The Oakmark Funds 2006 Third Quarter Report

Description
One of our most important responsibilities as mutual fund managers is to communicate with shareholders in an open and direct manner.

1-800-OAKMARK
oakmark.com
Advised by Harris Associates L.P.
J U N E 3 0 , 2 0 0 6
T HI RD QUART E R RE P ORT
The Oakmark Funds are distributed by Harris
Associates Securities L.P., member NASD. Date
of first use: July 2006.
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President’s Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Commentary on The Oakmark and Oakmark Select Funds . . . . . . . . . . . . . . . . . . . . 4
The Oakmark Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Oakmark Select Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Oakmark Equity and Income Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Oakmark Global Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Global Diversification Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Commentary on The International and International Small Cap Funds. . . . . . . . 29
The Oakmark International Fund
Letter from the Portfolio Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
International Diversification Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
The Oakmark International Small Cap Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
International Diversification Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Oakmark Philosophy and Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
The Oakmark Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2006 Third Quarter Report
THE OAKMARK FUNDS
FORWARD- LOOKING STATEMENT DISCLOSURE
One of our most important responsibilities as mutual fund managers is to
communicate with shareholders in an open and direct manner. Some of our
comments in our letters to shareholders are based on current management
expectations and are considered “forward-looking statements”. Actual future
results, however, may prove to be different from our expectations. You can
identify forward-looking statements by words such as “estimate”, “may”, “will”,
“expect”, “believe”, “plan” and other similar terms. We cannot promise future
returns. Our opinions are a reflection of our best judgment at the time this
report is compiled, and we disclaim any obligation to update or alter forward-
looking statements as a result of new information, future events, or otherwise.
THE OAKMARK FUNDS
Trustees and Officers
Trustees
Gary N. Wilner, M.D.—Chairman
Michael J. Friduss
Thomas H. Hayden
Christine M. Maki
John R. Raitt
Allan J. Reich
Steven S. Rogers
Marv R. Rotter
Burton W. Ruder
Peter S. Voss
Officers
John R. Raitt—President
Robert M. Levy—Executive Vice President
Henry R. Berghoef—Vice President
Chad M. Clark—Vice President
Kevin G. Grant—Vice President
David G. Herro—Vice President
Clyde S. McGregor—Vice President
William C. Nygren—Vice President
Vineeta D. Raketich—Vice President
Janet L. Reali—Vice President and Secretary
Ann W. Regan—Vice President and Assistant Secretary
Kristi L. Rowsell—Vice President
Edward A. Studzinski—Vice President
Robert A. Taylor—Vice President
Christopher P. Wright—Vice President
John J. Kane—Treasurer
Other Information
Investment Adviser
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602-3790
Transfer Agent
Boston Financial Data Services, Inc.
Quincy, Massachusetts
Legal Counsel
Bell, Boyd & Lloyd LLC
Chicago, Illinois
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Chicago, Illinois
For More Information
Please call 1-800-OAKMARK
(1-800-625-6275)
or 617-483-3250
Website
oakmark.com
To obtain a prospectus, an application or periodic reports, access our web
site at oakmark.com, or call 1-800-OAKMARK (1-800-625-6275) or
(617) 483-3250.
The Funds will file its complete schedule of portfolio holdings with the Securities and Exchange Commission
(“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q’s are available on
the SEC’s website at www.sec.gov. The Funds’ Forms N-Q may be reviewed and copied at the SEC’s Public
Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may
be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures the Funds use to determine how to vote proxies relating to
portfolio securities is available without charge, upon request, by calling toll-free 1-800-625-6275; on the Funds’
website at oakmark.com; and on the Securities and Exchange Commission’s website at www.sec.gov.
No later than August 31 of each year, information regarding how the Adviser, on behalf of the Funds, voted
proxies relating to the Funds’ portfolio securities for the twelve months ended the preceding June 30 will be
available through a link on the Funds’ website at oakmark.com and on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of the Funds. The report is not
authorized for distribution to prospective investors in the Funds unless it is accompanied or preceded by a
currently effective prospectus of the Funds.
No sales charge to the shareholder or to the new investor is made in offering the shares of the Funds, however, a
shareholder may incur a 2% redemption fee on an exchange or redemption of Class I shares held for 90 days or
less from any Fund.
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1
President’s Letter
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
[email protected].
John R. Raitt
President of The Oakmark Funds
President and CEO of Harris Associates L.P.
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THE OAKMARK FUNDS
2 THE OAKMARK F UNDS
Summary Information
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
The Oakmark
Performance for Period The Oakmark The Oakmark Equity and Income
Ended June 30, 2006
1
Fund—Class I Select Fund—Class I Fund—Class I
(OAKMX) (OAKLX) (OAKBX)
Average Annual Total
Return for:
U.S. Government
Securities 30.0%
Consumer
Discretionary 12.5%
Energy 12.2%
Consumer Staples 12.1%
Foreign Government
Securities 9.3%
Industrials 9.3%
Health Care 5.8%
Financials 5.6%
Information
Technology 2.9%
Materials 0.3%
Consumer
Discretionary 48.7%
Financials 21.2%
Information
Technology 17.5%
Health Care 8.3%
Industrials 4.3%
Consumer
Discretionary 42.9%
Financials 14.8%
Information
Technology 12.9%
Consumer Staples 12.6%
Health Care 8.1%
Industrials 7.2%
Energy 1.5%
Sector
Allocation as of
June 30, 2006
Sector and %
of Market Value
XTO Energy, Inc. 4.4%
EnCana Corp 3.2%
General Dynamics
Corporation 2.9%
Nestle SA 2.9%
ConocoPhillips 2.8%
Washington
Mutual, Inc. 15.8%
Yum! Brands, Inc. 7.2%
H&R Block, Inc. 6.2%
First Data
Corporation 5.3%
McDonald’s
Corporation 4.6%
Washington
Mutual, Inc. 3.5%
McDonald’s
Corporation 2.8%
Yum! Brands, Inc. 2.6%
Time Warner Inc. 2.4%
H&R Block, Inc. 2.4%
Top Five Equity
Holdings as of
June 30, 2006
2
Company and % of Total
Net Assets
13.44%
(11/1/95)
17.97%
(11/1/96)
15.10%
(8/5/91)
Since inception
13.27% N/A 8.00% 10 Year
9.44% 6.60% 4.29% 5 Year
11.41% 9.30% 8.41% 3 Year
10.13% 6.82% 4.16% 1 Year
1.57% -0.77% -0.35% 3 Months*
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3 THE OAKMARK F UNDS
The Oakmark The Oakmark
The Oakmark International International
Global Fund—Class I Fund—Class I Small Cap Fund—Class I
(OAKGX) (OAKIX) (OAKEX)
Consumer
Discretionary 31.8%
Industrials 21.9%
Information
Technology 17.7%
Financials 14.2%
Health Care 5.1%
Consumer Staples 4.9%
Materials 2.8%
Telecommunication
Services 1.6%
Consumer
Discretionary 32.8%
Financials 18.5%
Consumer Staples 16.9%
Telecommunication
Services 9.8%
Health Care 8.7%
Materials 5.7%
Industrials 5.3%
Information
Technology 2.0%
Energy 0.3%
Consumer
Discretionary 28.5%
Information
Technology 14.2%
Consumer Staples 12.3%
Health Care 10.6%
Financials 9.6%
Telecommunication
Services 9.2%
Industrials 8.6%
Energy 4.1%
Materials 2.9%
Julius Baer
Holding Ltd.,
Class B 3.9%
JJB Sports plc 3.8%
Matalan PLC 3.7%
Carpetright plc 3.6%
Square Enix Co.,
Ltd. 3.2%
GlaxoSmithKline plc 3.7%
British Sky
Broadcasting
Group plc 3.7%
DaimlerChrysler AG 3.4%
NTT DoCoMo, Inc. 3.3%
Bayerische Motoren
Werke (BMW) AG 3.2%
GlaxoSmithKline plc 3.6%
Bayerische Motoren
Werke (BMW) AG 3.2%
Snap-on
Incorporated 3.2%
NTT DoCoMo, Inc. 3.1%
Diageo plc 3.0%
14.39%
(11/1/95)
13.07%
(9/30/92)
16.41%
(8/4/99)
13.74% 11.41% N/A
21.59% 12.97% 16.52%
32.72% 24.30% 20.73%
31.38% 26.73% 20.47%
-0.58% 2.90% 0.80%
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4 THE OAKMARK AND OAKMARK S ELECT F UNDS
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.
THE OAKMARK AND OAKMARK SELECT FUNDS
This is an excerpt from Bill’s recent
keynote speech at the Morningstar
Investment Conference. Please see
the Oakmark website for the entire
text.
When we apply our criteria to
today’s market, where do we
find investment opportunity?
To answer that, I would like to
take a step backwards and look
at a graph of recent history. The
green line on Chart 1 shows the
spread of P/Es
3
for the S&P 500
4
companies in June 1999. If we
look at the far right hand side of the graph, it indicates
that 12% of the market value of the S&P 500 sold at a P/E
above 80 times earnings. We can also see the largest
grouping, at about 15% of the S&P market cap, at what
would be called a market multiple, between 30 and 35
times earnings. At the left-hand side of the graph, we see
that quite a bit of the S&P was selling at less than half of
the market multiple, and a fair amount was even at single
digit P/Es.
That was a good time to be a value investor. It was easy to
construct a portfolio of stocks that was selling much more
cheaply than the S&P 500 was selling. Despite the market
P/E multiple of about 30 times earnings, most stocks in the
Oakmark Fund portfolio sold at P/E’s in the teens. It was
full of what might be called “traditional value names” like
Brunswick, Old Republic, A.C. Nielsen, Boeing, Eaton,
Cooper Industries, Geon and Bandag. At the time, as
concerned as we were about “irrational exuberance,” our
bottom-up analysis made us comfortable that the specific
stocks we were invested in would end up having reasonable
long-term returns.
The market peaked in early 2000. The NASDAQ
5
, which was
over 5000, fell to near 1000. We saw the S&P 500, that had
been over 1500, fall below 1000. Yet despite the market
decline, the portfolio of undervalued traditional companies
that we owned went up in price. The result of that divergent
market—the overvalued stocks coming down in price and
the undervalued going up—was that the P/E distribution
graph changed significantly. The gray line on the chart
shows the P/E distribution as of June 2003, just four years
later. Two things are important to note: first, the average P/E
has moved way to the left reflecting the significant decline
in the market. Instead of over 30 times earnings, the average
multiple fell to about 15 times earnings.
DISTRIBUTION OF S&P 500 MULTIPLES
Trailing 12-Month P/E Multiples
Source: FactSet data. Chart is for illustrative purposes only.
LARGE-CAP GROWTH STOCKS
P/E ? EPS
7
? Stock Price P/E
Ticker Company 1999-A ‘06-E vs. ‘99-Avs. 2000 High 2006-E
S&P 500 Composite 31 67% -19% 15.2
C Citigroup Inc. 25 93% -12% 11.2
DELL Dell Inc. 90 110% -60% 17.4
HDI Harley-Davidson 58 325% 5% 14.2
HPQ Hewlett-Packard 45 44% -52% 14.9
HD Home Depot 68 201% -47% 11.9
KSS Kohl’s Corp. 83 273% -14% 19.3
TXN Texas Instruments 116 96% -70% 17.5
TWX Time Warner Inc. 225 142% -79% 19.1
TYC Tyco Int’l Ltd. 94 188% -55% 14.8
WMT Wal-Mart Stores 56 135% -31% 16.4
AVERAGE (ex. S&P 500) 86 161% -42% 15.7
Source: FactSet data and First Call estimates. As of 6/19/06. For informational
purposes only and are not recommendations of individual stocks.
0.0
3.0
6.0
9.0
12.0
15.0
18.0
21.0
24.0
27.0
30.0
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0 75.0>80.0
Trailing 12-Month P/E Multiples
June 30, 1999
June 30, 2003
May 30, 2006
%

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T
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a
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Just as important, notice how much tighter the
distribution is. Not nearly as many stocks sold at large
discounts or large premiums to the average multiple. To us,
much of that change was an accurate reflection of
fundamentals. We believed that the stocks that were selling
at modest discounts to the market in 2003—generally the
cyclical and commodity names—deserved to sell at
discounts because they had less control over their
businesses than other companies did. Looking at the
companies that were selling at premiums, we thought that
there, too, the market had rationally reduced the giant
premium required to own large-cap, growth businesses.
But as often happens, we thought the market went too far.
No longer was the value investor priced out of the market
for owning businesses with above average growth. Stock-
by-stock, our portfolio changed. As the mediocre
businesses that we had owned in Oakmark started to hit
their price targets, we couldn’t find traditional low P/E
stocks to replace them. Instead, the best opportunities that
our analysts uncovered were now the very same names
that four years earlier we thought were selling at crazy
prices. So one-by-one, names such as Home Depot and
Wal-Mart started to find their way into our portfolios.
We believe that the best opportunities in the market today
are still the fallen growth stocks: stocks that have
performed poorly over the past five years but whose
businesses have continued to perform well. We believe
these are still growth companies, but based on stock
performance, they now look more like value stocks. We
don’t believe the commodity price surge of the past three
years will recur; in fact, we think it will likely reverse
somewhat. And, if we are right, it is very unlikely that stock
price trends of the past three years will continue.
So, back to the P/E dispersion chart. The black line shows
where the market is on May 30, 2006. You see that we are
still confronting a very tight distribution, even somewhat
tighter than existed three years ago. And though this chart
doesn’t show it, I’d add that mid- and small-cap names no
longer are priced below this average. Today, very little
premium is required to buy what in our opinion are
superior businesses.
Let’s get more specific about some of the companies we
find interesting. Chart 2 shows P/Es based on the high
price in 2000 relative to trailing 1999 earnings. You can see
that the S&P 500 was over 30 times earnings. The average
of this list of highly thought of businesses: Citigroup, Dell,
Harley Davidson, Hewlett Packard, Home Depot, Kohls,
Texas Instruments, Time Warner, Tyco and Wal-Mart sold
at 86 times earnings.
The next column shows the percentage gain in earnings
per share from 1999 to the 2006 estimate. From 1999 to
2006, S&P 500 earnings grew 67%, about an 8% annual
compounded rate. In comparison, you can see the growth
that our sample companies achieved during that same time
period. The range is from a low of 44% at HP to a high of
over 300% at Harley Davidson. The average earnings
growth for these ten companies was 161%. Contrast that
with this third column, which shows the change in stock
price. The S&P 500 is down 19% from its high in 2000.
These ten high quality companies averaged a decline of
42%. They range from up 5% at Harley Davidson to down
79% at Time Warner. On average, these stocks lost a little
more than twice what the S&P lost, despite showing
earnings growth of more than double that of the S&P.
