Dear Fellow Shareholders, President's Letter
Dear Fellow Shareholders,
Domestic and international stock markets were strong in the fourth quarter, taking full-year returns to double-digit levels for all major markets. International markets produced particularly strong results for the third year in a row. Most of our Funds produced full-year 2006 results above or in line with their respective benchmarks. More importantly, every one of our Funds achieved a new all-time high net asset value during the quarter.
Morningstar Manager of the Year
In early January, David Herro, Chief Investment Officer of our International Group and portfolio manager of the Oakmark International, Oakmark Global Select and Oakmark International Small Cap Funds, received Morningstar's 2006 International Equity Fund Manager of the Year award.1 This is a well earned honor for David and a richly deserved reward for over a decade of outstanding performance for Oakmark shareholders.
We note that David is the second Oakmark Fund manager in five years to win this award, as Bill Nygren earned the Domestic Fund Manager of the Year honor in 2001 for his work on the Oakmark Fund and Oakmark Select. This makes Oakmark one of only two fund families to have Fund Manager of the Year recipients for both Domestic and International Equity Funds. We believe that this recognition speaks to our key strength—the depth, balance and quality of our investment team. Our investment professionals, both portfolio managers and analysts, are a very talented and experienced group. In particular, as both Bill and David are quick to note, these awards reflect the strength of our team of analysts and their central role in our investment success.
Fund Trading Costs
Mutual fund returns are a function of both investment returns and fund expenses. While fund expenses are typically small relative to investment returns, higher fund expenses can create a significant drag on long-term wealth accumulation. Several publications have written recently about the “hidden expense” of brokerage research and commissions and their impact on fund returns. This is a complicated subject: comparable data is not easy to find and brokerage commissions can vary across different funds for many reasons. However, a fund's commission expense relative to its peers can provide insight into the fund manager's level of care and skill in managing a fund.
A recent analysis by Lipper (the mutual fund tracking arm of Reuters) was the first that we have seen that compares brokerage commissions (as a percentage of fund assets) across mutual fund peer groups. We analyzed the details of the Lipper data and were pleased to see that for the most recent fiscal year, each of the Oakmark Funds ranked in the lowest 1/3 of funds represented in their peer universe, and three of our Funds ranked in the lowest quintile. Our attention to minimizing transaction costs is an ongoing endeavor, but our actions thus far seem to be paying off.
Personal Investment in the Funds
At Oakmark, we believe that share ownership helps to align the interests of management with shareholders. A management team that has a meaningful stake invested alongside other shareholders will have a more intense focus on performance and shareholder value. We believe this is true for the companies that we invest in, as well as for the mutual funds that we manage. Significant ownership of Oakmark shares—not just by Fund portfolio managers but by all levels of employees at the Fund and its adviser (including analysts, senior management, trustees and others)—communicates a higher standard of responsibility, focus, and commitment.
We encourage our investment team and other employees to make significant investments in The Oakmark Funds. Each year, we report the level of our Fund ownership to shareholders. In this regard, we are pleased to announce that as of December 31, 2006, the employees of the Funds' adviser, Harris Associates L.P., the Funds' officers and trustees and their families have over $240 million invested in The Oakmark Funds. This compares to a level of just over $200 million at the beginning of last year. This increase represents a combination of price appreciation and additional purchases.
For those particularly interested in portfolio manager holdings, every Fund manager (including the managers of the recently launched Global Select Fund) owns at least $1 million of each Fund that he manages. As required under SEC rules, we will provide more details on portfolio manager holdings when we release our year-end filings later this month.
