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September 2011
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.
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Dear Fellow Shareholders,
The Kinetics Water Infrastructure Fund (the “Fund”) (No-Load Class) returned -14.09% for the three months ending September 30, 2011, as compared with returns of -13.87 % for the S&P 500 Index and -14.62% for the S&P Global Water Index, bringing year-to-date performance for the Fund to -11.93%, compared with -8.68% and -10.47% for the S&P 500 Index and S&P Global Water Index, respectively.
The water industry at large is very predictable in terms of operations, however many water infrastructure projects require significant capital expenditures and or political motivation. Financial market strife and political congestion in the United States and European Union weighed heavily on economic conditions worldwide and this was manifested in the performance of various water related equities and bonds.
The positive takeaway is that the current displacement in the water industry is all but certain to be temporary—the utility and necessity of water and water systems is undeniable. While we are confident that the industry will recover operationally, longer-term concerns involving municipal and federal budgets are increasing. Corporate balance sheets are capitalized as strongly as we can recall in recent history; however the finances within various levels of government are becoming increasingly strained. Accordingly, decreased government spending and capital availability may place pricing pressures on various water related companies and keep equity prices depressed. At present, we believe that the greatest risk in the industry is minimal growth with company share prices range bound until clarity or a resolution are reached to address the respective structural flaws in the United States and European Union. Fortunately, a great deal of negativity is already priced into this stable industry, and we are actively taking advantage of this.
The implied volatility of water companies is such that the at-the-money put options on various companies can be sold for annualized premiums in excess of 20%. Selling puts is a method of achieving long exposure in equities, yet with what we believe is an embedded margin-of-safety. Consider Roper Industries, a $7.5 billion industrial company engaged in the design, manufacture and distribution of water pumps, valves, leak monitoring, metering and flow control equipment. The sale of a 6 month at-the-money put on the shares of Roper currently yields 10%, which if implied volatility and premiums remain constant, can be annualized at 20%. This strategy provides a considerable margin of safety to the investment as losses are not incurred until the shares of Roper declines 20%.
We believe that our portfolio of high quality, idiosyncratic water related equities, supplemented by the yield received on put option and debt securities will achieve an attractive rate of return during the ensuing months of uncertain political and economic developments.
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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