Value investors continued
to benefit in the first half of the year 2001. Traditional companies led the way as
technology and telecom stocks suffered from earnings problems. Our managers have strong
confidence in their current portfolios, and we believe the market has only partially
corrected the imbalances that were caused by the tech bubble.Finding Value In Tech?
During our conversations with reporters and clients, we are often asked if we are buying tech stocks. Our activity in this area is still muted, but we do have some exposure. Our holdings share several characteristics: market leadership, strong balance sheets, experienced management, and cyclical (not secular) problems. We believe these companies offer attractive reward opportunities.
Even after the sharp decline in tech stock prices over the past year, the market continues to place a significant valuation discount on more traditional companies compared to tech stocks. Thus, our portfolios continue to be significantly underweighted in the tech sector. And while other value managers may be increasing cash positions because they say they are finding fewer opportunities, our investment team continues to uncover many growing companies at attractive valuations.
The Value of Independent Research
Recently, two issues have surfaced which underscore the importance of our unique research effort. First, sell-side Wall Street analysts have come under fire because of concerns about conflicts of interest with investment banking clients. Second, the SEC recently introduced Regulation FD, which ensures that all investors receive company information in a timely and fair basis.
We support timely and accurate disclosure to all investors—these are vital attributes of our capital markets. Moreover, we typically do not rely on Wall Street analysts nor the company "guidance" that flourished before Reg FD, so we are not affected by these issues. Our experienced, independent research effort represents an important strength of our investment process, and this acts as an important competitive advantage in this environment.
Dispassionate Evaluation of Holdings
Our managers have made investment mistakes—all managers do. We believe one of the key ingredients of long-term investment success is the ability to admit a mistake, take the loss and move on to a more attractively priced, more promising idea. But many investors find it psychologically difficult to admit a mistake: when a stock or fund is down, many will wait for it to rise rather than consider better investment opportunities. This trait can often lead to the long-term erosion of capital. We try to overcome the tendency to hold on too long by constantly asking ourselves the following question: if we didn't own the stock, would we buy it today?
Oakmark Fund's 10-year anniversary
We are pleased to celebrate a significant event: the 10-year anniversary for The Oakmark Fund. Its start on August 5, 1991, marked the beginning of our family of funds—now seven funds in all—each designed to address a unique objective yet managed with a consistent investment process. The Oakmark Fund, like many value investments, has successfully weathered difficult periods when value was out of favor. As value investors, we recognize that patience is a virtue and believe that, over the long term, patient investors are rewarded. We generally hold the companies in which we invest for three to five years, a time horizon that we'd encourage our shareholders to consider as well.
Top Performers
While we are pleased with recent returns, long-term performance is also important to us and our shareholders. Perhaps the volatility we've all lived through over the past several years has reaffirmed a lesson: the market is unpredictable, and thus, one must invest with full consideration given to the risk and reward potential of investment positions.
Thank you for your support and continued investment.
Robert M. Levy
President and CEO
July 5, 2001