Now, price being down is often sufficient for us to get
interested in a stock, but it certainly is not sufficient to
argue that it is undervalued. So, the fourth column shows
the current P/E for each stock and the S&P 500 based on
2006 First Call estimates. You can see the range. At the low
end, Citigroup sells at 11 times earnings, and at the high
end, Kohl’s sells at 19 times earnings. As a group, the list
today sells at 15.7 times earnings, barely half a P/E point
higher than the S&P 500. So these ten stocks, which were
priced at 86 times earnings just six years ago, are now
priced basically at parity with the S&P.
Over the past six years, achieving earnings growth that
was more than double the S&P was not sufficient to
prevent these stocks from declining sharply in price. The
starting P/E was just too high to overcome. But today, they
face a very different outlook. They are now priced as if
they are only average businesses. If they prove to be only
average businesses, well, they are already priced as such. So,
that’s our margin of safety. But, if as expected, they show
earnings growth that is superior to the S&P 500, these
should now perform as superior stocks. We think it is likely
that these 10 companies, all of which have been added to
the Oakmark Fund in the past couple of years, will achieve
long-term earnings growth significantly higher than the
S&P 500 will achieve. And if we’re right, not only do we
make money with the higher earnings growth, but we also
think it is highly likely that we’ll also make money from
P/E expansion.
Best wishes,
William C. Nygren, CFA
Portfolio Manager
[email protected]
5 THE OAKMARK AND OAKMARK S ELECT F UNDS
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Last quarter The Oakmark Fund lost a fraction of
one percent, which rounds to no change, com-
pared to the S&P 500’s loss of a little more than
1%. For the calendar year-to-date, both the Fund
and the S&P are up 3%. Comcast, up 25%, led the
Fund’s biggest gainers in the quarter, followed by
Kohl’s and H&R Block, which were both up 11%.
Kohl’s has continued to achieve strong sales
momentum. Comcast’s and Block’s gains seemed
less tied to news and more like reversals of past
stock underperformance. During the past quarter,
more of our stocks were up than down, but we
uncharacteristically had more large losers than
large gainers. Pulte Homes, Home Depot and For-
tune Brands were all double-digit losers due to
growing fears of a hard landing for the housing
market. Sun Microsystems, one of our best per-
formers last quarter, gave back those gains as com-
petitors’ new product introductions began to
narrow Sun’s performance advantage. We remain
confident in all of these holdings. We sold CBS
and restored our Viacom weighting to a normal
position. We also sold our Coca-Cola Enterprises
because we believed Coca-Cola had become more
attractive (see below), and we converted our
remaining Burlington Resources stock into Cono-
coPhillips because selling some Conoco instead of
Burlington realized less taxable gain. In addition to
Coca-Cola, we added shares of Schering-Plough,
which is discussed on our website.
Coca-Cola (KO—$43)
In 1998 we were the “value” part of a mutual fund
presentation to financial advisors. We started off
the discussion of investment philosophy with our
familiar three requirements: we want businesses
that grow, managements on our side, but most
important, we will only buy at large discounts to
estimated business value. Then, the growth man-
ager began: “Coca-Cola. Investing doesn’t need to
be so complicated. When you buy great businesses
you don’t need to worry about price.” Coke stock
peaked at $89 in 1998, and despite growing earn-
ings more than 50% since then, the stock now
trades at less than half that price. The world’s
largest beverage company, which was previously
priced at over 60 times earnings, today sells at 17
times expected earnings and has a dividend yield
of 3%. We believe that growth in global sales,
combined with share repurchase and an above-
average dividend yield will now produce good
returns for Coca-Cola shareholders.
Best wishes,
Kevin G. Grant, CFA
Portfolio Manager
[email protected]
William C. Nygren, CFA
Portfolio Manager
[email protected]
Report from Bill Nygren and Kevin Grant, Portfolio Managers
THE OAKMARK FUND
6
Average Annual Total Returns
(as of 6/30/06)
Total Return 1-year 5-year 10-year Since
Last 3 Months* Inception
(8/5/91)
Oakmark Fund (Class I) -0.35% 4.16% 4.29% 8.00% 15.10%
S&P 500 -1.44% 8.63% 2.49% 8.32% 10.52%
Dow Jones Average
8
0.94% 11.08% 3.43% 9.14% 11.71%
Lipper Large Cap
Value Index
9
0.06% 10.46% 3.93% 8.35% 10.43%
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
Fund (Class I)
$81,332
S & P 500
$44,394
12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 8/5/91 6/06
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$90,000
$80,000
THE OAKMARK F UND
THE VALUE OF A $10,000 INVESTMENT IN THE
OAKMARK FUND FROM ITS INCEPTION (8/5/91) TO
PRESENT (6/30/06) AS COMPARED TO THE
STANDARD & POOR’S 500 INDEX
4
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Apparel Retail—4.1%
Limited Brands 4,628,047 $ 118,431,723
The Gap, Inc. 5,766,700 100,340,580
218,772,303
Broadcasting & Cable TV—7.1%
Comcast Corporation, Special Class A (a) 3,425,000 $ 112,271,500
The DIRECTV Group, Inc. (a) 6,150,000 101,475,000
EchoStar Communications Corporation, Class A (a) 2,525,000 77,795,250
Liberty Media Holding Corp - Capital, Class A (a) 739,970 61,987,287
Discovery Holding Company, Class A (a) 1,740,140 25,458,248
378,987,285
Catalog Retail—1.2%
Liberty Media Holding Corp - Interactive, Class A (a) 3,699,850 $ 63,859,411
Department Stores—2.1%
Kohl’s Corporation (a) 1,950,000 $ 115,284,000
Home Improvement Retail—2.1%
The Home Depot, Inc. 3,181,500 $ 113,865,885
Homebuilding—1.9%
Pulte Homes, Inc. 3,500,000 $ 100,765,000
Household Appliances—1.7%
The Black & Decker Corporation 1,050,000 $ 88,683,000
Housewares & Specialties—1.9%
Fortune Brands, Inc. 1,400,000 $ 99,414,000
Leisure Products—1.0%
Mattel, Inc. 3,274,300 $ 54,058,693
Motorcycle Manufacturers—2.2%
Harley-Davidson, Inc. 2,200,000 $ 120,758,000
Movies & Entertainment—6.2%
Time Warner, Inc. 7,447,700 $ 128,845,210
The Walt Disney Company 3,400,000 102,000,000
Viacom, Inc., Class B (a) 2,839,745 101,776,461
332,621,671
Publishing—1.3%
Gannett Co., Inc. 1,234,500 $ 69,045,585
Schedule of Investments—June 30, 2006 (Unaudited)
Name Shares Held Market Value
THE OAKMARK F UND
THE OAKMARK F UND 7
Common Stocks—94.5%
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Restaurants—5.3%
McDonald’s Corporation 4,450,000 $ 149,520,000
Yum! Brands, Inc. 2,724,000 136,935,480
286,455,480
Specialized Consumer Services—2.4%
H&R Block, Inc. 5,358,600 $ 127,856,196
Brewers—3.7%
Anheuser-Busch Companies, Inc. 2,350,000 $ 107,136,500
InBev NV (b) 1,850,000 90,745,400
197,881,900
Distillers & Vintners—1.6%
Diageo plc (c) 1,271,000 $ 85,856,050
Hypermarkets & Super Centers—2.1%
Wal-Mart Stores, Inc. 2,300,000 $ 110,791,000
Packaged Foods & Meats—3.4%
H.J. Heinz Company 2,250,000 $ 92,745,000
General Mills, Inc. 1,756,000 90,714,960
183,459,960
Soft Drinks—1.1%
The Coca-Cola Company 1,398,700 $ 60,172,074
Integrated Oil & Gas—1.5%
ConocoPhillips 1,200,373 $ 78,660,442
Asset Management & Custody Banks—1.3%
The Bank of New York Company, Inc. 2,150,000 $ 69,230,000
Diversified Banks—2.0%
U.S. Bancorp 3,450,000 $ 106,536,000
Life & Health Insurance—1.5%
AFLAC Incorporated 1,767,000 $ 81,900,450
Other Diversified Financial Services—4.4%
JP Morgan Chase & Co. 2,800,000 $ 117,600,000
Citigroup, Inc. 2,400,000 115,776,000
233,376,000
Thrifts & Mortgage Finance—4.8%
Washington Mutual, Inc. 4,137,300 $ 188,578,134
MGIC Investment Corporation 1,090,600 70,889,000
259,467,134
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Shares Held Market Value
THE OAKMARK F UND
THE OAKMARK F UND 8
Common Stocks—94.5% (cont.)
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Health Care Equipment—2.0%
Baxter International, Inc. 2,900,000 $ 106,604,000
Pharmaceuticals—5.6%
Bristol-Myers Squibb Company 4,500,000 $ 116,370,000
Abbott Laboratories 2,487,300 108,471,153
Schering-Plough Corporation 4,000,000 76,120,000
300,961,153
Aerospace & Defense—3.6%
Raytheon Company 2,650,000 $ 118,110,500
Honeywell International, Inc. 1,900,000 76,570,000
194,680,500
Building Products—1.9%
Masco Corporation 3,433,600 $ 101,771,904
Industrial Conglomerates—1.3%
Tyco International Ltd. (b) 2,558,000 $ 70,345,000
Computer Hardware—5.0%
Dell Inc. (a) 4,000,000 $ 97,640,000
Hewlett-Packard Company 2,925,000 92,664,000
Sun Microsystems, Inc. (a) 19,270,000 79,970,500
270,274,500
Data Processing & Outsourced Services—2.2%
First Data Corporation 2,575,000 $ 115,978,000
Office Electronics—1.4%
Xerox Corporation (a) 5,272,400 $ 73,339,084
Semiconductors—3.6%
Intel Corp. 5,700,000 $ 108,015,000
Texas Instruments Incorporated 2,800,000 84,812,000
192,827,000
Total Common Stocks (Cost: $3,849,711,568) 5,064,538,660
Short Term Investments—5.5%
U.S. Government Agencies—2.8%
Fannie Mae, 4.96%-5.17%
due 7/10/2006 - 7/27/2006 $150,000,000 $ 149,564,611
Total U.S. Government Agencies (Cost: $149,564,611) 149,564,611
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Shares Held/
Name Par Value Market Value
THE OAKMARK F UND
THE OAKMARK F UND 9
Common Stocks—94.5% (cont.)
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Repurchase Agreement—2.7%
IBT Repurchase Agreement, 4.75% dated 6/30/2006
due 7/3/2006, repurchase price $147,194,339,
collateralized by Government National Mortgage
Association Bonds, with rates of 4.875% - 5.375%,
with maturities from 5/20/34 - 7/20/34, with an
aggregate market value plus accrued interest of
$52,500,000, and by Small Business Administration
Bonds, with rates of 7.125% - 8.260%, with maturities
from 7/25/2018 - 7/25/2030, and with an aggregate
market value plus accrued interest of $101,992,903 $147,136,098 $ 147,136,098
Total Repurchase Agreement (Cost: $147,136,098) 147,136,098
Total Short Term Investments (Cost: $296,700,709) 296,700,709
Total Investments (Cost $4,146,412,277)—100.0% $5,361,239,369
Other Assets In Excess Of Other Liabilities—0.0% 1,508,170
Total Net Assets—100% $5,362,747,539
(a) Non-income producing security.
(b) Represents a foreign domiciled corporation.
(c) Represents an American Depository Receipt.
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Par Value Market Value
THE OAKMARK F UND
THE OAKMARK F UND 10
Short Term Investments—5.5% (cont.)
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The Oakmark Select Fund lost a little less than 1%
last quarter, compared to the S&P 500, which lost
a little more than 1%. For the calendar year-to-
date, Select’s 2% gain slightly trails the S&P’s 3%
gain. Our most positive performers were two of
our largest holdings, Washington Mutual and H&R
Block. Washington Mutual benefited from a strong
financial sector performance, perhaps because
investors now anticipate an end to rising short-
term interest rates. H&R Block responded well to a
strong second half of their tax preparation year.
We are pleased with Block’s progress and antici-
pate a strong 2007 tax season—one that is not bur-
dened by computer problems or new lending
products from their competition. On the down-
side, recent purchases Dell and Pulte continued to
decline—in our opinion, excessively—so both
positions were significantly increased. Unfortu-
nately, the magnitude of their declines was greater
than the magnitude of our winners, leading to the
slight decline in the portfolio for the quarter.
Two of our holdings, Viacom International and Lib-
erty Media, split into two pieces this year. Viacom
spun off their interest in CBS last quarter, and Lib-
erty spun off their ownership of QVC as Liberty
Interactive. We viewed both companies as attractive
prior to their spin-offs, and after the spin-offs, we
thought all four were attractive. Because of Select’s
concentrated mandate, however, we sought to
focus our investment in the most attractive oppor-
tunities. So during the quarter, we sold CBS and
Liberty Capital, and we increased our positions in
“new” Viacom and Liberty Interactive. The sales
were achieved with minimal tax consequences
because we had not incurred a meaningful gain or
loss on either position.
With Nickelodeon and MTV as its major assets,
the “new” Viacom is nearly a pure play in cable
TV programming. Liberty Interactive is the leader
in shop-at-home programming due to its primary
asset, the QVC channel. QVC has shown amazing
growth and viewer loyalty as it continues to
deliver that perfect combination of entertain-
ment, information and value to its customers. We
believe that both Viacom and Liberty Interactive
will be above average growers and that they will
produce much more cash than they need to sup-
port their growth. We are pleased to now have full
positions in these focused businesses.
