President's Letter
Dear Fellow Shareholders,
Both domestic and international stock markets rose by small amounts in the second quarter. These returns extend the market's recovery to five straight quarters from the lows of early 2003. Most, though not all, of our funds achieved returns for the quarter that exceeded their respective benchmarks.
The Economy and the Market
The world economic picture is largely positive. U.S. corporate earnings improved substantially in the first half of 2004, and analysts project double-digit earnings growth for the remainder of this year and next. Rising employment, high consumer confidence and relatively low interest rates should provide a strong foundation for continued U.S. economic growth. Outside of the U.S., growth is also solid and in some cases is even accelerating.
With powerful growth in corporate profits, we believe that the U.S. market is reasonably priced today—at roughly 16 times 2005 earnings estimates. At these levels, we believe that the prospective returns for stocks—a combination of dividend yield, earnings growth, and change in earnings multiples—are superior to bonds and other assets. International markets are also trading at what we believe are reasonable valuation levels.
While the global economic picture is bright, our decisions are still driven by a focus on valuation and a "bottom-up" stock selection process. Looking at the market from our "stock-by-stock," bottom-up viewpoint, our positive outlook is tempered by the difficulty of finding as many significantly undervalued stocks as we could a few years ago. Bargains can still be found, but a broader market focus on fundamentals has moved stock prices closer to business value and made it harder for bargain hunters like us.
Whatever the market conditions, our investment process and philosophy will remain constant. Our strong research group, our disciplined focus on business value, and our long-term investment horizon provide us with what we believe is a meaningful edge that increases the probability of superior long-term performance.
Industry Governance and Regulation
Over the past several months, several new mutual fund industry regulations have been proposed or enacted in response to allegations of conflicts or abuses by fund companies. Our firm is working diligently to implement both the letter and the spirit of these rules. Implementing these rules will require substantial work, but not a substantive change in the way we do business at Oakmark. We have always believed in setting high standards for how we conduct our business and treat our shareholders. As we review the newly issued rules, we have generally found that we are already conducting our business in line with the principles behind the rules.
As you may know, more rules have been proposed or are under development. We continue to support and encourage sensible regulations to protect fund investors and enhance fund governance. If you would like to learn more about our position on these issues, please visit our web site at www.oakmark.com.
Shareholder Communications
One important goal of the new SEC mutual fund rules is increased communications to shareholders. Since inception of The Oakmark Funds, we have placed significant emphasis on thoughtful and frequent shareholder communications. This philosophy applies to portfolio manager commentary included in our shareholder reports; a comprehensive website with data, news, and analysis; and shareholder reports that come out quarterly (more frequently than the 6-months cycle required by the SEC).
One challenge in writing quarterly letters is that quarterly communications may encourage investors to focus upon short-term or cyclical events, even though we repeatedly advocate long-term investing and long-term holding periods (for our stocks and our funds). We believe hearing from a fund manager every three months is desirable, but thinking of an investment with a three-month horizon is not.
Another challenge for our managers is coming up with something fresh, interesting, and enlightening to discuss every quarter. This is particularly difficult when we have an investment process and philosophy that is monotonously unchanged from year to year! That said, we believe Oakmark investors should understand our investment process. We believe that an educated fund investor is a better investor and is more inclined to take the patient long-term view that can produce superior long-term investment results. Our portfolio managers work very hard to provide these insights in their letters. I commend these letters for your reading and hope that they prove to be informative.
Thank you for your continued investment and confidence in the Oakmark Family of Funds. We welcome your comments and questions. You can reach us via e-mail at ContactOakmark@oakmark.com.
John R. Raitt
President of The Oakmark
Funds
President and CEO of Harris
Associates L.P.
