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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 Small Cap Opportunities Fund (“Fund”) (No-Load Class) declined by 10.86% for the second quarter of 2010, compared to declines of 11.43% for the S&P 500 Index and 13.97% for the MSCI EAFE Index. Economic and corporate level figures improved over the quarter, but were overshadowed by fears of a stalled or muted recovery. The largest corporations dominated headlines as many required emergency funding during the crisis and are now meticulously scrutinized in all of their activities. Logic could lead to the assumption that the largest companies are the largest employers and revenue generators, thus the critical element to a sustained recovery. A glance through history will show that while the incumbent large corporations are critical to sustaining the economy, small businesses provide the incremental growth and progression.
In 1962, Sam Walton opened his first Wal-Mart Discount City Store in Rogers, Arkansas. Within 5 years, the company expanded to 24 stores across Arkansas and generated $12.6 million in revenue. By 1970, Wal-Mart was incorporated with 38 stores, 1,500 employees and revenues of $44.2 million. After another five years, Wal-Mart increased employees 5 fold and revenues over 7 fold. Today, Wal-Mart employs over 2.1 million people across the globe and earns over $400 billion in revenue.
Anyone familiar with U.S. economic history or having lived and worked through the 1970’s is familiar with the hardships that faced the United States and the economy. Just as Sam Walton began to aggressively expand his business, inflation was stubbornly high at 10%, unemployment lingered at over 8%, President Nixon resigned amidst scandal, OPEC implemented an oil embargo, Middle East tensions peaked, and the 20-year conflict in Vietnam was dragging on. It can be argued that this was the most difficult business environment in American history since the Great Depression. This makes the success of Mr. Walton all the more remarkable; or does it?
The adversity that Wal-Mart faced in its beginnings shaped the company into what it is today. Sam Walton acknowledged that consumers in Arkansas aspired for a discount store with multiple product lines. The environment in which his business began required scrupulous attention to supply chain management, scale and cost synergies, all paradigms of the Wal-Mart business model that stand to this day. It is interesting to consider if Wal-Mart would be as we know it today had it emerged during more prosperous times.
Consider also that between 1970 and 1972 the following companies were founded: FedEx, Western Digital, Charles Schwab, Viacom, Starbucks and Exxon (consolidation of Esso, Enco and Humble). Despite the most difficult environment during these years (and the decade that followed) these companies currently have a combined market capitalization of approximately $350 billion and employ over 500,000 people; and this doesn’t even include Wal-Mart.
Most large corporations have the ability to operate conservatively during difficult economic times, effectively waiting out for a more prosperous cycle. Through adversity, the small businesses tend to be dynamic and progressive, willing to embrace all opportunities and reduce non vital operations. The Kinetics Small Cap Opportunities Fund is invested in such companies that we believe will adapt and lead in the economic recovery. All things considered, we do not feel that the current headwinds faced by businesses are quite as bad as those faced by Mr. Walton, but we are encouraged by all of the leading businesses that began amidst such uncertainty.
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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