Oakmark Select Fund: Third Quarter 2011

September 30, 2011

Oakmark Select Fund - Investor Class
Average Annual Total Returns 09/30/11
Since Inception 11/01/96 11.17%
10-year 3.46%
5-year -0.96%
1-year -0.34%
3-month -14.60%

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 decreased in value by 15% in the quarter, resulting in a flat September fiscal year return. The S&P 500 fell by 14% in the quarter and returned 1% for our fiscal year.

For our fiscal year, four holdings increased by more than 20%: Bristol-Myers, Comcast, eBay and MasterCard. Three lost over 20%: Bank of America, Best Buy and Newfield Exploration. No obvious macro trend is shared by either the winners or the losers, and the seven extreme performers are from seven different industries. Though we achieved our expectation of having more big winners than big losers, the magnitude of the gains did not offset the magnitude of the losses. Our business-value estimates for the four gainers are substantially higher than they were a year ago, so despite their appreciation, we believe they still merit their positions in the portfolio.

During the quarter, we sold our positions in Bank of America and Best Buy. Both companies failed to meet our expectations for business-value growth. Bank of America suffered because of mortgage-related lawsuits and demands for more excess capital, and Best Buy was hurt by declining sales of consumer electronics and competitive pressures. A silver lining to that cloud is that selling Bank of America and Best Buy allowed us to fully offset this year’s taxable gains so far. We enter the final month of our tax year with a small capital loss to carry forward. That means we will not have to make a capital gains distribution for 2011 unless we make unusually large gains this month. Since that will happen only if our stocks perform well, it’s a good problem to have.

The two stocks that most hurt our return for the quarter were Newfield Exploration and TE Connectivity. Newfield fell 42% as energy prices declined. We believe that Newfield’s business is performing well and will continue to perform well. We therefore conclude that the company is worth a lot more than the current price of Newfield’s stock. For that reason, we substantially increased our Newfield position. TE Connectivity, which lost 23%, was—and remains—an overweighted position. It now sells at 9x our estimate of earnings for this year, is increasing its dividend to what will be a 3% yield, and is aggressively deploying excess cash in share repurchases. We believe TE is an unusually attractive stock.

During this very weak quarter two stocks increased in value: Bristol-Myers and MasterCard. Both businesses are performing consistently with our expectations, but we trimmed them so that we could increase our holdings in stocks we believe are selling at much larger discounts to their value.

FedEx was the only new holding added during the quarter. FedEx has been a holding in the Oakmark Fund for several years, but never made the cut for Select’s more concentrated portfolio. Our business-value estimate for FedEx continues to increase as the company further invests in its leading global network. Its stock, however, has decreased by 27% this year due to investors’ growing fears about the short-term economic outlook. We believe our FedEx investment is a typical example of an opportunity we get because we have a longer investment horizon than most investors.

We believe the business values of our holdings have grown over the past year. As that growth has not led to higher stock prices than a year ago, we believe our portfolio has become a more attractive investment. We appreciate your patience while we wait for the gap between price and value to close.

As of 9/30/11, Bristol-Myers Squibb Co. represented 4.2%, Comcast Corp., Class A 5.4%, eBay, Inc. 4.5%, MasterCard, Inc. Class A 4.9%, Bank of America Corp. 0%, Best Buy Co., Inc. 0%, TE Connectivity, Ltd. 5.8%, and FedEx Corp. 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.