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 December 31, 20062 |
The
Oakmark Fund—Class I (OAKMX) |
The
Oakmark Select Fund—Class I (OAKLX) |
The
Oakmark Equity and Income Fund—Class I (OAKBX) |
|||
| |
||||||
| 3 Months* | 8.30% | 8.39% | 4.50% | |||
1 Year |
18.26% | 13.60% | 10.82% | |||
| Average Annual Total Return for: |
||||||
3 Year |
9.25% | 9.33% | 9.92% | |||
5 Year |
6.94% | 8.09% | 9.88% | |||
10 Year |
8.58% | 17.05% | 13.27% | |||
| Since inception | 15.57% | 18.28% | 13.48% | |||
| (8/5/91) | (11/1/96) | (11/1/95) | ||||
| Top Five Equity Holdings as of December 31, 20063 |
McDonald's Corporation | 3.1% | Washington Mutual, Inc. |
15.0% | XTO Energy, Inc. |
4.2% |
| Washington Mutual, Inc. | 3.1% | Yum! Brands, Inc. | 8.2% | Caremark Rx, Inc. | 3.4% | |
| Time Warner Inc. | 2.7% | McDonald's Corporation | 6.0% | General Dynamics Corporation | 3.0% | |
| Company and % of Total Net Assets | Yum! Brands, Inc. | 2.7% | H&R Block, Inc. | 5.8% | Nestle SA | 2.9% |
| Harley-Davidson, Inc. | 2.5% | Time Warner Inc. | 5.5% | Diageo plc | 2.8% | |
| Sector Allocation as of December 31, 2006 |
Consumer Discretionary | 40.9% | Consumer Discretionary | 51.5% | U.S. Government Securities | 32.8% |
| Financials | 14.2% | Financials | 20.3% | Consumer Discretionary | 12.8% | |
| Information Technology | 13.8% | Information Technology | 16.0% | Consumer Staples | 11.8% | |
| Consumer Staples | 12.7% | Health Care | 7.8% | Energy | 10.8% | |
| Sector and % of Market | Health Care | 9.9% | Industrials | 4.4% | Health Care | 8.2% |
| Value | Industrials | 7.0% | Industrials | 7.9% | ||
| Energy | 1.5% | Financials | 6.5% | |||
| Foreign Government Securities |
6.1% | |||||
| Information Technology | 2.8% | |||||
| 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 December 31, 20062 | The
Oakmark
Global Fund—Class I (OAKGX) |
The
Oakmark Global Select Fund—Class I (OAKWX) |
The
Oakmark
International Fund—Class I (OAKIX) |
The
Oakmark
International Small Cap Fund—Class I (OAKEX) |
||||
| 3 Months* | 9.19% |
7.92% |
9.62% |
11.89% |
||||
| 1 Year | 24.18% |
N/A |
30.60% |
34.90% |
||||
| Average Annual Total Return for: |
||||||||
| 3 Year | 17.59% |
N/A |
21.08% |
28.25% |
||||
| 5 Year | 18.85% |
N/A |
17.53% |
24.99% |
||||
| 10 Year | N/A |
N/A |
12.36% |
15.50% |
||||
| Since inception | 17.44% |
N/A |
13.71% |
15.68% |
||||
(8/4/99) |
(10/2/06) |
(9/30/92) |
(11/1/95) |
|||||
| Top Five Equity Holdings as of December 31, 20063 | GlaxoSmithKline plc | 3.5% | UBS AG | 4.9% | DaimlerChrysler AG | 3.9% | MLP AG | 4.1% |
| Vodafone Group Plc | 3.3% | DaimlerChrysler AG | 4.8% | GlaxoSmithKline plc | 3.6% | Benfield Group Plc | 4.0% | |
| DaimlerChrysler AG | 3.2% | GlaxoSmithKline plc | 4.8% | UBS AG | 3.4% | Tandberg ASA | 3.9% | |
| Company and % of Total Net Assets | Snap-on Incorporated | 3.2% | British Sky Broadcasting Group plc | 4.8% | Rohm Company Limited | 3.3% | Sogecable SA | 3.5% |
| Rohm Company Limited | 3.1% | The Home Depot, Inc. | 4.8% | Novartis AG | 3.2% | Julius Baer Holding Ltd. | 3.4% | |
| Sector Allocation as of December 31, 2006 |
Consumer Discretionary | 29.3% |
Consumer Discretionary | 30.7% | Consumer Discretionary | 31.4% | Consumer Discretionary | 32.0% |
| Information | Financials | 25.5% | Financials | 28.9% | Information | |||
| Technology | 18.0% |
Health Care | 15.3% | Consumer Staples | 12.1% | Technology | 22.5% | |
| Health Care | 12.4% |
Information | Health Care | 8.9% | Financials | 16.0% | ||
| Financials | 11.0% |
Technology | 15.1% | Telecommunication | Industrials | 13.8% | ||
| Consumer Staples | 9.2% |
Industrials | 5.1% | Services | 6.0% | Consumer Staples | 7.4% | |
| Sector and % of Market Value | Industrials | 8.4% |
Consumer Staples | 5.0% | Industrials | 4.7% | Health Care | 3.7% |
| Telecommunication Services | 8.0% | Telecommunication Services | 3.3% | Information Technology | 4.4% | Materials | 3.1% | |
| Energy | 2.7% |
Materials | 3.3% | Telecommunication Services | 1.5% | |||
| Materials | 1.0% |
Energy | 0.3% | |||||