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 (3/31/02) AS COMPARED TO THE RUSSELL 2000 INDEX11 |
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Average
Annual Total Returns2 |
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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 | 12.26% | 34.79% | 9.54% | 14.62% |
| Russell 2000 | 3.98% | 13.98% | 9.52% | 10.17% |
| S&P Small Cap 60012 | 6.97% | 21.97% | 13.44% | 13.67% |
| Lipper Small Cap Value Index13 | 7.98% | 23.50% | 12.49% | 13.52% |
| 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 | ||||
During the first calendar quarter of 2002, your Fund produced a gain of 12% as small cap stocks continued their above average relative performance. The Russell 2000 Small Cap Index rose 4% for the just ended quarter, thus your Fund outperformed the Russell 2000 by over 8% for the calendar quarter ending March 31, 2002. While the strength in smaller cap stock prices over the past two quarters would indicate that investors have begun to rediscover smaller company stocks, we continue to believe we can find more attractively priced smaller cap stocks vis-à-vis larger cap stocks. However, we also believe as investor money gravitates towards small cap stocks it is becoming more difficult to find the wonderful small cap stock bargains we were able to uncover a year or two ago. Looking forward, we believe that when the economy recovers, significant upside still exists for small cap stocks, but we would not expect the quarterly gains to be as strong as we have achieved during the past two quarters.
Finding Value In Today's Stock Market
As our analysts survey the investment landscape to uncover stocks in which your Fund can invest, we are struck by how few traditional manufacturing companies we are excited about owning. Smaller manufacturers have been a sector we have looked to for investments, yet in today's economy we can find only a relative few that we view as good values. Our principal investment thesis is that we want to own good businesses that have an above average probability of growing the value of their business over time and we want to pay a rational price for that business. In recent years we have largely concluded that many small manufacturers face a multitude of hurdles that inhibit the growth of their business value over time. These hurdles include severe pricing pressure from their customers (often large assemblers like the auto manufacturers or large retailers such as Wal-Mart or Home Depot), stiff foreign competition from companies in low-wage countries and legacy legal problems like asbestos or other EPA related problems.
Given these issues, we believe it is difficult (but not impossible) for smaller manufacturers to grow their business value over our investment time horizon of three to five years. Therefore, we have been concentrating our investments into businesses that largely do not face the aforementioned problems. In so doing, we have ventured into some industries that are not thought of as traditional for value investors, but we would disagree since we continue to adhere to the principle of trying to buy good businesses at attractive prices.
Recent Portfolio Changes
The Fund's portfolio remained steady at forty-nine stocks over the past quarter as we bought four new companies and sold four of our holdings. We sold American Greetings, Georgia Gulf Corporation and Standard Motor Products after these stocks appreciated to our sell targets while we sold Oratec Interventions after the company agreed to be acquired at a nice premium. We initiated positions in Insituform Technologies, Oakley Inc., Sensient Technologies and Surebeam Corp.
Highlights |
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Our new purchases are companies in diverse industries (sewer pipe restorations, sunglasses & sporting apparel, food flavorings & inks and food irradiation processing, respectively) with well above average businesses that we believe have bright futures. Insituform is a firm that has a dominant share of repairing and replacing municipal sewer pipes using a trenchless technique. The trenchless method is less disruptive than the older trench technique and can be less expensive as well. With municipal sewer systems aging and the EPA becoming more active in encouraging cities to fix their leaking sewer systems, we believe demand for Insituform's products and services is likely to experience solid growth over the next five years. This growth profile, combined with a good balance sheet, projected growth in cash flow and a stock trading at an attractive level prompted us to add this company to your Fund.
Disruption Creates Opportunity
Oakley Inc. is a company with a well known brand (especially among younger consumers) whose stock suffered a setback after Sunglass Hut stopped selling Oakley products last year. This created an opportunity for us to buy this stock at what we believe are attractive prices. Simultaneous to our investment, a surge of activity occurred at Oakley where the management team aggressively pursued additional outlets for its products. Given Oakley's brand strength, numerous quality retailers quickly agreed to sell Oakley's products. This created enough pressure on Sunglass Hut to resume selling Oakley products in early 2002.
This impressive display of Oakley's brand strength is buttressed by the innovation and style that Oakley builds into its products. Oakley's innovative products are protected by over 400 patents worldwide, and their engineers and designers have excellent track records producing cutting edge designs. We believe the stocks of most producers of premium consumer goods trade at multiples of earnings and cash flow that fully value the underlying business, however we do not believe that is the case with respect to Oakley.