Best wishes,
Henry R. Berghoef, CFA
Portfolio Manager
[email protected]
William C. Nygren, CFA
Portfolio Manager
[email protected]
Report from Bill Nygren and Henry Berghoef, Portfolio Managers
11 THE OAKMARK S ELECT F UND
THE VALUE OF A $10,000 INVESTMENT IN THE
OAKMARK SELECT FUND FROM ITS INCEPTION
(11/1/96) TO PRESENT (6/30/06) AS COMPARED TO
THE STANDARD & POOR’S 500 INDEX
4
Average Annual Total Returns
(as of 6/30/06)
Total Return 1-year 5-year Since
Last 3 Months* Inception
(11/1/96)
Oakmark Select Fund (Class I) -0.77% 6.82% 6.60% 17.97%
S&P 500 -1.44% 8.63% 2.49% 8.00%
S&P MidCap 400
10
-3.15% 12.98% 9.30% 13.96%
Lipper Mid Cap Value Index
11
-2.21% 10.94% 10.13% 10.91%
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
Select Fund
(Class I)
$49,368
S & P 500
$21,034
11/1/96 6/06 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
THE OAKMARK SELECT FUND
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w_c_nygren_photo_c.eps V1.5
Apparel Retail—7.2%
Limited Brands 9,280,981 $ 237,500,304
The Gap, Inc. 11,060,000 192,444,000
429,944,304
Broadcasting & Cable TV—2.7%
Discovery Holding Company, Class A (a) 10,809,500 $ 158,142,985
Catalog Retail—3.8%
Liberty Media Holding Corp - Interactive, Class A (a) 13,050,000 $ 225,243,000
Homebuilding—4.0%
Pulte Homes, Inc. 8,250,000 $ 237,517,500
Leisure Products—2.5%
Mattel, Inc. 9,070,900 $ 149,760,559
Movies & Entertainment—8.1%
Time Warner, Inc. 15,340,000 $ 265,382,000
Viacom, Inc., Class B (a) 5,975,000 214,144,000
479,526,000
Restaurants—11.9%
Yum! Brands, Inc. 8,557,000 $ 430,160,390
McDonald’s Corporation 8,200,000 275,520,000
705,680,390
Specialized Consumer Services—6.2%
H&R Block, Inc. 15,419,600 $ 367,911,656
Other Diversified Financial Services—4.4%
JP Morgan Chase & Co. 6,200,000 $ 260,400,000
Thrifts & Mortgage Finance—15.8%
Washington Mutual, Inc. 20,667,400 $ 942,020,092
Health Care Technology—3.7%
IMS Health Incorporated 8,303,441 $ 222,947,391
Pharmaceuticals—4.1%
Bristol-Myers Squibb Company 9,490,200 $ 245,416,572
Diversified Commercial and Professional Services—4.1%
The Dun & Bradstreet Corporation (a) 3,484,900 $ 242,827,832
Computer Hardware—3.7%
Dell Inc. (a) 9,000,000 $ 219,690,000
Data Processing & Outsourced Services—5.3%
First Data Corporation 7,015,400 $ 315,973,616
Schedule of Investments—June 30, 2006 (Unaudited)
Name Shares Held Market Value
THE OAKMARK S ELECT F UND
THE OAKMARK S ELECT F UND 12
Common Stocks—95.1%
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Office Electronics—3.8%
Xerox Corporation (a) 16,446,400 $ 228,769,424
Semiconductors—3.8%
Intel Corp. 12,000,000 $ 227,400,000
Total Common Stocks (Cost: $4,174,417,150) 5,659,171,321
Short Term Investments—4.8%
U.S. Government Agencies—1.7%
Fannie Mae, 4.96%-5.17%
due 7/10/2006 - 7/27/2006 $100,000,000 $ 99,751,306
Total U.S. Government Agencies (Cost: $99,751,306) 99,751,306
Repurchase Agreement—3.1%
IBT Repurchase Agreement, 4.75% dated 6/30/2006
due 7/3/2006, repurchase price $185,459,637,
collateralized by Government National Mortgage
Association Bonds with rates of 5.000%, with maturity
dates from 7/20/2034 - 2/20/2035, and with a market
value plus accrued interest of $108,392,955, and by
Small Business Administration Bonds, with rates from
6.625% - 8.375%, with maturities from 9/25/2016 -
5/25/2030, and with an aggregate market value plus
accrued interest of $86,262,613 $185,386,255 $ 185,386,255
Total Repurchase Agreement (Cost: $185,386,255) 185,386,255
Total Short Term Investments (Cost: $285,137,561) 285,137,561
Total Investments (Cost $4,459,554,711)—99.9% $5,944,308,882
Other Assets In Excess Of Other Liabilities—0.1% 3,439,419
Total Net Assets—100% $5,947,748,301
(a) Non-income producing security.
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Shares Held/
Name Par Value Market Value
THE OAKMARK S ELECT F UND
THE OAKMARK S ELECT F UND 13
Common Stocks—95.1% (cont.)
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“No question is so difficult to answer as that to which
the answer is obvious.”
George Bernard Shaw
Our Results
The Oakmark Equity and Income Fund increased 2%
for the quarter ended June 30, bringing the calendar
year gain to 4%. For the calendar year 2006, the Fund
has outperformed both the S&P 500 and our primary
benchmark, the Lipper Balanced Fund Index, which
have gained respectively 3% and 2% for the year. This
represents another period of absolute positive returns.
In our fashion, we are moderately pleased with this
result. While good relative returns might gain one
admission to the Investment Managers’ Hall of Fame,
if such a place existed, they do little to help you, our
investors and partners, preserve your capital and pro-
tect your purchasing power from the ravages of infla-
tion. In another setting, it would be moderately
amusing to note that the media now accepts what
most of us have known for some time: that the gov-
ernment’s statistics on inflation understate the actual
rate of inflation by as much as 200 basis points. We
wonder why this realization took so long to sink in,
since consumers have been dealing with the increased
costs of gasoline, real estate property taxes, grocery
bills, health care insurance, prescription costs, and
the like for a while now. For those living on a fixed
income, inflation is not just an abstract statistic.
In one of our prior letters, we had expressed the sen-
timent that 2006 might prove to be a difficult year.
We hoped that increased market volatility would pro-
vide opportunities to purchase attractive, underval-
ued securities. Indeed, since the middle of May, the
market has taken many investors on the equivalent
of Mr. Toad’s Wild Ride. So, in hindsight we should
perhaps be careful for what we wish. The real estate
bubble, whose existence had been denied for some
time—primarily by those who stood to and did profit
mightily from it—has clearly popped. Around the
country, statistics demonstrate this; in many places,
inventories of both new and existing unsold homes
have hit five-year highs. Builders have adopted any
number of “incentives” to clear out inventory and
batten down the hatches. Falling house prices, cou-
pled with the increase in interest rates, have deprived
many consumers of their last source of ready liquid-
ity—the home equity and mortgage refinancing com-
bination that many used as a giant piggy bank. In
addition, a considerable number of home buyers
opted for once-attractive adjustable rate mortgages,
which are now adjusting upwards rather dramati-
cally. Given these factors, it is easy to see that discre-
tionary consumer spending is at risk.
Perhaps the most bitter pill for the consumer is the
continued high price of energy. Gasoline prices now
hover around $3 a gallon in most of the country, and
there are no signs of any price relief in sight. In our
opinion, the issue is not whether available oil and
gasoline supplies have peaked. Rather, it is the deple-
tion of the production and storage capacity that for-
merly allowed producers surge capability to meet
periods of increased demand. To beat a dead horse into
the ground, according to a recent article in The Finan-
cial Times, hurricanes Rita, Katrina, and Wilma cost
the energy industry a total of $31B in damages, much
of which has not yet and may never be repaired. Daily
oil production in the Gulf of Mexico is down 15%
Report from Clyde S. McGregor and Edward A. Studzinski, Portfolio Managers
THE OAKMARK EQUITY AND INCOME FUND
THE VALUE OF A $10,000 INVESTMENT IN THE
OAKMARK EQUITY AND INCOME FUND FROM ITS
INCEPTION (11/1/95) TO PRESENT (6/30/06) AS
COMPARED TO THE LIPPER BALANCED FUND INDEX
12
Average Annual Total Returns
(as of 6/30/06)
Total Return 1-year 5-year 10-year Since
Last 3 Months* Inception
(11/1/95)
Oakmark Equity &
Income Fund (Class I) 1.57% 10.13% 9.44% 13.27% 13.44%
Lipper Balanced
Fund Index -0.97% 7.04% 4.32% 7.36% 7.73%
S&P 500
4
-1.44% 8.63% 2.49% 8.32% 9.34%
Lehman Govt./
Corp. Bond
13
-0.14% -1.52% 5.13% 6.25% 5.94%
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
Equity and
Income Fund
(Class I)
$38,379
Lipper
Balanced
Fund Index
$22,127
11/1/95 6/06 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05
$10,000
$15,000
$20,000
$25,000
$35,000
$30,000
$40,000
14 THE OAKMARK EQUI TY AND I NCOME F UND
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V1.5
from pre-hurricane days. Daily natural gas production is down
11%. Part of the problem, unfortunately, is a lack of skilled work-
ers, supplies and equipment, and the logistics capability to get
them in place to effect repairs. Some hopefully await either sup-
plies of Liquefied Natural Gas from overseas or for natural gas
and oil production to come down from Canada via pipeline. Yet
no new construction has begun for what will be a multi-year
effort. In our view, another underappreciated factor of the
energy sector is demand from economies with greater where-
withal to pay for energy than the United States. A current arti-
cle in The New York Times Magazine points out that from 2001
to now, highway mileage in China has doubled to 23,000 miles,
behind only the U.S. The number of passenger cars on the road
in China was six million. Today, it is 20 million. In Beijing, one
thousand new cars are sold per day. We suspect that while other
commodity prices have perhaps seen their high water mark,
energy faces a different set of supply and demand dynamics.
The investment community also underappreciates the improv-
ing intelligence and character of the energy industry’s manage-
ment teams. Not too long ago, managements were overly
focused upon top line growth. They would fund projects with-
out any real attention to their risk, capital costs or ultimate pay-
back. Even if a true profit would never be made, managements
would justify projects on the hopes of stimulating positive cash
flow in a few years. Today’s managements are much more
attuned to the costs of capital and seek to achieve fair returns for
their shareholders. They are taking funds generated from today’s
energy prices and are either reinvesting in sensible value addi-
tive projects or returning them to shareholders through share
repurchases or dividend increases. For example, we continue to
view the management of XTO, our largest holding, as one of the
best managements we have observed in any industry.
Portfolio Adjustments
This past quarter, we positioned the portfolio more defen-
sively, thereby generating more portfolio activity than in
recent quarters. At the end of March, 62.3% of the Fund was
invested in Equity and Equivalents compared to 57.1% at the
end of June. We eliminated positions in Burlington Resources,
Morgan Stanley, R.R. Donnelley, The DirecTV Group, Pulte
Homes, and Plum Creek Timber. As previously noted, Burling-
ton Resources was acquired by ConocoPhillips for a combina-
tion of stock and cash. Plum Creek Timber reached its sell
target. The DirecTV Group was sold as a duplication of our
exposure to it through our ownership in News Corporation.
We initiated small starter positions in International Rectifier,
Mueller Water Products, and PRIMEDIA.
Fixed Income and Helicopter Ben
In the fixed income portion of the portfolio, we remain as
defensively and conservatively positioned as in prior quarters.
The duration (a measure of volatility) of the fixed income
portfolio is now at 1.8. We have slightly repositioned our
government securities and decreased the percentage held in
agencies while increasing U.S. Treasuries. We continue to use
fixed income investments for tax positioning. Early this year
we recognized that the takeover of Burlington would trigger
larger capital gains for the Fund than in recent years. The
investment in foreign sovereign debt, primarily Canadian, has
also increased slightly over the past quarter, now standing at
8.8% of the portfolio. We feel that our defensive posture in
fixed income has served us well over the past few years,
especially as the Federal Reserve has continued to raise short-
term rates, which have now reached 5.25%. Historically, a new
Federal Reserve Chairman has used the beginnings of his term
to prove his inflation-fighting credentials. Certainly while the
signs of inflation have enabled the Federal Reserve to justify
recent actions, we wonder if at this point everyone is looking
at the wrong thing. Could the real issue, especially as the econ-
omy starts to slow, be credit quality? On the one hand, cor-
porate balance sheets have improved dramatically in recent
years. Year to date, corporations have also thrown lots of cash
at their shareholders in the form of dividend increases and
share repurchase authorizations ($53B and $100B respec-
tively). On the other hand, the joys of being a corporate bond-
holder have decreased. By taking advantage of direct,
“leveraged” loans that allocate higher capital to them, both
hedge funds and private equity investors are placing them-
selves in front of bondholders in the credit seniority line. Since
the beginning of the year, the $158B in leveraged loans and
$51.7B in collateralized debt obligations dwarfs the $52B in
high yield debt new issues. We wonder what will happen if any
liquidity issues develop and someone wants their collateral.
Will all of these investors try and squeeze out the liquidity
door at once? According to Stephanie Pomboy of Macro-
Mavens, since May 1, investment-grade fixed income paper
has lost 0.8%, junk issues are down 2.4%, but asset-backed
issues are pretty much unchanged. Are investors afraid to see
how liquid that asset-backed security really is? With our pen-
chant for spectator sports, we prefer to remain spectators on
these questions and maintain our portfolio of high quality,
very liquid government obligations. Given that the market
capitalization of credit derivatives now apparently exceeds
that of the corporate bond market, we think our conservatism
is appropriate.
From each according to ......
Summer is a great time for institutional investors, especially if
they have followed the old market adage of “Sell in May.” We
like this time of year because the decreased pressure allows us
time to reflect so that we can consider what’s gone right, what
dumb mistakes we have made, and what we have learned from
those mistakes. We have always believed that mistakes are only
dumb if you do not make the effort to learn from them. At this
point, we are frequently examining industries and companies
that are becoming more attractive. Summer often provides an
unrivaled opportunity to visit companies, as corporate man-
agers also feel less pressure during the summer and they are
always more inclined to meet with institutional investors who
come to them. From this perspective, we agree with a British
fund manager’s comment about face time. We should not be
seeing faces, including our own, in the office at this time of
year. Rather, the faces should be out and about, learning by
wandering around. In that vein, one great aspect of our job is
that it rewards the naturally curious, and the naturally curious
also tend to be most successful at it. As we are out and about, we
continue to search for businesses that are priced safely within
the discount to intrinsic value range that we like. We remain
grateful to you, our shareholders and partners, for your patience
and confidence in entrusting us with your capital to manage.
