THE OAKMARK SMALL CAP FUND
Report from James P. Benson and
Clyde S. McGregor, Portfolio Managers
THE OAKMARK SMALL CAP FUNDReport from James P. Benson and
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THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK SMALL CAP FUND FROM ITS INCEPTION (11/1/95) TO PRESENT (12/31/01) AS COMPARED TO THE RUSSELL 2000 INDEX10 |
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Average
Annual Total Returns1 |
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| Total Return Last 3 Months* |
1-year | 5-year | Since Inception (11/1/95) |
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| Oakmark Small Cap Fund | 18.67% | 26.30% | 8.17% | 13.11% |
| Russell 2000 | 21.09% | 2.49% | 7.52% | 9.90% |
| S&P Small Cap 60011 | 20.69% | 6.54% | 10.65% | 13.01% |
| Lipper Small Cap Value Index12 | 18.55% | 17.20% | 10.74% | 12.69% |
| Past performance is no guarantee of future results. Investment return and principal value vary, and you may have a gain or loss when you sell shares. Average annual total return measures annualized change, while total return measures aggregate change. | ||||
| * Not annualized | ||||
The fourth calendar quarter of 2001 resulted in a snapback for the stock market as September's extreme skittishness gave way to hope for the future. Signs that the rate of economic deterioration was slowing, coupled with positive political developments, gave investors the confidence to put additional funds into equities. The Russell 2000 Small Cap Index rose 21% for the just-ended quarter and on a calendar year basis this index of small company stocks managed to rise by 2%. We are pleased to report that The Oakmark Small Cap Fund recorded a 19% gain in the most recent quarter and we finished 2001 with a gain of 26%. Your Fund outperformed the Russell 2000 by 24% for the calendar year ending December 31, 2001. While 2001 was a good year for your Fund, we are encouraged that our analysts continue to uncover fundamentally undervalued small cap stocks and we remain optimistic that 2002 will be a positive year.
Financial Strength Remains a Key Focus
While we are probably beginning to sound like a broken record given our last few quarterly letters, we continue to focus our investments on those companies with strong balance sheets and good business models. In the second half of 2000 we began to concentrate our portfolio into what we believe are financially robust companies. This helped us minimize negative investment outcomes during 2001 and allowed the winners in the portfolio to shine through. Our goal is to not only own companies that are well-positioned to benefit when economic growth resumes, but also to own those firms that can handle a period of economic contraction. We continue to find many financially strong companies whose stock prices, we believe, trade in line with more financially leveraged companies and we have generally positioned your Fund's investments in those companies with the stronger balance sheets. Until the relative valuations change, we expect to continually favor financially solid firms for our new purchases in your Fund.
Stock Selection Remains Crucial
Over the past few months many people have asked us, "How can your Fund be up so much in a down market?" Well, the answer is rather boring—it always boils down to individual stock selection. Our investment philosophy is based upon having an outstanding group of analysts who devote their talents to identifying attractive stocks for your Fund to purchase. When analyzing companies, we adhere to a disciplined process in estimating private market values for the companies in which we invest (typically using a net present value approach to expected future cash flows generated by the company) and only buying stocks when they trade at a substantial discount to this estimate. This approach helps reduce the chances of overpaying for a stock. Additionally, this methodology creates a sell discipline, as we typically sell stocks when they approach 100% of our estimate of private market value.
The Fund's portfolio declined by a net of one position to stand at forty-nine stocks at the end of the fourth quarter. We added two new stocks and sold three stocks. We sold Gardner Denver Incorporated and Symantec Corporation after these stocks appreciated to our sell targets and we sold Ugly Duckling Corporation due to liquidity concerns.
Highlights |
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We initiated positions in EFunds Corporation and Tupperware Corporation.
Our two new purchases are companies with well above average businesses that we believe have bright futures. EFunds Corp. is a company that fits well within our investment criteria. EFunds is a rapidly growing provider of debit card processing and automated teller machine outsourcing with expanding cash flows and a debt-free balance sheet. Late in the fourth quarter of 2001, EFunds announced that business had slowed vis-a-vis their earlier expectations and their stock fell sharply. We took advantage of this price decline and bought shares at a significant discount to our estimate of EFunds private market value. We view the slowdown in their business to be a temporary condition brought on principally by the sluggish economy and not the result of serious company specific problems. Additionally, with strong positive cash flow and a debt-free balance sheet with approximately $40 million in cash, we believe EFunds is in excellent position to grow when the economy recovers. We believe this new investment in a financially strong company should aid your Fund's performance in future periods.
