As filed with the Securities and Exchange Commission on September 4, 2009

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

Kinetics Mutual Funds, Inc. & Kinetics Portfolios Trust

(Exact name of registrant as specified in charter)

(Address of principal executive offices) (Zip code)

(Name and address of agent for service)

Registrant’s telephone number, including area code

Date of fiscal year end: December 31, 2009

Date of reporting period: June 30, 2009

 

 

Item 1. Report to Stockholders.

 

 

(Kinetics Mutual Funds, Inc.)

 

 

 

 

 

Dear Fellow Shareholders:

 

We are pleased to present the Kinetics Mutual Funds’ Semi-Annual Report for the period ending June 30, 2009. On balance, the Kinetics Family of Mutual Funds had respectable results for the first half of 2009, with gains of 18.30% for The Paradigm Fund, 33.11% for the Small Cap Opportunities Fund, 29.78% for the Market Opportunities Funds, 18.49% for the Internet Fund, 10.77% for the Medical Fund, 6.44% for the Water Infrastructure Fund, 39.41% for The Global Fund, and 9.49% for the Multi-Disciplinary Fund. This compares with first-half 2009 returns of 3.16% and 16.36% for the S&P 500 Index⁽¹⁾ and the NASDAQ Composite Index⁽²⁾, respectively.

 

We have always maintained that our long-term investment results will be driven by the underlying business operations of the companies we own. In this regard, nothing has changed. As global investors have reassessed risk, those companies that have rebounded the most in price tended to be those which had performed well operationally throughout the crisis. We believe that our funds possess many of these types of businesses. At present, we still believe our Funds offer noteworthy value for long-term investors, as we believe the price recovery for our holdings is still in the earlier stages.

 

We continue to inform our shareholders through our website, www.kineticsfunds.com. This website provides a broad array of information, including recent portfolio holdings, quarterly investment commentaries, newsflashes, recent performance data, and online access to account information.

 

Kinetics offers the following funds to investors:

 

The Paradigm Fund focuses on companies that currently have, or which should soon have, sustainable high returns on equity. The Fund has produced attractive returns over the last 91/2 years. The Paradigm Fund is Kinetics’ flagship fund.

 

The Small Cap Opportunities Fund focuses on undervalued and special situation small capitalization equities that have the potential for rewarding long- term investment results.

 

The Medical Fund is a sector fund, offering an investment in scientific discovery within the promising field of medical research, particularly in the development of cancer treatments and therapies. As a sector fund, The Medical Fund is likely to have heightened volatility.

 

 

The Internet Fund is a sector fund that focuses on companies engaged in the evolution of Internet-related developments. As such, this Fund has been, and is likely to continue to be, quite volatile. The Internet Fund is not designed to be a major component of one’s equity exposure. In some cases, we view this Fund’s holdings as publicly traded venture capital and are quite aware that many of these investments will not fulfill their promise. However, we expect that, over time, some small percentage will develop into excellent investments, allowing the fund to produce overall attractive, albeit, lumpy returns.

 

The Global Fund’s mandate was changed in early April 2008 to an emphasis on international investments, with particular attention to China and other Asian markets.

 

The Market Opportunities Fund focuses on those companies that benefit from increasing transactional volume or throughput, such as publicly-traded exchanges, or that act as facilitators, such as gaming companies, airports and publicly-traded toll roads.

 

The Water Infrastructure Fund is a sector fund that invests in global companies engaged in water infrastructure and water-specific natural resources, as well as related activities.

 

The Multi-Disciplinary Fund is a fund that seeks to utilize stock options and fixed-income investments so as to provide investors with equity-like returns, but with more muted volatility. At times, the options strategies of the fund may cause the manager to purchase equity securities.

 

The Kinetics Government Money Market Fund is a short-term investment vehicle that provides a useful service for those participating in our equity product offerings.

 

Peter B. Doyle

President

Kinetics Mutual Funds, Inc.

 

 

 

 

Dear Fellow Shareholders,

 

Starting in March of 2009, investors have witnessed a rebound in global equity markets. Many of our funds participated fully in this rebound, which was the result of a reassessment of risk on the part of investors, as liquidity and funding demands lessened.