Edward A. Studzinski, CFA
Portfolio Manager
[email protected]
Clyde S. McGregor, CFA
Portfolio Manager
[email protected]
15 THE OAKMARK EQUI TY AND I NCOME F UND
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Common Stocks—57.1%
Apparel Retail—1.6%
The TJX Companies, Inc. 7,240,000 $ 165,506,400
Broadcasting & Cable TV—5.4%
EchoStar Communications Corporation, Class A (a) 8,250,000 $ 254,182,500
The E.W. Scripps Company, Class A 4,750,000 204,915,000
Jupiter Telecommunications Co., Ltd. (a) (b) 125,000 86,726,669
CBS Corporation, Class A 840,100 22,733,106
568,557,275
Movies & Entertainment—1.9%
News Corporation, Class B 9,735,100 $ 196,454,318
Publishing—1.8%
The Washington Post Company, Class B 240,000 $ 187,202,400
PRIMEDIA Inc. (a) 2,918,600 5,341,038
192,543,438
Restaurants—1.0%
McDonald’s Corporation 3,000,000 $ 100,800,000
Specialty Stores—0.2%
Zale Corporation (a) 782,900 $ 18,860,061
Brewers—0.6%
InBev NV (b) 1,250,000 $ 61,314,459
Distillers & Vintners—2.6%
Diageo plc (c) 4,100,000 $ 276,955,000
Hypermarkets & Super Centers—1.7%
Costco Wholesale Corporation 3,200,000 $ 182,816,000
Packaged Foods & Meats—3.7%
Nestle SA (c) 3,900,000 $ 306,243,600
Smithfield Foods, Inc. (a) 2,950,000 85,048,500
391,292,100
Personal Products—1.3%
Avon Products, Inc. 4,321,800 $ 133,975,800
Tobacco—1.5%
UST, Inc. 3,500,000 $ 158,165,000
Schedule of Investments—June 30, 2006 (Unaudited)
Name Shares Held Market Value
THE OAKMARK EQUI TY AND I NCOME F UND
THE OAKMARK EQUI TY AND I NCOME F UND 16
Equity and Equivalents—57.1%
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Integrated Oil & Gas—2.8%
ConocoPhillips 4,500,000 $ 294,885,000
Oil & Gas Exploration & Production—8.8%
XTO Energy, Inc. 10,561,338 $ 467,550,433
EnCana Corp. (b) 6,500,000 342,160,000
St. Mary Land & Exploration Company 2,900,000 116,725,000
926,435,433
Property & Casualty Insurance—5.3%
SAFECO Corporation 4,610,000 $ 259,773,500
MBIA, Inc. 2,912,200 170,509,310
The Progressive Corporation 5,200,000 133,692,000
563,974,810
Biotechnology—1.5%
MedImmune, Inc. (a) 6,000,000 $ 162,600,000
Health Care Equipment—0.5%
Hospira, Inc. (a) 1,350,000 $ 57,969,000
Health Care Services—2.7%
Caremark Rx, Inc. 5,801,300 $ 289,310,831
Life Science Tools & Services—0.6%
Varian, Inc. (a) 1,649,400 $ 68,466,594
Aerospace & Defense—6.4%
General Dynamics Corporation 4,700,000 $ 307,662,000
Raytheon Company 3,599,700 160,438,629
Alliant Techsystems, Inc. (a) 1,325,000 101,163,750
Honeywell International, Inc. 1,889,500 76,146,850
Rockwell Collins, Inc. 655,000 36,594,850
682,006,079
Human Resource & Employment Services—0.4%
Watson Wyatt & Company Holdings 1,130,000 $ 39,708,200
Industrial Conglomerates—2.0%
Tyco International Ltd. (b) 7,500,000 $ 206,250,000
Industrial Machinery—0.0%
Mueller Water Products, Inc (a) 36,800 $ 640,688
Application Software—0.4%
Mentor Graphics Corporation (a) 3,638,318 $ 47,225,368
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Shares Held Market Value
THE OAKMARK EQUI TY AND I NCOME F UND
THE OAKMARK EQUI TY AND I NCOME F UND 17
Equity and Equivalents—57.1% (cont.)
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Data Processing & Outsourced Services—1.1%
Ceridian Corporation (a) 4,800,000 $ 117,312,000
Semiconductors—0.6%
International Rectifier Corporation (a) 1,500,000 $ 58,620,000
Technology Distributors—0.6%
CDW Corporation 1,200,000 $ 65,580,000
Paper Products—0.1%
Schweitzer-Mauduit International, Inc. 700,000 $ 15,155,000
Total Common Stocks (Cost: $4,575,482,401) 6,043,378,854
Total Equity And Equivalents (Cost: $4,575,482,401) 6,043,378,854
Fixed Income—37.3%
Corporate Bonds—0.2%
Paper Packaging—0.2%
Sealed Air Corporation, 144A, 5.625% due 7/15/2013 (d) $ 20,000,000 $ 19,056,600
Total Corporate Bonds (Cost: $20,179,183) 19,056,600
Government and Agency Securities—37.1%
Canadian Government Bonds—8.4%
Canada Government, 3.25% due 12/1/2006 CAD 250,000,000 $ 222,892,592
Canada Government, 3.75% due 6/1/2008 CAD 250,000,000 221,300,278
Canada Government, 3.00% due 6/1/2007 CAD 250,000,000 221,053,928
Canada Government, 2.75% due 12/1/2007 CAD 250,000,000 218,841,261
884,088,059
France Government Bonds—0.3%
France Government, 3.00% due 7/25/2012,
Inflation Indexed EUR 27,461,000 $ 37,779,366
Norwegian Government Bonds—0.1%
Norway Government, 6.75% due 1/15/2007 NOK 50,000,000 $ 8,175,842
U.S. Government Notes—26.6%
United States Treasury Notes, 5.125% due 6/30/2008 500,000,000 $ 499,687,500
United States Treasury Notes, 4.875%
due 5/31/2008 (e) 500,000,000 497,207,000
United States Treasury Notes, 4.875% due 5/15/2009 500,000,000 496,601,500
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Shares Held/
Name Par Value Market Value
THE OAKMARK EQUI TY AND I NCOME F UND
THE OAKMARK EQUI TY AND I NCOME F UND 18
Equity and Equivalents—57.1% (cont.)
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U.S. Government Notes—26.6% (cont.)
United States Treasury Notes, 3.375% due 1/15/2007,
Inflation Indexed 270,818,850 $ 271,527,583
United States Treasury Notes, 4.375% due 12/31/2007 250,000,000 247,021,500
United States Treasury Notes, 4.25% due 11/30/2007 250,000,000 246,699,250
United States Treasury Notes, 4.75% due 3/31/2011 250,000,000 246,240,250
United States Treasury Notes, 4.50% due 2/15/2009 250,000,000 246,045,000
United States Treasury Notes, 3.625% due 1/15/2008,
Inflation Indexed 62,345,000 63,416,586
2,814,446,169
U.S. Government Agencies—1.7%
Federal Home Loan Mortgage Corporation, 3.75%
due 11/15/2006 50,000,000 $ 49,693,150
Federal Home Loan Bank, 2.875% due 9/15/2006 25,000,000 24,871,300
Federal Home Loan Bank, 2.625% due 10/16/2006 25,000,000 24,800,275
Federal Home Loan Bank, 2.75% due 12/15/2006 25,000,000 24,696,975
Fannie Mae, 3.25% due 11/15/2007 25,000,000 24,265,650
Federal Home Loan Mortgage Corporation,
3.00% due 11/17/2006 10,000,000 9,910,580
Fannie Mae, 4.00% due 4/13/2009 5,000,000 4,942,305
Federal Home Loan Bank, 4.30% due 8/16/2010 5,000,000 4,935,675
Fannie Mae, 4.25% due 2/19/2010 2,888,000 2,770,981
Fannie Mae, 3.125% due 11/30/2009 2,697,000 2,660,032
Fannie Mae, 3.50% due 10/14/2010 2,550,000 2,512,041
176,058,964
Total Government and Agency Securities (Cost: $3,891,883,887) 3,920,548,400
Total Fixed Income (Cost: $3,912,063,070) 3,939,605,000
Short Term Investments—6.3%
U.S. Government Agencies—2.3%
Fannie Mae, 4.96%-5.17%
due 7/10/2006 - 7/27/2006 $150,000,000 $ 149,564,611
Federal Home Loan Bank, 5.15% due 7/19/2006 100,000,000 99,742,500
Total U.S. Government Agencies (Cost: $249,307,111) 249,307,111
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Par Value Market Value
THE OAKMARK EQUI TY AND I NCOME F UND
THE OAKMARK EQUI TY AND I NCOME F UND 19
Fixed Income—37.3% (cont.)
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Repurchase Agreement—4.0%
IBT Repurchase Agreement, 4.75% dated 6/30/2006
due 7/3/2006,repurchase price $419,948,688,
collateralized by Government National Mortgage
Association Bonds with a rate of 3.750% - 5.767%,
with maturities from 9/20/2031 - 4/20/2035, and with
a market value plus accrued interest of $81,200,579,
and by Small Business Administration Bonds, with
rates of 6.875% - 8.735%, with maturities from
5/25/2016 - 9/25/2030, and with an aggregate market
value plus accrued interest of $359,571,066 $419,782,524 $ 419,782,524
Total Repurchase Agreement (Cost: $419,782,524) 419,782,524
Total Short Term Investments (Cost: $669,089,635) 669,089,635
Total Investments (Cost $9,156,635,106)—100.7% $ 10,652,073,489
Other Liabilities In Excess Of Other Assets—(0.7%) (77,885,756)
Total Net Assets—100% $10,574,187,733
(a) Non-income producing security.
(b) Represents a foreign domiciled corporation.
(c) Represents an American Depository Receipt.
(d) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities
may be resold in transactions exempt from registration, normally to qualified institutional buyers.
(e) All or a portion of security out on loan.
Key to abbreviations:
CAD: Canadian Dollar
EUR: Euro
NOK: Norwegian Krone
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Par Value Market Value
THE OAKMARK EQUI TY AND I NCOME F UND
THE OAKMARK EQUI TY AND I NCOME F UND 20
Short Term Investments—6.3% (cont.)
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The Oakmark Global Fund gained 1% in the quar-
ter 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 fig-
ures 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 appear-
ance, 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 experi-
encing precipitous declines. Soon, stock markets
worldwide were in retreat, though developed mar-
ket 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 specula-
tion. The cumulative effect of ever tighter money
may have simply reached a tipping point. What-
ever 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 hold-
ings, XTO Energy, an independent natural gas and
oil producer. We enjoyed it because the story illus-
trated 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 com-
panies, not for investors….Investors are not really
buying oil and gas companies as an invest-
ment…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
Report from Clyde S. McGregor and Robert A. Taylor, Portfolio Managers
THE OAKMARK GLOBAL FUND
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 INDEX
14
The Oakmark
Global Fund
(Class I)
$28,548
MSCI World
Index
$11,981
8/4/99 6/06 12/99 12/00 12/01 12/02 12/03 12/04 12/05
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
21 THE OAKMARK GLOBAL F UND
Average Annual Total Returns
(as of 6/30/06)
Total Return 1-year 5-year Since
Last 3 Months* 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 Index
15
-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
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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 judg-
ments, 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 cap-
ital allocation decisions and incentive programs.
Returning to XTO, we see a company management that
has enhanced value per share by its recent hedging deci-
sions. 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 for-
ward 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 fool-
ish 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 manage-
ment to think and act more offensively, should an attrac-
tive 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 natu-
ral gas reserves are comparatively stable. We base our judg-
ment 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 cer-
tain factors, because we know that these same investors
will periodically provide us with new true value opportu-
nities 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 inves-
tigations, 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 manage-
ment teams do not show the same commitment to share-
holder 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 fol-
lowing exercise for ten years without any hedging.
To date, troublesome options programs are mostly an
American phenomenon. Evaluating alignment of inter-
ests 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 let-
ter, a headline has crossed our news screen that yet
another well-known company has hired an outside inves-
tigator to probe its option grants. We may be tilting at
windmills, but we still look forward to a day when com-
pensation 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 prof-
itability. 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.
Robert A. Taylor, CFA
Portfolio Manager
[email protected]
Clyde S. McGregor, CFA
Portfolio Manager
[email protected]
22 THE OAKMARK GLOBAL F UND
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23 THE OAKMARK GLOBAL F UND
THE OAKMARK GLOBAL F UND
Pacific Rim 17.7%
Japan 11.9%
Korea 4.3%
Australia 1.5%
Other 2.7%
Bermuda 2.7%
Latin America 0.3%
Mexico 0.3%
% of Fund
Equity Market Value
* Euro currency countries comprise 14.9% of the Fund.
% of Fund
Equity Market Value
Europe 40.3%
Great Britain 13.1%
Switzerland 12.3%
* Germany 5.1%
* France 4.3%
* Ireland 2.8%
* Netherlands 1.7%
* Italy 1.0%

United States 39.0%
Latin America
Pacific Rim
Other
Europe
United States
Global Diversification—June 30, 2006 (Unaudited)
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Apparel Retail—2.0%
The TJX Companies, Inc. Discount Apparel &
(United States) Home Fashion Retailer 1,900,000 $ 43,434,000
Apparel, Accessories & Luxury Goods—1.0%
Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 1,946,000 $ 22,077,708
Automobile Manufacturers—3.2%
Bayerische Motoren Werke
(BMW) AG (Germany) Luxury Automobile Manufacturer 1,424,000 $ 71,142,603
Broadcasting & Cable TV—3.8%
CBS Corporation, Class B
(United States) Radio & Television Broadcasting 1,585,000 $ 42,874,250
Discovery Holding
Company, Class A Media Management &
(United States) (a) Network Services 2,913,700 42,627,431
85,501,681
Household Appliances—3.2%
Snap-on Incorporated
(United States) Tool & Equipment Manufacturer 1,760,000 $ 71,139,200
Leisure Products—1.3%
Brunswick Corp. Leisure & Recreation
(United States) Products Manufacturer 877,000 $ 29,160,250
Motorcycle Manufacturers—2.8%
Harley-Davidson, Inc.
(United States) Motorcycle Manufacturer 1,126,000 $ 61,806,140
Movies & Entertainment—6.5%
Vivendi Universal SA Music, Games, Television,
(France) Film, & Telecommunications 1,051,500 $ 36,850,837
Time Warner, Inc. Filmed Entertainment &
(United States) Television Networks 2,117,000 36,624,100
News Corporation, International Multimedia &
Class B (United States) Entertainment Company 1,726,500 34,840,770
Viacom, Inc., Class B Worldwide Entertainment &
(United States) (a) Publishing Company 944,000 33,832,960
142,148,667
Schedule of Investments—June 30, 2006 (Unaudited)
Name Description Shares Held Market Value
THE OAKMARK GLOBAL F UND
THE OAKMARK GLOBAL F UND 24
Common Stocks—97.8%
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Publishing—4.0%
The Washington Post
Company, Class B
(United States) Newspaper & Magazine Publishing 59,460 $ 46,379,395
Trinity Mirror plc
(Great Britain) Newspaper Publishing 4,596,800 41,481,964
87,861,359
Distillers & Vintners—3.0%
Diageo plc (Great Britain) Beverages, Wines, &
Spirits Manufacturer 3,902,500 $ 65,634,095
Household Products—3.6%
Henkel KGaA (Germany) Consumer Chemical Products
Manufacturer 375,000 $ 38,995,037
Uni-Charm Corporation
(Japan) Toiletry Products Manufacturer 596,200 32,925,411
Kimberly-Clark de Mexico Hygiene Products Manufacturer,
S.A. de C.V (Mexico) Marketer & Distributor 2,072,200 6,564,898
78,485,346
Packaged Foods & Meats—4.4%
Nestle SA (Switzerland) Food & Beverage Manufacturer 201,500 $ 63,290,663
Cadbury Schweppes plc Beverage & Confectionary
(Great Britain) Manufacturer 3,493,000 33,685,018
96,975,681
Soft Drinks—1.2%
Lotte Chilsung Beverage Soft Drinks, Juices &
Co., Ltd. (Korea) Sports Drinks Manufacturer 20,880 $ 25,309,091
Integrated Oil & Gas—1.1%
ConocoPhillips International & Integrated
(United States) Energy Company 384,436 $ 25,192,091
Oil & Gas Exploration & Production—2.9%
XTO Energy, Inc. Oil & Natural Gas
(United States) Exploration & Production 1,424,000 $ 63,040,480
Asset Management & Custody Banks—2.3%
Julius Baer Holding
AG-B (Switzerland) Asset Management 584,500 $ 50,774,120
Diversified Banks—4.2%
Bank of Ireland (Ireland) Commercial Bank 3,347,000 $ 59,719,676
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK GLOBAL F UND
THE OAKMARK GLOBAL F UND 25
Common Stocks—97.8% (cont.)
