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 (9/30/03) AS COMPARED TO THE STANDARD & POOR'S 500 INDEX6 | |||||
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| Annual Average Total Returns1 | |||||
| (as of 9/30/03) | |||||
| Total Return Last 3 Months* |
1-year | 5-year | 10-year | Since Inception (8/5/91) |
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| Oakmark Fund | 0.33% | 20.99% | 5.11% | 10.73% | 16.50% |
| S&P 500 | 2.65% | 24.40% | 1.00% | 10.04% | 10.29% |
| Dow Jones Average9 | 3.91% | 25.13% | 5.32% | 12.35% | 12.12% |
| Lipper Large Cap Value Index10 | 1.95% | 22.65% | 2.00% | 8.92% | 9.78% |
| 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 increased in value by less than 1% last quarter bringing the fiscal year to a 21%increase. The quarter was disappointing relative to gains achieved in the market averages—the S&P 500 gained 3% and the NASDAQ7 added to its great year by rising another 10%. The technology stocks were very strong, and we own almost none of them. We maintain that their premium prices—particularly versus high quality non-technology stocks—are a result of overly positive investor sentiment rather than fundamental value. Even our one traditional technology holding, Sun Microsystems, was among our worst performers in the quarter. The reason Sun appeals to us—high book value, large cash balance, large sales base, high R&D spending—is of no interest to today's tech stock buyers that seem to focus only on earnings growth. Our pharmaceutical stocks also lost money in the quarter. We continue to believe that these companies have above-average futures and therefore deserve to sell at above-average multiples. Looking across our portfolio, we are generally very pleased with how the businesses are performing. That gives us confidence about the stocks as we look ahead to next year. During the quarter, we sold the Medco shares we received from the Merck spinoff and we added one new holding, AFLAC.
AFLAC INC. (AFL—$31)
We have been a fan of AFLAC since the duck made his television debut several years ago! Those funny commercials have not only brought many smiles, but have quickly made the AFLAC name one of the insurance industry's most recognized. AFLAC's strong track record during the 1990's, (20%compounded annual earnings growth), caused the stock to reach a high of $37 in 2000, which was over thirty times earnings. Despite achieving rapid growth in the US market, the majority of AFLAC's sales and income still comes from Japan where it is the leading provider of supplemental medical insurance. While growth has slowed in the US, profit growth in Japan remains robust. With projected growth "just" in the low teens, the stock fell below $30. Selling at less than half its peak P/E8 multiple, just over fourteen times our earnings estimate for next year, we believe AFLAC is another on our growing list of excellent businesses priced below the market multiple.
Best wishes,
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| William C. Nygren, CFA Portfolio Manager bnygren@oakmark.com |
Kevin Grant, CFA Portfolio Manager kgrant@oakmark.com |
| THE OAKMARK FUND |
Schedule of Investments—September 30, 2003
| Name | Shares Held | Market Value |
| Common Stocks—91.7% | ||
| Food & Beverage—8.3% | ||
| General Mills, Inc. | 1,805,000 | $84,961,350 |
| Kraft Foods Inc. | 2,845,000 | 83,927,500 |
| Diageo plc (b) | 1,821,000 | 80,397,150 |
| H.J. Heinz Company | 2,310,000 | 79,186,800 |
| Anheuser-Busch Companies, Inc. | 1,400,000 | 69,076,000 |
| 397,548,800 | ||
| Household Products—1.3% | ||
| The Clorox Company | 1,390,200 | $63,768,474 |
| Other Consumer Goods & Services—6.3% | ||
| H&R Block, Inc. (c) | 3,029,300 | $130,714,295 |
| Fortune Brands, Inc. | 1,745,600 | 99,062,800 |
| Mattel, Inc. | 3,839,800 | 72,802,608 |
| 302,579,703 | ||
| Broadcasting & Programming—2.2% | ||
| Liberty Media Corporation, Class A (a) | 7,399,400 | $73,772,018 |
| The Walt Disney Company | 1,500,000 | 30,255,000 |
| 104,027,018 | ||
| Building Materials & Construction—1.8% | ||
| Masco Corporation | 3,533,000 | $86,487,840 |
| Cable Systems & Satellite TV—6.1% | ||
| General Motors Corporation, | ||
| Class H (Hughes Electronics Corporation) (a) | 6,100,000 | $87,291,000 |
| AOL Time Warner Inc. (a)(d) | 5,727,700 | 86,545,547 |
| EchoStar Communications Corporation (a) | 2,075,000 | 79,410,250 |
