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September 2011
You should consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. For a free copy of the most recent Prospectus, visit our website at www.kineticsfunds.com or call 1-800-930-3828. You should read the Prospectus before you invest. Performance data quoted represents past performance, which does not guarantee future results. Investment return and principal value of an investment may fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. To obtain performance data current to the most recent month-end, click on the link below.
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Dear Fellow Shareholders,
During the third quarter of 2011, the Kinetics Internet Fund (the “Fund”) (No-Load Class) declined by 18.48%, underperforming the S&P 500 and Nasdaq Composite Indexes, which fell 13.87% and 12.91%, respectively. As a result, the Fund's return for the year-to-date period ending September 30, 2011, stands at -9.5%, as compared to -8.68% for the S&P 500 and -8.95% for Nasdaq Composite.
The sharp decline during the quarter was a manifestation of the investing community's worries—worries pertaining to macroeconomics applied to equities in general. In other words, within the last three months, the Fund was caught on the wrong side of the "risk on/risk off" mentality that has become so pervasive. As a result of this phenomenon, the mere rumor of what the European leaders may or may not be contemplating to address the European debt crisis has the ability to cause the prices of stocks, bonds (i.e., Treasuries) or commodities (i.e., oil, gold) to fluctuate by 2% or more on any given day. Unfortunately, in this type of environment, volatility will be unavoidable, and as we have witnessed, the movement of stocks will be highly correlated. The lockstep movement of stocks occurs not only between companies in different sectors of the economy, but also among stock markets globally. When the U.S. market declines, those in Europe and Asia invariably fall in sympathy.
While the elevated volatility is damaging for investor confidence, the seemingly indiscriminant and collective buying or selling of equities that occurs daily suggests that the market makes no distinction among individual stocks—that in essence the components of the stock market are viewed as homogenous and therefore stock selection is not germane to the investment process. This is, in our opinion, preposterous. The ultimate determinant of one's return from a common stock is the amount of earnings the underlying business will generate, not whether the public feels optimistic or pessimistic at the moment.
Although a great number of the portfolio holdings have declined (some dramatically), we have used the weakness as a buying opportunity. For example, the Fund has increased its allocation to Dish Network (DISH) and Echostar Corp. (SATS), the two U.S. satellite television providers. These companies have built up their businesses over many years such that they are now producing meaningful earnings and cash flow. Moreover, their ownership of wireless spectrum positions these companies to become premier providers of broadband wireless services. Given the continued growth of mobile Internet access, one can see how these companies could increase in value. Thanks to the market pullback, we were able to purchase the companies at essentially single-digit multiples.
While unpleasant, one should keep in mind that volatility is not necessarily detrimental to the long-term investor. It provides the opportunity to acquire superb companies at attractive prices that enable one to compound wealth over time.
We thank you for your confidence and believe you will be rewarded for it.
The Horizon Kinetics Investment Team
Disclosure
The opinions expressed are not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Additionally, the views expressed herein may change at any time subsequent to the date of issue hereof.
Because the Funds [other than The Paradigm Fund and The Small Cap Opportunities Fund] invest in a single industry, their shares do not represent a complete investment program. Internet and biotechnology stocks are subject to a rate of change in technology, obsolescence and competition that is generally higher than that of other industries, and have experienced extreme price and volume fluctuations. International investing presents special risks including currency exchange fluctuation, government regulations, and the potential for political and economic instability. Because smaller companies [for The Global and Small Cap Opportunities Fund] often have narrower markets and limited financial resources, they present more risk than larger, more well established companies.
Non-investment grade debt securities (i.e., junk bonds) are subject to greater credit risk, price volatility and risk of loss than investment grade securities. Further, options contain special risks including the imperfect correlation between the value of the option and the value of the underlying asset.
Unlike other investment companies that directly acquire and manage their own portfolios of securities, the Funds pursue their investment objectives by investing all of their investable assets in a corresponding portfolio series of Kinetics Portfolios Trust.
You will be charged a redemption fee of 2.0% of the net amount of the redemption if you redeem or exchange your shares 30 days or less after you purchase them.
Distributor: Kinetics Funds Distributor LLC is an affiliate of Kinetics Asset Management LLC, and is not an affiliate of Kinetics Mutual Funds, Inc.
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