 

In our opinion, the primary impetus for the strong global equity performance was the noteworthy progress made in restarting global credit markets. The non-Treasury fixed income markets had, in effect, shut down between September 2008 and March 2009. This caused investors to turn to other sources of liquidity. The good news was that global equity markets functioned properly. The bad news was that global equity markets functioned properly and, accordingly, they were used as automatic teller machines to meet the cash needs of corporations and individuals around the world. This forced liquidation of stocks created a negative equity bubble which fed upon itself. Investors that do not have a focused objective benchmark, such as a company’s business operations, tend to latch on to the easiest piece of data obtainable, price, to make decisions. A price focus usually translates into a buy-high/sell-low strategy, which is not the path to financial success.

 

With the restoration of the fixed income markets, credit spreads between most non-Treasury debt and Treasuries tightened significantly during the first six months of 2009, indicating improved liquidity and a higher appetite for riskier assets, including equities. In many cases, the shares that appreciated the most were those of companies whose underlying businesses had not been impacted, or only minimally impacted, by the financial crisis, which is how we would characterize many of the holdings in our funds.

 

In a modern global economy, the importance of the circulation of money cannot be overstated. For a six-month period of time, from September 2008 to March 2009, money circulation ground to a halt. The impact of this dynamic had a significant effect on the global economy, which is still being reflected in weak global economic statistics. With the restoration of money circulation, the economic numbers should improve markedly.

 

 

According to Dealogic, a leading consultant to the investment banking industry, over $1.5 trillion of debt and $260 billion of equity was issued globally during the second quarter of 2009. Eventually, we believe much of this capital will make its way into productive uses that should help stimulate a global economic recovery. The equity markets have already discounted some of the expected economic improvement, and negative sentiment seems to be losing its chokehold on investors. That being said, the vast majority of investors can remain on the sidelines with their cash, and we can still witness very strong global stock markets, as stock prices are set at the margins. If the marginal demand to buy dwarfs the marginal propensity to sell, stock prices will go higher. It would seem to be reasonable that the buyers of stocks over the last nine months are likely to be the strong hands in the market, and those who collect shares for investment are very unlikely to be sellers.

 

We are not unaware of the problems facing the United States economy, which is largely driven by consumption. It is hard to become overly optimistic about the chances of a robust economic recovery based upon such expectations, when many consumers are either being laid off or are highly indebted. This leads us to believe that the best opportunities in equities are generally in those businesses that are not dependent upon the American consumer. In broad terms, our exposure to financials is largely through those companies that facilitate transactions, which will continue to occur irrespective of consumption. Our exposure to commodities and oil is predicated on the global demand for these assets and the world’s limited supply. Our exposure to China is predicated on the belief that the world’s business axis is shifting from the Atlantic to the Pacific.

 

We remain quite hopeful about our country’s future because societies advance based on the application of knowledge and, in that regard, this country and the world are making tremendous strides. We do, however, believe that broad United States equity returns will be subdued because most of the large companies that drive those returns depend upon a hearty consumer.

 

We thank you for your continued support, and we appreciate your perseverance in these interesting times.

 

The Kinetics Investment Team

 

 

Disclosure

This material is intended to be reviewed in conjunction with a current prospectus, which includes all fees and expenses that apply to a continued investment program, as well as information regarding the risk factors, policies and objectives of the Funds. Read it carefully before investing.

 

Mutual Fund investing involves risk. Principal loss is possible. Because The Internet Fund, The Medical Fund and The Water Infrastructure Fund invest in a single industry or geographic region, their shares are subject to a higher degree of risk than funds with a higher level of diversification. 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 [for The Global Fund, The Water Infrastructure Fund, The Paradigm Fund, The Market Opportunities Fund, The Small Cap Opportunities Fund and The Internet Fund] presents special risks including currency exchange fluctuation, government regulations, and the potential for political and economic instability. Accordingly, the share price for these Funds is expected to be more volatile than that of a U.S.-only fund. Past performance is no guarantee of future performance.

 

Because smaller companies [for The Global Fund, The Small Cap Opportunities Fund and the Water Infrastructure 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. Each Fund [other than The Kinetics Government Money Market Fund] may invest in futures, swaps and other derivative instruments, which may result in loss as derivative instruments may be illiquid, difficult to price and leveraged so that small changes may produce disproportionate losses to the Fund. To the extent the Funds segregate assets to cover derivative positions, they may impair their ability to meet current obligations, to honor requests for redemption and to manage the Funds in a manner consistent with their respective investment objectives.

 

 

Purchasing and writing put and call options and, in particular, writing “uncovered” options are highly specialized activities that entail greater than ordinary investment risk.

