THE OAKMARK FUND
Report from Bill Nygren and Kevin Grant,
Portfolio Managers
THE OAKMARK FUNDReport from Bill Nygren and Kevin Grant,
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| THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO PRESENT (9/30/02) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX2 | |||||
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| Average Annual Total Returns4 | |||||
| (as of 9/30/02) | |||||
| Total Return Last 3 Months* |
1-year | 5-year | 10-year | Since Inception (8/5/91) |
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| Oakmark Fund | -16.60% | -11.77% | 0.35% | 12.15% | 16.10% |
| S&P 500 | -17.28% | -20.49% | -1.63% | 8.99% | 9.11% |
| Dow Jones Average1 | -17.33% | -12.48% | 0.81% | 11.11% | 11.03% |
| Lipper Large Cap Value Index10 | -18.65% | -19.61% | -1.77% | 8.49% | 8.70% |
| The graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. | |||||
| 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 Oakmark Fund declined 17% last quarter, which took our fiscal year results into negative territory by 12%. The loss in the quarter was only fractionally better than the 17% loss suffered by the S&P 500, but the fiscal year results compare favorably to the S&P 500 loss of 20%. The pain of this decline has caused many investors to give up on stocks. The stock market is down nearly 50% from its peak. Stocks now appear significantly undervalued using the Fed model (which compares P/E7 ratios to long-term government bond yields); the dividend yield on the S&P 500 exceeds the yield on Treasury bills for the first time since 1963; and money-market fund assets compared to the market value of stocks is at the highest level ever recorded. Those data points are much more typical of market bottoms than tops. Many stocks have now fallen to our buy targets, and we continue to add new holdings that have the business fundamentals of growth companies, but the valuation levels of value stocks. All of our new holdings are discussed on our website (www.oakmark.com). The new holding discussed below is not singled out because of higher confidence in it, but rather because it is an exception to our belief that most large technology companies continue to be fully valued.
Sun Microsystems (SUNW—$2.59)
Two years ago, Sun reached a high of $65, which we thought was silly because that was over 125 times earnings, nearly 30 times book value8 and 13 times sales. As a leading supplier of servers and workstations, the last two years have been extremely disappointing for Sun's business. However, Sun continues to have a $12 billion sales base, and their Solaris operating system is unmatched for high-end servers. Today, Sun sells at a slight premium to tangible book value and has net cash of more than half its stock price. Net of its cash, Sun sells at about one-third of sales and less than three times its annual R&D spending. Sun probably won't return to a $65 price during our lifetime, but that is irrelevant to the investment decision today. At $2.59, we believe Sun is now selling at less than 60% of business value and, from this level, is likely to achieve above-average returns.
Best wishes,
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| William C. Nygren, CFA Portfolio Manager bnygren@oakmark.com |
Kevin Grant, CFA Portfolio Manager kgrant@oakmark.com |
October 3, 2002
| THE OAKMARK FUND |
Schedule of Investments—September 30, 2002
| Name | Shares Held | Market Value |
| Common Stocks—93.5% | ||
| Food & Beverage—6.4% | ||
| General Mills, Inc. | 1,755,000 | $77,957,100 |
| Kraft Foods Inc. | 1,895,000 | 69,091,700 |
| H.J. Heinz Company | 1,910,000 | 63,736,700 |
| 210,785,500 | ||
| Household Products—2.4% | ||
| The Clorox Company | 1,390,200 | $55,858,236 |
| Newell Rubbermaid, Inc. | 775,000 | 23,924,250 |
| 79,782,486 | ||
| Other Consumer Goods & Services—7.8% | ||
| H&R Block, Inc. | 2,453,300 | $103,063,133 |
| Fortune Brands, Inc. | 1,645,600 | 77,820,424 |
| Mattel, Inc. | 3,216,300 | 57,925,563 |
| Cendant Corporation (a) | 1,895,100 | 20,391,276 |
| 259,200,396 | ||
| Broadcasting & Programming—2.5% | ||
| Liberty Media Corporation, Class A (a) | 8,201,400 | $58,886,052 |
| The Walt Disney Company | 1,500,000 | 22,710,000 |
| 81,596,052 | ||
