Dear
Fellow Shareholders,Dear
Fellow Shareholders,
World markets took a wild ride in the second quarter. The strong stock market rally of the first quarter extended into April, but then quickly reversed with sharp corrections in markets all around the world. At their worst, U.S. market averages fell almost 8% from their peak. Emerging markets and small cap international stocks, the strongest performers of the past several years, were hit the hardest. International small cap indexes were down 18% from peak to trough. Many markets rallied strongly at the end of the quarter, leaving the major world market indexes with mixed results for the period.
Our Funds also turned in mixed results for the quarter. Importantly, for the year-to-date, all of our Funds have produced solidly positive returns, and most have exceeded their benchmark.
Market Volatility and Investment Discipline
The market volatility of the past quarter was not unusual. As value investors, we believe that a key component to success is taking a disciplined approach to sharp price swings and to use stock price volatility to one's advantage. Stocks move randomly up and down, with significant shifts often based upon non-fundamental factors. Investor emotion—greed in a strong market and fear in sharp declines—often extends these swings to extremes. Emotion-driven investors are often tempted to buy yesterday's winners and sell based on extrapolating short-term concerns. This is not the key to investment success.
Instead, an unemotional focus on business value (which is far less volatile than market prices) and a determination to buy stocks at significant discounts to those business values help turn market volatility into an advantage. This discipline provides the means to tune out the market's noise, to buy stocks when they are out of favor, and to sell them when the market has fully recognized their intrinsic value. While many investors have observed the market volatility of the last quarter and chosen to take to the sidelines out of fear and uncertainty, we welcome it and have used the volatility as a means to enhance returns and build more attractive portfolios for our shareholders. This is a repeated theme in many of the Fund manager letters that follow this one.
We also encourage our Fund investors to take a similar approach when making their fund investment decisions. Sticking to a disciplined long-term plan, particularly in periods of volatility, is essential to long-term wealth accumulation.
Oakmark Funds Elect New Trustee
On April 26, 2006, Steven S. Rogers was elected to The Oakmark Funds' Board of Trustees. His election brings the total number of trustees on the Oakmark Board to ten, of which eight are independent trustees. Steve is the Gordon and Llura Gund Family Distinguished Professor of Entrepreneurship at Kellogg School of Management, Northwestern University, where he has taught since 1995. Steve brings to the board a distinguished record of academic achievement at Kellogg, significant experience on several public company boards and a creative and inquisitive financial mind. We are pleased to have him serving Oakmark shareholders.
Thank you for your continued investment and confidence in The Oakmark 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, 20061 |
The Oakmark
Fund—Class I (OAKMX) |
The Oakmark
Select Fund—Class I (OAKLX) |
The Oakmark
Equity and Income Fund—Class I (OAKBX) |
|||
| 3
Months* |
-0.35% |
-0.77% |
1.57% |
|||
| 1
Year |
4.16% |
6.82% |
10.13% |
|||
| Average Annual Total Return for: | |
|
|
|||
| 3
Year |
8.41% |
9.30% |
11.41% |
|||
| 5
Year |
4.29% |
6.60% |
9.44% |
|||
| 10
Year |
8.00% |
N/A |
13.27% |
|||
| Since inception | 15.10% (8/5/91) |
17.97% (11/1/96) |
13.44% (11/1/95) |
|||
| Top Five Equity Holdings as of June 30, 20062 | Washington
Mutual, Inc. |
3.5% | Washington
Mutual, Inc. |
15.8% | XTO
Energy, Inc. |
4.4% |
| McDonald's
Corporation |
2.8% | Yum!
Brands, Inc. |
7.2% | EnCana
Corp |
3.2% | |
| Yum! Brands, Inc. | 2.6% |
H&R Block, Inc. | 6.2% |
General Dynamics Corporation | 2.9% | |
| Company and % of Total Net Assets | Time Warner Inc. | 2.4% |
First Data Corporation | 5.3% |
Nestle SA | 2.9% |
| H&R Block, Inc. | 2.4% | McDonald's Corporation | 4.6% | ConocoPhillips | 2.8% | |
| Sector Allocation as of June 30, 2006 | Consumer Discretionary | 42.9% | Consumer Discretionary | 48.7% | U.S. Government Securities | 30.0% |
| Financials | 14.8% | Financials | 21.2% | Consumer Discretionary | 12.5% | |
| Information
Technology |
12.9% |
Information
Technology |
17.5% |
Energy |
12.2% | |
| Sector and % of Market Value | Consumer Staples | 12.6% |
Health Care | 8.3% | Consumer Staples | 12.1% |
| Health Care | 8.1% | Industrials | 4.3% | Foreign Government Securities | 9.3% | |
| Industrials | 7.2% | Industrials | 9.3% | |||
| Energy | 1.5% | Health Care | 5.8% | |||
| Financials | 5.6% | |||||
| Information Technology | 2.9% | |||||
| Materials | 0.3% | |||||
The performance data quoted represents past performance. The above performance information for the Funds 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, visit oakmark.com.
* Not annualized
| Performance
for Period Ended June 30, 20061 |
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* |
0.80% |
2.90% |
-0.58% |
|||
| 1
Year |
20.47% |
26.73% |
31.38% |
|||
| Average Annual Total Return for: | |
|
|
|||
| 3
Year |
20.73% |
24.30% |
32.72% |
|||
| 5
Year |
16.52% |
12.97% |
21.59% |
|||
| 10
Year |
N/A |
11.41% |
13.74% |
|||
| Since inception | 16.41% (8/4/99) |
13.07% (9/30/92) |
14.39% (11/1/95) |
|||
| Top Five Equity Holdings as of June 30, 20062 | GlaxoSmithKline
plc |
3.6% | GlaxoSmithKline
plc |
3.7% | Julius
Baer Holding Ltd., Class B |
3.9% |
Bayerische
Motoren Werke (BMW) AG |
3.2% | British
Sky Broadcasting Group plc |
3.7% | JJB
Sports plc |
3.8% | |
| Snap-on
Incorporated |
3.2% | DaimlerChrysler
AG |
3.4% | Matalan
PLC |
3.7% | |
| Company and % of Total Net Assets | NTT
DoCoMo, Inc. |
3.1% | NTT
DoCoMo, Inc. |
3.3% | Carpetright
plc |
3.6% |
| Diageo
plc |
3.0% | Bayerische
Motoren Werke (BMW) AG |
3.2% | Square
Enix Co., Ltd. |
3.2% | |
Sector
Allocation as of June 30, 2006 |
Consumer
Discretionary |
28.5% | Consumer Discretionary | 32.8% | Consumer Discretionary | 31.8% |
| Information
Technology |
14.2% | Financials | 18.5% | Industrials | 21.9% | |
Consumer
Staples |
12.3% | Consumer
Staples |
16.9% | Information
Technology |
17.7% | |
Sector
and % of Market Value |
Health
Care |
10.6% | Telecommunication
Services |
9.8% | Financials |
14.2% |
| Financials |
9.6% | Health
Care |
8.7% | Health
Care |
5.1% | |
| Telecommunication
Services |
9.2% | Materials |
5.7% | Consumer
Staples |
4.9% | |
Industrials |
8.6% | Industrials |
5.3% | Materials |
2.8% | |
Energy |
4.1% | Information
Technology |
2.0% | Telecommunication
Services |
1.6% | |
Materials |
2.9% | Energy |
0.3% | |||