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Diversified Banks—4.2% (cont.)
Australia and New
Zealand Banking Group
Limited (Australia) Commercial Bank 1,674,000 $ 33,076,615
92,796,291
Diversified Capital Markets—1.8%
Credit Suisse Group
(Switzerland) Investment Services & Insurance 705,700 $ 39,482,950
Investment Banking & Brokerage—1.1%
Daiwa Securities
Group, Inc. (Japan) Stock Broker 2,062,000 $ 24,576,791
Health Care Services—2.6%
Laboratory Corporation
of America Holdings Medical Laboratory &
(United States) (a) Testing Services 920,000 $ 57,251,600
Pharmaceuticals—7.7%
GlaxoSmithKline plc
(Great Britain) Pharmaceuticals 2,825,000 $ 78,934,489
Novartis AG (Switzerland) Pharmaceuticals 899,600 48,712,543
Takeda Pharmaceutical
Company Limited Pharmaceuticals &
(Japan) Food Supplements 539,000 33,534,428
Santen Pharmaceutical
Co., Ltd. (Japan) Pharmaceuticals 401,500 9,542,817
170,724,277
Aerospace & Defense—0.9%
Alliant Techsystems,
Inc. (United States) (a) Propulsion Systems & Munitions 269,087 $ 20,544,792
Diversified Commercial and Professional Services—1.1%
Meitec Corporation
(Japan) Software Engineering Services 760,000 $ 24,771,059
Environmental & Facilities Services—2.0%
Waste Management, Inc.
(United States) Waste Management Services 1,234,000 $ 44,275,920
Human Resource & Employment Services—1.7%
Adecco SA (Switzerland) Temporary Employment Services 617,000 $ 36,488,569
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK GLOBAL F UND
THE OAKMARK GLOBAL F UND 26
Common Stocks—97.8% (cont.)
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Industrial Conglomerates—2.7%
Tyco International Ltd. Diversified Manufacturing &
(Bermuda) Services 2,131,000 $ 58,602,500
Computer Hardware—1.8%
Dell Inc.
(United States) (a) Technology Products & Services 1,635,000 $ 39,910,350
Data Processing & Outsourced Services—3.9%
eFunds Corporation
(United States) (a) Electronic Debit Payment Services 2,237,100 $ 49,328,055
Ceridian Corporation
(United States) (a) Data Management Services 1,538,000 37,588,720
86,916,775
Home Entertainment Software—1.0%
Square Enix Co., Ltd.
(Japan) Entertainment Software 1,069,000 $ 22,231,912
Office Electronics—2.6%
Neopost SA (France) Mailroom Equipment Supplier 494,750 $ 56,383,370
Semiconductors—1.8%
Rohm Company Integrated Circuits & Semiconductor
Limited (Japan) Devices Manufacturer 442,000 $ 39,511,185
Systems Software—2.8%
Oracle Corporation
(United States) (a) Software Services 4,182,000 $ 60,597,180
Diversified Chemicals—1.6%
Akzo Nobel N.V.
(Netherlands) Chemical Producer 666,000 $ 35,913,882
Specialty Chemicals—1.2%
Givaudan (Switzerland) Fragrance & Flavor
Compound Manufacturer 32,800 $ 25,823,075
Wireless Telecommunication Services—9.0%
NTT DoCoMo, Inc. (Japan) Mobile Telecommunications 46,600 $ 68,409,647
SK Telecom Co., Ltd.
(Korea) Mobile Telecommunications 302,130 64,963,921
Vodafone Group Plc
(Great Britain) Mobile Telecommunications 29,795,000 63,499,193
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK GLOBAL F UND
THE OAKMARK GLOBAL F UND 27
Common Stocks—97.8% (cont.)
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Wireless Telecommunication Services—9.0%(cont.)
SK Telecom Co., Ltd.
(Korea) (b) Mobile Telecommunications 55,000 $ 1,288,100
198,160,861
Total Common Stocks (Cost: $1,748,790,117) 2,154,645,851
Short Term Investments—2.1%
Repurchase Agreement—2.1%
IBT Repurchase Agreement, 4.75% dated 6/30/2006
due 7/3/2006,repurchase price $46,562,870,
collateralized by Small Business Administration
Bonds, with rates of 7.566% - 8.265%, with maturities
from 9/25/2018 - 6/25/2030, and an aggregate market
value plus accrued interest of $48,871,669 $46,544,446 $ 46,544,446
Total Repurchase Agreement (Cost: $46,544,446) 46,544,446
Total Short Term Investments (Cost: $46,544,446) 46,544,446
Total Investments (Cost $1,795,334,563)—99.9% $ 2,201,190,297
Foreign Currencies (Cost $786,527)—0.0% $ 790,892
Other Assets In Excess Of Other Liabilities—0.1% 1,128,409
Total Net Assets—100% $2,203,109,598
(a) Non-income producing security.
(b) Represents an American Depository Receipt.
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Shares Held/
Name Description Par Value Market Value
THE OAKMARK GLOBAL F UND
THE OAKMARK GLOBAL F UND 28
Common Stocks—97.8% (cont.)
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Fellow Shareholders,
Despite volatile equity markets
during the past quarter, The
Oakmark International Fund
and The Oakmark Interna-
tional Small Cap Fund per-
formed well. Year to date, both
Funds are outpacing compara-
ble international market
indices. Please see the individ-
ual Fund letters for more spe-
cific performance information.
Haunted Markets
A strong whiff of fear floated through the global equity
markets over the past quarter as investors’ and speculators’
attention turned to rising interest rates and fears of infla-
tion. Those sectors that have rode a strong wave of
upward momentum over the past few years were espe-
cially hard hit, including emerging markets stocks, small
caps, cyclicals, and resources. Indeed, many of these sec-
tors were looking very pricey. A correction was to be
expected because recent performance was unsustainable
and because many companies were selling at valuation
levels that were not consistent with their long-term
growth prospects.
Ironically, many pundits associated rising interest rates
with the resurgence of inflation, and they ignored the fact
that rates went up in order to prevent inflation. Let’s not
forget that only a few years ago rates were aggressively
lowered in Japan, the U.S., and Europe to fight deflation
fears. Such fears were legitimate. Japan had experienced
deflation, Germany was close to it, and many believed
that the U.S. was poised for deflation post-9/11. As a
result, the world was flooded with liquidity and began to
grow mainly because of the U.S. and emerging markets.
Today, global central banks are responsibly mopping up
this excess liquidity while the world, in our opinion and
despite high-energy prices, is growing in a more balanced
fashion. This balanced growth is occurring as the world’s
second and third largest economies, Japan and Germany,
are finally rebounding. Sadly, the sustainability of Japan’s
growth remains in question because significant reforms
are still needed. Germany, however, seems to have real
potential for long-term growth in our view, though some
surrounding areas, such as France and Italy, still seem
stalled economically.
Overall, despite weakened share prices, foreign compa-
nies continue to generate profit and cash flow growth,
and we believe that investment opportunities for long-
term value investors have improved. We welcome market
instability and weakness because they make quality com-
panies selling at low prices easier to find.
David G. Herro, CFA
Portfolio Manager
[email protected]
29 THE OAKMARK I NTERNATI ONAL AND OAKMARK I NTERNATI ONAL S MALL CAP F UNDS
THE OAKMARK INTERNATIONAL AND
OAKMARK INTERNATIONAL SMALL CAP FUNDS
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The Oakmark International Fund returned 3% this
quarter, somewhat better than the MSCI World ex
U.S. and the Lipper International indices, which had
a gain of 1% and a loss of 1%, respectively. More
importantly, for the longer term, the Fund has
gained 13% year to date and since inception. In
those same time periods the MSCI World ex U.S.
Index has returned 10% and 8%, and the Lipper
International Index has returned 9%.
Impact Players
Despite volatile markets, the following three stocks
have had a significant positive affect on our Fund’s
year-to-date and second quarter returns:
Enodis Plc: This company was the best performer
both year-to-date and the second quarter. A long-
term portfolio holding, UK Enodis manufactures
and distributes commercial food service equipment,
and its management team recently executed a text-
book turnaround at the company. Today, in addition
to its excellent performance, the company is sub-
ject to a takeover bid.
BSkyB Plc: We added this UK provider of pay/satel-
lite TV last year. Initially the stock underperformed
as concerns of competition and subscriber churn hit
the share price. Today, the company is executing
well in a fairly competitive market and was success-
ful in bidding on the UK Premier soccer rights.
Associated British Ports: Is the owner operator of a
number of large ports throughout the UK and has
been another long-term holding of the Fund. We
sold this strong performer during the past quarter
because it reached its sell target, which was close to
an initial bid price for the company.
As far as underachievers, the following two stocks
have weakened the portfolio’s return since the
beginning of the year:
DaimlerChrysler: Though a newer holding, shares
in DaimlerChrysler have been hurt from trouble in
the U.S. auto sector. However, we continue to build
our position because we believe that the market is
overlooking CEO Dieter Zetsche’s potential to turn
the company around, especially in their Mercedes
autos and commercial vehicle divisions.
Rohm Co.: Both technology stocks and Japanese
stocks have been weak year-to-date. Rohm is a Japan-
ese specialty semiconductor manufacturer that con-
tinues to perform well, despite its weak share price.
Lastly, as we often say, “Weak share price breeds
opportunity.” This holds true for our former portfo-
lio holding Mexican media company Grupo Tele-
visa, which we sold at the end of 2005 when it hit
our estimate of fair value. Six months later, due to a
greater than 20% share price decline and improved
value creation, we bought shares again. We continue
to watch closely for other such opportunities.
David G. Herro, CFA
Portfolio Manager
[email protected]
Report from David G. Herro
THE OAKMARK INTERNATIONAL FUND
30 THE OAKMARK I NTERNATI ONAL F UND
THE VALUE OF A $10,000 INVESTMENT IN THE
OAKMARK INTERNATIONAL FUND FROM ITS
INCEPTION (9/30/92) TO PRESENT (6/30/06) AS
COMPARED TO THE MSCI WORLD EX U.S. INDEX
17
The Oakmark
International
Fund (Class I)
$54,157
MSCI World ex
U.S. Index
$30,646
9/30/92 6/06 12/93 12/92 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05
$5,000
$15,000
$10,000
$25,000
$20,000
$35,000
$30,000
$45,000
$40,000
$55,000
$50,000
Average Annual Total Returns
(as of 6/30/06)
Total Return 1-year 5-year 10-year Since
Last 3 Months* Inception
(9/30/92)
Oakmark International
Fund (Class I) 2.90% 26.73% 12.97% 11.41% 13.07%
MSCI World ex U.S. 0.67% 26.89% 10.40% 6.76% 8.49%
MSCI EAFE
18
0.70% 26.56% 10.02% 6.39% 8.23%
Lipper International
Fund Index
19
-0.52% 27.26% 10.13% 7.80% 9.44%
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
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31 THE OAKMARK I NTERNATI ONAL F UND
THE OAKMARK I NTERNATI ONAL F UND
% of Fund
Equity Market Value
% of Fund
Equity Market Value
Pacific Rim 27.0%
Japan 13.6%
Korea 6.8%
Taiwan 3.0%
Australia 1.6%
Singapore 1.2%
Hong Kong 0.8%
Other 0.4%
Israel 0.4%
Latin America 0.4%
Mexico 0.4%
Europe 72.2%
Great Britain 28.0%
Switzerland 16.0%
* Germany 11.3%
* France 7.6%
* Netherlands 5.2%
* Ireland 2.8%
* Spain 1.3%
* Euro currency countries comprise 28.2% of the Fund.
