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March 2009
You should consider the investment objectives, risks, charges and
expenses of the fund carefully before investing. For a free copy of a
prospectus, which contains this and other information, visit our website at
www.kineticsfunds.com or call 1-800-930-3828. You should read the
prospectus carefully before you invest. Please read the important
disclosure at the end of this portfolio commentary.
(Click here for most recent and complete performance information)
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Dear Fellow Shareholders,
The Kinetics Paradigm Fund (No-Load Class) declined by 10.46% in the 1st quarter of 2009, compared to declines of 11.66% for the S&P 500 Index and 3.07% for the Nasdaq Composite. The Fund’s outperformance of the S&P 500 was due to recognition of the severe discounts to the intrinsic value of the companies in the portfolio.
As of this writing, the global equity markets (with minor exceptions) have rallied significantly from their lows earlier this year. For us, this comes as no surprise, and we expect continued upside. In some respects, stocks are no different from virtually any other goods or services, such that prices are determined by supply and demand. For example, a popular clothing item in limited supply can command a very high price and vice versa. The massive declines witnessed in equities over the last 16 months were, to a very large degree, driven by liquidity needs at every conceivable level. Thus, for a brief period of time, even if it did not feel brief, there were infinitely more sellers than buyers of stocks. This liquidity demand caused equity valuations to become divorced from their underlying business operations in ways never witnessed by us previously.
The ensuing panic and fear caused even further selling, as it was thought to be more prudent to move to cash. It became, in our view, a bubble of fear. This is merely the opposite of extreme optimism. As most of you know, we left the Fund very much intact (to the great dismay of some of our investors), with the exception of raising cash as demanded by shareholders. We are frequently asked why we did not move further to cash as we saw the crisis mounting. For us, the capital markets are there to take advantage of the opportunities we see based on our understanding of the microeconomics of the individual businesses. Many of the Fund’s holdings prospered during this crisis, yet their stocks declined precipitously. Those companies that did report a decline in profitability saw their stocks decline by an even greater amount.
However, just because you can transact with great ease (literally with a touch of the button) does not mean that you should or, more importantly, that it is wise to do so. The current belief that long-term, business-like investing is outdated, an opinion promulgated on virtually every financial news program, is just plain silly. Shows such as CNBC’s Fast Money talk about owning stocks for days and hours. This is not investing; it is gambling. Ultimately, your success or failure as an investor will be linked with the success or failure of the actual business operations of the underlying companies. We have repeated this ad nauseam, but it somehow gets lost in the noise of the moment again and again and again. We will not jump off of a cliff just because everyone else has already jumped.
Mathematically, as each day passes, more and more liquidity re-enters the system, not only through government programs, but also through the very instruments that were at the heart of the crisis, including the repayment of sub-prime loans and the maturity of credit default swaps. Thus, the need to raise cash (by selling holdings, particularly equities) abates. As this liquidity grows, investors are at liberty to reassess, as they have done over the last month, their position pertaining to riskier assets. We believe that the valuations for world-class franchises are trading at levels that portend a wonderful experience for those that are focused on what ultimately matters: the intrinsic values of the businesses themselves and the opportunities that still remain very much intact for those businesses.
It is quite clear that we do not believe that this is a bear market rally, but, rather, more of a sustained re-adjustment for stocks that will bring equity prices back in line with their underlying business operations. While it is true that some companies are permanently impaired, this is not true for a great many of the holdings. We were of the opinion that the Fund’s holdings were not overvalued in late 2007. Thus, we believe that our stocks have significant upside potential. We also know that the markets will not behave in linear fashion and that we are still in the minority camp, although the strident negativity has certainly started to subside. During this crisis, for each seller there had to be a corresponding buyer. The question that we find most interesting is: “Who buys during a crisis?” The answer, we believe, are the most savvy and well-capitalized investors, such as Warren Buffett, who, once they purchase a stock, are very unlikely to trade it frequently. It is quite plausible that liquidity has been drained from certain stocks, such that when the broader investor base re-enters the market, supply may be limited. Volatile upside moves in certain names may not be such an uncommon feature going forward.
We thank you for your confidence and believe you will be rewarded for it.
The Kinetics Investment Team
Disclosure
Past performance does not guarantee future results. Due to market volatility, current performance may be more or less than for the rankings shown. Investment return and principal value will vary, and an investment in the fund can lose money.
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, biotechnology and water related stocks are subject to a rate of change in technology, obsolescence, regulation 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. The Fund's share price is expected to be more volatile than that of a U.S.-only fund. Because smaller companies [for The Global Fund 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 [for all Funds], 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. Small and medium-size companies often have narrower markets and more limited managerial and financial resources than do larger, more established companies. As a result, their performance can be more volatile and they may face a greater risk of business failure.
As non-diversified and single industry funds, the value of their shares may fluctuate more than shares invested in a broader range of industries and companies.
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.
Distributor: Kinetics Funds Distributor, Inc. is an affiliate of Kinetics Asset Management, Inc., and is not an affiliate of Kinetics Mutual Funds, Inc.
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