Expanding Channels of Distribution
Tupperware Corporation is a company with a well-known brand we believe investors have largely forgotten about given the perception that the company utilizes outdated channels of distribution. Tupperware representatives still have home parties, but in recent years the company's distribution channels have been expanded to include kiosks in shopping malls, displays in Target Stores and Kroger Supermarkets and a pretty impressive web site. Additionally, since approximately 80% of Tupperware's sales occur outside the United States, the strength of the U.S. dollar in recent years has had a dampening impact on Tupperware's growth when the non-U.S. results are translated into dollars.
Tupperware's core business of designing, manufacturing and selling distinctive and innovative housewares with high gross margins has been maintained over the years. We believe the firm's expanding channels of distribution give the company a real opportunity to reinvigorate growth over the next several years. While it may take a year or two for the new distribution channels to significantly impact Tupperware's growth rate, we can afford to be patient since we have been buying Tupperware's stock at approximately eleven times earnings. If the new channels result in higher sales and profits for Tupperware, we anticipate investors will eventually place a higher multiple on Tupperware's earnings that may result in a higher stock price.
Our Small Cap Outlook
Despite a very strong fourth quarter, numerous small cap stocks continue to sell at very compelling valuations. We can usually find good quality small cap stocks to buy at price-to-cash-flow multiples that are approximately one-third lower than their large cap peers. Therefore, based upon these attractive valuations, we maintain our assessment that the rebound in small cap value stocks that began well over a year ago will likely persist for the foreseeable future.
We would like to sincerely thank our shareholders for your ongoing support of The Oakmark Small Cap Fund.
James P. Benson, CFA
Portfolio Manager
jbenson@oakmark.com
Clyde S. McGregor, CFA
Portfolio Manager
mcgregor@oakmark.com
January 7, 2002
| THE OAKMARK SMALL CAP FUND |
Schedule of Investments—December 31, 2001
| Name | Shares Held | Market Value |
| Common Stocks—91.9% | ||
| Food & Beverage—6.8% | ||
| Ralcorp Holdings, Inc. (a) | 579,000 | $13,143,300 |
| Del Monte Foods Company (a) | 1,100,000 | 9,361,000 |
| 22,504,300 | ||
| Apparel—1.7% | ||
| R.G. Barry Corporation (a) | 907,000 | $5,723,170 |
| Retail—2.7% | ||
| ShopKo Stores, Inc. (a) | 936,000 | $8,892,000 |
| Household Products—0.2% | ||
| Tupperware Corporation | 36,000 | $693,000 |
| Office Equipment—2.9% | ||
| InFocus Corporation (a) | 357,500 | $7,872,150 |
| MCSi, Inc. (a) | 75,000 | 1,758,750 |
| 9,630,900 | ||
| Other Consumer Goods & Services—4.2% | ||
| Department 56, Inc. (a) | 800,000 | $6,880,000 |
| Central Parking Corporation | 250,000 | 4,910,000 |
| American Greetings Corporation, Class A | 150,000 | 2,067,000 |
| 13,857,000 | ||
| Bank & Thrifts—7.6% | ||
| BankAtlantic Bancorp, Inc., Class A | 1,023,700 | $9,397,566 |
| People's Bank of Bridgeport, Connecticut | 325,000 | 6,909,500 |
| Golden State Bancorp Inc. | 190,000 | 4,968,500 |
| PennFed Financial Services, Inc. | 150,000 | 3,723,000 |
| 24,998,566 | ||
| Insurance—4.1% | ||
| The PMI Group, Inc. | 200,000 | $13,402,000 |
| Other Financial—3.1% | ||
| NCO Group, Inc. (a) | 450,000 | $10,305,000 |
| Hotels & Motels—2.9% | ||
| Prime Hospitality Corp. (a) | 860,000 | $9,503,000 |
| Educational Services—4.5% | ||
| ITT Educational Services, Inc. (a) | 399,800 | $14,740,626 |
| Marketing Services—0.2% | ||
| Grey Global Group Inc. | 1,000 | $666,750 |