| Comcast Corporation, Special Class A (a) | 1,300,000 | 38,402,000 |
| 291,648,797 | ||
| Hardware—1.6% | ||
| The Black & Decker Corporation | 1,922,200 | $77,945,210 |
| Motorcycles—1.6% | ||
| Harley-Davidson, Inc. | 1,575,000 | $75,915,000 |
| Publishing—2.7% | ||
| Gannett Co., Inc. | 884,500 | $68,601,820 |
| Knight-Ridder, Inc. | 916,000 | 61,097,200 |
| 129,699,020 | ||
| Recreation & Entertainment—1.2% | ||
| Carnival Corporation (e) | 1,678,300 | $55,199,287 |
| Restaurants—4.7% | ||
| McDonald's Corporation | 4,900,000 | $115,346,000 |
| Yum! Brands, Inc (a) | 3,674,000 | 108,823,880 |
| 224,169,880 | ||
| Retail—10.0% | ||
| The Home Depot, Inc. | 3,281,500 | $104,515,775 |
| The Kroger Co. (a) | 5,790,000 | 103,467,300 |
| The Gap, Inc. | 4,776,700 | 81,777,104 |
| Safeway Inc. (a) | 3,327,000 | 76,321,380 |
| J.C. Penney Company, Inc. | 3,502,900 | 74,856,973 |
| Toys 'R' Us, Inc. (a)(c) | 3,125,000 | 37,593,750 |
| 478,532,282 | ||
| Bank & Thrifts—7.0% | ||
| Washington Mutual, Inc. | 4,587,300 | $180,602,001 |
| U.S. Bancorp | 3,700,000 | 88,763,000 |
| The Bank of New York Company, Inc. | 2,300,000 | 66,953,000 |
| 336,318,001 | ||
| Insurance—3.2% | ||
| MGIC Investment Corporation | 1,640,600 | $85,426,042 |
| AFLAC Incorporated | 2,067,000 | 66,764,100 |
| 152,190,142 | ||
| Other Financial—2.4% | ||
| Fannie Mae | 1,670,000 | $117,234,000 |
| Health Care Services—1.1% | ||
| AmerisourceBergen Corp | 1,000,000 | $54,050,000 |
| Medical Products—2.5% | ||
| Baxter International Inc. | 2,500,000 | $72,650,000 |
| Guidant Corporation | 956,700 | 44,821,395 |
| 117,471,395 | ||
| Pharmaceuticals—8.5% | ||
| Bristol-Myers Squibb Company | 3,750,000 | $96,225,000 |
| Merck & Co., Inc. | 1,850,000 | 93,647,000 |
| Abbott Laboratories | 2,050,000 | 87,227,500 |
| Schering-Plough Corporation | 5,100,000 | 77,724,000 |
| Chiron Corporation (a) | 999,000 | 51,638,310 |
| 406,461,810 | ||
| Telecommunications—1.8% | ||
| Sprint Corporation | 5,741,800 | $86,701,180 |
| Computer Services—4.8% | ||
| First Data Corporation | 2,513,800 | $100,451,448 |
| SunGard Data Systems, Inc. (a) | 3,203,700 | 84,289,347 |
| Automatic Data Processing, Inc. | 1,200,000 | 43,020,000 |
| 227,760,795 | ||
| Computer Systems—1.2% | ||
| Sun Microsystems, Inc. (a) | 17,450,000 | $57,759,500 |
| Office Equipment—1.4% | ||
| Xerox Corporation (a) | 6,472,400 | $66,406,824 |
| Aerospace & Defense—2.6% | ||
| Honeywell International, Inc. | 3,250,000 | $85,637,500 |
| The Boeing Company | 1,152,800 | 39,575,624 |
| 125,213,124 | ||
| Other Industrial Goods & Services—0.8% | ||
| Illinois Tool Works Inc. | 604,200 | $40,034,292 |
| Waste Disposal—1.9% | ||
| Waste Management, Inc. | 3,474,300 | $90,922,431 |
| Oil & Natural Gas—3.2% | ||
| ConocoPhillips | 1,435,335 | $78,584,591 |
| Burlington Resources, Inc. | 1,571,100 | 75,727,020 |
| 154,311,611 | ||
| Electric Utilities—1.5% | ||
| Duke Energy Corporation | 3,997,700 | $71,199,037 |
| Total Common Stocks (Cost: $3,864,754,742) | 4,391,555,453 | |
| Par Value | ||
| Short Term Investments—8.4% | ||
| U.S. Government Bills—5.0% | ||
| United States Treasury Bills, 0.845% - 0.93% | ||
| due 10/2/2003 - 11/28/2003 | $240,000,000 | $239,824,096 |
| Total U.S. Government Bills (Cost: $239,816,491) | 239,824,096 | |
| Repurchase Agreements—3.4% | ||
| IBT Repurchase Agreement, 0.95% | ||
| due 10/1/2003, repurchase price $160,004,222 | ||
| collateralized by U.S. Government Agency Securities | $160,000,000 | $160,000,000 |
| IBT Repurchase Agreement, 0.75% | ||
| due 10/1/2003, repurchase price $1,752,013 | ||
| collateralized by a U.S. Government Agency Security | 1,751,976 | 1,751,976 |
| Total Repurchase Agreements (Cost: $161,751,976) | 161,751,976 | |
| Total Short Term Investments (Cost: $401,568,467) | 401,576,072 | |
| Total Investments (Cost $4,266,323,209)—100.1% | $4,793,131,525 | |
| Other Liabilities In Excess Of Other Assets—(0.1%) | (2,616,390) | |
| Total Net Assets—100% | $4,790,515,135 | |
| (a) | Non-income producing security. |
| (b) | Represents an American Depository Receipt. |
| (c) | See footnote number five in the Notes to Financial Statements regarding transactions in securities of affiliated issuers. |
| (d) | Effective October 16, 2003, AOL Time Warner Inc.changed its name to Time Warner Inc. |
| (e) | Represents a foreign domiciled corporation. |
See accompanying notes to financial statements.