As filed with the Securities and Exchange Commission on September 7, 2010

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-09303 & 811-09923

Kinetics Mutual Funds, Inc. & Kinetics Portfolios Trust

(Exact name of registrant as specified in charter)

555 Taxter Road, Suite 175
Elmsford, NY 10523
(Address of principal executive offices) (Zip code)

U.S. Bancorp Fund Services, LLC
615 E. Michigan Street
Milwaukee, WI 53202
(Name and address of agent for service)

(800) 930-3828
Registrant’s telephone number, including area code

Date of fiscal year end: December 31, 2010

Date of reporting period: June 30, 2010

 

 

Item 1. Report to Stockholders.

 

 

(Kinetics Mutual Funds, Inc.)

 

 

 

 

 

Dear Fellow Shareholders:

 

We are pleased to present the Kinetics Mutual Funds’ (“Funds”) Semi-Annual Report for the six-month period ended June 30, 2010. On balance, the Kinetics Family of Mutual Funds did not meet our expectations for the first half of 2010, with returns of (8.03)% for the Paradigm Fund,(7.80)% for the Tactical Paradigm Fund, (7.39)% for the Small Cap Opportunities Fund, (8.76)% for the Market Opportunities Fund, (4.33)% for the Internet Fund, (6.76)% for the Medical Fund, (14.45)% for the Water Infrastructure Fund, (7.14)% for the Global Fund, and 0.09% for the Multi-Disciplinary Fund. This compares with first-half 2010 returns of (6.65)% and (7.05)% for the S&P 500 Index⁽¹⁾ and the NASDAQ Composite Index⁽²⁾, respectively.

 

The Funds continue to be managed by focusing upon strong businesses at attractive valuations. Companies within the Funds’ portfolios have nearly universally met or exceeded our expectations, but the market has gyrated wildly in response to a seemingly endless array of proposed impending crises. A critical aspect to our investment process includes analyzing a company’s ability to function in a myriad of business environments. In this regard, we were not surprised that most holdings in the Funds have approached or exceeded earnings figures from 2007. Despite this, many of the companies in the Funds continue to trade well below the valuations seen in 2007. It is our belief that over the fullness of time, fundamentals will drive stock prices, and we remain exceptionally optimistic about our positioning.

 

Shareholders can continue to access additional information from our website, www.kineticsfunds.com. This website provides a broad array of information, including recent portfolio holdings, quarterly investment commentaries, conference call transcripts, newsflashes, recent performance data, and online access to account information.

 

Kinetics offers the following funds to investors:

 

The Paradigm Fund focuses on companies that are valued attractively and have had sustainable high business returns. This has been a very successful strategy for the Fund over the past 10 years. The Paradigm Fund is Kinetics’ flagship fund.

 

The Tactical Paradigm Fund invests generally all of its assets in the Paradigm Portfolio while also hedging market risk with futures, options and short sales of exchange traded funds. The Fund may also

 

 

purchase or write options in combination with each other to adjust market risk and return of its overall investment positions.

 

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 same investment fundamentals employed by the Paradigm Fund are used to identify such opportunities.

 

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. In some cases, we view a segment of 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 Fund employs the same investment criteria as the Paradigm Fund, but with an international focus.

 

The Market Opportunities Fund focuses on those companies that benefit from increasing transactional volume or throughput, such as publicly-traded exchanges and credit card processors, or companies 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 uses a unique two-part strategy of fixed income and derivative components. The Fund generally invests in U.S. corporate bonds and simultaneously sells at-the-money put options on equities. This strategy aims to achieve equity-like returns, with bond-like volatility. At times the Fund may purchase equity positions in addition to the core option/bond portfolio.

 

 

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:

 

If we were penning this commentary at the end of June, instead of mid-August, we could have easily been writing about what impact the Greek crisis and the potential demise of the Euro were having on global equity prices during the first six-months of 2010. If we felt expansive, the unflattering acronym PIIGS, standing for the all of the perceived financially troubled European nations (Portugal, Italy, Ireland, Greece and Spain) could have been mentioned. This would have demonstrated that we had an International/Global outlook and were aware of such pressing issues. Back in June these issues dominated the business press, and the European crisis, as explained by most pundits, was expected to have dire consequences for the world economy. Today, the European crisis appears to be but a small footnote in history. Pundits and market participants have now moved on to the next potential concern: deflation. It should be noted that the Euro, despite its previously predicted imminent collapse, has rallied substantially over the last 45 days, as have most global equity markets, notwithstanding the last few days prior to this writing.

 

All of the perceived financial troubles, and there have been many over the last two years, along with the anchoring effect of the financial crisis of 2008-2009, have caused a massive flight to less risky assets. As of August 12, 2010, the 10-year U.S. Treasury Note has a pre-tax yield of 2.72%. If you are in a 35% federal tax bracket, then your after-tax yield is just 1.77% with this investment. Such a low yield is reflective of its perceived safety. One had better be very certain that there will be, at a minimum, an absence of inflation when buying at such a low yield. Should the 10-year Treasury Note yield quickly move back to 4%, low by historical standards, one would experience an approximate 12% decline in the price of one’s investment. Should the 10-year Note similarly move back to a 6% yield, which is still below the 10-year Treasury’s long-term average yield, one would experience an approximate 25% decline in one’s investment. Ten years of 3% inflation per annum erodes approximately 35% of one’s original principal amount.

