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June 2008
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)
(Click here for the most recent portfolio holdings)
Dear Fellow Shareholders,
For the second quarter of 2008, the Medical Fund (No-Load Class) is pleased to report a year-to-date return of 4.17%, a modest yet positive increase, as compared to the S&P 500 Index which decreased by 2.73%, and Nasdaq Composite, which had a slight gain of 0.61%.
A pervasive atmosphere of uncertainty continues to influence the market place. The result has been a general disregard for companies valuations without proper consideration. This temporal arbitrage requires, in our view, only patience and judicious investing to experience returns.
The pharmaceutical industry is, to a large extent, a victim of this uncertainty. In general, these companies are immune to macro-economic forces, have no mortgage exposure and derive some revenues in foreign currencies. Further, the research engines within the industry are as dynamic as ever. Research programs are well funded from strong revenue streams and therefore largely insular. Loss of revenue may necessitate cuts in research and development (“R&D”), but a drop in stock price will not.
Consider Johnson and Johnson’s (“JNJ”) latest earnings report. Revenue increased to $16.5 billion for the second quarter of 2008, up 8.7 percent. Of that amount, $8.2 billion was overseas sales. JNJ spent roughly $1.9 billion in R&D for the second quarter, or 11% of sales. The gross margin for the quarter was 71.3% and a net margin of 21.2%. These are hardly the metrics of a company with no future.
JNJ is an illustration of the industry in general: A solid company, executing its business model yet overlooked due to pervasive uncertainty. It should be said that in some sectors and companies, this uncertainty is deserved. As mentioned earlier, patience and the purchase of sound equities is all that is required to exploit this temporal arbitrage. Our commitment to patience can be seen in the Fund’s turnover ratio of 13%, well below the industry average.
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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