Europe
Pacific Rim
Latin America
Other
International Diversification—June 30, 2006 (Unaudited)
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COLORS: Black, PANTONE 541 U, ~note-color 2 GRAPHICS: 14017-1_intl_pie.eps V1.5
Advertising—2.0%
Publicis Groupe
(France) (a) Advertising & Media Services 3,706,400 $ 143,168,262
Apparel Retail—0.8%
Giordano International Pacific Rim Clothing
Limited (Hong Kong) Retailer & Manufacturer 121,265,300 $ 57,382,535
Apparel, Accessories & Luxury Goods—1.9%
Swatch Group AG,
Bearer Shares
(Switzerland) Watch Manufacturer 817,300 $ 138,049,528
Swatch Group AG,
Registered Shares
(Switzerland) Watch Manufacturer 24,700 862,697
138,912,225
Automobile Manufacturers—8.4%
DaimlerChrysler AG
(Germany) Automobile Manufacturer 4,957,400 $ 244,943,654
Bayerische Motoren Werke
(BMW) AG (Germany) Luxury Automobile Manufacturer 4,599,500 229,789,608
Honda Motor Co., Ltd. Automobile & Motorcycle
(Japan) Manufacturer 4,050,000 128,464,698
603,197,960
Broadcasting & Cable TV—6.0%
British Sky Broadcasting Television Production &
Group plc (Great Britain) Broadcasting 25,124,300 $ 266,447,272
Gestevision Telecinco SA Television Production &
(Spain) Broadcasting 3,866,900 92,736,721
Societe Television Television Production &
Francaise 1 (France) Broadcasting 1,261,000 41,128,492
Grupo Televisa S.A. Television Production &
(Mexico) (b) Broadcasting 1,369,500 26,445,045
426,757,530
Consumer Electronics—2.1%
Koninklijke (Royal)
Philips Electronics
N.V. (Netherlands) Electronics Manufacturer 4,952,300 $ 154,745,466
Movies & Entertainment—1.6%
Vivendi Universal SA Music, Games, Television,
(France) Film, & Telecommunications 3,416,600 $ 119,738,061
Schedule of Investments—June 30, 2006 (Unaudited)
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL F UND
THE OAKMARK I NTERNATI ONAL F UND 32
Common Stocks—96.5%
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Publishing—3.3%
Trinity Mirror plc
(Great Britain) Newspaper Publishing 15,646,538 $ 141,195,861
Johnston Press plc
(Great Britain) Newspaper Publishing 13,044,300 99,983,698
241,179,559
Restaurants—2.2%
Compass Group PLC International Foodservice
(Great Britain) Group Operator 33,783,000 $ 163,831,571
Specialty Stores—2.3%
Signet Group plc
(Great Britain) Jewelry Retailer 94,997,900 $ 168,643,312
Tires & Rubber—1.2%
Compagnie Generale
des Etablissements
Michelin (France) Tire Manufacturer 1,473,500 $ 88,579,968
Brewers—1.2%
Heineken Holding NV
(Netherlands) Brewer 2,384,100 $ 87,913,715
Distillers & Vintners—2.9%
Diageo plc (Great Britain) Beverages, Wines, & Spirits
Manufacturer 12,570,000 $ 211,408,218
Household Products—3.6%
Henkel KGaA (Germany) Consumer Chemical
Products Manufacturer 1,228,200 $ 127,716,545
Uni-Charm Corporation
(Japan) Toiletry Products Manufacturer 2,169,400 119,806,082
KAO Corp. (Japan) Household & Chemical
Products Manufacturer 575,000 15,048,279
262,570,906
Hypermarkets & Super Centers—1.3%
Metro AG (Germany) Internet Food Retailer 1,719,000 $ 97,445,806
Packaged Foods & Meats—4.8%
Nestle SA (Switzerland) Food & Beverage Manufacturer 575,100 $ 180,637,520
Cadbury Schweppes plc Beverage & Confectionary
(Great Britain) Manufacturer 17,248,900 166,341,113
346,978,633
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL F UND
THE OAKMARK I NTERNATI ONAL F UND 33
Common Stocks—96.5% (cont.)
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COLORS: Black, PANTONE 541 U, ~note-color 2, ~note-color 3 GRAPHICS: none V1.5
Soft Drinks—1.5%
Lotte Chilsung Beverage Soft Drinks, Juices &
Co., Ltd. (Korea) Sports Drinks Manufacturer 88,800 $ 107,636,364
Tobacco—1.0%
KT&G Corporation
(Korea) Tobacco Products Manufacturer 1,232,250 $ 71,954,308
Integrated Oil & Gas—0.3%
Total SA (France) Oil & Natural Gas Exploration
and Production 344,000 $ 22,637,650
Diversified Banks—11.6%
Chinatrust Financial
Holding Co. (Taiwan) Commercial Bank 249,047,606 $ 206,530,097
Bank of Ireland (Ireland) Commercial Bank 10,968,500 195,708,176
Lloyds TSB Group plc
(Great Britain) Commercial Bank 12,952,600 127,304,603
Australia and New Zealand
Banking Group Limited
(Australia) Commercial Bank 5,483,800 108,354,563
United Overseas Bank
Limited, Foreign Shares
(Singapore) Commercial Bank 8,395,368 82,741,726
Kookmin Bank (Korea) Commercial Bank 864,000 71,032,411
BNP Paribas SA (France) Commercial Bank 610,000 58,399,504
850,071,080
Diversified Capital Markets—2.4%
Credit Suisse Group
(Switzerland) Investment Services & Insurance 3,073,000 $ 171,930,146
Insurance Brokers—0.4%
Willis Group Holdings
Limited (Great Britain) Consulting Services Provider 930,000 $ 29,853,000
Investment Banking & Brokerage—2.1%
Daiwa Securities
Group, Inc. (Japan) Stock Broker 12,790,000 $ 152,442,852
Real Estate Management & Development—0.0%
United Overseas Land
Limited (Singapore) Real Estate Investor 839,536 $ 1,516,930
Reinsurance—1.3%
Hannover
Rueckversicherung AG
(Germany) (c) Reinsurance 2,672,900 $ 93,503,435
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL F UND
THE OAKMARK I NTERNATI ONAL F UND 34
Common Stocks—96.5% (cont.)
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JOB: 06-14017-1 CYCLE#;BL#: 16; 0 TRIM: 7.75" x 9.75" AS: CHI COMPOSITE
COLORS: Black, PANTONE 541 U, ~note-color 2 GRAPHICS: none V1.5
Pharmaceuticals—8.4%
GlaxoSmithKline plc
(Great Britain) Pharmaceuticals 9,565,000 $ 267,259,606
Novartis AG (Switzerland) Pharmaceuticals 3,320,000 179,775,060
Takeda Pharmaceutical
Company Limited Pharmaceuticals &
(Japan) Food Supplements 1,692,800 105,319,259
Sanofi-Aventis (France) Pharmaceuticals 588,508 57,433,387
609,787,312
Diversified Commercial and Professional Services—1.1%
Meitec Corporation
(Japan) Software Engineering Services 2,483,800 $ 80,955,732
Environmental & Facilities Services—0.1%
Rentokil Initial plc
(Great Britain) Global Business Services 3,400,000 $ 9,808,157
Human Resource & Employment Services—2.7%
Adecco SA (Switzerland) Temporary Employment Services 2,949,000 $ 174,399,984
Michael Page International
plc (Great Britain) Recruitment Consultancy Services 3,609,145 23,392,478
197,792,462
Industrial Machinery—1.1%
Enodis plc (Great Britain) Food Processing Equipment 19,852,920 $ 79,297,962
Electronic Equipment Manufacturers—0.4%
Orbotech, Ltd. (Israel)(c) Optical Inspection Systems 1,237,700 $ 28,380,461
Semiconductors—1.6%
Rohm Company Limited Integrated Circuits & Semiconductor
(Japan) Devices Manufacturer 1,281,000 $ 114,510,923
Diversified Chemicals—1.7%
Akzo Nobel N.V.
(Netherlands) Chemical Producer 2,311,200 $ 124,630,878
Fertilizers & Agricultural Chemicals—1.1%
Syngenta AG
(Switzerland) (c) Crop Protection Products 614,500 $ 81,678,663
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL F UND
THE OAKMARK I NTERNATI ONAL F UND 35
Common Stocks—96.5% (cont.)
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JOB: 06-14017-1 CYCLE#;BL#: 16; 0 TRIM: 7.75" x 9.75" AS: CHI COMPOSITE
COLORS: Black, PANTONE 541 U, ~note-color 2, ~note-color 3 GRAPHICS: none V1.5
Specialty Chemicals—2.7%
Givaudan (Switzerland) Fragrance & Flavor
Compound Manufacturer 134,700 $ 106,047,810
Lonza Group AG,
Registered Shares
(Switzerland) Industrial Organic Chemicals 1,307,800 $ 89,696,969
195,744,779
Wireless Telecommunication Services—9.4%
NTT DoCoMo, Inc.
(Japan) Mobile Telecommunications 163,200 $ 239,580,566
SK Telecom Co., Ltd.
(Korea) Mobile Telecommunications 1,021,312 219,602,264
Vodafone Group Plc
(Great Britain) Mobile Telecommunications 95,129,500 202,740,276
Vodafone Group Plc
(Great Britain) (b) Mobile Telecommunications 606,000 12,907,800
SK Telecom Co., Ltd.
(Korea) (b) Mobile Telecommunications 405,100 9,487,442
684,318,348
Total Common Stocks (Cost: $5,498,644,486) 7,020,905,169
Short Term Investments—3.1%
Repurchase Agreement—3.1%
IBT Repurchase Agreement, 4.75% dated 6/30/2006
due 7/3/2006,repurchase price $230,364,220,
collateralized by Government National Mortgage
Association Bonds with rates of 5.000%, with
maturities of 2/20/2033 - 8/20/2034, and with
a market value plus accrued interest of $42,737,409,
and by Small Business Administration Bonds, with
rates of 7.125% - 8.375%, with maturities from
2/25/2015 - 11/25/2030, and with a market value
plus accrued interest of $199,049,312 $230,273,070 $ 230,273,070
Total Repurchase Agreement (Cost: $230,273,070) 230,273,070
Total Short Term Investments (Cost: $230,273,070) 230,273,070
Total Investments (Cost $5,728,917,556)—99.6% $ 7,251,178,239
Foreign Currencies (Cost $3,780,458)—0.1% $ 3,791,417
Other Assets In Excess Of Other Liabilities—0.3% 22,380,141
Total Net Assets—100% $7,277,349,797
(a) All or a portion of security out on loan.
(b) Represents an American Depository Receipt.
(c) Non-income producing security.
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Shares Held/
Name Description Par Value Market Value
THE OAKMARK I NTERNATI ONAL F UND
THE OAKMARK I NTERNATI ONAL F UND 36
Common Stocks—96.5% (cont.)
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JOB: 06-14017-1 CYCLE#;BL#: 16; 0 TRIM: 7.75" x 9.75" AS: CHI COMPOSITE
COLORS: Black, PANTONE 541 U, ~note-color 2, ~note-color 3 GRAPHICS: none V1.5
The Oakmark International Small Cap experi-
enced a loss of 1% for the quarter ended June 30,
2006, outperforming some of our benchmark
indices. More importantly, however, for the past
twelve months and since inception your Fund is
up 31% and 14% respectively, outpacing the MSCI
World ex U.S. Index with returns of 27% and 7%.
Markets experienced strong volatility this quarter.
The main indices rose nearly 8.5% through early
May, only to fall 7.5% over the past six weeks.
With risk aversion increasing, emerging markets
and smaller-cap stocks experienced their first
declines in several quarters. This was not an inter-
national phenomenon alone, as the Russell 2000
Index
22
in the U.S. fell 5% in the quarter.
In these turbulent markets, the Fund benefited
greatly from both geographic allocation and stock
selection. One of the worst performing small cap
markets in the quarter was Japan, whose small
cap index declined over 13%. As we’ve discussed
many times in previous letters, we continue to
be relatively underweight in the Japanese market
not because we don’t like Japan in general, but
because we haven’t found sufficient companies
and management teams in the country that meet
our quantitative and qualitative criteria. The
Fund’s underweighting in Japan was the largest
contributor to performance.
Stock selection in Switzerland and the United
Kingdom was particularly strong, and the Fund’s
large overweighting in these two markets more
than compensated for its underweighting in
Japan. The Fund’s Swiss and UK names returned
6% and 5% (in U.S. dollars) respectively in the
quarter, solidly ahead of both countries’ return
in the MSCI World ex U.S. Small Cap Index.
Large Contributors
Carpetright PLC, a UK retailer and a name we’ve
discussed in the past, continued to rebound in
the quarter, gaining 16%. As you may recall, we
aggressively added to this position in the sum-
mer of 2005 as the shares fell in response to a
slowing UK housing new-build and refurbish-
ment market. As we noted at the time, carpet
retail is cyclical by nature, but Carpetright is very
well managed, generates strong returns on capital
and throws off massive amounts of free cash flow.
During the general market downturn, Car-
petright’s business model and management team
have shined. Carpetright has gained tremendous
market share, as the group outperformed the
overall market by an estimated 1300 basis points
in 2005. It has done this despite moving a large
portion of its retail outlets to third-tier,
Report from David G. Herro and Chad M. Clark, Portfolio Managers
THE OAKMARK INTERNATIONAL
SMALL CAP FUND
THE VALUE OF A $10,000 INVESTMENT IN THE
OAKMARK INTERNATIONAL SMALL CAP FUND FROM
ITS INCEPTION (11/1/95) TO PRESENT (6/30/06) AS
COMPARED TO THE MSCI WORLD EX U.S. INDEX
17
Average Annual Total Returns
(as of 6/30/06)
Total Return 1-year 5-year 10-year Since
Last 3 Months* Inception
(11/1/95)
Oakmark International
Small Cap Fund
(Class I) -0.58% 31.38% 21.59% 13.74% 14.39%
MSCI World ex U.S. 0.67% 26.89% 10.40% 6.76% 7.45%
MSCI World ex U.S.
Small Cap
20
-3.54% 28.31% 18.54% N/A N/A
Lipper International
Small Cap Index
21
-2.72% 31.73% 17.72% 11.64% N/A
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
International
Small Cap
Fund (Class I)
$41,924
MSCI World ex
U.S. Index
$21,510
11/1/95 6/06 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05
$5,000
$15,000
$10,000
$25,000
$20,000
$35,000
$30,000
$45,000
$40,000
37 THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
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David G Herro new photo.eps V1.5
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND 38
lower-cost, out-of-town locations. International opera-
tions in Belgium and the Netherlands are also improving,
and Polish operations are gaining scale. In the second half
of 2006, Carpetright posted a significant improvement in
both sales and operating profit. We continue to be large
holders of the stock.
Gurit Holding AG, a Swiss holding company, was the sec-
ond largest contributor to performance in the quarter.
Gurit’s management had built a very unique collection of
quality assets via acquisition, including dental supplies,
industrial composites, and textile machine components.
However, we became increasingly critical of their opera-
tional execution as profits fell in their two non-healthcare
operations. The Board became critical as well, deciding in
the fall of 2005 to split the businesses and terminate the
CEO, refocusing the remaining management and unlock-
ing a large amount of value. Since the announcement,
Gurit’s shares have advanced almost 60%. The textile
machine components operations have been divested, and
we believe the dental business looks particularly attractive
in a consolidating industry. As the share price has neared
our target price, we’ve been trimming our holding.
Mabuchi Motor, a Japanese manufacturer of a variety of
mini-motors, advanced 17% in the quarter, well ahead of
its local benchmark. After a sustained period of tough con-
sumer electronics markets, the group appears to have hit
an inflection point. First quarter results point to a slowing
rate of decline in the consumer-related sales and a large
increase in auto-related sales. Mabuchi continues to pay
out virtually 100% of its free cash flow in dividends and
share repurchases and remains well over-capitalized.
Detractors
Sogecable, the leading Spanish pay-TV provider, was the
worst performer in the quarter, falling 28%. Sogecable cur-
rently owns the rights to broadcast all Spanish soccer
games, of which all but one game per week are resold to
other content providers. In May, a Spanish content
provider bid for the TV rights for Barcelona’s soccer team.
This isn’t very valuable because without owning the rights
to the remaining teams you can’t broadcast the match.
While such deals create confusion and noise, Sogecable
will retain the rights to Barcelona for the next couple years.
