Oakmark Select Fund: First Quarter 2011

March 31, 2011

Oakmark Select Fund - Investor Class
Average Annual Total Returns 03/31/11
Since Inception 11/01/96 12.64%
10-year 5.41%
5-year 2.24%
1-year 13.43%
3-month 6.52%

Gross Expense Ratio as of 09/30/10 was 1.08%

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.

The Oakmark Select Fund increased in value by 7% for the quarter ended March 31, 2011. That was a good return for just three months, and it also exceeded the 6% return achieved by the S&P 500.

Fourteen of the Fund’s holdings increased by more than 5%, and only one lost that much. Best Buy was that one, falling 16% after also being one of our poor performers in the prior quarter. The company has strung together several months of disappointing sales. The bulls believe that the stock, now selling at eight to nine times projected earnings (compared to about 13 times for the S&P 500), has gone from undervalued to greatly undervalued. The bears believe Best Buy is a disadvantaged competitor to Wal-Mart and Amazon. We agree with the bulls and believe that even if Best Buy loses market share, it can use excess capital to repurchase shares, which would allow the company to achieve above-average per-share earnings growth.

On the positive side of the portfolio, we had five stocks that gained more than Best Buy lost: DirecTV (+17%), Calpine and Cenovus (+19% each), Capital One (+22%) and the best performer, H&R Block (+42%).

Block has appeared on our “Biggest Loser” list several times in the past year, but unlike the TV show, that’s not the goal. Investors have been concerned about lingering liabilities from the Option One subprime mortgage business that Block shut down in 2007, as well as regulatory efforts to stop refund anticipation loans (RALs) and the growing trend of taxpayers preparing their returns online. We believe that online preparers are largely converts from pen-and-paper preparation, that RALs are a very small part of Block’s income, and that the mortgage liabilities are not going to spiral out of control. One of the few positives in acknowledging that one is a subprime lender is that, unlike the so-called prime lenders, the buyers of Block’s mortgages can’t now come back claiming they were shocked to discover the loans were indeed subprime. During the quarter, Block reported good early-season tax results and also reported another quarter of relatively small mortgage losses. We think Block’s new management is doing a terrific job.

During the quarter, we sold our Western Union shares to fund a purchase of MasterCard. We believe MasterCard, which has been achieving strong revenue and earnings growth, will continue to benefit from the global trend in spending toward using plastic instead of paper.

As of 3/31/11, Best Buy Co., Inc. represented 3.2% of The Oakmark Select Fund’s total net assets, Wal-Mart Stores Inc. 0%,, Inc. 0%, DIRECTV, Class A 4.0%, Calpine Corp. 4.7%, Cenovus Energy, Inc. 4.8%, Capital One Financial Corp. 4.4%, H&R Block, Inc. 4.1%, Western Union Co. 0%, and Mastercard, Inc., Class A 3.8%. 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.

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 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.