 

As non-diversified Funds [other than The Kinetics Government Money Market Fund], the value of Fund shares may fluctuate more than shares invested in a broader range of industries and companies.

 

An investment in the Kinetics Government Money Market Fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

 

Unlike other investment companies that directly acquire and manage their own portfolios of securities, The Kinetics Mutual Funds pursue their investment objectives by investing all of their investable assets in a corresponding portfolio series of Kinetics Portfolios Trust.

 

The information concerning the Funds included in the shareholder report contains certain forward-looking statements about the factors that may affect the performance of the Funds in the future. These statements are based on Fund management’s predictions and expectations concerning certain future events and their expected impact on the Funds, such as performance of the economy as a whole and of specific industry sectors, changes in the levels of interest rates, the impact of developing world events, and other factors that may influence the future performance of the Funds. Management believes these forward-looking statements to be reasonable, although they are inherently uncertain and difficult to predict. Actual events may cause adjustments in portfolio management strategies from those currently expected to be employed.

 

The Nasdaq Composite (NASDAQ) and the Standard & Poor’s 500 Index (S&P 500) each represent an unmanaged, broad-basket of stocks. They are typically used as a proxy for overall market performance.

 

Distributor:  Kinetics Funds Distributor, Inc. is not an affiliate of Kinetics Mutual Funds, Inc. Kinetics Funds Distributor, Inc. is an affiliate of Kinetics Asset Management, Inc., Investment Adviser to Kinetics Mutual Funds, Inc.

 

For more information, log onto www.kineticsfunds.com.

 

July 1, 2009 — Kinetics Asset Management, Inc.

 

 

 

Shareholders incur two type of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvestments of dividends or other distributions made by the Fund, redemption fees, and exchange fees, and (2), ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses. This example is intended to help investors understand the ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested on January 1, 2009 and held for the entire period from January 1, 2009 to June 30, 2009.

 

Actual Expenses

 

The first line of the table below provides information about actual account values and actual expenses. Unlike other mutual funds that directly acquire and manage their own portfolio securities, each Feeder Fund invests all of its investable assets in a corresponding Master Portfolio, a separately registered investment company. The Master Portfolio, in turn, invests in securities. With this type of organization, expenses can accrue specifically to the Master Portfolio or the Feeder Fund or both. The Adviser for the Master Portfolios has directed a certain amount of the Master Portfolio’s trades to brokers believed to provide the best execution and, as a result, the Master Portfolios have generated direct brokerage credits to reduce certain service provider fees. Each Feeder Fund records its proportionate share of the Master Portfolio’s expenses, including directed brokerage credits, on a daily basis. Any expense reductions include Feeder Fund-specific expenses as well as the expenses allocated from the Master Portfolio.

 

The Feeder Funds will charge shareholder fees for outgoing wire transfers, returned checks, and exchanges executed by telephone between the Feeder Fund and any other series of Kinetics Mutual Funds, Inc. The Feeder Fund’s transfer agent charges a $5.00 transaction fee to shareholder accounts for telephone exchanges between any two series of Kinetics Mutual Funds, Inc. The Feeder Fund’s transfer agent does not charge a transaction fee for written exchange requests. IRA accounts are assessed a $15.00 annual fee. Finally, as a disincentive to market-timing transactions, the Feeder Funds will assess a 2.00% fee on the redemption or exchange of Fund shares held for less than 30 days. These fees will be paid to the Feeder Funds to help offset transaction costs. The Feeder Funds reserve the right to waive the redemption fee, subject to their sole discretion, in instances deemed not to be disadvantageous to the Feeder Funds or shareholders.

 

 

 

You may use the information provided in the first line, together with the amounts you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

 

Hypothetical Example for Comparison Purposes

 

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Feeder Funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the Feeder Funds’ actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses one paid for the period. You may use this information to compare the ongoing costs of investing in the Feeder Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight one’s ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help one determine the relative total costs of owning different funds. If these transactional costs were included, one’s costs would have been higher.

 

 

 

Expense Example

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to the Financial Statements.

 

 

 

 

See Notes to the Financial Statements.

 

 

 

 

 

See Notes to the Financial Statements.

 

 

 

See Notes to the Financial Statements.

 

 

 

See Notes to the Financial Statements.

 

 

See Notes to the Financial Statements.

 

 

 

See Notes to the Financial Statements.

 

 

 

See Notes to the Financial Statements.

 

 

 

See Notes to the Financial Statements.