| Building Materials & Construction—1.9% | ||
| Masco Corporation | 3,133,000 | $61,250,150 |
| Cable Systems & Satellite TV—6.2% | ||
| AOL Time Warner Inc. (a) | 6,766,600 | $79,169,219 |
| General Motors Corporation, Class H | ||
| (Hughes Electronics Corporation) (a) | 5,100,000 | 46,665,000 |
| EchoStar Communications Corporation (a) | 2,475,000 | 42,817,500 |
| Comcast Corporation (a) | 1,800,000 | 37,548,000 |
| 206,199,719 | ||
| Hardware—2.1% | ||
| The Black & Decker Corporation | 1,622,200 | $68,018,846 |
| Marketing Services—1.5% | ||
| The Interpublic Group of Companies, Inc. | 3,165,000 | $50,165,250 |
| Publishing—3.5% | ||
| Gannett Co., Inc. | 884,500 | $63,843,210 |
| Knight-Ridder, Inc. | 916,000 | 51,671,560 |
| 115,514,770 | ||
| Recreation & Entertainment—1.1% | ||
| Carnival Corporation | 1,500,000 | $37,650,000 |
| Retail—14.3% | ||
| Yum! Brands, Inc (a) | 2,439,000 | $67,584,690 |
| J.C. Penney Company, Inc. | 3,902,900 | 62,134,168 |
| The Kroger Co. (a) | 4,390,000 | 61,899,000 |
| McDonald's Corporation | 3,300,000 | 58,278,000 |
| Safeway Inc. (a) | 2,527,000 | 56,352,100 |
| The Home Depot, Inc. | 2,100,000 | 54,810,000 |
| CVS Corporation | 1,605,000 | 40,686,750 |
| The Gap, Inc. | 3,599,000 | 39,049,150 |
| Toys ‘R' Us, Inc. (a) | 3,125,000 | 31,812,500 |
| 472,606,358 | ||
| Bank & Thrifts—5.8% | ||
| Washington Mutual, Inc. | 3,937,300 | $123,906,831 |
| U.S. Bancorp | 3,700,000 | 68,746,000 |
| 192,652,831 | ||
| Insurance—1.8% | ||
| MGIC Investment Corporation | 1,437,900 | $58,709,457 |
| Other Financial—2.1% | ||
| Fannie Mae | 1,170,000 | $69,661,800 |
| Medical Products—2.4% | ||
| Guidant Corporation (a) | 2,396,100 | $77,417,991 |
| Pharmaceuticals—10.6% | ||
| Bristol-Myers Squibb Company | 3,250,000 | $77,350,000 |
| Abbott Laboratories | 1,850,000 | 74,740,000 |
| Merck & Co., Inc. | 1,600,000 | 73,136,000 |
| Schering-Plough Corporation | 3,225,000 | 68,757,000 |
| Chiron Corporation (a) | 1,622,000 | 56,672,680 |
| 350,655,680 | ||
| Telecommunications—1.2% | ||
| Sprint Corporation | 4,421,000 | $40,319,520 |
| Telecommunications Equipment—0.9% | ||
| Motorola, Inc. | 2,975,000 | $30,285,500 |
| Computer Services—4.3% | ||
| First Data Corporation | 2,400,000 | $67,080,000 |
| SunGard Data Systems, Inc. (a) | 2,801,600 | 54,491,120 |
| Electronic Data Systems Corporation | 1,501,000 | 20,983,980 |
| 142,555,100 | ||
| Computer Systems—0.9% | ||
| Sun Microsystems, Inc. (a) | 12,000,000 | $31,080,000 |
| Office Equipment—1.1% | ||
| Xerox Corporation (a) | 7,427,400 | $36,765,630 |
| Aerospace & Defense—2.3% | ||
| Honeywell International, Inc. | 1,950,000 | $42,237,000 |
| The Boeing Company | 1,000,000 | 34,130,000 |
| 76,367,000 | ||
| Other Industrial Goods & Services—1.1% | ||
| Illinois Tool Works Inc. | 604,200 | $35,242,986 |
| Waste Disposal—1.8% | ||
| Waste Management, Inc. | 2,574,300 | $60,032,676 |
| Oil & Natural Gas—4.2% | ||
| ConocoPhillips | 1,635,335 | $75,617,890 |
| Burlington Resources Inc. | 1,671,100 | 64,103,396 |
| 139,721,286 | ||
| Electric Utilities—3.3% | ||
| TXU Corp. | 1,565,000 | $65,276,150 |
| Duke Energy Corporation | 2,220,000 | 43,401,000 |
| 108,677,150 | ||
| Total Common Stocks (Cost: $3,433,430,323) | 3,092,914,134 | |
| Par Value | ||
| Short Term Investments—6.4% | ||
| U.S. Government Bills—4.8% | ||
| United States Treasury Bills, 1.58% - 1.665% | ||
| due 10/3/2002 - 11/29/2002 | $160,000,000 | $159,873,818 |
| Total U.S. Government Bills (Cost: $159,870,861) | 159,873,818 | |
| Repurchase Agreements—1.6% | ||
| IBT Repurchase Agreement, 1.75% due 10/1/2002, | ||
| repurchase price $50,002,431 collateralized by | ||
| U.S. Government Agency Securities | $50,000,000 | $50,000,000 |
| IBT Repurchase Agreement, 1.11% due 10/1/2002, | ||
| repurchase price $1,886,022 collateralized by a | ||
| U.S. Government Agency Security | 1,885,964 | 1,885,964 |
| Total Repurchase Agreement (Cost: $51,885,964) | 51,885,964 | |
| Total Short Term Investments (Cost: $211,756,825) | 211,759,782 | |
| Total Investments (Cost $3,645,187,148)—99.9% | $3,304,673,916 | |
| Other Assets In Excess Of Other Liabilities—0.1% | 4,007,917 | |
| Total Net Assets—100% | $3,308,681,833 | |
| (a) | Non-income producing security. |
See accompanying notes to financial statements.