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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 Kinetics Water Infrastructure Fund (No-Load Class) declined by 2.26% compared to the S&P 500 Index which declined by 2.73% and NASDAQ Composite, which had an increase of 0.61%.
The Water Infrastructure Fund celebrated its one year anniversary on July 3, 2008. The past twelve months have imbued investors with a large degree of trepidation as market psychology, which was somewhat mixed during the second half of 2007 in response to the credit crisis, became solidly negative in the first half of 2008. That crisis and a host of other issues drove the market to lows not seen since 2006. Despite the negative market sentiment, investing in water, and in particular global equities involved with the treatment and delivery of fresh water, continues to become a “mainstream” concept rather than a novelty theme.
Let’s take a quick glance at what happened to companies in the oil and gas industry over the last four years. As we pine for the days of $30/barrel oil while staring at $150/barrel, the companies involved in the various aspects of the oil and gas industry have moved, for the most part, upwards collectively. Why bring this to your attention? The global water business is enormous in terms of capital intensity. The annual capital spent is on par with oil & gas in terms of embedded capital. While the oil & gas industry is clearly defined, the water infrastructure business is still developing. It is evolving from a loosely defined industrial group to a group of companies that provides solutions, through products and services, that are integrated in the flow of the commodity from the source to use to treatment and disposal. Remember, water is a commodity, too, perhaps our most important commodity as both developed countries and emerging economies battle issues such as commodity shortage, crumbling infrastructure and an insatiable demand that shows no sign of slowing.
The investment team has been very aware of the media’s fascination with water as “the next oil,” and a host of commodity investors have been eyeing the sector as the next great investment frontier. Many believe that fresh water could become one of the highest priced commodities on a global basis. One of the most appealing aspects for us, as investors, is the underlying fact that the cost to produce and move fresh water to the end user is grossly undervalued when compared to the “actual” cost to provide it. A number of recent articles from all over the world have pointed out this fact. In our opinion, “ownership” of the source (primarily through water utilities) and the means (product & service companies) to provide “treatment” to insure the water is safe for various usages is a sustainable theme. Furthermore, we believe this approach will provide the means to weather various kinds of markets.
With this in mind, we continue to align the portfolio to capitalize on underlying sector themes and geography-specific water needs. As supply and demand issues drive water prices higher, the investment team believes the Fund will be the direct beneficiaries of the resulting price-to-value inequality.
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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