THE OAKMARK INTERNATIONAL AND OAKMARK INTERNATIONAL SMALL CAP FUNDS

Fellow Shareholders,

The Oakmark International Funds ended the first quarter with satisfactory performance on an absolute basis. In addition, both Funds outpaced most international market indexes for the quarter. Please see the individual Fund letters for more specific performance information.

Traveler’s Log: Japan

In February, as I left Japan after my third visit in fifteen months, I had the definite sense that the country had passed a turning point in relation to its national confidence and economic achievement, which should bode very well for future growth. Consider the fact that deflation finally appears defeated. This alone has tremendous macro-economic consequences as a decade plus of pentup demand is being slowly unleashed. I expect the pace to pick up dramatically very soon. The signs are already there: cranes everywhere, a firming job market, rising interest rates, and increasing property values. In our view, when consumers are fully convinced, they will transfer out of low interest savings accounts and into higher earning investment products, and they will also purchase additional goods and services. Recall that in periods of deflation, not only is cash king, but spending is curtailed because it makes no sense to buy today what will cost less tomorrow.

Add to this environment a political leader who supports a far more responsible monetary policy, and it’s easy to become darn right enthusiastic. Even Japan’s foreign policy is also becoming more assertive. The country is no longer afraid to engage in global problem-solving, as its actions in the North Korean situation demonstrate.

There is some bad news, however. On this trip we heard a lot of lip service about return on equity (“ROE”). I fear much of this is just posturing and telling foreign investors what we want to hear. I really don’t believe that attitudes towards shareholders have changed all that much. For every company that “gets it,” at least five don’t. Toshiba and Nippon Koa have often been labeled as foreign favorites, and I have no idea why. Even the progressive government was cautious about letting in more foreign workers, claiming that it will lead to more crime and “social conflict.” Unfortunately, these attitudes are as conducive to enhancing long-term economic growth as a negative population growth rate is.

As such, my enthusiasm for Japan’s economic transformation is mitigated by some unique cultural issues that will impede the pace of advance and development. And, that is without even factoring in the inability of Tokyo cab drivers to deliver their fares to common destinations just a mile or so away!

Up, Up, and Away!

Commodities, metals, energy, real estate, global small caps, cyclical stocks, emerging markets… what do they all have in common? All of these asset classes have experienced strong price increases in the past three to five years. In the meantime some of the most secure, profitable, and best run businesses in the world have experienced poor price performance. To us, this spells value.We continue to be enthusiastic about the opportunities we are finding in the forgotten asset class of large, blue chip global companies. About the other asset classes, we must warn: what goes strongly up, also can fall down.

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