THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SELECT FUND FROM ITS INCEPTION (11/1/96) TO PRESENT (6/30/01) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX3
6/30/01 NAV4 $26.20	Total Return Last 3 months*	Average Annual Total Return1 Through 6/30/01 From Fund Inception 11/1/96
The Oakmark Select Fund	9.26%	31.49%
Standard & Poor's 500 Stock Index w/inc	5.85%	14.17%
Standard & Poor's MidCap 400 Index w/inc7	13.16%	19.18%
Lipper Mid Cap Value Fund Index8	10.43%	11.74%
*Not annualized.

The Oakmark Select Fund gained 9% last quarter, increasing the gain for the nine-month fiscal-year-to-date to 31%. The return for the quarter exceeded the 6% return on the S&P 500 but trailed the 13% return of the S&P Midcap 400 Index. Technology stocks led the Midcap Index, and we have very little exposure to that sector. We continue to believe that most technology stocks are overvalued, so our portfolio is invested elsewhere, consistent with our goal of owning undervalued stocks.

Our best performing stock for the quarter was H&R Block, up nearly 30%. In an environment where many companies reported disappointing earnings, H&R Block showed strong earnings gains. Management's increased focus on the tax preparation business and intelligent reinvestment of excess cashflow bolstered confidence that annual earnings-per-share growth can be 15% for many years to come. Even with the stock price gain, H&R Block still sells at just two-thirds of the S&P 500 multiple of expected year ahead cash earnings. That discount seems unwarranted for a low-risk company that is growing faster than the market.

Some of our value-investing peers have been holding more cash in their portfolios claiming they can no longer find attractively priced stocks. Our largest holdings — Washington Mutual, Toys 'R' Us, H&R Block — are industry leaders that will likely achieve above average growth, while selling at 10-15 times expected cash earnings. Compare that to the S&P 500, which sells at over 20 times. We believe our holdings represent outstanding values relative to the market, as well as relative to either cash or bond alternatives. It continues to be a great time to be a stock picker!

Washington Mutual

As portfolio managers, we are frequently given credit that really belongs to our analysts. And with a large holding that has performed as well as Washington Mutual, we're reminded of a comment from former New York Mets manager Casey Stengel, "Managing is getting paid for home-runs someone else hits." In the case of Washington Mutual, that "someone else" is our analyst and Oakmark Small Cap Fund manager, Jim Benson. In 1998, Jim identified this under-appreciated savings and loan company that was growing more rapidly than almost any other large financial service provider, was run by a CEO who had most of his family's wealth invested in the stock, and yet sold at a P/E ²⁴ near the low end of both the industry and the overall stock market. After a difficult stock performance year in 1999, Washington Mutual has truly emerged as a homerun. Thanks, Jim! In fact, after the stock more than doubled last year, our most frequent shareholder e-mail has gone something like this: "Congratulations on being so right on Washington Mutual. Since it's up so much, why don't you claim victory and reduce the size of our holding?"

As a reminder, there are three qualities we look for in any stock we consider purchasing:

1. A stock price that is below 60% of the price we estimate an acquirer who pays in cash would pay to own the entire business today.
2. An expected annual growth rate in per-share value that, when added to the dividend yield, exceeds 10% per year.
3. A successful management with economic incentive to behave like owners.

When a stock meets all three criteria, we purchase it and wait patiently for the market price to increase to 90% of our value estimate. Then, we sell it. In The Oakmark Select Fund, we have often been willing to take very large position sizes — 15% of the portfolio — for our favorite ideas. These large positions are reserved not necessarily for the stocks with the largest return potential, but rather for those stocks we believe have the best probability of achieving a large return. Why, in our judgement, does Washington Mutual still deserve to account for 15% of our assets?

1. Price — Washington Mutual is priced at less than 10 times our estimate of next year's cash earnings — less than half the S&P 500 multiple and less than two-thirds the multiple accorded other leading financial service companies. Acquisitions of inferior companies in the financial sector have occurred at multiples in the teens.

2. Value growth — Washington Mutual's existing markets have above-average population growth, and Washington Mutual has consistently gained market share and increased its number of accounts per customer. In addition, Washington Mutual has used its industry leading low-cost structure to make acquisitions that add to both current earnings and growth opportunities. Washington Mutual's recently announced acquisition of Dime Savings Bank fits that mold: it adds a few pennies to next year's expected cash earnings and creates many new growth opportunities along the East Coast.

3. Management — CEO Kerry Killenger continues to have most of his personal wealth invested in Washington Mutual stock. Killenger's track record is impressive. Over the last decade of his tenure, earnings-per-share have grown at a compound rate of 17%, and the stock has returned 26% per year.

When we consider the risk of being wrong in our assessment of Washington Mutual, we conclude the probability is much less than with other stocks. Washington Mutual has targeted the middle-market customer, who is much less sensitive to stock market declines or economic slowdowns than the upper income customer that most financial institutions prefer. Also, loans on owner-occupied, middle-market homes that account for so much of Washington Mutual's asset base are not nearly as risky as the consumer and corporate loans at most financial service companies. We conclude that Washington Mutual has a relatively low-risk business model, is being managed for the benefit of its shareholders, and is likely to continue growing at a rate significantly above most other companies. Best of all, despite the business success and the strong stock performance, this company is still priced at a bargain level. So, when shareholders ask why we are still taking the risk of having such a big position in Washington Mutual, it's because this stock still has a much better risk-return tradeoff than anything else we have found.

Fund Closing

Perhaps the most significant event last quarter was our decision to close The Oakmark Select Fund to new investors. Just five years ago, when we launched the Fund, skeptics argued we could never attract enough assets to make it worthwhile. In May, with Fund assets approaching $4 billion, we felt it was appropriate to stop accepting money from new shareholders. (Investments into existing accounts will still be accepted.) By constraining inflows, the Fund can continue investing in both midcap and large cap companies with the highly concentrated approach we have used since the Fund opened in 1996. Once, when accepting an award, Yogi Berra said, "I want to thank everyone who made this day necessary." We want to thank you, our shareholders, for making the Fund closing necessary by trusting us to continue taking good care of your assets.

William C. Nygren, CFA

Portfolio Manager
bnygren@oakmark.com

Henry R. Berghoef, CFA

Portfolio Manager
berghoef@oakmark.com

July 6, 2001