Oakmark Select Fund: Second Quarter 2012

June 30, 2012

Oakmark Select Fund - Investor Class
Average Annual Total Returns 06/30/12
Since Inception 11/01/96 11.92%
10-year 5.18%
5-year 0.04%
1-year 2.73%
3-month -5.35%

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 decreased in value by 5% last quarter, reducing our calendar year-to-date return to 9%. The S&P 500 lost 3% in the quarter, but matched our calendar year-to-date gain of 9%.

The Oakmark Select Fund decreased in value by 5% last quarter, reducing our calendar year-to-date return to 9%. The S&P 500 lost 3% in the quarter, but matched our calendar year-to-date gain of 9%.

Our best performer, eBay, gained 14% as investors reacted favorably to strong results in both its PayPal and Marketplaces divisions. That success was more than offset by five holdings that lost more than eBay gained – Dell, JP Morgan, Newfield Exploration, Texas Instruments and TRW.

Dell and JP Morgan had company-specific issues – declining PC sales and a hedge gone awry – that we believe investors overreacted to. Newfield, TI and TRW are each economically sensitive and suffered as investors’ fear of a double dip grew. We believe each is financially strong and undervalued whether or not the economy weakens this year.

During the quarter, we eliminated our position in H&R Block and replaced it with BMC Software. We had owned Block in the Fund since 2000, and its price roughly doubled during a period when the price of the S&P was basically unchanged. Despite a good point-to-point return, we could have made more money had we sold Block after two years. Expectations that one of several new CEOs could eliminate the recurring operational shortfalls in the tax preparation business proved optimistic and losses in sub-prime mortgages prevented business value from growing as we expected.

Our newest addition, BMC Software, is a leading provider of enterprise service management software. The need for BMC’s products, which allow IT programs to function smoothly on a broad array of devices, grows as the number of devices grows. As one BMC manager told us, “The worst day, nowadays, for an IT manager is when his CEO gets a new iPad.” In addition to liking BMC’s products, we liked the company’s aggressive share repurchases and its valuation, which is much lower than the multiple of sales at which many similar companies have been acquired. After our purchase, we were pleased to see a large stake purchased by activist investor Elliott Associates, which shares our view that BMC is undervalued.

This will be the last report that shows Henry as a portfolio manager of Oakmark Select, as he is retiring at the end of July. As shareholders, we all owe Henry a debt of gratitude for his contributions to the Fund’s performance. We are fortunate to have in our research department several strong candidates for joining me as a manager of the Fund. We expect to announce our selection before calendar year end.

As of 6/30/12 eBay, Inc. represented 5.0%, Dell, Inc. 3.8%, JPMorgan Chase & Co. 4.9%, Newfield Exploration Co. 5.1%, Texas Instruments, Inc. 4.0%, TRW Automotive Holdings Corp. 4.0%, H&R Block, Inc. 0%, and BMC Software, Inc. 4.4% 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 Fund’s investments and investment strategy (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) represents the Fund’s investments and the views of the portfolio managers and Harris Associates L.P., the Fund’s investment adviser, at the time of this letter, and are subject to change without notice.