Fellow Shareholders,

In the recent quarter ending June 30, 2003, both The Oakmark International Fund and The Oakmark International Small Cap Fund achieved very strong returns, up 25% and 29% respectively, surpassing the relevant market indices and peer group indices.

The Funds' performance was aided by a rebound in equity markets around the world over the past few months, quite a contrast to the fear that drove markets lower in March. The large declines in equity prices in the first quarter of calendar year 2003 provided us the opportunity to add to our favorite holdings at very attractive prices.

Relief!

For months now we have been arguing that global stocks were significantly undervalued. We believed that depressed valuations did not mirror medium and long-term prospects for stocks. Though there has been a significant rebound as can be seen by the above numbers, we believe that this could be just the beginning of the equity recovery and that overseas stock markets are on firm footing for recovery from the 3 year bear market.

Our favorite indicator of opportunity is valuation. Even after a strong March, April and May, we believe that international stocks in general are still cheap. The MSCI World Index¹⁶ (as of May 31^st, 2003) trades at a price to cash flow ratio of 10.5x. Europe trades at just 8.8x and Japan is at 7.3x. More compelling is the relationship with dividend yields and interest rates. Today, the 5 year US Treasury is around 2%, the number is 3% in Europe and below 1% in Japan. Yet, The MSCI World yields 2.2%, Europe yields 3.2% and Japan yields 1.2%. In a very unusual circumstance, stocks offer a higher yield than bonds! These valuation numbers are an indication that equities as an asset class are cheap, both relative to bonds and in an absolute sense.

Finally, opportunities going forward seem attractive. The war in the Middle East has ended and the SARS problem seems to be fading. This appears to be giving both consumers and businesses the confidence needed to help improve the growth rate of the global economy. East Asia, which has slowed because of SARS, seems to be picking up and has the potential to be a strong driver of global growth over the next 10 years. Continued reform and foreign direct investment should fuel growth in the region's most important economy, China. In North Asia, South Korea continues down the path of improved corporate governance.

The European economy remains fairly stagnant on the whole and faces some serious structural, pension and budgetary issues. But there are some positive developments.

Corporate tax reform has been pervasive and positive, and now Germany looks to be on the verge of a major cut in personal income taxes. Labor reform—read flexibility to hire and fire—hopefully seems to be more of a foregone conclusion. The failure of the recent strike by East German metalworkers orchestrated by the powerful IG Metal Union was very encouraging. It took a week but workers soon recognized that striking for a 35-hour work-week in a region of 19% unemployment and uncompetitive wages did not make much sense. Public opinion was strongly against this strike. This very public defeat by Germany's highest profile union will hopefully fuel further labor flexibility reforms throughout the German economy.

Most positive has been the continued improvement in European corporate governance. Managements are working much harder for shareholders today than they were ten years ago. There is a recognition that the market for capital is global and competitive and managements need to do a better job of producing attractive returns. Currently, we think share prices in Europe reflect most of the problems but very little of the positive developments.

Looking Forward

Despite this quarter's strong return, we still remain optimistic about the quality and valuations of the businesses we own in both The Oakmark International Fund and The Oakmark International Small Cap Fund.

David G. Herro, CFA Portfolio Manager dherro@oakmark.com	Michael J. Welsh, CFA, CPA Portfolio Manager mwelsh@oakmark.com