Our Outlook For Small Caps
After two consecutive quarters of double digit percentage returns we are finding it somewhat more difficult to find stocks we are sufficiently enthused about to buy. Six months ago it was like shooting fish in a barrel, now it is like shooting fish in a lake—you can still be successful, but you have a higher probability of missing. Our analysts, however, are working hard to uncover additional small cap investment opportunities, and given our style of fairly low-turnover portfolios, we do not need a plethora of new ideas, but rather just a few per quarter. Therefore, we continue to believe small caps have further upside potential, but the rate of gain is likely to slow from the recent torrid pace.
We would like to sincerely thank our long time shareholders for your ongoing interest in and your support of The Oakmark Small Cap Fund. Additionally, we welcome all of our new shareholders and we look forward to communicating with all of you over the next several years.
James P. Benson, CFA
Portfolio Manager
jbenson@oakmark.com
Clyde S. McGregor, CFA
Portfolio Manager
mcgregor@oakmark.com
April 3, 2002
| THE OAKMARK SMALL CAP FUND |
Schedule of Investments—March 31, 2002 (Unaudited)
| Name | Shares Held | Market Value |
| Common Stocks—85.6% | ||
| Food & Beverage—5.7% | ||
| Ralcorp Holdings, Inc. (a) | 579,000 | $15,748,800 |
| Del Monte Foods Company (a) | 1,300,000 | 12,649,000 |
| 28,397,800 | ||
| Apparel—3.3% | ||
| Oakley, Inc. (a) | 600,000 | $10,740,000 |
| R.G. Barry Corporation (a)(d) | 907,000 | 5,469,210 |
| 16,209,210 | ||
| Retail—3.3% | ||
| ShopKo Stores, Inc. (a) | 900,000 | $16,290,000 |
| Household Products—3.1% | ||
| Tupperware Corporation | 673,700 | $15,326,675 |
| Office Equipment—4.1% | ||
| InFocus Corporation (a) | 750,000 | $13,657,500 |
| MCSi, Inc. (a) | 550,000 | 6,550,500 |
| 20,208,000 | ||
| Other Consumer Goods & Services—3.4% | ||
| Department 56, Inc. (a)(d) | 800,000 | $11,200,000 |
| Central Parking Corporation | 250,000 | 5,747,500 |
| 16,947,500 | ||
| Bank & Thrifts—6.7% | ||
| BankAtlantic Bancorp, Inc., Class A | 1,000,000 | $13,000,000 |
| People's Bank of Bridgeport, Connecticut | 360,000 | 8,874,000 |
| Golden State Bancorp Inc. | 250,000 | 7,422,500 |
| PennFed Financial Services, Inc. | 150,000 | 4,087,500 |
| 33,384,000 | ||
| Insurance—3.0% | ||
| The PMI Group, Inc. | 200,000 | $15,152,000 |
| Other Financial—3.1% | ||
| NCO Group, Inc. (a) | 560,000 | $15,545,600 |
| Hotels & Motels—2.1% | ||
| Prime Hospitality Corp. (a) | 810,000 | $10,651,500 |
| Educational Services—3.5% | ||
| ITT Educational Services, Inc. (a) | 385,000 | $17,325,000 |
| Marketing Services—0.1% | ||
| Grey Global Group Inc. | 1,000 | $681,000 |
| Information Services—3.5% | ||
| eFunds Corporation (a) | 1,100,000 | $17,655,000 |
| Data Storage—1.2% | ||
| Imation Corp. (a) | 219,300 | $5,818,029 |
| Computer Services—2.5% | ||
| CIBER, Inc. (a) | 1,000,000 | $9,150,000 |
| Interland, Inc. (a) | 1,250,000 | 3,200,000 |
| 12,350,000 | ||
| Computer Software—7.0% | ||
| MSC.Software Corp. (a) | 800,000 | $18,400,000 |
| Mentor Graphics Corporation (a) | 610,000 | 12,895,400 |
| SilverStream Software, Inc. (a) | 750,000 | 3,690,000 |
| 34,985,400 | ||
| Computer Systems—1.1% | ||
| Optimal Robotics Corp., Class A (a) | 300,000 | $5,376,000 |
| Security Systems—3.0% | ||
| Checkpoint Systems, Inc. (a) | 925,000 | $14,753,750 |
| Pharmaceuticals—0.3% | ||
| Elan Corporation plc (a)(b) | 115,000 | $1,599,650 |
| Medical Research—0.8% | ||
| Covance Inc. (a) | 200,000 | $4,056,000 |
| Medical Products—4.8% | ||
| Hanger Orthopedic Group, Inc. (a)(d) | 960,000 | $9,936,000 |
