The Oakmark Fund increased in value 20% for the fiscal year and 7% for the calendar year-to-date despite losing 9% of its value in the last quarter. Though we will never be satisfied when we lose money, we did lose less than most investors—the S&P 500 was down 15% for the quarter. The S&P 500 declined 27% for the fiscal year and 29% since its March 2000 peak.

The bear market has been led by large capitalization growth companies, and an increasing number of them now meet our criteria. In the last quarter alone, we added positions in American Express, Fannie Mae, Gap, Honeywell, Interpublic Group and Safeway. A year or two ago these stocks were owned mostly by growth funds. We think the market is creating an unusual opportunity to purchase high-quality, large-capitalization growth companies at value prices. As value managers, we prefer to purchase companies that achieve above-average earnings growth. However, because we are unwilling to pay more than 60% of estimated intrinsic value, we are usually unable to buy them. Companies that grow earnings at above average rates, yet are priced below the market multiple, combine the best elements of "growth" and "value" investing. An increasing percentage of The Oakmark Fund is now invested in such stocks. (For more detail on our new positions, please check our website at www.oakmark.com).

Happy Anniversary, Oakmark

Last quarter we celebrated the ten-year anniversary of the start of The Oakmark Fund. We feel that milestone is significant for several reasons. First, not many mutual funds are as old as The Oakmark Fund. According to Morningstar, there are now 7004 mutual funds that invest primarily in domestic equities, and only 868 of those, or 12%, have ten-year histories. Interestingly, there are two reasons so few funds have long-term records. The most obvious reason is the rapid proliferation of funds—there are more than three times as many funds available today compared to ten years ago. The less well-known reason that such a small percentage of funds have long-term records is that over half the funds from ten years ago no longer exist. Funds with poor performance have been closed or merged into larger funds, effectively eliminating their negative effect on the track records of the fund management companies.

Another reason our ten-year anniversary is significant is that we have always encouraged evaluation of investment track records over long periods of time. Short-term records might reflect the portfolio manager’s ability, but they might simply reflect luck or a briefly favorable investment climate. Eighteen months ago investors thought there were many more talented growth managers than value managers—today it’s the reverse. At Oakmark, we believe a decade is enough time to experience the ups and downs of different market cycles, so track records that cover a decade are meaningful report cards. Seven out of eight mutual funds don’t have such a report card. Since we do, let’s look at the record.

Get Rich Slowly

Our goal for The Oakmark Fund has always been to compound wealth. A diverse group of great thinkers—Albert Einstein, Benjamin Franklin, John Maynard Keynes and Baron de Rothschild—have each been credited with the quote, "compound interest is the eighth wonder of the world." Why is compound interest so wonderful? Because of interest-on-interest, ten years of 20% returns grows capital not by 200% but by 519%. Pretty amazing! This explains why there are so many stories of surprisingly large estates left by persons of modest means or of retirement accounts that have grown to become very large assets. Although the recent market decline and concern about the economic outlook has focused investors on the near-term, it may be useful to step back and think about a longer period of time.

At the beginning of 1991 we were completing the process of registration to launch The Oakmark Fund. Not only were we confident that our approach to value investing would create good long-term results but we were also excited about the short-term—the uncertainty surrounding the Gulf War led to an unusually large number of stocks selling well below our buy targets. By August 5, 1991, The Oakmark Fund’s inception date, the Gulf War victory had already ended six-months earlier. The S&P 500 had increased 25% since the start of the war, a statistic that is frequently cited as we try to put today’s events in perspective. We were disappointed that we were starting the fund immediately following such a strong increase in prices.

In the ensuing decade we experienced the Oklahoma bombing, the depression in Asian economies, the Russian debt default and the resulting bankruptcy of Long Term Capital Management, the impeachment of a President, Y2K fears, the Internet stock bubble and its collapse, a presidential election that appeared to end in a tie and the World Trade Center and Pentagon terrorist attacks. At the time, each of these events loomed so large that investors’ time horizons became very short. Throughout this period, we pursued our long-term approach of focusing on what a company might earn in five years and, unlike most investors, not worrying about the next five weeks or months.

The results speak for themselves. Since its inception, The Oakmark Fund has achieved a compound return of over 19% per year—one of the highest returns of any mutual fund. That return not only substantially exceeded inflation, money market funds and bonds but also exceeded the S&P 500 by more than 6 percentage points per year. And as you would expect from a value fund, by almost any measure this return was achieved with less than the market level of risk: a beta of 0.6, nine down quarters out of 41 compared to 10 down quarters for the S&P 500, and a worst loss quarter of 13.8% compared to 14.7% for the S&P 500. But the statistic that we think best sums up our first ten years is the one shown on the performance graph on the first page of this report: $10,000 invested in The Oakmark Fund at inception on August 5, 1991 is now worth $59,986.

Shifting from the past to thinking about the future, we’re reminded of something Buffett said—Jimmy, not Warren—"Yesterday’s over my shoulder, so I can’t look back for too long. There’s just too much to see waiting in front of me and I know that I can’t go wrong." We think the outlook for the next decade is exciting. Economic effects of the September 11th attack will undoubtedly make most companies miss earnings estimates for 2001; many will still be negatively effected into 2002. Our judgement, however, is that corporate profitability in 2003-2005 will not be significantly reduced. For that reason, we believe stocks are attractively priced and The Oakmark Fund is structured to continue compounding capital at excellent long-term rates. Because of that belief, last month we each made a significant additional personal investment in The Oakmark Fund.

Finally, this time of year usually brings a flood of e-mails asking for information about capital gains distributions. We continue to enjoy a large capital loss carry forward and will therefore have no capital gains distribution in 2001.

William C. Nygren, CFA	Kevin Grant, CFA
Portfolio Manager bnygren@oakmark.com	Portfolio Manager kgrant@oakmark.com
October 4, 2001

Schedule of Investments—September 30, 2001

See accompanying notes to financial statements.