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A $10,000 investment in the Kinetics Internet Fund (WWWFX
) in February, 1998, would have nearly tripled in value by February, 2003, despite the massive sell-off in the technology sector over the last few years. A similar investment in the Standard & Poor's 500-stock index, albeit a far less volatile investment, would have been a losing proposition.
Peter Doyle, founder and chief investment strategist for Kinetics Asset Management and lead manager of the fund, has navigated through some treacherous waters since technology and Internet stocks imploded about three years ago. For the five-year period ended February, Kinetics Internet returned 21.1% annualized, vs. a loss of 5.4% for the average tech fund. Among tech funds of all stripes and sizes that S&P tracks, Kinetics Internet is the No. 1 performer for that period by a wide margin.
VOLATILE RETURNS. Launched in late 1996 as one of the very first Internet-themed mutual funds, Kinetics Internet skyrocketed 196% in 1998 and an additional 216% in 1999. Then it dropped 50% in 2000 as dot-com stocks collapsed. Since that time, as many tech and Internet stocks have continued their downward spiral, the fund has fallen moderately vs. other tech funds, losing 10% in 2001 and 23.4% more last year. Also, Kinetics Internet has outperformed the S&P 500 in three of the last five years.
Not surprisingly, volatility has hurt the fund's overall S&P ranking, which is risk-adjusted and accounts for both performance and volatility over the last three years. In December, 2002, S&P downgraded Kinetics Internet to 1 Star from 2 Stars because of its underperformance relative to all domestic equity funds over the trailing three-year period. The fund's assets are about $270 million, after being as high as $1.5 billion in 2000.
Doyle has made some big changes over the past few years. When former co-manager Ryan Jacob left the North Babylon (N.Y.) firm in mid-1999, Doyle sold speculative stocks like theglobe.com and other dot-coms, and bought companies that were properly capitalized and could survive the Internet-stock market meltdown that he correctly predicted. Doyle purchased established names such as Liberty Media (L
), which "had a good business model as well as the financial resources to withstand the vanishing of capital," he says. "In retrospect, this was the right thing to do because so many dot-coms went bankrupt, even though at the time stocks like Liberty Media were also in significant decline."
UNLIKELY PICKS. Doyle insists the dot-com blowup didn't force him to modify or adjust his definition of an Internet company. For example, the fund's largest holding, Kroll (KROL
), is a security company that also has a large Internet business that protects online networks, Doyle says. "Cyber-security is growing tremendously, especially since September 11," he notes. "Kroll has a product that their clients can use repeatedly."
Another top holding that doesn't look like an Internet stock is Washington Post (WPO
). Along with newspapers, the company owns cable systems and Kaplan Online, a Web site that helps teenagers study for the SATs and other tests, Doyle notes. "Kaplan is the dominant name in online education, and moreover, the Internet makes The [Washington] Post a global paper, not a regional one," he says. Doyle says he views washingtonpost.com as more as of a "distribution platform."
Despite the fund's aggressive profile, Doyle considers himself a value investor from the Graham-Dodd school of stock-picking, and he says he never got sucked into the hysteria surrounding tech and Internet stocks during their runup in 1998 and 1999. He looks for reasonable valuation, strong management, and a solid balance sheet and business model. He sells holdings when valuations rise too high and fundamentals deteriorate.
DOWN ON THE BIG SHOTS. As of Dec. 31, Kinetics Internet's 10 largest holdings were Kroll, 9.1% of the fund; eSpeed (ESPD
), 7.9%; Leucadia National (LUK
), 5.9%; Commonwealth Telephone (CTCO
), 4.8%; Groupe Bruxelles Lambert, 4.6%; Washington Post, 3.8%; CheckFree (CKFR
), 3.4%; Pargesa Holding, 3.2%; Barra (BARZ
), 3.0%; and Euronext, 2.9%. Cash stood at 10.8% at yearend. Relatively large cash positions at different points have helped cushion the portfolio.
Doyle thinks the average tech stock remains overvalued, even with the deleterious effects of a three-year bear market. Even so, he says certain areas of tech have rosy outlooks. CheckFree, for example, can dominate the bill-paying industry, he says. "Their financials are reasonably healthy, and they sign up new customers on a regular basis," Doyle says. "Once that company reaches a critical mass, each new customer they get will represent pure profit."
The manager is extremely pessimistic on the big and familiar tech giants like Microsoft (MSFT
), Cisco Systems (CSCO
), Intel (INTC
), and Dell Computer (DELL
). His firm runs a hedge fund that shorts these stocks. "They remain grossly overvalued, and their profit expectations remain low," Doyle says. "I think companies like Cisco and Dell will become single-digit stocks and remain that way for a long time."
Doyle concedes that Kinetics Internet will always have high volatility, which doesn't make it appropriate as a core holding. He recommends that individual investors keep only a small portion of their equity assets, between 5% to 10%, in technology stocks. Though this outperforming sector fund is
no-load, its high 2.63%
expense ratio (vs. an average 1.59% expense ratio for its peers) and aggressive posture might make some investors think twice.
Ghosh is a reporter for Standard & Poor's Fund Advisor Edited by Karyn McCormack
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