| Information Services—0.8% | ||
| eFunds Corporation (a) | 199,500 | $2,743,125 |
| Data Storage—1.3% | ||
| Imation Corp. (a) | 200,000 | $4,316,000 |
| Computer Services—3.4% | ||
| CIBER, Inc. (a) | 960,000 | $9,072,000 |
| Interland, Inc. (a) | 1,050,000 | 2,215,500 |
| 11,287,500 | ||
| Computer Software—8.1% | ||
| Mentor Graphics Corporation (a) | 520,000 | $12,256,400 |
| MSC.Software Corp. (a) | 630,500 | 9,835,800 |
| SilverStream Software, Inc. (a) | 700,000 | 4,767,000 |
| 26,859,200 | ||
| Computer Systems—1.1% | ||
| Optimal Robotics Corp., Class A (a) | 100,000 | $3,545,000 |
| Security Systems—3.7% | ||
| Checkpoint Systems, Inc. (a) | 910,000 | $12,194,000 |
| Pharmaceuticals—1.6% | ||
| Elan Corporation plc (a)(b) | 115,000 | $5,181,900 |
| Medical Research—1.1% | ||
| Covance Inc. (a) | 155,000 | $3,518,500 |
| Medical Products—6.0% | ||
| CONMED Corporation (a) | 335,500 | $6,696,580 |
| Hanger Orthopedic Group, Inc. (a) | 960,000 | 5,760,000 |
| Sybron Dental Specialties, Inc. (a) | 250,000 | 5,395,000 |
| ORATEC Interventions, Inc. (a) | 300,000 | 1,941,000 |
| 19,792,580 | ||
| Automotive—0.3% | ||
| Standard Motor Products, Inc. | 80,200 | $1,114,780 |
| Automobile Rentals—1.5% | ||
| Dollar Thrifty Automotive Group, Inc. (a) | 310,000 | $4,805,000 |
| Transportation Services—2.9% | ||
| Teekay Shipping Corporation (c) | 250,000 | $8,712,500 |
| Frontline Limited (c) | 75,000 | 768,750 |
| 9,481,250 | ||
| Instruments—4.5% | ||
| IDEXX Laboratories, Inc. (a) | 388,200 | $11,067,582 |
| Measurement Specialties, Inc. (a) | 400,000 | 3,764,000 |
| 14,831,582 | ||
| Machinery & Industrial Processing—1.6% | ||
| Columbus McKinnon Corporation | 525,000 | $5,381,250 |
| Chemicals—2.1% | ||
| H.B. Fuller Company | 140,000 | $4,027,800 |
| Georgia Gulf Corporation | 150,000 | 2,775,000 |
| 6,802,800 | ||
| Oil & Natural Gas—4.6% | ||
| St. Mary Land & Exploration Company | 300,000 | $6,357,000 |
| Cabot Oil & Gas Corporation, Class A | 200,000 | 4,810,000 |
| Berry Petroleum Company, Class A | 250,000 | 3,925,000 |
| 15,092,000 | ||
| Other Industrial Goods & Services—0.6% | ||
| Intergrated Electrical Services, Inc. (a) | 399,500 | $2,045,440 |
| Real Estate—5.8% | ||
| Catellus Development Corporation (a) | 725,000 | $13,340,000 |
| Trammell Crow Company (a) | 500,000 | 5,850,000 |
| 19,190,000 | ||
| Total Common Stocks (Cost: $260,545,331) | 303,098,219 | |
| Par Value/ Shares Subject to Call |
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| Short Term Investments—9.1% | ||
| Commercial Paper—6.1% | ||
| Citicorp, 1.92% due 1/2/2002 | $5,000,000 | $5,000,000 |
| American Express Credit Corporation, 1.93% due 1/4/2002 | 5,000,000 | 5,000,000 |
| General Electric Capital Corporation, 1.75% due 1/2/2002 | 10,000,000 | 10,000,000 |
| Total Commercial Paper (Cost: $20,000,000) | 20,000,000 | |
| Repurchase Agreements—3.0% | ||
| State Street Repurchase Agreement, 1.57% due 1/2/2002 | $10,009,000 | $10,009,000 |
| Total Repurchase Agreements (Cost: $10,009,000) | 10,009,000 | |
| Total Short Term Investments (Cost: $30,009,000) | 30,009,000 | |
| Total Investments (Cost $290,554,331)—101.0% | $333,107,219 | |
| Call Options Written—0.0% | ||
| Equity Options‚—0.0% | ||
| Medical Research—0.0% | ||
| Covance Inc., January 22.50 Calls | (130,000) | (156,000) |
| Total Equity Options (Premiums Received: $(140,590)) | (156,000) | |
| Total Call Options Written (Premiums Received: | ||
| $(140,590))—0.0% | (156,000) | |
| Other Liabilities In Excess Of Other Assets—(1.0)% | (3,136,322) | |
| Total Net Assets—100% | $329,814,897 | |
| (a) | Non-income producing security. |
| (b) | Represents an American Depository Receipt. |
| (c) | Represents foreign domiciled corporation. |
