Oakmark Fund: Second Quarter 2011

June 30, 2011

Oakmark Fund - Investor Class
Average Annual Total Returns 06/30/11
Since Inception 08/05/91 12.52%
10-year 4.73%
5-year 5.16%
1-year 26.73%
3-month 1.45%

Gross Expense Ratio as of 09/30/10 was 1.11%

Past performance is no guarantee of future results. The performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. The investment return and principal value vary so that an investor’s shares when redeemed may be worth more or less than the original cost. To obtain the most recent month-end performance data, view it here.

For the quarter ended June 30, The Oakmark Fund increased just over 1% compared to a near zero return for the S&P 500. For the year to date, Oakmark is now up 7%, compared to 6% for the S&P 500. Our relative out-performance was aided by our smaller exposure to cyclical businesses and to industrial commodity companies, including energy.

Our most positive contributors in the quarter were MasterCard (+20%), Dell (+15%), McDonald’s (+12%) and Northrop Grumman (+11%). The only common theme among these diverse companies was that they demonstrated strong fundamental performance. The biggest detractors were mostly financials, with double-digit losses for Bank of New York, JPMorgan, Wells Fargo, Aflac and Bank of America. Despite the populist dislike of this industry and the nasty politics that surround it, we believe that our financial stocks are all inexpensively valued relative to their earnings potential.

During the quarter we eliminated our position in Johnson & Johnson after the company announced a stock-financed acquisition that we believe will decrease its per-share value, and we initiated a position in Google.

Google (GOOG — $506)
Google is the world’s dominant Internet search engine. In 2007, its stock price hit an all-time high of $747. The company then earned just over $13 per share for a P/E of 56 times. At that point, the business was selling for $702, net of $45 per share in cash. That was still about 56 times earnings, net of interest income. Google is expected to earn $35 per share in 2012, and to end the year with $146 of cash per share. Therefore, net of that cash and its interest income, Google sells at $360—less than 11 times projected earnings. The S&P 500 trades at about 12 times expected 2012 earnings. That means the market is now valuing Google as a below-average business, yet Google’s 2011 revenues and earnings are expected to be more than double their 2007 levels. Cash per share is expected to increase $100 over the five years ending next year. Clearly Google has been growing faster and generating more cash than the average business. And we expect Internet usage and search activity to continue growing. Google continues to improve its targeting algorithms, which makes Internet advertising—the source of virtually all of the company’s profits—more valuable to its clients. Today Google’s share of global search advertising revenue is approximately 80%, which is as high as it has ever been. Despite these positives, the stock, net of cash, has fallen by nearly half. We believe that paying less than a market multiple to buy a global leader in an above-average growth industry—especially when that company’s free cash flow approximates reported earnings—is usually a very good investment.

As of 6/30/11, Mastercard, Inc., Class A represented 2.1%, Dell Inc. 2.0%, McDonald’s Corp. 1.9%, Northrop Grumman Corp. 2.0%, Bank of New York Mellon Corp. 1.5%, JPMorgan Chase & Co. 1.6%, Wells Fargo & Co. 1.8%, Aflac, Inc. 1.5%, Bank of America Corp. 1.1%, Johnson & Johnson 0%, and Google Inc., Class A 0.7% of the Oakmark Fund’s total net assets. Portfolio holdings are subject to change without notice and are not intended as recommendations of individual stocks.

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.

The Price-Earnings Ratio (“P/E”) is the most common measure of the expensiveness of a stock.

The discussion of the Funds’ investments and investment strategy (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the Funds’ investments and the views of the portfolio managers and Harris Associates L.P., the Funds’ investment adviser, at the time of this letter, and are subject to change without notice.