THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS

Fellow Shareholders,

The Oakmark International and Oakmark International Small Cap Funds had an acceptable fourth quarter with returns of 9% and 11% respectively. For the fiscal year, The Oakmark International Fund returned 26% and The Oakmark International Small Cap Fund returned 29%. This compares to the MSCI World ex U.S. Index¹³ return of 27%. Most importantly, since the Funds' inceptions, they have posted annualized returns of 13% and 14% respectively. This compares very well to the MSCI World ex U.S. Index, which returned 8% relative to the International Fund and 7% relative to the International Small Cap Fund.

Europe,Japan and The Big Picture

Last quarter we wrote about Europe's failure to embrace real economic reform. We argued that no country or region could afford to be complacent about competitiveness, especially in a challenging global economy. In September, an important election in Germany pitted a reform candidate against the relatively stale Gerhard Schroeder. Sadly, the results demonstrated that the electorate of Europe's largest economy isn't quite convinced that the status quo is all that bad. It was finally decided that Angela Merkel will be the new German chancellor, but with heavy involvement by outgoing chancellor, Gerhard Schroeder's opposition party. A few weeks after the German elections, Poland held its election with opposite results: it threw out the old communists for a free market government. Is there something Old Europe can learn from New?

More damning for Old Europe is that Japan recently faced the same choice, but, with a different result. Prime Minister Koizumi called a snap election because there was opposition to his plan to liberalize the Postal Savings Banks. Though it was quite a gamble, Koizumi and reform won big. Is Japan finally on the brink of fundamental change? This is certainly a possibility. But of course, economic reform is one issue; far more important are the events within corporate Japan itself. Unfortunately, the vast majority of corporate Japan still appears locked into a culture that places shareholder value behind numerous other objectives. The good news is that a select number of Japanese companies are changing. As a result of these changes and low valuations, we have been able to significantly increase our weightings in Japan, though we still remain underweighted there relative to the MSCI World ex U.S. Index.

Mike Welsh

Before I end this report, I would like to wish my longtime partner, Mike Welsh, a fond farewell. Mike has chosen to retire from Harris Associates L.P. effective January 2006. Mike was the first person I hired back in September 1992 when The Oakmark International Fund started, and he was made a co-manager a few years later. He has been a solid contributor to the success of the Funds, most notably for his savvy stock recommendations in South Korea during the second half of the1990s. We wish him well in the next chapter of his life.

David G. Herro, CFA Portfolio Manager dherro@oakmark.com