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June 2010
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.
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Dear Fellow Shareholders,
The Kinetics Medical Fund (“Fund”) (No-Load Class) declined by 10.53% for the second quarter of 2010, compared with declines of 11.43% for the S&P 500 Index and 12.04% for the Nasdaq Composite. In a market without conviction, good equities are treated with as much contempt as bad ones. While this fact may be disconcerting in the short-term, it provides great long term opportunity.
Current market psyche appears to be governed by reactionary tendencies rather than rational investor mentality. Thus, swings in valuation occur on the mere notion of some news. However, such changes in pricing completely ignore corporate fundamentals, creating once again, systemic arbitrages. Solid companies with robust balance sheets and good earnings prospects are sold to avoid exposure to the public equity market.
Consider, for example, Biogen-Idec (NASD: BIIB). Biogen-Idec is currently trading at two times book value and eleven times forward earnings. Biogen-Idec has been experiencing 10% revenue growth year over year, and 16% return on equity. We believe this is a deeply discounted company. In the large pharmaceutical sector, consider further Novartis (NYSE: NVS). Novartis also has a 16% return on equity, a forward price to earnings ratio of 11, and real revenue growth spread across several franchises. Historically, revenue growth of this magnitude has been rewarded by much higher price to earnings ratios, and coupled with the internal rates of return, one would expect it to trade at 20 or more price to earnings ratio. Thus, these companies are essentially trading at a discount to intrinsic value.
These are two examples of the discounting that have occurred for essentially no basis in fact. The cycle of pharmaceutical development is much longer than one or more quarters in a calendar year. Furthermore, many of these companies are well capitalized and largely have no correlation to global macroeconomic issues.
We thank you for your confidence and believe you will be rewarded for it.
The Kinetics Investment Team
Disclosure
You should consider the investment objectives, risks, charges and expenses of the Funds before investing. For a free copy of the Funds' 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.
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.
Past performance and 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 can lose money.
Because the Funds [other than The Paradigm Fund, The Tactical 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 (except the Tactical Paradigm Fund) 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, Inc. is an affiliate of Kinetics Asset Management, Inc., and is not an affiliate of Kinetics Mutual Funds, Inc.
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