However, it is clear that pricing for soccer content will
increase. Sogecable has lost nearly 1B Euros in market cap-
italization for what is anticipated to be a couple hundred
of millions in increased content costs. We believe this is a
gross over-reaction given that Sogecable will retain the top
pay-TV position in the under-penetrated Spanish market,
a valuable Canal-Plus franchise, movie exclusivity and at a
minimum pay-per-view access to soccer matches. We have
added to our position in the quarter.
MLP, one of the two leading independent financial advi-
sors in Germany, fell 13% in the quarter. Management
has set very aggressive targets for new customer additions
and sales of pension and investment products. The first
quarter results showed increasing consultants and cus-
tomers, yet brokerage revenues fell like-for-like. We con-
tinue to believe the independent financial advisors will
benefit strongly as large unfunded state pension schemes
transition to private and corporate offerings. MLP’s advi-
sors will become more productive as training improves
and a greater share complete the required exams to sell a
broader product portfolio.
Portfolio Composition
We sold our entire positions in Coloplast, Alfa Laval and
Robert Wiseman in the period as each reached its respec-
tive sell price. We’ve used the market volatility to begin
building a number of new positions including: Kimberly
Clark de Mexico, a manufacturer of diapers and bathroom
tissue; Binggrae, a South Korean food products company;
Britvic, a UK soft drinks and juices bottler; Boewe Systec,
a German manufacturer of mail inserting and cutting
machines; and Australian Pharmaceutical Industries, an
Australian pharma distributor.
Geographically, our portfolio weightings remain very sim-
ilar to last quarter with Europe and the UK representing
71% of investments and the majority of the balance
excluding cash in the Pacific Rim.
After having a tremendous run over the past four years,
both small capitalization international stocks and emerg-
ing markets retrenched in the quarter. Our strong new
idea generation is evidence of this, with five new names
added in the quarter, two of which hail from emerging
markets. In addition to idea generation, the volatile mar-
kets allowed us to add to many of the Fund’s positions
that continue to demonstrate strong underlying perform-
ance, yet whose share prices declined along with the over-
all markets. We are excited and thank you for your
continued confidence.
Chad M. Clark, CFA
Portfolio Manager
[email protected]
David G. Herro, CFA
Portfolio Manager
[email protected]
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39 THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
Pacific Rim 27.5%
Japan 10.3%
Korea 5.5%
Australia 4.4%
Hong Kong 2.5%
New Zealand 1.7%
Malaysia 1.5%
Singapore 1.3%
Philippines 0.3%
Other 1.1%
Israel 1.1%
Latin America 0.4%
Mexico 0.4%
% of Fund
Equity Market Value
* Euro currency countries comprise 24.2% of the Fund.
% of Fund
Equity Market Value
Europe 71.0%
Great Britain 25.4%
Switzerland 14.1%
* France 7.1%
* Spain 5.9%
* Germany 5.5%
* Italy 5.5%
Norway 5.1%
Sweden 2.2%
* Finland 0.2%

Pacific Rim
Europe
Other
Latin America
International Diversification—June 30, 2006 (Unaudited)
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Advertising—1.1%
Asatsu-DK, Inc. (Japan) Advertising Services Provider 400,200 $ 12,939,007
Apparel Retail—7.5%
JJB Sports plc Sportswear & Sports
(Great Britain) Equipment Retailer 13,334,000 $ 44,198,090
Matalan plc (Great Britain) Clothing Retailer 13,827,935 43,214,343
87,412,433
Apparel, Accessories & Luxury Goods—2.2%
Bulgari S.p.A. (Italy) Jewelry Manufacturer & Retailer 2,312,000 $ 26,230,041
Auto Parts & Equipment—2.6%
Kongsberg Automotive Auto Parts & Equipment
ASA (Norway) Manufacturer 3,094,400 $ 27,340,520
Wagon PLC (Great Britain) Auto Parts & Equipment
Manufacturer 759,954 3,256,799
30,597,319
Broadcasting & Cable TV—5.4%
Sogecable SA (Spain) (a) Cable Television Services 1,298,500 $ 37,352,436
Media Prima Berhad
(Malaysia) Film Producer & Sports Promoter 37,018,200 16,320,447
M6 Metropole Television Television Entertainment
(France) Channel Owner & Operator 297,700 9,317,520
62,990,403
Home Improvement Retail—3.6%
Carpetright plc
(Great Britain) Carpet Retailer 1,786,400 $ 41,887,250
Photographic Products—1.6%
Vitec Group plc
(Great Britain) Photo Equipment & Supplies 2,383,907 $ 19,165,175
Publishing—4.8%
Daekyo Co., Ltd. (Korea) Educational Information
Service Provider 371,900 $ 29,399,209
Tamedia AG (Switzerland) TV Broadcasting & Publishing 168,224 16,374,509
SCMP Group, Ltd. Newspaper Publisher &
(Hong Kong) Distributor 31,402,000 10,613,838
56,387,556
Restaurants—0.1%
Alsea SA (Mexico) Pizza Restaurants 311,800 $ 1,099,702
Schedule of Investments—June 30, 2006 (Unaudited)
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND 40
Common Stocks—96.5%
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Textiles—1.8%
Chargeurs SA (France) (a) Wool, Textile Production & Trading 790,182 $ 20,931,230
Brewers—0.4%
Kook Soon Dang
Brewery Co., Ltd.
(Korea) Wine & Spirits Manufacturer 437,000 $ 4,518,545
Distillers & Vintners—1.1%
Baron De Ley, S.A. Beverages, Wines, & Spirits
(Spain) (a) Manufacturer 232,057 $ 12,688,735
Household Products—0.3%
Kimberly-Clark de
Mexico S.A. de C.V Hygiene Products Manufacturer,
(Mexico) Marketer & Distributor 967,000 $ 3,063,534
Packaged Foods & Meats—2.7%
Lotte Confectionery
Co., Ltd. (Korea) Candy & Snacks Manufacturer 17,104 $ 21,543,378
Binggrae Co., Ltd. (Korea) Dairy Products Manufacturer 167,000 6,908,827
Alaska Milk Corporation
(Philippines) Milk Producer 56,360,000 3,182,533
31,634,738
Soft Drinks—0.2%
Britvic Plc (Great Britain) Soft Drink
Manufacturer & Supplier 771,000 $ 2,851,466
Asset Management & Custody Banks—7.1%
Julius Baer Holding
AG-B (Switzerland) Asset Management 522,600 $ 45,397,014
MLP AG (Germany) Asset Management 1,817,800 37,456,670
82,853,684
Insurance Brokers—2.9%
Benfield Group Ltd.
Common Stock
(Great Britain) Reinsurance Service Provider 5,352,000 $ 34,119,626
Multi-Sector Holdings—2.4%
Pargesa Holding AG,
Class B (Switzerland) Diversified Operations 297,100 $ 28,165,629
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND 41
Common Stocks—96.5% (cont.)
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Other Diversified Financial Services—0.2%
Ichiyoshi Securities
Co., Ltd. (Japan) Stock Broker 143,000 $ 2,162,994
Real Estate Management & Development—1.1%
Countrywide PLC
(Great Britain) Real Estate Service Provider 1,359,000 $ 12,565,314
Health Care Distributors—1.3%
Australian Pharmaceutical
Industries Limited Pharmaceutical Products
(Australia) Distributor 8,716,000 $ 14,961,546
Health Care Supplies—2.0%
Ansell Limited (Australia) Protective Rubber &
Plastics Products 1,932,884 $ 13,889,273
Medisize Holding AG Medical & Dental Applications
(Switzerland) (a) Holding Company 140,000 9,619,239
23,508,512
Pharmaceuticals—1.7%
Santen Pharmaceutical
Co., Ltd. (Japan) Pharmaceuticals 820,200 $ 19,494,443
Air Freight & Logistics—1.7%
Mainfreight Limited
(New Zealand) Logistics Services 5,786,405 $ 19,567,394
Commercial Printing—0.9%
De La Rue Plc
(Great Britain) Commercial Printing 1,053,190 $ 10,643,410
Diversified Commercial and Professional Services—3.6%
Intrum Justitia AB
(Sweden) Diversified Financial Services 2,546,643 $ 25,301,000
Prosegur, Compania de
Seguridad SA (Spain) Security & Transportation Services 677,700 16,902,838
42,203,838
Industrial Conglomerates—2.2%
Haw Par Corporation
Limited (Singapore) Diversified Operations 4,086,687 $ 14,716,566
Rheinmetall AG
(Germany) Automotive Pump Manufacturer 144,300 10,060,743
24,777,309
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND 42
Common Stocks—96.5% (cont.)
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Industrial Machinery—10.7%
Interpump Group
S.p.A. (Italy) Pump & Piston Manufacturer 4,124,100 $ 36,133,271
Schindler Holding AG
(Switzerland) Escalator & Elevator Manufacturer 549,000 29,054,272
Saurer AG (Switzerland) (a) Textile Equipment Manufacturer 298,853 22,733,900
Halma plc (Great Britain) Electronic Instrument Producer 4,468,700 16,341,111
Pfeiffer Vacuum Technology
AG (Germany) Vacuum Pump Manufacturer 166,000 10,503,584
LISI (France) Industrial Fastener Manufacturer 149,048 10,199,232
124,965,370
Office Services & Supplies—2.2%
Domino Printing Sciences
plc (Great Britain) Printing Equipment 4,832,700 $ 25,402,368
Communication Equipment—2.6%
Tandberg ASA (Norway) Develops & Markets
Communication Equipments 3,663,000 $ 30,304,824
Computer Storage & Peripherals—1.2%
Lectra (France) Manufacturing Process Systems 2,186,404 $ 14,681,730
Data Processing & Outsourced Services—1.8%
Baycorp Advantage
Limited (Australia) Credit Reference Services 8,662,000 $ 20,661,910
Electronic Equipment Manufacturers—4.0%
Mabuchi Motor Co., Digital Camera Motors
Ltd. (Japan) Manufacturer 546,000 $ 32,634,044
Orbotech, Ltd. (Israel) (a) Optical Inspection Systems 536,500 12,301,945
Vaisala Oyj, Class A Atmospheric Observation
(Finland) Equipment 77,800 2,388,242
47,324,231
Home Entertainment Software—3.2%
Square Enix Co., Ltd.
(Japan) Entertainment Software 1,808,500 $ 37,611,237
IT Consulting & Other Services—1.7%
Morse plc (Great Britain) Business & Technology Solutions 13,929,000 $ 20,219,643
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Name Description Shares Held Market Value
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND 43
Common Stocks—96.5% (cont.)
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Office Electronics—2.4%
Neopost SA (France) Mailroom Equipment Supplier 220,700 $ 25,151,712
Boewe Systec AG Automated Paper Management
(Germany) Systems Producer 60,358 3,562,822
28,714,534
Industrial Gases—0.9%
Taiyo Ink Mfg. Co.,
Ltd. (Japan) Manufacturer of Resist Inks 218,000 $ 11,105,732
Specialty Chemicals—1.8%
Croda International plc
(Great Britain) Chemical Producer 1,625,900 $ 13,044,791
Gurit-Heberlein AG
(Switzerland) Chemical Producer 14,000 7,872,889
20,917,680
Alternative Carriers—1.5%
Asia Satellite
Telecommunications
Holdings Limited
(Hong Kong) Satellite Operator 10,633,500 $ 18,073,240
Total Common Stocks (Cost: $876,512,495) 1,129,403,332
Short Term Investments—2.9%
Repurchase Agreement—2.9%
IBT Repurchase Agreement, 4.75% dated 6/30/2006 due
7/3/2006, repurchase price $33,523,953, collateralized
by a Government National Mortgage Association Bond
with a rate of 5.625%, with maturity at 1/20/2034, and
an aggregate market value plus accrued interest of
$10,689,539, and by Small Business Administration
Bonds, with rates of 7.550% - 9.125%, with maturities
from 11/25/2015 - 11/25/2029, and an aggregate market
value plus accrued interest of $24,496,684 $33,510,688 $ 33,510,688
Total Repurchase Agreement (Cost: $33,510,688) 33,510,688
Total Short Term Investments (Cost: $33,510,688) 33,510,688
Total Investments (Cost $910,023,183)—99.4% $ 1,162,914,020
Foreign Currencies (Cost $1,074,992)—0.1% $ 1,092,970
Other Assets In Excess Of Other Liabilities—0.5% 6,370,550
Total Net Assets—100% $1,170,377,540
(a) Non-income producing security.
Schedule of Investments—June 30, 2006 (Unaudited) cont.
Shares Held/
Name Description Par Value Market Value
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND
THE OAKMARK I NTERNATI ONAL S MALL CAP F UND 44
Common Stocks—96.5% (cont.)
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This material must be preceded or accompanied by a prospectus. To order a prospectus, which explains management fees
and expenses and the special risks of investing in the Funds, visit oakmark.com or call 1-800-OAKMARK. Please read the
prospectus carefully before investing.
The discussion of investments and investment strategy of the Funds (including current investment themes, the portfo-
lio managers’ research and investment process, and portfolio characteristics) represents the investments of the Funds and
the views of the portfolio managers and Harris Associates L.P., the Funds’ investment adviser, at the time of this report,
and are subject to change without notice.
The performance data quoted represents past performance. The above performance 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 origi-
nal 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.
The performance information for Class I shares of The Oakmark Fund, The Oakmark Select Fund, The Oakmark Equity &
Income Fund, The Oakmark Global Fund, The Oakmark International Fund and The Oakmark International Small Cap
Fund does not reflect the imposition of a 2% redemption fee on shares held by an investor for 90 days or less. The pur-
pose of this redemption fee is to deter market timers.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and
underperform growth stocks during given periods.
Because The Oakmark Select Fund is non-diversified, the performance of each holding will have a
greater impact on the Fund’s total return, and may make the Fund’s returns more volatile than a more
diversified fund.
The Oakmark Equity and Income Fund closed to certain new investors as of 5/7/04. The Oakmark
Global Fund and The Oakmark International Fund closed to certain new investors as of 12/15/03. The
Oakmark International Small Cap Fund closed to new investors as of 5/10/02.
Equity and Income invests in medium- and lower-quality debt securities that have higher yield poten-
tial but present greater investment and credit risk than higher-quality securities, which may result in
greater share price volatility. An economic downturn could severely disrupt the market in medium or
lower grade debt securities and adversely affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest.
Investing in foreign securities represents risks which in some way may be greater than in U.S. invest-
ments. Those risks include: currency fluctuation; different regulation, accounting standards, trading
practices and levels of available information; generally higher transaction costs; and political risks.
