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 (3/31/01) AS COMPARED TO THE LIPPER BALANCED FUND INDEX14 | ||
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| 3/31/01 NAV2 $16.62 | Total Return Last 3 months* |
Average Annual Total Return3 Through 3/31/01 From Fund Inception 11/1/95 |
| The Oakmark Equity & Income Fund | 4.14% | 16.26% |
| Lipper Balanced Fund Index | -5.01% | 10.73% |
| Lehman Govt./Corp. Bond15 | 3.20% | 6.97% |
| S&P 500 w/inc.1 | -11.86% | 15.42% |
| *Not annualized. | ||
Quarter and Mid-Year Review
Returns to the Oakmark Equity and Income Fund have been surprisingly consistent over the past six months despite the volatile experience of the market averages. The Fund returned 4.1% in the quarter ended March 31, which compares to a loss of 5.0% for the Lipper Balanced Fund Index. For the six months, the result was a positive 9.0%, again a favorable comparison to the 6.3% which the Lipper lost in the period. While we are happy that the Fund looks good relative to its competitive benchmark, the positive rate of return pleases us more. Our primary goal for Oakmark Equity and Income is to generate positive rates of return in all environments. If we can keep the Fund moving forward most of the time, we know that the relative outcomes will take care of themselves.
Ignore the Media!
If you have been watching a lot of business television over the last few years, you will certainly answer the following question incorrectly: "In which year did more New York Stock Exchange issues decline in price, 1999 or 2000?" The correct answer was 1999 by a landslide. Two-thirds of NYSE16 issues lost money in 1999 while only 43% suffered this outcome in 2000. What seems to be a paradox is explained by the fact that in 1999 the issues with the largest market capitalizations excelled while they lagged last year. Measures of market breadth began to improve midway through 2000 even as the market averages were rolling over. As an example of what we mean, on most days when the averages sank in the just-ended quarter, the NYSE reported more stocks hitting new highs than new lows. Two years ago some analysts wrote of a "stealth bear market." Given all of the gloom and doom on the media these days it is clear that the bull market we are describing is equally stealthy.
In his letter to shareholders in the 2000 annual report for Berkshire Hathaway famed investor Warren Buffett wrote that there are no bargains in the market currently. We are sympathetic to this point of view and believe that the stealth bull market described above explains this outcome. It also explains the higher than typical percentage of cash in the Fund. We do differ from Buffett in one respect. He writes that he is "content with what we own, but far from excited by it." In the Oakmark Equity and Income Fund we are still reasonably excited by what we own, and reasonably excited is about all one can hope for from two 50-ish portfolio managers.
| Total Returns as of March 31, 2001 |
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| 3 Months* | 4.14% |
| 6 Months* | 8.96% |
| 1 Year | 19.54%6 |
| *Not annualized Average
Annual Total Returns |
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| 3 Year | 11.68% |
| 5 Year | 16.58% |
| Since inception | 16.26% |
TIPS
No, we are not referring to the next hot stock idea. The most significant new position to enter the Equity and Income Fund portfolio in the quarter was our first ever commitment to Treasury Inflation Protection Securities, often referred to as "TIPS". While other nations have issued inflation-indexed securities for many years, the US Treasury's initial foray into this market occurred in 1997. TIPS carry coupons that are lower than traditional Treasury notes of comparable maturity, but these coupons represent real returns because the principal value of the notes is adjusted daily based on the rate of inflation (CPI) which was experienced over the preceding half year. Since the principal grows with inflation, the cash interest we receive from these notes is above and beyond the inflation rate in the US economy and is a "real" return on the Fund's money.
Highlights |
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Why buy TIPS rather than traditional Treasury notes? One should favor TIPS if your expectation for CPI inflation is higher than that which is implied in the TIPS price. Subtracting the cash yield on TIPS from the yield on Treasury notes of similar maturity gives a reading on the market's expectation for consumer prices. When we began to purchase TIPS for the Fund, Treasury notes and TIPS were priced on the assumption that inflation would average 1.7% for the next seven years, a meaningful decline from the 3.4% increase in the CPI in 2000. If inflation were to average more than 1.7% per year over the remaining life of the issue, then the return to the TIPS would exceed that of a similar maturity Treasury note.
