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December 2009
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 Internet Fund (No Load Class) appreciated by 2.49% for the three month period ended December 31, 2009, compared to returns of 6.04% and 6.91% for the S&P 500 Index and Nasdaq Composite, respectively, during the same period. Year-to-date, the Fund gained 48.61% as of December 31, 2009, compared to returns of 26.46% and 43.89% for the S&P 500 Index and Nasdaq Composite, respectively, for the same period.
We at Kinetics Asset Management, Inc. would like to take this opportunity to express our gratitude for allowing us to serve your investment needs. We are aware that there are many options available in the marketplace (perhaps too many) and therefore we must constantly earn your confidence and business.
To this end, we believe that our fundamental approach to investments – purchasing quality businesses with the ability to generate attractive returns on capital – is the appropriate course. In combination with the deliberate decision to invest for the long term, our goal is to provide superior risk-adjusted returns. While it is obviously impossible for us to control the timing and direction of stock price movements, we do have command over our investment process. As such, we believe it is by exercising investment discipline consistently, especially during times of excessive euphoria or pessimism, that our clients’ interests are best served.
The final quarter of 2009 was somewhat mild in terms of the Fund’s investment returns, although it still reflected the generally upbeat mood of the equity markets. It is noted that 2009 represents the Fund’s third best annual return since inception, exceeded only by the exceptional years of 1998 and 1999. Without question, 2009 was a welcome reversal from the crises-plagued year of 2008.
It might also be noted that the returns achieved this year did not fully offset the losses incurred in the preceding year, meaning that one would still be in a loss position if measured from starting point of January 1, 2008 and ending on December 31, 2009. However, over a longer holding period, the results are more favorable. For example, over the three-year period ended December 31, 2009, the Fund generated a positive return of 8.86%, on a compounded basis. Over the same three year period, the S&P 500 experienced a loss of 15.95%, while the Nasdaq Composite had a loss of 6.05%. This, we are convinced, speaks favorably to the practice of maintaining a long-term orientation.
The positive return achieved in 2009 was broad-based. Substantially all of the investments in the portfolio, with the exclusion of six positions, appreciated during the calendar year. By and large, we do not view this as aberrational, as the investments were unduly punished in the 2008 sell-off. The exceptional returns of the year were due in part to a reversion to the mean. While we cannot take credit for this, we are gratified to be justified for not succumbing to market pressures and panicking during the crisis. By remaining true to our investment process, we made the conscious decision to remain invested, and therefore were able to participate in the recovery.
Looking forward, uncertainty abounds. Although surveys of the investment community suggests a positive outlook for technology companies, other lingering questions, such as whether the Federal Reserve will begin to raise interest rates, whether health care legislation will be passed, or whether stricter financial regulations will be enforced, are influencing investor expectations. However, irrespective of these issues, the quest for cost containment and greater productivity by businesses and individuals alike continues unabated. This should positively impact our investment portfolio, and also enable the Fund to find other attractive investment opportunities. Nevertheless, investors should keep in mind that we remain agnostic to the technological aspects of a firm. Rather, our focus is upon the underlying ability to produce earnings, which is the singular determinant of share appreciation.
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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