Letter from the President

Dear Fellow Shareholders,

At the end of the calendar year, we, like you, are frustrated by the difficult market environment. The Dow¹, S&P 500², EAFE³, and NASDAQ⁴ each posted significant double-digit losses for the year. The bear market has broadened, and we have experienced our first negative year in some time. While the Funds have fared well on a relative basis, absolute returns are not in line with our long-term goal of positive rates of return. By adhering to our core value philosophy, we strive to avoid significant losses so that negative years are not large enough to impair the long-term goals of our clients.

Uncertainty and Investing

The troubling uncertainties of the economy, potential war with Iraq, and corporate scandals and bankruptcies have been hanging over Wall Street. We believe the bear market has been worse than justified by these factors. In our opinion, these negative factors do not warrant this extreme bear market. The economy is bottoming, and interest rates and inflation remain low. We are also completing the third straight down year for stocks. Thus we enter 2003 with a conviction that most of the negative outcomes are reflected in equity prices.

During times of uncertainty, an investment firm should attend to what it can control, as opposed to what it cannot. Therefore, we concentrate on our strengths that we believe increase the probability of superior long-term performance:

• Adhering to a disciplined philosophy and process—one which has been employed successfully at Harris Associates, adviser to the Oakmark Funds, for over 25 years

• Employing an investment strategy that properly balances risk and reward—qualities important to our fund portfolios

• Focusing on an appropriate investment horizon—avoiding over reacting to short-term events

• Relying on an experienced research group—a team made up of seasoned investment professionals averaging 16 years of experience, with many who have been with the firm for over 10 years

This final point is worth highlighting. Recent changes that strengthen corporate full disclosure and tighten Wall Street oversight are appropriate, and they will, in our view create a competitive advantage for investment firms, like ours, with significant internal research capabilities.

Equities: The Critical Decision

Historically, market valuation has tended to reflect the extremes of investor sentiment. When the tech market was overvalued in March 2000, investors were pouring an unprecedented amount of money into these equities. Shortly thereafter, we witnessed a major correction in this sector. Now, after three years of the worst bear market since the Great Depression—when we believe the long-term prospects for equities are improving—investor opinion has rarely been more negative. We believe that valuation excesses have been removed from the market and that short-term emotional volatility creates opportunity for long-term investors.

Apprehensive investors are moving from stocks to investments assumed to be lower risk, such as bonds and cash. Unfortunately, this decision results from an analysis of what has done well instead of what will do well. Given the expected returns of the stocks in our portfolios and the very low interest rate environment, we believe the most critical decision an investor can make in the year ahead is to maintain or increase one's equity exposure.

On a final note, I am pleased to announce that John Raitt, a partner and investment analyst who has been with Harris Associates L.P. since 1986 and served as our Director of Research from 1998 to 2002, has been named President and CEO of Harris Associates L.P. I will retain the titles of Chairman and Chief Investment Officer. John has played an integral role at our firm and will join me in communicating with all of our shareholders in the future.

Robert M. Levy

Robert M. Levy
President
January 3, 2003

THE OAKMARK FAMILY OF FUNDS

Summary Information

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