In considering the investment in TIPS for the Fund, we are not making a macroeconomic "call." We do not have an inflation forecast that guides us. Instead, we are merely trying to obtain something for free, a tactic which often helps us in our equity investing. In this case, we have obtained without cost the possibility that inflation merely continues on its historic path. The most negative environment for TIPS was the one which prevailed when the Fed was tightening monetary policy thereby pushing yields up and inflation expectations down. We do not expect those conditions to return soon.
Top Five
Industries |
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| Industries and % of Total Net Assets |
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In closing, we would like to welcome our new shareholders. You should know that the culture of Harris Associates demands that we managers eat our own cooking and that we make ourselves available to our shareholders who have entrusted us with their hard-earned money. We both have substantial proportions of our net worth invested in this fund and have additional assets committed to other funds in the Oakmark family. And, we welcome your e-mailed questions or comments at the addresses below.
Top Five
Equity Holdings25 |
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| Company and % of Total Net Assets |
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Clyde S. McGregor, CFA
Portfolio Manager
mcgregor@oakmark.com
Edward A. Studzinski, CFA
Portfolio Manager
estudzinski@oakmark.com
April 4, 2001
| THE OAKMARK EQUITY
AND INCOME FUND Schedule of Investments—March 31, 2001 (Unaudited) |
| Shares Held | Market Value | |
| Equity and Equivalents—53.9% | ||
| Food & Beverage—3.0% | ||
| UST Inc. | 160,300 | $4,817,015 |
| Retail—5.0% | ||
| J.C. Penney Company, Inc. | 300,000 | $4,797,000 |
| Office Depot, Inc. (a) | 380,000 | 3,325,000 |
| 8,122,000 | ||
| Household Products—1.2% | ||
| Energizer Holdings, Inc. (a) | 80,000 | $2,000,000 |
| Other Consumer Goods & Services—1.7% | ||
| H&R Block, Inc. | 56,000 | $2,803,360 |
| Bank & Thrifts—0.6% | ||
| Washington Mutual, Inc. | 17,000 | $930,750 |
| Insurance—3.0% | ||
| The PMI Group, Inc. | 75,000 | $4,873,500 |
| Other Financial—2.9% | ||
| GATX Corporation | 110,000 | $4,670,600 |
| Marketing Services—2.6% | ||
| Harte-Hanks Incorporated | 185,000 | $4,184,700 |
| Information Services—5.0% | ||
| NOVA Corporation (a) | 245,000 | $4,517,800 |
| Ceridian Corporation (a) | 155,000 | 2,867,500 |
| Equifax Inc. | 25,000 | 781,250 |
| 8,166,550 | ||
| Computer Services—1.5% | ||
| Electronic Data Systems Corporation | 30,000 | $1,675,800 |
| SunGard Data Systems Inc. (a) | 15,000 | 738,450 |
| 2,414,250 | ||
| Computer Software—5.2% | ||
| The Reynolds and Reynolds Company, Class A | 245,000 | $4,716,250 |
| Novell, Inc. (a) | 750,000 | 3,750,000 |
| 8,466,250 | ||
| Telecommunications—2.7% | ||
| Telephone and Data Systems, Inc. | 47,500 | $4,441,250 |
| TV Programming—0.5% | ||
| AT&T Corp. - Liberty Media Group, Class A (a) | 60,000 | $840,000 |
| Pharmaceuticals—2.5% | ||
| Chiron Corporation (a) | 92,500 | $4,058,438 |
| Medical Products—5.6% | ||
| Apogent Technologies Inc. (a) | 200,000 | $4,048,000 |
| Edwards Lifesciences Corporation (a) | 175,000 | 3,430,000 |
| Sybron Dental Specialties, Inc. (a) | 76,666 | 1,609,986 |
| 9,087,986 | ||
| Transportation Services—0.4% | ||
| Nordic American Tanker Shipping Limited | 32,500 | $646,750 |
| Agricultural Equipment—1.3% | ||
| Alamo Group Inc. | 141,900 | $2,029,170 |
| Instruments—2.3% | ||