| CONMED Corporation (a) | 350,000 | 8,750,000 |
| Sybron Dental Specialties, Inc. (a) | 250,000 | 5,025,000 |
| 23,711,000 | ||
| Automobile Rentals—1.3% | ||
| Dollar Thrifty Automotive Group, Inc. (a) | 305,600 | $6,463,440 |
| Transportation Services—2.1% | ||
| Teekay Shipping Corporation (c) | 250,000 | $9,530,000 |
| Frontline Limited (c) | 100,000 | 1,120,000 |
| 10,650,000 | ||
| Instruments—3.8% | ||
| IDEXX Laboratories, Inc. (a) | 600,000 | $16,104,000 |
| Measurement Specialties, Inc. (a) | 550,000 | 2,866,875 |
| 18,970,875 | ||
| Machinery & Industrial Processing—2.8% | ||
| SureBeam Corporation, Class A (a) | 1,410,000 | $7,811,400 |
| Columbus McKinnon Corporation | 500,000 | 6,400,000 |
| 14,211,400 | ||
| Building Materials & Construction—1.1% | ||
| Insituform Technologies, Inc., Class A (a) | 214,200 | $5,412,834 |
| Chemicals—1.2% | ||
| H.B. Fuller Company | 140,000 | $4,193,000 |
| Sensient Technologies Corporation | 72,700 | 1,673,554 |
| 5,866,554 | ||
| Oil & Natural Gas—2.9% | ||
| St. Mary Land & Exploration Company | 250,000 | $5,427,500 |
| Cabot Oil & Gas Corporation, Class A | 200,000 | 4,952,000 |
| Berry Petroleum Company, Class A | 250,000 | 3,862,500 |
| 14,242,000 | ||
| Other Industrial Goods & Services—0.6% | ||
| Intergrated Electrical Services, Inc. (a) | 650,000 | $3,250,000 |
| Real Estate—4.2% | ||
| Catellus Development Corporation (a) | 700,000 | $13,769,000 |
| Trammell Crow Company (a) | 500,000 | 7,250,000 |
| 21,019,000 | ||
| Total Common Stocks (Cost: $339,648,207) | 426,509,217 | |
Par Value |
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| Short Term Investments—14.3% | ||
| U.S. Government Bills—9.0% | ||
| United States Treasury Bills, 1.71% - 1.76% | ||
| due 4/4/2002 - 5/2/2002 | $45,000,000 | $44,967,488 |
| Total U.S. Government Bills (Cost: $44,967,694) | 44,967,488 | |
| Commercial Paper—2.8% | ||
| ChevronTexaco Corporation, 1.79% due 4/5/2002 | $6,000,000 | $6,000,000 |
| American Express Credit Corporation, 1.80% due 4/11/2002 | 8,000,000 | 8,000,000 |
| Total Commercial Paper (Cost: $14,000,000) | 14,000,000 | |
| Repurchase Agreements—2.5% | ||
| State Street Repurchase Agreement, 1.75% due 4/1/2002, | ||
| repurchase price $12,152,363 collateralized by | ||
| U.S. Treasury Bonds | $12,150,000 | $12,150,000 |
| Total Repurchase Agreements (Cost: $12,150,000) | 12,150,000 | |
| Total Short Term Investments (Cost: $71,117,694) | 71,117,488 | |
| Total Investments (Cost $410,765,901)—99.9% (e) | $497,626,705 | |
Shares Subject to Call |
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| Call Options Written—(0.1%) | ||
| Retail—0.0% | ||
| ShopKo Stores, Inc., September 17.50 Calls | (70,000) | $(140,000) |
| Educational Services—(0.1%) | ||
| ITT Educational Services, Inc., May 50 Calls | (10,000) | $(10,000) |
| ITT Educational Services, Inc., July 45 Calls | (40,000) | (140,000) |
| (150,000) | ||
| Total Call Options Written (Premiums Received: | ||
| $(305,768))—(0.1%) | (290,000) | |
| Other Assets In Excess Of Other Liabilities—0.2% | $868,256 | |
| Total Net Assets—100% | $498,204,961 | |
| (a) | Non-income producing security. |
| (b) | Represents an American Depository Receipt. |
| (c) | Represents foreign domiciled corporation. |
| (d) | See footnote number five in the Notes to Financial Statements regarding transactions in affiliated issuers. |
| (e) | At March 31, 2002, net unrealized appreciation of $86,876,572, for federal income tax purposes, consisted of gross unrealized appreciation of $107,304,707 and gross unrealized depreciation of $20,428,135. |
See accompanying notes to financial statements.