 

In our opinion, the 10-year U.S. Treasury Note’s pre-tax yield is the functional equivalent of buying a stock at a price-earnings multiple of 36 times (100/2.72). Such a valuation multiple brings to mind the

 

 

prices that investors were paying for established technology/Internet stocks near their peak in late 1999 and early 2000. At that time, however, excessive optimism caused the high valuations, whereas today, we believe it is excessive pessimism that is driving the pricing of U.S. Treasuries. While we are aware of the major differences between stocks and U.S. Treasury Notes (one of which is that investors are guaranteed the face amount at maturity), investors’ expectations for the future must be excessively bleak, given that there are attractive alternative investment opportunities that offer a much higher initial yield. Since the U.S. Treasury market is multi-trillion in size, the low yields, as a function of supply and demand, are the result of substantial institutions buying the securities rather than individuals who are concerned about their retirement nest eggs. While we offer no prediction as to the direction of the price of U.S. Treasury Notes, we know too well what can happen when everyone gets into an investment: they all eventually flee. We believe our funds offer a better investment alternative.

 

For example, the Kinetics Medical Fund owns a position in Bristol-Myers Squibb. This is a world class pharmaceutical company, tracing its history back to 1887, and trades at a price-earnings multiple of 11.3 times next year’s estimated earnings of $2.33. The initial earnings yield, on its 2011 earnings estimate, is 8.9% (1/11.2 = 8.89%). It should also be noted that Bristol’s current dividend yield is 4.80%. Compare both of these yields to the yield of 10-year U.S. Treasury Notes, set forth above. We could have told you a similar story about NYSE-Euronext, which traces its domestic history back to 1792, and is held in both the Kinetics Paradigm Fund and the Kinetics Market Opportunities Fund. There are many more companies in each of our funds that have similar stories. Given everything that we know about valuations, interest rates and expected returns, equities currently look very compelling relative to other asset classes. Ironically, in our opinion, the massive investor flight to safety has caused the risky asset class, stocks, to become a far safer harbor for one’s wealth. The global equity markets trade on the release of generally non-meaningful news which investors tend to forget almost immediately. Longer term investment success will be predicated upon the valuation and quality of the underlying assets.

 

 

Furthermore, please be aware that our Kinetics Multi-Disciplinary Fund uses a unique options strategy on names we would be comfortable holding to capture the high premiums others are willing to pay in order to have protection. This fund was started in 2008, a very inauspicious year in which to start a mutual fund, and we believe it has performed quite commendably. Because of its income return characteristics and short-term gains, this fund is particularly well-suited for tax-advantaged accounts. It will also likely perform admirably if volatility remains high while the equity market remains fairly flat, which is what has happened thus far in 2010.

 

We appreciate your confidence and believe you will be appropriately rewarded as we live through what could be a continued volatile ride.

 

The Kinetics Investment Team
August 12, 2010

 

 

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, 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, The Internet Fund and The Tactical Paradigm 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. Investments [for all Funds] in futures, swaps and other derivative instruments 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 [other than The Kinetics Government Money Market Fund] Funds, 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 or generally 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, 2010 — 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 a 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, 2010 and held for the entire period from January 1, 2010 to June 30, 2010.

 

Actual Expenses

 

The first line and second line items of the table below provide information about actual account values and actual expenses before and after expense reimbursement. Unlike other mutual funds that directly acquire and manage their own portfolio securities, each Fund invests all or generally all of its investable assets in a corresponding series of The Kinetics Portfolios Trust (each, a “Master Portfolio”, and together the “Master Portfolios”), 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 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 Fund records its proportionate share of the Master Portfolio’s expenses, including directed brokerage credits, on a daily basis. Any expense reductions include Fund-specific expenses as well as the expenses allocated from the Master Portfolio.

 

The Funds will charge shareholder fees for outgoing wire transfers, returned checks, and exchanges executed by telephone between the Fund and any other series of Kinetics Mutual Funds, Inc. The Funds’ transfer agent charges a $5.00 transaction fee to shareholder accounts for telephone exchanges between any two series of Kinetics Mutual Funds, Inc. The Funds’ 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 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 Funds to help offset transaction costs. The Funds reserve the right to waive the redemption fee, subject to their sole discretion, in instances deemed not to be disadvantageous to the Funds or shareholders as described in the Funds’ prospectus.

 

 

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 third and fourth line items of the table below provide information about hypothetical account values and hypothetical expenses before and after expense reimbursements based on the Funds’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which are not the 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 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. In if these transactional costs were included, one’s costs would have been higher.

 

 

Expense Example

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentages are stated as a percent of net assets.

 

 

 

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.