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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.
(Click here for most recent and complete performance information)
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Dear Fellow Shareholders,
The Kinetics Multi Disciplinary Fund (the “Fund”) (No-Load Class) returned -12.34% for the three months ending September 30, 2011, compared with returns of -13.87 % for the S&P 500 Index and -11.12% for the CBOE BuyWrite Monthly Index, bringing year-to-date performance for the Fund to -6.66%, compared with -8.68% and -8.97% for the S&P 500 Index and CBOE BuyWrite Monthly Index, respectively.
The investment team at Kinetics allocates capital based upon company specific fundamental analysis. Over the long-term, we are confident that markets will ultimately reward value investors as intrinsic and market values are reconciled. However, as we have noted in the past, markets can remain volatile, momentum driven and otherwise inefficient over short and medium periods of time. The third quarter of 2011 exemplifies such short-term market disruptions, which in our opinion offer excellent opportunities for longer term capital to be allocated.
The CBOE Volatility Index (“VIX”) appreciated by 160% in the quarter, reaching 42.96 at the conclusion of September. The price movement of the VIX Index can be associated with a variety of triggers, all of which are related to increased fear or unrest in the marketplace. An appreciating VIX environment typically coincides with a negative return for equities, as investors flee for perceived safe haven assets. The negative performance of the S&P 500 Index only illustrates part of the equity market action. Consider the following companies, which most if not all would agree represent a relatively diversified sample: Bank of America Corp. (Financial), Chesapeake Energy (Energy), General Growth Properties (Real Estate), Harry Winston Diamond (Retail) and Rio Tinto (Mining). On aggregate, these companies lost 1/3 of their market value during the quarter, which is equal to nearly $100 billion of equity. Macroeconomic and political events during the period were a cause of great concern; however such sharp equity and VIX movements are not justified in our opinion.
A beneficial aspect of the multi disciplinary strategy is that losses can be largely or completely recouped in a static environment after the options are rolled. For example, the VIX increase of 160% is reflected in the prices demanded for put protection. Let’s assume that the Fund is put with the stock, the shares are sold and the proceeds are rolled into new 6-9 month contracts with premiums as high as 30%. Effectively, in this scenario the new option exposure has 30% downside protection and will earn 30% of income in a flat or rising market. The primary risk of the position is the inability to participate in full equity gains in the event of an increase greater than 30%. We believe that the risk adjusted return potential of the put strategy is very attractive, particularly for investors with a desire for income and or less volatile returns.
It behooves our investment team to remain diligently focused on the operations and valuations of the companies within the portfolio. Of course, the operations and valuations must be taken within the context of the prevailing political and economic backdrop. We are optimistic in our outlook for the equities held by the Fund, but acknowledge the potential for additional market volatility. As such, we take great comfort that the premiums received from writing puts provide us with a very attractive return in a flat or appreciating market, yet a considerable margin of safety in our opinion should markets continue to decline. We look forward to the day when market volatility returns to a level consistent with historical norms.
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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