THE OAKMARK GLOBAL FUND Report from Clyde S. McGregor and Robert A. Taylor, Portfolio Managers

THE VALUE OF A $10,000 INVESTMENT IN THE OAKMARK GLOBAL FUND FROM ITS INCEPTION (8/4/99) TO PRESENT (6/30/06) AS COMPARED TO THE MSCI WORLD INDEX14
	Average Annual Total Returns
	(as of 6/30/06)
	Total Return Last 3 Months*	1-year	5-year	Since Inception (8/4/99)
Oakmark Global Fund (Class I)	0.80%	20.47%	16.52%	16.41%
MSCI World	-0.51%	16.93%	5.72%	2.65%
Lipper Global Fund Index15	-1.29%	18.73%	6.22%	4.76%

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.

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 most recent month-end performance data, visit oakmark.com.

* Not annualized

The Oakmark Global Fund gained 1% in the quarter ended June 30, 2006, which contrasts to the Lipper Global Fund Index's loss of 1%. The MSCI World Index reported a fractional loss. The figures for the calendar six months are a gain of approximately 8% for the Fund compared to 6% for both the Lipper Global Fund Index and the MSCI World Index.

While a 1% return gives the quarter a dull appearance, close observers know that this is deceptive. In April, most stock markets continued their first quarter uptrend. That trend broke in mid-May, beginning with several emerging markets experiencing precipitous declines. Soon, stock markets worldwide were in retreat, though developed market volatility was more muted. We do not know definitively what prompted this change in investor psychology, though monetary conditions likely played a part. Central banks in many nations have been tightening for some time in order to head off inflation and dampen speculation. The cumulative effect of ever tighter money may have simply reached a tipping point. Whatever the cause, we welcome this "repricing of risk." We entered 2006 with virtually no emerging market exposure in The Global Fund because we did not find attractive valuations. After the recent revaluation our analysts have been busy seeking out new opportunities, and we believe their efforts are bearing fruit in our portfolios. As always, we will do our best to invest the Fund in undervalued equities wherever they may be found.

Seeing Differently

During the quarter we enjoyed reading a Dow Jones Newswire story concerning one of our holdings, XTO Energy, an independent natural gas and oil producer. We enjoyed it because the story illustrated differences between Harris Associates and other investing firms. The article began "Investors looking to play [emphasis added] the rise and fall of natural gas prices should stay away from XTO Energy Inc. The Fort Worth, Texas company has relied more than its peers on locking in a portion of future natural gas prices….Indeed, locking in prices has historically been what's best for companies, not for investors….Investors are not really buying oil and gas companies as an investment…they are buying into those companies as a play on commodities."¹⁶

Where should we begin? For one thing, we detest the use of the term "play" to describe an investment tactic. It is our duty always to treat our investors' funds with the utmost respect, and "play" implies something closer to speculation than respect. More importantly, we do not invest in companies as a means to bet on price movements for a commodity, a new technology, or whatever. To do so would indicate that we trust our ability to forecast the future, when we actually avoid reliance on forecasting as much as possible.

When we invest in a company, we do so because we believe that the stock market has undervalued the company based on what can be known today. To make our value judgments, we estimate private market value, look for free cash flow generation, and analyze historic trends of growth in intrinsic value per share. We also study management's capital allocation decisions and incentive programs.

Returning to XTO, we see a company management that has enhanced value per share by its recent hedging decisions. Management has pre-sold nearly half of its 2006 and 2007 production of natural gas at prices far above the current spot market. In addition, management sold forward most of the company's oil production through 2007 at prices approaching $75/barrel. To value the business, we do not anticipate that future commodity sales will be made at these outstanding levels—in fact, we assume prices far below current levels—but we would also be foolish not to credit the company for these value-enhancing decisions. As well, the certainty of cash flows from these hedges reduces risk in the near term and allows management to think and act more offensively, should an attractive opportunity to acquire properties emerge.

The central component of business value for a natural resource company is its reserve base, the estimate of resources that can be produced in the future on existing properties with existing technology. Unlike prices in the spot or futures markets, acquisition values for oil and natural gas reserves are comparatively stable. We base our judgment on a multitude of private market transactions. XTO sells at a substantial discount to our estimate of the value of the company's reserves, and management has demonstrated great ability to increase reserves faster than production.

In conclusion, we hope that other investors continue to treat stocks as vehicles through which they may play certain factors, because we know that these same investors will periodically provide us with new true value opportunities to exploit.

Aligning Interests

We have written previously on our discomfort with the evolution of stock options programs in corporate America. During the recent quarter a long list of companies announced that regulators were investigating their options programs for various problems, especially "back-dating" of options grants. While we have no insight into these investigations, they do highlight our fundamental issue: options programs originally intended to align interests between management and shareholders have often been distorted into lottery-like compensation schemes for executives.

We believe that managers and directors should always strive to avoid dilution of their shareholders' value and should only contemplate share issuance under the most compelling circumstances. Management and directors should always have an idea of their company's current business value per share. Most managers do seem to have such an idea of value, as evidenced when they reject acquisition offers for being too low. Sadly, most management teams do not show the same commitment to shareholder value when they develop employee compensation and incentive plans.

We believe that managers should treat their shareholders as their partners. To that end, managers should always execute share issuance programs in a value-enhancing fashion. An example of an employee incentive program that aligns interests would be one where the option price at time of issuance is significantly above the current share price and the program requires the recipient to hold the shares following exercise for ten years without any hedging.

To date, troublesome options programs are mostly an American phenomenon. Evaluating alignment of interests challenges us wherever we invest, however. At Harris Associates we attempt to achieve an alignment of interests between our firm and our clients. When examining our business practices, we always ask ourselves, "Is this in the shareholders' interests?" One measure of our desire for alignment is that our Fund managers are all substantial shareholders in The Oakmark Funds. As we write this letter, a headline has crossed our news screen that yet another well-known company has hired an outside investigator to probe its option grants. We may be tilting at windmills, but we still look forward to a day when compensation programs are transparent and closely aligned with shareholder interests.

Activity

During the quarter we eliminated four holdings that met our price objectives and initiated two new positions. Our sales included holdings from Switzerland (Lonza Group), Australia (Ansell), the UK (Michael Page), and the U.S. (Equifax). We added Kimberly-Clark de Mexico and Square-Enix (Japan). Square-Enix, the game software maker of Final Fantasy and Dragon Quest, has fallen almost 30% since the start of 2006 due to a weak outlook for this year. As we have experienced in the past, title and platform launches can cause erratic short-term results, but they have little impact on the company's trend profitability. As long-term investors, we use the resulting share price volatility to our advantage.

As always, we thank you for entrusting a portion of your assets to our care. Please feel free to e-mail us with your comments.

Global Diversification—June 30, 2006 (Unaudited)

Schedule of Investments—June 30, 2006 (Unaudited)