The stocks of smaller companies often involve more risk than the stocks of larger companies. Stocks
of small companies tend to be more volatile and have a smaller public market than stocks of larger com-
panies. Small companies may have a shorter history of operations than larger companies, may not have
as great an ability to raise additional capital and may have a less diversified product line, making them
more susceptible to market pressure.
1. Total return includes change in share prices and in each case includes reinvestment of any dividends and capital gain dis-
tributions.
2. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.
3. The Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.
4. The S&P 500 Index is a broad market-weighted average of U.S. blue-chip companies. This index is unmanaged and investors
cannot actually make investments in this index.
5. The NASDAQ Composite Index is a market value weighted index of all common stocks listed on NASDAQ. This index is
unmanaged and investors cannot actually make investments in this index.
45 THE OAKMARK F UNDS
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6. Market Cap is the market price of an entire company, calculated by multiplying the number of shares outstanding by the
price per share.
7. EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.
8. The Dow Jones Industrial Average is an unmanaged index that includes only 30 big companies. This index is unmanaged
and investors cannot actually make investments in this index.
9. The Lipper Large Cap Value Fund Index is an equally weighted index of the largest 30 funds within the large cap value funds
investment objective as defined by Lipper Inc. The index is adjusted for the reinvestment of capital gains and income div-
idends. This index is unmanaged and investors cannot actually make investments in this index.
10. The S&P MidCap 400 is an unmanaged broad market-weighted index of 400 stocks that are in the next tier down from the
S&P 500 and that are chosen for market size, liquidity, and industry group representation. This index is unmanaged and
investors cannot actually make investments in this index.
11. The Lipper Mid Cap Value Fund Index measures the performance of the 30 largest U.S. mid-cap value funds tracked by Lip-
per. This index is unmanaged and investors cannot actually make investments in this index.
12. The Lipper Balanced Fund Index measures the performance of the 30 largest U.S. balanced funds tracked by Lipper. This
index is unmanaged and investors cannot actually make investments in this index.
13. Lehman Brothers Government/Corporate Bond Index is a benchmark index made up of the Lehman Brothers Government
and Corporate Bond indexes, including U.S. government Treasury and agency securities as well as corporate and Yankee
bonds. This index is unmanaged and investors cannot actually make investments in this index.
14. The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed mar-
ket equity performance. As of December 2003 the MSCI World Index consisted of the following 23 developed market
country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy,
Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the
United States. This index is unmanaged and investors cannot actually make investments in this index.
15. The Lipper Global Fund Index measures the performance of the 30 largest mutual funds that invest in securities through-
out the world. This index is unmanaged and investors cannot actually make investments in this index.
16. The quoted passages are taken from “DJ Tales of the Tape: Pure-Play Investors Looking Past XTO” by Alex Davidson, Dow
Jones Newswires, April 10, 2006.
17. The MSCI World Index ex U.S. is a free float-adjusted market capitalization index that is designed to measure global devel-
oped market equity performance. As of April 2002 the MSCI World Index consisted of the following 22 developed market
country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy,
Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. This
index is unmanaged and investors cannot actually make investments in this index.
18. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to
measure developed market equity performance, excluding the US & Canada. As of December 2003 the MSCI EAFE Index
consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Ger-
many, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. This index is unmanaged and investors cannot actually make investments in this
index.
19. The Lipper International Fund Index reflects the net asset value weighted total return of the 30 largest international equity
funds. This index is unmanaged and investors cannot actually make investments in this index.
20. The MSCI World ex U.S. Small Cap Index is the small cap component of the MSCI World ex U.S. Standard Index. Securi-
ties selected represent 40% of the small cap asset class in each developed market on a capitalization-weighted basis. This
index is unmanaged and investors cannot actually make an investment in this index.
21. The Lipper International Small Cap Funds Index measures the performance of the 10 largest international small-cap funds
tracked by Lipper. This index is unmanaged and investors cannot actually make investments in this index.
22. The Russell 2000 Index is an unmanaged, market-weighted index, with dividends reinvested, of 2,000 small companies,
formed by taking the largest 3,000 small companies and eliminating the largest 1,000 of those companies. This index is
unmanaged and investors cannot actually make investments in this index.
46 THE OAKMARK F UNDS
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Invest
Managers select stocks from the approved list for their specific funds
Approved List
Securities available for investment
Quantitative and Qualitative Research
Rigorous analysis is performed to ensure that the stock meets
our strict value standards
Criteria Screens
Managers and research team screen for stocks that are worth
further consideration
Bottom-Up Investment Process
Universe of Thousands of Equity Securities
All stocks available for investment
Who Should Invest
Any investor who is seeking a disciplined value manager
for the purposes of growing and diversifying a portfolio
should consider one of The Oakmark Funds, keeping in
mind that all equity investments should be considered
long-term investments. As value investors, we recognize
that patience is a virtue and believe that, over the long
term, investors are rewarded for their patience. We gener-
ally hold the companies in which we invest for three to
five years, a time horizon that we encourage our share-
holders to consider as well.
How to Use Value Funds
in an Overall Portfolio
Investment styles tend to move in cycles. One style may be
in favor for a few years while the other is out of favor, and
vice versa. Diversifying the stock portion of your portfolio
may help reduce overall volatility—and potentially pro-
vide more consistent returns over time.
Investment Philosophy
All Oakmark managers follow a consistent investment
philosophy—to invest in companies they believe are
trading at a substantial discount to underlying business
value. Critical to this philosophy is to invest with man-
agement teams who are committed to maximizing the
company’s business value.
Three key tenets of our
investment philosophy:
1
Buy businesses trading at a significant discount
to our estimate of true business value.
2
Invest in companies expected to grow shareholder
value over time.
3
Invest with management teams who think
and act as owners.
Investment Process
We seek to identify undervalued companies through an
intensive, in-house research process. This process is not
based on macro-economic factors, such as the perform-
ance of the economy or the direction of interest rates.
Nor is it based on technical factors, such as the perform-
ance of the stock market itself. And, while some value
managers might use only one summary statistic—such as
price-earnings ratio—our investment professionals take a
more in-depth approach using a range of valuation meas-
ures appropriate for a specific company or industry.
From the universe of thousands of equity securities, our
team generates investment ideas through a variety of
methods. If a security appears attractive, detailed quan-
titative and qualitative research follows. This careful
process of identifying undervalued stocks results in an
“approved list.”
The Result: a unified effort aimed at identifying the
best values in the marketplace. From the list of
approved stocks, each fund manager constructs a rela-
tively focused portfolio, built on a stock-by-stock basis
from the bottom up.
THE OAKMARK FUNDS
THE OAKMARK F UNDS 47
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Multiple – A ratio used to measure a stock’s valua-
tion, usually greater than 1. Sometimes used to mean
price/earnings ratio.
P/B or Price-to-Book Ratio – A stock’s capitalization
divided by its book value. The value is the same whether
the calculation is done for the whole company or on a
per-share basis.
P/E or Price-to-Earnings Ratio – The most common
measure of a stock’s valuation. It is equal to a stock’s
capitalization divided by its after-tax earnings over a
12-month period. The value is the same whether the
calculation is done for the whole company or on a
per-share basis. Equivalently, the cost an investor in
a given stock must pay per dollar of current annual
earnings. Also called earnings multiple.
Share repurchase – Program through which a corpo-
ration buys back its own shares in the open market,
typically an indication that the corporation’s man-
agement believes the stock price is undervalued.
Value investing – Investors who utilize valuation
measures such as business value (including growth
rate), price/earnings ratio, price/book ratio, and yield
to gauge the attractiveness of a company. Managers
who employ a value investment style believe that the
true, underlying value of a company is not reflected
in its current share price, and, over time, the price
has potential to increase as the market recognizes the
overall value of the business. Value stocks sell at rel-
atively low prices in relation to their underlying
business value, earnings, or book value.
Stocks become undervalued for a variety of rea-
sons, including an overall market decline, or when a
specific industry falls into disfavor and investors view
all companies in that industry in the same light. Con-
sequently, an individual company’s stock price may
fall, even though it may be only temporarily affected
by the industry’s problems and its underlying value
has remained unchanged.
“x times earnings” (“12 times earnings”) – Another way
to express a stock’s price-to-earnings (P/E) ratio. A
stock with a P/E ratio of 12 sells at 12 times earnings.
Book value – A company’s common stock equity as it
appears on a balance sheet, equal to total assets minus
liabilities, preferred stock, and intangible assets such as
goodwill. A company’s book value often differs sub-
stantially from economic value, especially in industries
such as media.
Business value/Intrinsic value – The perceived or esti-
mated actual value of a security, as opposed to its
current market price or book value. Business value
can be evaluated based on what a knowledgeable
buyer would pay for a business if the company were
sold in its entirety.
Growth investing – Investors who look for companies
based on whether the stock of a company is growing
earnings and/or revenue faster than the industry as a
whole or the overall market. Growth investors gen-
erally expect high rates of growth to persist, and the
stock, in turn, to deliver returns exceeding the mar-
ket’s. A growth mutual fund is generally one that
emphasizes stocks believed to offer above-average
growth prospects, with little to no emphasis on the
stock’s current price.
M & A (Mergers & Acquisitions) – Merger: the com-
bining of two or more entities into one, through a
purchase acquisition or a pooling of interests. Acqui-
sition: can also be called a takeover, and is defined as
acquiring control of a corporation, called a target, by
stock purchase or exchange, either hostile or friendly.
Market capitalization (market cap or cap) – The mar-
ket price of an entire company on any given day,
calculated by multiplying the number of shares
outstanding by the price per share.
Momentum investing – Approach to investing based
on the belief that stock price trends are likely to con-
tinue. Momentum investors tend to buy stocks that
have been outperforming the market and to sell those
stocks when their relative performance deteriorates.
Momentum investors do not consider a company’s
underlying value or fundamentals in their invest-
ment decisions.
THE OAKMARK F UNDS
The Oakmark Glossary
48
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President’s Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Commentary on The Oakmark and Oakmark Select Funds . . . . . . . . . . . . . . . . . . . . 4
The Oakmark Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Oakmark Select Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Oakmark Equity and Income Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Oakmark Global Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Global Diversification Chart. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Commentary on The International and International Small Cap Funds. . . . . . . . 29
The Oakmark International Fund
Letter from the Portfolio Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
International Diversification Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
The Oakmark International Small Cap Fund
Letter from the Portfolio Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
International Diversification Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Oakmark Philosophy and Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
The Oakmark Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2006 Third Quarter Report
THE OAKMARK FUNDS
FORWARD- LOOKING STATEMENT DISCLOSURE
One of our most important responsibilities as mutual fund managers is to
communicate with shareholders in an open and direct manner. Some of our
comments in our letters to shareholders are based on current management
expectations and are considered “forward-looking statements”. Actual future
results, however, may prove to be different from our expectations. You can
identify forward-looking statements by words such as “estimate”, “may”, “will”,
“expect”, “believe”, “plan” and other similar terms. We cannot promise future
returns. Our opinions are a reflection of our best judgment at the time this
report is compiled, and we disclaim any obligation to update or alter forward-
looking statements as a result of new information, future events, or otherwise.
THE OAKMARK FUNDS
Trustees and Officers
Trustees
Gary N. Wilner, M.D.—Chairman
Michael J. Friduss
Thomas H. Hayden
Christine M. Maki
John R. Raitt
Allan J. Reich
Steven S. Rogers
Marv R. Rotter
Burton W. Ruder
Peter S. Voss
Officers
John R. Raitt—President
Robert M. Levy—Executive Vice President
Henry R. Berghoef—Vice President
Chad M. Clark—Vice President
Kevin G. Grant—Vice President
David G. Herro—Vice President
Clyde S. McGregor—Vice President
William C. Nygren—Vice President
Vineeta D. Raketich—Vice President
Janet L. Reali—Vice President and Secretary
Ann W. Regan—Vice President and Assistant Secretary
Kristi L. Rowsell—Vice President
Edward A. Studzinski—Vice President
Robert A. Taylor—Vice President
Christopher P. Wright—Vice President
John J. Kane—Treasurer
Other Information
Investment Adviser
Harris Associates L.P.
Two North LaSalle Street
Chicago, Illinois 60602-3790
Transfer Agent
Boston Financial Data Services, Inc.
Quincy, Massachusetts
Legal Counsel
Bell, Boyd & Lloyd LLC
Chicago, Illinois
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Chicago, Illinois
For More Information
Please call 1-800-OAKMARK
(1-800-625-6275)
or 617-483-3250
Website
oakmark.com
To obtain a prospectus, an application or periodic reports, access our web
site at oakmark.com, or call 1-800-OAKMARK (1-800-625-6275) or
(617) 483-3250.
The Funds will file its complete schedule of portfolio holdings with the Securities and Exchange Commission
(“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q’s are available on
the SEC’s website at www.sec.gov. The Funds’ Forms N-Q may be reviewed and copied at the SEC’s Public
Reference Room in Washington, DC, and that information on the operation of the Public Reference Room may
be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures the Funds use to determine how to vote proxies relating to
portfolio securities is available without charge, upon request, by calling toll-free 1-800-625-6275; on the Funds’
website at oakmark.com; and on the Securities and Exchange Commission’s website at www.sec.gov.
No later than August 31 of each year, information regarding how the Adviser, on behalf of the Funds, voted
proxies relating to the Funds’ portfolio securities for the twelve months ended the preceding June 30 will be
available through a link on the Funds’ website at oakmark.com and on the SEC’s website at www.sec.gov.
This report is submitted for the general information of the shareholders of the Funds. The report is not
authorized for distribution to prospective investors in the Funds unless it is accompanied or preceded by a
currently effective prospectus of the Funds.
No sales charge to the shareholder or to the new investor is made in offering the shares of the Funds, however, a
shareholder may incur a 2% redemption fee on an exchange or redemption of Class I shares held for 90 days or
less from any Fund.
Merrill Corp - Harris-Oakmark Harris Associates Investment Trust 3rd Quarterly Report [Funds] 06-30-2006 [AUX] | sbeaupr | 24-Jul-06 11:38 | 06-14017-1.aa | Sequence: 2
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1-800-OAKMARK
oakmark.com
Advised by Harris Associates L.P.
J U N E 3 0 , 2 0 0 6
T HI RD QUART E R RE P ORT
The Oakmark Funds are distributed by Harris
Associates Securities L.P., member NASD. Date
of first use: July 2006.
Merrill Corp - Harris-Oakmark Harris Associates Investment Trust 3rd Quarterly Report [Funds] 06-30-2006 [AUX] | sbeaupr | 24-Jul-06 11:38 | 06-14017-1.aa | Sequence: 1
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JOB: 06-14017-1 CYCLE#;BL#: 15; 0 TRIM: 15.5" x 9.75" AS: CHI COMPOSITE
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