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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 Market Opportunities Fund (the “Fund”) (No-Load Class) returned -13.98% for the three months ending September 30, 2011, as compared with returns of -13.87% for the S&P 500 Index and -19.01% for the MSCI EAFE Index, bringing year-to-date performance for the Fund to -11.43%, compared with -8.68% and -14.98% for the S&P 500 Index and the MSCI EAFE Index, respectively.
The Fund invests in companies which facilitate the global flows of capital. Many of these companies enjoy significant operating leverage, a characteristic which first piqued our interest in the industry. While the initial focus of the Fund was on securities exchanges, we have adapted our view as the industry has involved. During the financial crisis of 2007/2008, many of the exchanges took a defensive stance, cutting costs, husbanding cash and generally avoiding risk, despite their consistent cash flows and strong capital position. While these actions may have appeased some investors seeking linear returns, we prefer to invest in companies whose management is willing to take calculated risks in order to enhance long-term asset value and cash flows. This type of activity is frequently associated with variability in quarterly earnings and volatility in stock price. We recognize that volatility is unpleasant to experience, but we are willing to endure it in the near term in order to participate in what we expect to be superior long-term returns. We are very optimistic for the prospects of the holdings of the Fund, many of which are owner-operator companies with vested management teams. They are largely companies involved in the global flows of capital, with assets that we believe are undervalued by the market, and a focus on long-term, sustainable growth.
CBOE Holdings (“CBOE”) is an example of a company whose value is underappreciated by the market. The CBOE is the primary options exchange in the world, and there is reason to believe that this business will continue to grow. Conventional trading of options currently drives CBOE’s revenues, but we believe that this does not represent the most valuable asset of the company. The proprietary CBOE VIX index (“VIX”) has become the standard tool used by the market to assess volatility. We believe that the potential future revenues associated with trading futures and options on the VIX as well as the associated proprietary products and licensing revenues have the potential to eclipse the current revenues of the firm, yet this is not reflected in the stock price. As the market recognizes the value of this asset, we are confident that this investment will generate strong returns for the patient investor.
Brookfield Asset Management (BAM) is an asset management company focused on “real assets” and the generation of income primarily in office, power and infrastructure assets. These include assets as diverse as timberlands, the largest hydro-electric power plant portfolio in North America, and electricity transmission grids in South America, among many forms of hard asset investments. They are almost all long-term inflation beneficiaries. As an owner-operator, BAM commits company capital alongside investors and leverages its ability to access inexpensive long-term capital in order to increase return on equity. They are experts in their fields and were integral in the reorganization and management of General Growth Properties. As of September 30, Brookfield Asset Management shares traded at a 30% discount to their stated NAV per share. Despite the company’s record of success, its continuing profitability and its well-ordered balance sheet, it is trading below liquidation value and, implicitly, as if it will not earn any future profits. We are confident the company will continue to grow the business, and that the value of the assets will be recognized by the market in the long-term.
WisdomTree is a provider of unique ETFs, for which we believe there is a growing appetite in the market. As we have remarked in the past, the growing trend toward indexation has led to increasing flows of capital into passively-managed ETFs. These are largely commoditized products which simply track an index, and are increasingly subject to price competition, as evidenced by Vanguard’s success in growing assets under management (despite their relatively recent entry into the fray) by offering products comparable to those of their competitors, but with lower expense ratios. In contrast to these commoditized products, the ETFs offered by WisdomTree are highly differentiated and span across multiple asset classes. The team at WisdomTree was the first to come to the market with currency ETFs, which invest in the sovereign debt of various nations, thus achieving exposure to the respective currency. These products allow individuals to gain access to currency exposure that was once only readily available to institutional investors. Their products have seen great initial success, in part due to high retail investor demand based in the prevalent concerns over various sovereign debts. WisdomTree appears to have carved out a profitable niche for itself in the ETF space, which we believe will allow the company to generate attractive returns as assets under management grow, and may attract a potential buyer for the company.
The volatility experienced over the past months has been disconcerting to many investors, including the investment team at Kinetics. While many factors contributed to this volatility, it is our belief that in time, stock prices will once again be driven by the fundamentals of the issuers. Therefore, we view the current dislocation in the market as an opportunity to invest in businesses with solid fundamentals and the potential for sustainable, strong returns at a discount to their intrinsic value. It may take some time for the value of the companies to be recognized and for their stocks to trade at the premium we believe they deserve, but it is our belief that our patience will benefit our investors in the fullness of 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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