THE OAKMARK FUND
Report from Bill Nygren and Kevin Grant,
Portfolio Managers
THE OAKMARK FUNDReport from Bill Nygren and Kevin Grant,
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| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (6/30/01) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX3 | ||
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| 6/30/01 NAV4 $35.18 |
Total Return Last 3 months* |
Average Annual Total Return1 Through 6/30/01 From Fund Inception 8/5/91 |
| The Oakmark Fund | 9.25% | 20.96% |
| Standard & Poor's 500 Stock Index w/inc | 5.85% | 14.72% |
| Dow Jones Industrial Average w/inc5 | 6.71% | 15.97% |
| Lipper Large Cap Value Fund Index6 | 4.45% | 13.85% |
| *Not annualized. | ||
The Oakmark Fund gained 9% for the quarter ended June 30, increasing the nine-month fiscal-year-to-date return to 32%. Those returns compare very favorably to the S&P 500's less than 6% increase last quarter and its nine-month loss of 14%.
Our performance last quarter was aided by large increases in: JC Penney, +65%, where investors gained confidence that new CEO Allen Questrom will succeed in turning around this large retailer; Xerox, +60%, where both operating results and asset sales reached targets which quieted concerns of a liquidity squeeze; and Cendant, +34%, where CEO Henry Silverman demonstrated an ability to make synergistic acquisitions that increase per-share earnings.
As we enter a new quarter, our portfolio continues to be significantly underweighted in technology stocks. We said in our last quarterly report that we felt most technology businesses were worth less than their stock prices. Despite their declining earnings outlook, technology companies actually out-performed non-technology companies during the last quarter. As a result, we believe their overvaluation has increased and we continue to believe that our best opportunity is to buy growing companies outside of the tech sector.
We primarily compare our portfolio to the S&P 500 Index which is currently priced at just over 20 times next year's expected cash earnings. The stocks we have been adding to the portfolio are generally growing faster than the S&P 500, yet are priced at a lower multiple of expected cash earnings. Here are brief descriptions of our new holdings:
Guidant (GDT—36)
Guidant is a leading manufacturer of medical devices primarily for cardiovascular diseases. Guidant stock peaked at $72 last year and has declined largely due to new product introductions from competitors. The medical device industry has historically experienced strong secular growth combined with product cycles — companies introducing new products gain market share. Guidant has numerous new products in testing and will likely be the beneficiary of market share gains as these products are introduced in the coming years. Selling at less than 17 times estimated 2002 cash earnings, Guidant is not only selling at a large discount to its peers, but also at a discount to the S&P 500.
Note: On July 10, an FDA advisory panel voted against approving Guidant's new device for treating congestive heart failure. The stock has declined further to $28. That decline is triple the amount we believe Guidant's business value has declined. As you would expect, we have significantly increased our position.
Hughes Electronics (GMH—21)
Through its DirecTV subsidiary, Hughes Electronics is the largest provider of satellite TV service. Just last month, DirecTV announced they had reached the 10 million subscriber milestone. Hughes stock peaked last March at $47 and has declined along with the technology sector as the excitement over satellite-delivered Internet access has declined. The per-subscriber economics of satellite TV are very similar to cable TV, leading us to conclude that the per-subscriber values ought to be similar. Hughes stock is now selling at about half the per-subscriber price of the large cable stocks.
Kraft Foods (KFT—31)
In our opinion, Kraft Foods is, quite simply, the best packaged foods company. The strength of its brands, its scale advantages, and its highly talented management team are unmatched by the competition. For that reason, when Kraft was brought public at a valuation similar to other food stocks, we saw an investment opportunity. Even better, the stock declined from its initial offering price, allowing us the opportunity to purchase the majority of our shares below $30. We expect Kraft to continue growing earnings-per-share at a double-digit rate and believe the stock is undervalued selling at 15 times our estimate of next year's cash earnings.
Waste Management (WMI—31)
Waste Management is the largest waste disposal company in the United States. Its stock price peaked in 1999 at $60. We started getting interested in this stock in the summer of 1999, after the price fell to $30 in response to an earnings shortfall. Although the stock met our price criteria, we could not get comfortable with either their management or computer systems. With its new CEO, Maurice Myers, and much improved management information systems, Waste Management now meets our qualitative criteria. Despite the stock price increase over the last year, the stock is just back to the level it declined to in the summer of 1999. To us, selling at 16 times next year's cash earnings estimates, Waste Management looks inexpensive.