| Performance for
Period Ended June 30, 20041 |
The
Oakmark Fund-Class I (OAKMX) |
The
Oakmark Select Fund-Class I (OAKLX) |
The Oakmark |
The
Oakmark Equity and Income Fund-Class I (OAKBX) |
||||
| 3 Months* | 2.23% |
-1.53% |
-1.27% |
1.87% | ||||
| 6 Months* | 3.70% | 0.88% | 5.67% | 6.13% | ||||
| 1 Year | 15.85% | 12.56% | 24.01% | 18.21% | ||||
| Average Annual Total Return for: 3 Year |
3.89% |
5.86% |
5.50% |
10.29% |
||||
| 5 Year | 3.47% | 11.68% |
6.47% | 12.18% | ||||
| 10 Year | 11.47% | N/A | N/A | N/A | ||||
| Since inception | 16.76% (8/5/91) |
20.79% (11/1/96) |
11.10% (11/1/95) |
14.68% (11/1/95) |
||||
| Value of $10,000 from inception date |
$73,941 | $42,553 | $24,917 | $32,803 | ||||
| Top Five
Equity Holdings as of June 30, 20042
Company and % of Total |
Washington Mutual, Inc. |
2.9% | Washington Mutual, Inc. |
15.9% | Checkpoint Systems, Inc. | 4.5% | Burlington Resources, Inc. | 3.4% |
| First Data Corporation | 2.6% | H&R Block, Inc. | 7.3% | NeighborCare, Inc. | 4.3% | First Data Corporation | 3.0% | |
| The Gap, Inc. | 2.5% | First Data Corporation | 6.2% | Tupperware Corporation | 4.1% | XTO Energy, Inc. | 3.0% | |
| H&R Block, Inc. | 2.3% | Yum! Brands, Inc. | 6.1% | Mentor Graphics Corporation | 3.8% | General Dynamics Corporation | 2.7% | |
| Yum! Brands, Inc. | 2.2% | Burlington Resources, Inc. | 4.9% | NCO Group, Inc. | 3.6% | Nestle SA | 2.6% | |
| Top Five
Industries as of June 30, 2004
Industries and % of Total Net Assets |
Retail | 10.2% | Banks & Thrifts | 15.9% | Computer Software | 9.4% | U.S. Government Notes |
27.0% |
| Food & Beverage | 8.2% | Retail | 14.8% | Food & Beverage | 8.5% | Oil & Natural Gas | 7.5% | |
| Pharmaceuticals | 7.9% | Other Consumer Goods & Services | 11.3% | Medical Products | 6.0% | Food & Beverage | 6.2% | |
| Cable Systems & Satellite TV | 6.7% | Information Services | 7.4% | Oil & Natural Gas | 4.7% | Health Care Services | 5.9% | |
| Banks & Thrifts | 5.6% | Pharmaceuticals | 6.7% | Security Systems | 4.5% | Aerospace & Defense | 5.8% | |
| Performance for
Period Ended June 30, 20041 |
The
Oakmark Global Fund-Class I (OAKGX) |
The
Oakmark International Fund-Class I (OAKIX) |
The
Oakmark International Small Cap Fund-Class I (OAKEX) |
|||
| 3 Months* | 1.40% |
1.82% |
2.92% |
|||
| 6 Months* | 5.34% |
5.49% |
9.65% |
|||
| 1 Year | 31.42% | 31.51% | 47.41% |
|||
| Average Annual Total Return for: 3 Year |
17.05% |
7.99% |
18.75% |
|||
| 5 Year | N/A | 7.58% | 11.52% | |||
| 10 Year | N/A | 9.95% | N/A | |||
| Since inception | 16.68%3 (8/4/99) |
11.79% (9/30/92) |
11.86% (11/1/95) |
|||
| Value of $10,000 from inception date |
$21,323 | $37,083 | $26,436 | |||
| Top Five
Equity Holdings as of June 30, 20042
Company and % of Total |
Diageo plc |
5.2% |
GlaxoSmithKline plc |
3.7% |
Neopost SA |
4.2% |
| First Data Corporation | 4.6% | Diageo plc |
3.5% |
Gurit-Heberlein AG | 4.0% | |
| Nestle SA | 4.2% | Bank of Ireland | 3.2% | Interpump Group S.p.A. |
3.8% | |
| Takeda Chemical Industries, Ltd. |
3.9% | Euronext NV | 3.2% | Baycorp Advantage Limited |
3.5% | |
| Bank of Ireland | 3.7% | Bayerische Motoren Werke (BMW) AG |
3.0% | Schindler Holding AG | 3.4% | |
| Top Five
Industries as of June 30, 2004
Industries and % of Total |
Food & Beverage | 12.5% | Food & Beverage | 14.4% | Retail | 8.2% |
| Pharmaceuticals | 9.2% | Banks & Thrifts | 12.9% | Food & Beverage | 7.1% | |
| Banks & Thrifts | 7.8% | Pharmaceuticals | 11.2% | Other Industrial Goods & Services |
6.9% | |
| Computer Services | 7.5% | Chemicals | 9.1% | Airport Maintenance | 6.5% | |
| Information Services | 6.2% | Other Financial | 6.0% | Machinery & Industrial Processing |
5.8% | |
The performance data quoted represents past performance. The above performance information for the Fund does not reflect the imposition of a 2% redemption fee on shares held for 90 days or less to deter market timers. If reflected, the fee would reduce the performance quoted. Past performance does not guarantee future results. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Average annual total return measures annualized change, while total return measures aggregate change. To obtain current month end performance data call 1-800-OAKMARK.
* Not annualized