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March 2013
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)
(Click here for the most recent portfolio holdings)
Dear Fellow Shareholders,
The Small Cap Opportunities Fund (the “Fund”) (No-Load Class) completed the three months ending March 31, 2013 by returning 17.60%, as compared to 10.61% for the S&P 500 Index (“S&P”) and 12.39% for the Russell 2000 Index (“Russell 2000”), respectively, for the same period.
Our bottom-up investment process is highly differentiated from others in the industry in that we seldom, if ever begin our investment research process with a generic parameter such as market capitalization. Rather, our investment team seeks out predictive attributes (for example, dormant assets) in businesses and focuses upon areas that are prone to pricing inefficiencies (for instance, spin-offs). This process tends to uncover an outsized number of opportunities in small- and mid-capitalization companies, as compared to larger businesses, since larger companies tend to have greater investment coverage and major index representation—both factors that can contribute to full and/or over-valuation.
The Fund’s emphasis on owner-operators (managers who are also significant equity holders in their businesses) leads the investment team to opportunities that span industries, geographies, and capitalizations. In fact, it is not uncommon for our coverage of a large or even mega-capitalization owner-operator company to unearth compelling opportunities in smaller businesses. This should not come as a surprise to long-term readers of these letters, as owner-operators regularly utilize capital structure and corporate action strategies to maximize shareholder value. The most frequent example of such a transaction is when an owner-operator believes that a smaller entity is assigned little to no value within the structure of a larger corporation, and therefore seeks to monetize that ownership through a tax-free spinoff transaction. Owner-operators also have a proclivity for entering industries that are rife with opportunity, whether through consolidation, reorganization, or capital structure maximization. Becoming cognizant ofa large owner-operator entering an industry or niche area within an industry frequently leads our investment team to identify complementary opportunities.
Ascent Capital Group, Inc. (“Ascent Capital”) is an example of a recent addition to the Fund that was sourced through our unique investment process. Ascent Capital, in its current form, is the result of a 2011 merger with its former parent Ascent Media Corporation (“Ascent Media”), which was previously owned and subsequently spun-off from Discovery Holdings in 2008. Discovery Holdings is currently an approximately $30 billion company over which owner-operator John Malone continues to exert significant influence through his holdings of voting preference “class B” shares. Most small capitalization managers would pay little, if any, attention to a $30 billion enterprise, but the Fund’s investment team has followed the company for years due to John Malone’s role. As a result, we have tracked the progression of Ascent Capital which is now an approximately $900 million company and, accordingly, is within the small cap investment universe.
Ascent Media, the predecessor to Ascent Capital, owned and operated a variety of complementary businesses within the media industry that have gradually been liquidated. The turnover in those businesses culminated in the 100% purchase of Monitronics International Inc. (“Monitronics”) in December 2010 by Ascent Media. Monitronics is one of the top national security alarm monitoring companies,with 800,000 customers and 370 dealers—this represents a divergence from the previous Ascent Media business strategy of managing media entities, hence the merger/name change in 2011. The security alarm monitoring industry is very fragmented, with many local private operators and only five companies with nationwide reach (including Monitronics). Monitronics distinguishes itself from its competitors who outsource their sales, installation, and service operations to third-party dealers, while Monitronics operates its own monitoring centers and communications networks; this business model, while expensive to implement, is extremely scalable. As such, Monitronics is currently rationalizing its capital structure while acquiring contracts from smaller niche operators. John Malone continues to hold his voting preference shares and oversee the company’s transition.
Ascent Capital epitomizes the type of unique investment opportunity that our investment process seeks to uncover. Ascent, as part of a large global media company, was spun-off and ultimately changed its business strategy altogether. Even many small cap analysts are likely to have eschewed or overlooked such an opportunity given the business transition. As a function of diligently following the actions of John Malone and further embracing the spin-off and business transition, we were able to uncover and participate in this opportunity.
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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