Highlights |
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US Bancorp (USB—23)
"New" US Bancorp, one of the largest banks in the US, was formed in February, when "old" US Bancorp merged with Firstar. USB stock has declined from a high of $35 two years ago, despite showing continued growth in earnings. We believe that USB's large exposure to highly stable fee-based revenue (like merchant processing, investment management fees, and trust services) should result in USB being priced at a premium to most banks. Currently, however, USB is priced at a discount, selling at just 10 times next year's cash earnings estimate.
Values like these make us confident that our portfolio remains very attractive. Thank you for your continuing support.
William C. Nygren, CFA
Portfolio Manager
bnygren@oakmark.com
Kevin G. Grant, CFA
Portfolio Manager
kgrant@oakmark.com
July 6, 2001
| THE OAKMARK FUND Schedule of Investments—June 30, 2001 (Unaudited) |
| Shares Held | Market Value | |
| Common Stocks—94.1% | ||
| Food & Beverage—4.9% | ||
| H.J. Heinz Company | 1,710,000 | $69,921,900 |
| Sara Lee Corporation | 2,857,400 | 54,119,156 |
| Kraft Foods Inc. (a) | 865,700 | 26,836,700 |
| 150,877,756 | ||
| Retail—11.9% | ||
| J.C. Penney Company, Inc. | 3,305,700 | $87,138,252 |
| The Kroger Co. (a) | 3,450,000 | 86,250,000 |
| Toys 'R' Us, Inc. (a) | 3,000,000 | 74,250,000 |
| Tricon Global Restaurants, Inc. (a) | 1,450,000 | 63,655,000 |
| CVS Corporation | 1,430,000 | 55,198,000 |
| 366,491,252 | ||
| Household Products—4.9% | ||
| Newell Rubbermaid Inc. | 2,050,000 | $51,455,000 |
| The Clorox Company | 1,440,200 | 48,750,770 |
| The Dial Corporation | 2,052,900 | 29,253,825 |
| Energizer Holdings, Inc. (a) | 959,400 | 22,018,230 |
| 151,477,825 | ||
| Household Appliances—1.1% | ||
| Maytag Corporation | 1,126,500 | $32,961,390 |
| Office Equipment—1.9% | ||
| Xerox Corporation | 6,175,000 | $59,094,750 |
| Hardware—3.4% | ||
| The Black & Decker Corporation | 1,522,200 | $60,066,012 |
| The Stanley Works | 1,072,600 | 44,920,488 |
| 104,986,500 | ||
| Other Consumer Goods & Services—9.6% | ||
| Fortune Brands, Inc. | 2,573,000 | $98,700,280 |
| H&R Block, Inc. | 1,340,300 | 86,516,365 |
| Mattel, Inc. | 3,227,800 | 61,069,976 |
| Cendant Corporation (a) | 2,595,100 | 50,604,450 |
| 296,891,071 | ||
| Bank & Thrifts—5.3% | ||
| Washington Mutual, Inc. | 3,150,000 | $118,282,500 |
| U.S. Bancorp | 2,000,000 | 45,580,000 |
| 163,862,500 | ||
| Insurance—1.6% | ||
| MGIC Investment Corporation | 700,000 | $50,848,000 |
| Hotels & Motels—1.2% | ||
| Starwood Hotels & Resorts Worldwide, Inc. | 990,000 | $36,907,200 |
| Information Services—4.1% | ||
| Equifax Inc. | 1,720,500 | $63,107,940 |
| Moody's Corporation | 1,489,400 | $49,894,900 |
| The Dun & Bradstreet Corporation (a) | 517,800 | 14,601,960 |
| 127,604,800 | ||
| Computer Services—5.6% | ||
| Electronic Data Systems Corporation | 1,086,500 | $67,906,250 |
| First Data Corporation | 1,040,000 | 66,820,000 |
| SunGard Data Systems Inc. (a) | 1,281,600 | 38,460,816 |
| 173,187,066 | ||
| Semiconductors—0.7% | ||
| Teradyne, Inc. (a) | 655,000 | $21,680,500 |
| Telecommunications—5.2% | ||
