Oakmark Select Fund: First Quarter 2012

March 31, 2012

Oakmark Select Fund - Investor Class
Average Annual Total Returns 03/31/12
Since Inception 08/05/91 12.52%
10-year 4.87%
5-year 2.69%
1-year 10.84%
3-month 15.58%

Gross Expense Ratio as of 09/30/11 was 1.07%

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 gained 16% for the past quarter, compared to a 13% gain for the S&P 500. During the first half of our fiscal year, the Fund increased 27%, compar ed to 26% for the S&P 500. Stocks have enjoyed an amazing six months, producing impressive, but unsustainable, returns. However, for the reasons discussed in the preceding Commentary on the Oakmark and Oakmark Select Funds, we continue to believe that equities remain attractively priced.

Our largest holding, Discovery Communications, gained 24% during the quarter. Though we had other holdings that had larger gains, because of Discovery’s weighting in the portfolio, it contributed the most to our performance. We have written before about Discovery making most of its money from just a couple of its cable networks. Like almost everyone else, we were excited about the prospects for its new Oprah Winfrey Network (OWN). But a funny thing happened: While OWN struggled, little-known “ID: Investigation Discovery” became a big ratings success and, by some measures, it is now a Top 20 cable network. So if your Saturday night TV hasn’t included “Who the (Bleep) Did I Marry?” or “Scorned: Love Kills,” you should tune in. But be forewarned: it’s addictive.

It was also a very good quarter for our financial sector holdings. JPMorgan Chase gained 39% and Capital One gained 32%. Both companies performed extremely well on their stress tests. JPMorgan announced an acceleration of its share repurchases, and Capital One increased its earnings power via acquisitions. Our single largest gainer was last quarter’s newcomer, TRW Holdings, up 42%. We believed the market overreacted to cyclical concerns surrounding TRW, as the company’s share price fell by more than 50% from July to December. The stock’s recent improvement offsets some of that overreaction. We believe that TRW, as well as our other strong performers, remains undervalued.

The only decliner during the quarter was Newfield Exploration, down 8%. When we bought Newfield, it was primarily a natural gas company. Recently, however, much of its drilling activity has been oriented toward oil and natural gas liquids, whose values correlate more with oil prices. With oil prices staying high and natural gas prices collapsing, Newfield has further slowed its natural gas drilling to accelerate its development of liquids. The resulting slowing of near-term production growth has frustrated many investors. We believe Newfield management is taking the proper steps to maximize its long-term value and believe the stock merits retention in the portfolio.

During the quarter we neither initiated nor eliminated any positions.

We are pleased to report that in the past quarter, for the first time in several years, the Fund’s NAV exceeded its previous high water mark. We are aware that the past few years have been quite the roller coaster ride. That’s why we are especially pleased that so many investors remained with us throughout that period. We are always excited to see our shareholders rewarded for their patience.

As of 3/31/12, Discovery Communications, Inc., Class C represented 8.4%, JPMorgan Chase & Co. 5.0%, Capital One Financial Corp. 5.0%, TRW Automotive Holdings Corporation 4.8%, Newfield Exploration Co. 3.7% of the Oakmark Select 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.

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.