Oakmark Select Fund: Fourth Quarter 2011

December 31, 2011

Oakmark Select Fund - Investor Class
Average Annual Total Returns 12/31/11
Since Inception 11/01/96 11.67%
10-year 3.62%
5-year -0.67%
1-year 2.15%
3-month 9.96%

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 returned 10% for the quarter. Though we are always excited by double-digit returns, our excitement is tempered because we trailed the S&P 500’s 12% return. For all of 2011, both the Fund and the S&P returned 2%. Normally, beating the S&P by a measly four basis points (0.04%) is a middle-of-the-pack performance. But in 2011, so many investors misplayed the highly volatile markets that the Fund ranked in the 16th percentile of its Morningstar peer group.

Our best performers for the quarter were H&R Block and Federal Express, both returning 24%. Block was among many high-yield stocks that performed well, while FedEx benefited from reduced fears of a double dip and a greater-than-expected increase in Christmas shopping via the Internet. Our worst performer – and the only one that the Fund lost money on – was oil and gas producer Newfield Exploration, down 5%. Newfield announced a shortfall in its 2011 production due to its decision to shift capital away from an overcrowded basin to other opportunities with higher long-term returns. We believe Newfield’s actions were warranted and, therefore, we used its price decline to add to our position.

We eliminated one holding, Bristol Myers-Squibb, and used the proceeds to acquire TRW Automotive. Bristol was a good long-term holding for the Fund, providing both capital appreciation and an above-average annual dividend. Last year, that dividend attracted the interest of yield-hungry investors and made it one of the Fund’s best performers. Rather than paying a dividend, TRW has been using its cash flow to pay off debt. We consider debt repayment and share repurchase to be just as valuable to shareholders as a dividend, but currently dividends are more in favor. In July, TRW’s price was more than twice that of Bristol, but when concerns grew about a cyclical downturn in Europe, TRW stock fell sharply. During the past quarter, Bristol’s stock price exceeded TRW’s price. In our estimate, TRW shares are worth a lot more than their $33 price. We forecast that TRW’s EPS will exceed $7 within a couple of years, and with its debt paid down, the company will soon put that cash to work to reduce its share base, further increasing EPS.

As we stated in the opening letter, 2011 did not produce the attractive stock market returns that we expected. We do believe, however, that business values increased more than stock prices, so we begin 2012 enthusiastic that stocks are now priced at an even larger discount to our value estimates.

We thank you for your patience and, as always, for your investment in the Fund.

As of 12/31/11, H&R Block, Inc. represented 4.3%, FedEx Corp. 4.3%, Newfield Exploration Co. 4.0%, Bristol-Myers Squibb Co. 0%, and TRW Automotive Holdings Corporation 4.0% 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.

Morningstar is an independent monitor of mutual fund performance. Morningstar rankings reflect the total return percentile rank within each fund’s specified Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. Rankings are subject to change and are for the share class indicated. The Oakmark Select Fund ranked #299 out of 1,821, #42 out of 1,718, #721 out of 1,613, and #266 out of 1,230 funds in the large blend category for one, five, and ten years, and since inception, respectively, as of 12/31/11.

EPS refers to Earnings Per Share and is calculated by dividing total earnings by the number of shares outstanding.

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.