| AT&T Corp. | 3,084,200 | $67,852,400 |
| Sprint Corporation | 2,756,000 | 58,868,160 |
| Citizens Communications Company (a) | 2,708,900 | 32,588,067 |
| 159,308,627 | ||
| Telecommunications Equipment—2.8% | ||
| General Motors Corporation, Class H | ||
| (Hughes Electronics Corporation) | 2,200,000 | $44,550,000 |
| Motorola, Inc. | 2,575,000 | 42,642,000 |
| 87,192,000 | ||
| TV Programming—1.9% | ||
| AT&T Corp. - Liberty Media Group, Class A (a) | 3,450,000 | $60,340,500 |
| Publishing—3.1% | ||
| Knight-Ridder, Inc. | 1,066,000 | $63,213,800 |
| Gannett Co., Inc. | 484,500 | 31,928,550 |
| 95,142,350 | ||
| Pharmaceuticals—1.4% | ||
| Chiron Corporation (a) | 824,000 | $42,913,920 |
| Medical Products—2.4% | ||
| Guidant Corporation (a) | 1,380,500 | $49,698,000 |
| Apogent Technologies Inc. (a) | 1,011,700 | 24,887,820 |
| 74,585,820 | ||
| Automobiles—2.0% | ||
| Ford Motor Company | 2,500,000 | $61,375,000 |
| Aerospace & Defense—1.2% | ||
| The B.F. Goodrich Company | 970,000 | $36,840,600 |
| Waste Disposal—0.9% | ||
| Waste Management, Inc. | 930,000 | $28,662,600 |
| Instruments—1.4% | ||
| Rockwell International Corporation | 1,101,800 | $42,000,616 |
| Machinery & Industrial Processing—2.6% | ||
| Cooper Industries, Inc. | 1,029,400 | $40,753,946 |
| Eaton Corporation | 552,900 | 38,758,290 |
| 79,512,236 | ||
| Building Materials & Construction—1.8% | ||
| Masco Corporation | 2,233,000 | $55,735,680 |
| Utilities—2.0% | ||
| TXU Corp. | 1,315,000 | $63,369,850 |
| Oil & Natural Gas—3.6% | ||
| Burlington Resources Inc. | 1,500,000 | $59,925,000 |
| Conoco Inc., Class A | 1,800,000 | 50,760,000 |
| 110,685,000 | ||
| Diversified Conglomerates—1.8% | ||
| Textron, Inc. | 1,000,000 | $55,040,000 |
| Recreation & Entertainment—3.8% | ||
| Brunswick Corporation | 2,576,700 | $61,918,101 |
| Carnival Corporation | 1,000,000 | 30,700,000 |
| Park Place Entertainment Corporation (a) | 2,100,000 | 25,410,000 |
| 118,028,101 | ||
| Total Common Stocks (Cost: $2,310,620,236) | 2,907,603,510 | |
| Par Value | Market Value | |
| Short Term Investments—6.0% | ||
| U.S. Government Bills—1.3% | ||
| United States Treasury Bills, 3.69% - 4.77% | ||
| due 7/26/2001 - 11/15/2001 | $40,000,000 | $39,667,030 |
| Total U.S. Government Bills (Cost: $39,662,033) | 39,667,030 | |
| Commercial Paper—3.2% | ||
| Citicorp, 3.77% due 7/5/2001 | $20,000,000 | $20,000,000 |
| American Express Credit Corporation, 3.83% due 7/9/2001 | 10,000,000 | 10,000,000 |
| Ford Motor Credit Corp., 3.78% due 7/3/2001 | 20,000,000 | 20,000,000 |
| General Electric Capital Corporation, 4.08% due 7/2/2001 | 50,000,000 | 50,000,000 |
| Total Commercial Paper (Cost: $100,000,000) | 100,000,000 | |
| Repurchase Agreements—1.5% | ||
| State Street Repurchase Agreement , 3.85% due 7/2/2001 | $46,685,000 | 46,685,000$ |
| Total Repurchase Agreements (Cost: $46,685,000) | 46,685,000 | |
| Total Short Term Investments (Cost: $186,347,033) | 186,352,030 | |
| Total Investments (Cost $2,496,967,269)—100.1% | $3,093,955,540 | |
| Other Liabilities In Excess Of Other Assets—(0.1)% | (3,659,522) | |
| Total Net Assets—100% | $3,090,296,018 | |
| (a) | Non-income producing security. |