THE OAKMARK AND OAKMARK SELECT FUNDS

At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.

"In a crisis, don't hide behind anything or anybody. They're going to find you anyway." Bear Bryant

In August we posted a special letter on our website to Oakmark Select shareholders highlighting the negative performance that the Fund had experienced following the end of the second quarter. Though many shareholders expressed their appreciation for the additional update, several expressed surprise that a fund family as long-term oriented as Oakmark would be responsive to a short-term performance shortfall. To explain our thinking, here is our approach to shareholder communication: We believe that well-informed shareholders are more likely to have positive experiences owning our Funds, and satisfying customers makes good business sense. Of course we know that none of you are investing in our Funds just to get these quarterly letters! Like us, you expect the Funds to achieve good returns. But if there is a way to consistently produce good returns each and every quarter, we unfortunately haven't found it. And that means that even good long-term results will inevitably include some disappointing short-terms. As a group, mutual fund investors have, regrettably, shown an uncanny ability to take self-destructive actions following poor performance periods—buying near tops and selling near bottoms. We believe that investors who understand how their managers think about investing will be more likely to avoid that mistake.

A mutual fund company isn't required to say much to its shareholders: only two reports per year, mailed up to 60 days after quarter-end, including a summary of top holdings, fund financial statements, and a brief discussion and analysis of results (which some funds limit to a list of their best and worst performing holdings). In addition, complete portfolio holdings need to be filed quarterly with the SEC. When funds only deliver the minimum communication, it is no wonder that investors make decisions primarily based on recent performance.

When we invest in a business, we want timely, candid communication from management. We believe our Fund shareholders deserve the same. We don't think reporting semi-annually is frequent enough. Our companies report to their shareholders quarterly, and even though we are very long-term owners, we appreciate getting performance updates at that frequency. To us, quarterly reporting for mutual funds seems appropriate, too. Some of our Fund shareholders ask why we don't give updates more often than once a quarter, with some even requesting daily updates of our activity. We believe there is little to be said in more frequent updates, and importantly, such updates could disclose our intentions, which would invite front-running and increase our transactions costs. Sixty days after quarter-end doesn't seem timely to us. We expect to hear from our companies closer to the end of the quarter they are reporting on, so we strive to do the same. Our goal is to have our quarterly commentary and portfolio weightings available on our website within two weeks of quarter-end.

We also want a company to explain what went wrong. Most businesses love to trumpet their successes. It's not unusual to see a company issue a press release to draw attention to each tidbit of good news. Few companies give equal treatment to bad news. It raises a red flag for us when a company promotes the good news, but makes us dig through their 10-Qs to find the bad news. When we have good news to share with you, we'll wait for our normal reporting cycle, and chances are you'll find out about it before that. But when we have bad news, we want to make sure you hear it from us. Throughout Oakmark's history, we've only contacted shareholders between quarterly reports to explain bad news. We believe that communicating bad news in a candid, timely fashion builds trust.

We want our quarterly reports to be informative and tell our story. When we start researching a potential new holding, we will often read old annual reports. If a corporate annual report is well written it will not only highlight the ups and downs of the prior year, but it will also give a strategic plan. Managers will state their views of their company's competitive strengths and will explain how they intend to capitalize on them. After reading a series of these reports we can develop an informed opinion about a management's business philosophy and its rationale. We want our reports to leave a similar trail. An investor who reads a series of Oakmark reports should without a doubt understand that we are stock-pickers, that we are value investors, that we use a very long time horizon, and that we aren't concerned about short-term deviation from benchmarks. They should know that our goal is to maximize long-term, after-tax returns. They can see why we positioned the portfolios as we did, and what we got right and what we got wrong. They will get a much more complete view of how we approach investing than an investor who just looks at the performance figures.

We believe communication should be two-way. Most good companies want to answer questions from their investors. In some smaller companies, top management will communicate one-on-one with investors or potential investors, but to protect their managers' time, most larger companies have an investor relations officer whose job is handling investor inquiries. We use e-mail to facilitate one-on-one communication with investors. We not only want to answer your questions, but seeing the questions from our investors helps us to better target future commentary. From the day we first published e-mail addresses in our quarterlies we've been asked "Aren't you afraid too many shareholders will contact you?" We've always said we hope that time comes, and if it does, we'll get help to answer all the questions. For me, that time has finally arrived, and I've asked Mike Neary, our head of client servicing, and his team to begin helping me handle e-mail responses.

In summary, what we really want to see from a company's communication is that a management team's goal is to maximize the long-term value of the company's stock, that it has a reasonable strategy to achieve that goal, and that like us, it has an important personal investment in the stock. In our President's letter, once a year we update you on the total ownership our employees and Fund trustees have in The Oakmark Funds. Those numbers show that our investment is significant, and also, by comparing prior years, they show that we are adding new capital to our investment each year. By going far beyond the required level of communication we aim to have the most informed mutual fund shareholders. You can know with certainty our goals, our methods for achieving those goals, and our economic alignment with you. There are many unknowns in investing, but how your Fund is managed doesn't need to be one of them.

William C. Nygren, CFA
Portfolio Manager
oakmx@oakmark.com
oaklx@oakmark.com

September 30, 2007