| Rockwell International Corporation | 100,000 | $3,635,000 |
| Real Estate—2.8% | ||
| Catellus Development Corporation (a) | 265,728 | $4,185,216 |
| The St. Joe Company | 17,600 | 401,456 |
| 4,586,672 | ||
| Diversified Conglomerates—4.1% | ||
| Viad Corp. | 175,000 | $4,170,250 |
| Textron, Inc. | 42,000 | 2,387,280 |
| 6,557,530 | ||
| Total Equity and Equivalents (Cost: $78,956,882) | 87,331,771 | |
| Par Value | Market Value | |
| Fixed Income—33.2% | ||
| Preferred Stock—1.5% | ||
| Bank & Thrifts—1.1% | ||
| Pennfed Capital Trust, Preferred, 8.90% | 27,500 | $718,437 |
| BBC Capital Trust I, Preferred, 9.50% | 30,000 | 705,000 |
| Fidelity Capital Trust I, Preferred, 8.375% | 43,500 | 424,125 |
| 1,847,562 | ||
| Telecommunications—0.3% | ||
| MediaOne Finance Trust III, Preferred, 9.04% | 20,000 | $518,000 |
| Real Estate—0.1% | ||
| Host Marriott Corporation, Preferred Class B, 10.00% | 6,000 | $152,700 |
| Total Preferred Stock (Cost: $2,400,072) | 2,518,262 | |
| Corporate Bonds—1.1% | ||
| Retail—0.3% | ||
| Ugly Duckling Corporation, 12.00% due 10/15/2003, | ||
| Subordinated Debenture | 650,000 | $513,500 |
| Building Materials & Construction—0.4% | ||
| Juno Lighting, Inc., 11.875% due 7/1/2009, Senior | ||
| Subordinated Note | 750,000 | $690,000 |
| Utilities—0.4% | ||
| Midland Funding Corporation, 11.75% due 7/23/2005 | 500,000 | $558,125 |
| Total Corporate Bonds (Cost: $1,777,076) | 1,761,625 | |
| Government and Agency Securities—30.6% | ||
| U.S. Government Notes—28.1% | ||
| United States Treasury Notes, 3.375% due 1/15/2007, | ||
| Inflation Indexed | $19,885,140 | $20,096,420 |
| United States Treasury Notes, 6.125% due 8/15/2007 | 5,000,000 | 5,353,515 |
| United States Treasury Notes, 5.25% due 5/15/2004 | 5,000,000 | 5,117,480 |
| United States Treasury Notes, 5.25% due 8/15/2003 | 5,000,000 | 5,107,545 |
| United States Treasury Notes, 6.50% due 2/28/2002 | 5,000,000 | 5,102,380 |
| United States Treasury Notes, 6.375% due 8/15/2002, | ||
| Stripped Principal Payment | 5,000,000 | 4,719,495 |
| 45,496,835 | ||
| U.S. Government Agencies—2.5% | ||
| Federal Home Loan Bank, 6.75% due 5/1/2002 | $2,000,000 | $2,046,460 |
| Federal Home Loan Bank, 6.50% due 10/19/2001 | 1,000,000 | 1,009,700 |
| Federal Home Loan Mortgage Corporation, 7.00% | ||
| due 2/23/2016 | 1,000,000 | 998,938 |
| 4,055,098 | ||
| Total Government and Agency Securities (Cost: $48,953,951) | 49,551,933 | |
| Total Fixed Income (Cost: $53,131,099) | 53,831,820 | |
| Short Term Investments—13.8% | ||
| Commercial Paper—9.3% | ||
| American Express Credit Corporation, | ||
| 4.98% - 5.15% due 4/2/2001 - 4/4/2001 | $6,000,000 | $6,000,000 |
| Ford Motor Credit Corp., 4.80% due | ||
| 4/3/2001 | 2,000,000 | 2,000,000 |
| General Electric Capital Corporation, 5.35% due 4/2/2001 | 7,000,000 | 7,000,000 |
| Total Commercial Paper (Cost: $15,000,000) | 15,000,000 | |
| Repurchase Agreements—4.5% | ||
| State Street Repurchase Agreement, 5.18% due 4/2/2001 | $7,328,000 | $7,328,000 |
| Total Repurchase Agreements (Cost: $7,328,000) | 7,328,000 | |
| Total Short Term Investments (Cost: $22,328,000) | 22,328,000 | |
| Total Investments (Cost $154,415,981)—100.9% (b) | $163,491,591 | |
| Other Liabilities In Excess Of Other Assets—(0.9)% | (1,534,525) | |
| Total Net Assets—100% | $161,957,066 | |
| (a) | Non-income producing security. |
| (b) | At March 31, 2001, net unrealized appreciation of $9,075,609, for federal income tax purposes, consisted of gross unrealized appreciation of $11,052,368 and gross unrealized depreciation of $1,976,759. |