THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS First Quarter Report

We are happy to report that both of your Funds, Oakmark International and Oakmark International Small Cap, had very strong final quarters of 2001. Oakmark International returned 17% for the quarter, comparing very favorably to the 7% and 8% returns posted by the MSCI World ex-USA¹⁹and Lipper International Fund²⁰indices, respectively. Oakmark International Small Cap had an even stronger quarter, climbing 19%.

For the year, both Funds achieved very strong relative returns, placing in the top 2% of all international funds as tracked by Morningstar.²¹In a year that saw overseas indices fall over 20%, Oakmark International lost 5% while Oakmark International Small Cap gained 13%.

With Oakmark International Fund's ten-year anniversary coming into sight this year, we are especially proud that as of December 31, 2001, its performance ranks in the top 5% of all international funds since the Fund's inception in September of 1992.²²

We are optimistic going into 2002 that the future remains positive for both of these Funds. As we look to global economic recovery and continued economic reform around the world, we will be working to uncover attractive investment prospects of all shapes and sizes.

Starting January 1, 2002, goods in greater Europe will be priced in Euros, the new European single currency. The implementation of the single currency means these countries share a single monetary policy. On one hand, it means monetary policy will not be an effective tool for regional economic management. On the other hand, most monetarists would argue it should not be used like that anyway, believing that the sole purpose of monetary policy is to maintain price stability. The European Central Bank (ECB) appears to be very attentive to this latter purpose.

The biggest positive we can see in monetary union is that it brings Europe closer to being a single market from an economic perspective. This ultimately may mean more opportunity and potential profitability for those doing business there. It is also likely that as Europe becomes more unified it may become more of a recipient of investment funds both from within and from outside, and in the form of both fixed investment (plants, equipment, land, buildings) and financial investment (stocks and bonds). This trend would be positive for the rate of growth and for the currency.

Europe is also slowly adopting a basic tenet of Anglo-American capitalism. Over the past few years private pension schemes, tax changes, and improvements in corporate governance have meant the blossoming of an equity culture. All of these things should ultimately be positive for share prices.

Highlights

For the year, both Funds achieved very strong relative returns, placing in the top 1% of all international funds as tracked by Morningstar.

Oakmark International turns ten years old this year, and currently lands in the top 5% of its category since inception in September 1992 as ranked by Lipper Inc.

We fail to see any real opportunity in the crisis in Argentina at present, and unless there is drastic, positive change will stay out.

January 1, 2002 marks the introduction of the Euro, the new European single currency. The biggest positive we see in monetary union is that it brings Europe closer to being a single market, ultimately creating more opportunity and potential profitability for those doing business there.

Argentina remains in the headlines as it faces economic collapse. The problems in Argentina are serious, and we would add, home grown. The economic history of Argentina is storied. Though they were one of the richest economies of the world in the first part of the 20th century, their position was squandered as a result of corruption, an outsized welfare state, and protectionism. As a result, Argentina, with all of its natural resources, was marginalized by the 1970's. Finally, in the 1990's, an attempt at reform was made. At first, things looked good as hyperinflation was tamed and the economy began growing again. But the convertibility plan, which linked the Argentine peso to the dollar, meant that economic adjustment could not happen via the exchange rate and therefore had to happen through changes in productivity and micro-economic competitiveness. This did not happen. An untimely devaluation by important neighbor Brazil in 1999 exacerbated the peso situation. With restrictive labor policies, bloated government, and lots of wealth destroying corruption, Argentina just could not compete, and the convertibility plan became untenable.

As of now, this has not spread to other Latin American countries. Brazil, Mexico and Chile have, to varying degrees, addressed these issues. All are expected to grow in 2002. The type of "can do" attitude we witnessed in the Pacific Rim during the crisis in '97-'98 does not seem to exist in Argentina. Therefore, we fail to see any real opportunity in this crisis at present and unless there is drastic, positive change we will stay out.

It has been quite a year for overseas equity markets. The year opened with negative equity market conditions brought on by the collapse of the tech bubble. Worries of a global slowdown hit some industries hard, most notably telecom and media sectors. Then came September 11. Through all of this, we had some great stock performers in both funds. And in the interest of full disclosure, some not so great. Please refer to the Portfolio Update for each Fund.

We are thankful we were able to weather the very rough overseas markets in 2001 with strong relative performance in both of the Funds. We continue to see significant investment opportunity in both the larger cap and smaller cap markets at present.