmark Select Fund had a total two-year return of 44.04% — more than twice the "average" annual return of 19.99%. That's the beauty of compounding positive returns — your value grows more rapidly than is implied by the arithmetic average! When trying to grow capital over time, avoiding big losses is the key. One of the greatest advantages of our approach, value investing, is the lessened probability of big loss years.

AT&T

The only new stock in our portfolio this quarter is AT&T. AT&T stock declined from a high last year of $61 to its year-end price of $17.25. Part of that decline was caused by AT&T's disappointing performance in the consumer long-distance business that suffers from over-capacity. We think AT&T faced another problem: corporate structure. AT&T had traditionally been a long-distance telephone company serving both businesses and individuals. This relatively stable business attracted investors who liked a safe, low P/E, high yield stock. But things changed in the last couple years. Through both internal growth and acquisition, AT&T built a large cellular business. Additionally, AT&T spent $110 billion to acquire two large cable TV companies. However, these highly valuable cable and cellular properties did not show reported earnings and, further, had growth opportunities that required reinvestment of excess cash flow. Although these businesses improved AT&T's growth prospects, they increased the company's P/E ratio and reduced their ability to pay dividends. This combination of such different business units left AT&T without a natural group of shareholders.

Last quarter, AT&T announced plans to split the company. The wireless phone business (80% owned by AT&T, 20% owned publicly) will be spun-off to shareholders by this summer. AT&T Broadband, the cable businesses, will become a separately traded stock by late this year and fully spun-off in 2002. We believe that this breakup plan will help investors see the true value of each of AT&T's businesses.

If you examine our portfolio, you will also see that we have sold short shares in AT&T Wireless. No, your Fund is not becoming a hedge fund that tries to profit by identifying overvalued stocks and shorting them! We have simply sold, in advance, most of the AT&T Wireless shares we anticipate receiving later this year. When AT&T Wireless (AWE — 17.31) first began trading in April, AT&T stock had already fallen from $61 to $48. Because AT&T still owned 80% of AWE (a little more than half an AWE share per AT&T share) and AWE was trading at $31.81, the market was valuing AT&T's other businesses at $32 per share (the $48 at which AT&T traded, less their half share of AWE). At year-end, with AT&T at $17.25 and AWE at $17.31, the market price of their other businesses had fallen to just $8.42 per share. At that price, the enterprise value (debt plus equity) was much less than AT&T paid for its cable acquisitions, effectively valuing the traditional long distance business at less than zero! In addition to believing AT&T is a great long-term value, we believe AT&T's yearend price was depressed by both tax selling and by portfolio manager "window dressing" — managers who were selling their AT&T in hopes their clients would forget they ever owned it!

Holdings like AT&T position us well to continue compounding returns on the capital, including our own, with which we've been entrusted. Thank you for your continued support.

William C. Nygren, CFA

Portfolio Manager
bnygren@oakmark.com

Henry R. Berghoef, CFA

Portfolio Manager
berghoef@oakmark.com

January 8, 2001