Our Investment Strategies
Our fundamental investment approach capitalizes on the overwhelming need for investors, predominantly professional investors, to achieve short-term and relative-return-based results. This collective, short-term focus can create long-term price inefficiencies, because rewarding events and outcomes, even if visible and of large magnitude, which are 3 to 5 years in the future, have little utility to the average manager. This is one mechanism by which ignored and under-analyzed securities are created. We seek to exploit the resulting long-term pricing anomalies and unique opportunities in order to generate above average returns.
All of our strategies are based on in-house research. The focus is on companies and instruments whose financial results and returns will be specific to their own circumstances – idiosyncratic, in industry jargon – rather than tied to the systemic variables that govern the major stock market indexes.
The research is based on a long-horizon approach and focuses on absolute rather than relative returns. This allows us to make use of the opportunities created by – or ignored by – the short-term and trading liquidity needs of institutional investors and ETFs. The goal is to identify securities and construct portfolios with functional – as opposed to merely semantic or labelled – diversification.
To accommodate differing preferences, our research strategies can, variously, be accessed via specific mutual funds, individually managed accounts or, for more specific objectives, customized individual portfolios and private partnerships.
We are value oriented investors. Which is to say that we wish to buy something for less than it’s worth, with the expectation that it will provide an adequate future return. We do not purchase securities if we don’t believe this will happen; accordingly, it can often take quite a bit of time for an account to become fully invested. We consider investing cash the same as placing capital at risk; it should be done purposefully. If this sounds self-evident, that is not the way much investing is done.
Index-based investing, for instance, does not presume that future returns will be adequate; the goal, rather, is to gain ‘exposure’ to a given asset class or sector, such as large-company stocks or international stocks. The return will be what it will be. That exposure is described by superficial features such as size, geographic location, industry sector, historical price volatility, and one or two valuation measures such as the price-earnings ratio. Those are descriptive of the package, but say little about how the package might do in the future.
We focus on predictive attributes of a security or sector, which are qualities that are suggestive of rewarding future returns. Perhaps the most obvious predictive attribute is undervaluation – something that is far too cheap relative to a relevant measure of its worth, such as net asset value or earnings. There are others, perhaps the most powerful one being an owner-operated company, in which the controlling party is also the largest shareholder and has substantial capital at risk. These are often founders, such as was the case in companies as varied as Wal-Mart, Apple, and Starbucks, among better-known examples. A relatively small portion of publicly-traded companies fit this category; the vast majority are agency-operated, in which the CEO is the standard employee whose wealth is built through a compensation package as opposed to a major equity stake in the company.
Another predictive attribute is a hidden or dormant asset, one that is not currently producing much or any revenues. Because they do not manifest themselves on the income statement, dormant assets may be accorded little or no value in the stock price. Yet they might have substantial value. An example would be a cable television company that owns broadcast spectrum rights that have yet to become operational, or a land company that owns oil or mineral rights that have yet to be exploited and would cost little to develop.
Another attribute predictive of excess long-term return is corporate spin-offs, which for a variety of reasons are persistently underfollowed by Wall Street analysts and are often rejected from various portfolios and indexes.
The same focus on differentiating factors that make a stock too cheap, that suggest a higher level of future earnings or equity value, apply to all of our strategies, whether Large Cap, Small Cap, Asian, Spin-Off or others. Accordingly, they tend to have very little overlap with, and are relatively uncorrelated with the broad market indexes.
We offer a variety of investment products that are focused on particular attributes outlined above or combine several of these factors in a comprehensive offering. To find out more about our Separately Managed Accounts and Private Investment Partnerships please contact us at firstname.lastname@example.org or 646-495-7333. For our Mutual Fund offerings please visit www.KineticsFunds.com
Our Income Strategies
The income research and security selection approach is philosophically consistent with our equity research process: securities are selected because they are believed to provide an adequate or superior absolute expected return or are otherwise inefficiently priced, not simply because they meet a benchmark description. Accordingly, securities are evaluated across the spectrum of issuer size, industry, and credit quality; investment gifts often come in unexpected packages.
Likewise, investments are often made episodically, when opportunities are available, not in a blanket allocation fashion. This is when one can exploit inefficiencies created by marketplace shifts, in particular where we encounter motivated sellers of certain instruments. Such inefficiencies often occur in the fixed-income markets when dealers or other institutions experience short-term needs to transact in a given security.
Strategies range from all-bond portfolios to blended bond/income equity approaches. Where appropriate, and circumstances permitting, we believe in incorporating some form of principal and income growth into income portfolios, since long-term maintenance of purchasing power is perhaps the paramount objective of long-term capital.
> Income Investing: Our Approach and Examples
Our Alternative and Single-Purpose Strategies
It is an oddity of traditional investment strategy policy that one often cannot take advantage of the true dislocations that occur if they don’t conform in form to the client’s chosen strategy, even if they conform in substance. What is to be done when a major opportunity occurs in a segment of the bond market that would be ideal, as to expected return and margin of safety, within an equity portfolio? Practically speaking, it is not permissible to deviate from the established strategy, and for many good reasons.
Accordingly, when such opportunities occur, such as we might commit our own capital to, we can make clients aware of the nature of the investment and our analysis. These might occur with a relatively limited window of time and, in such circumstances, clients may establish a separate account or invest in a separate partnership in order to participate. Please speak with us if you would like to understand more about the form such investments have taken.