Kinetics Fund Is Good Judge Of Quality

That's no surprise when you consider the fund's buying parameters. To qualify for entry into the fund, a stock must have a market cap of $3 billion or less at the time of purchase and must show that it can return 15% on equity for three to five years.

No other quantitative criteria come into play. Minimum sales or earnings growth levels, a baseline for daily trading volume, whether the market is in an uptrend or a downtrend -- those factors, plus a host of others used by many asset managers, aren't used in buy decisions.

"The majority of the world and Wall Street operate on these trading black boxes," said Christopher Bell, senior vice president of marketing for Kinetics. "One of the biggest opportunities in the marketplace is that so little qualitative research is done."

Kinetics seeks companies that are, Bell says, "about to show their true value." The fund's managers eschew technical analysis, instead favoring stocks that show low multiples given their potential. In that sense, the fund's methodology can resemble a typical value approach.

But another trait the managers target is a near-term catalyst. A change in management, a promising new product or a change in the overall market climate all fall under that umbrella. Those are all traits common in many leading growth stocks.

Resists Pigeonholing

No surprise then that Kinetics considers itself neither a growth nor a value fund. The companies on its hit list typically feature long product life cycles and high barriers to entry within its industry.

"What Warren Buffett likes to call a durable competitive advantage," explained Bell.

One of the fund's biggest holdings is Icahn Enterprises (NYSE: - ) (formerly American Real Estate Partners). The stock took up just under 6% of total assets as of Sept. 30.

Much of that home furnishings and gaming stock's competitive advantage, Bell says, came from the company's principal owner, billionaire financier Carl Icahn. Whenever possible, Kinetics will follow the lead of some of Wall Street's most successful moneymakers, including Icahn and Buffett.

"It's just following great investors, doing what they do," said Bell.

Kinetics scooped up the stock about five years ago, when it traded in single digits. It's now at about 118.

That long holding period is also typical for Kinetics. Holding periods for stocks in the Kinetics family of funds are roughly five to 10 years. The fund's turnover was less than 5% in 2006. It projects to come in under 10% this year.

The fund also has reaped the benefits of some astute investments in utilities. Kinetics nabbed Reliant Energy (NYSE: - ) in 2002, when the stock was trading near rock bottom, in single digits.

Back then, Reliant and other utilities seemed to flirt with bankruptcy. If a utility didn't have excess power, it had to buy power delivery contracts. The wholesale costs of those contracts were higher than the delivery rates utilities could charge. So utilities kept losing money, and their credit ratings nose-dived.

To combat the problem, Reliant and other utilities started using debt to fund operations. That allowed those firms to generate cash flow, and in turn pay down debt and create equity. As the company's financials improved, so did its stock. Reliant is now trading at about 25.

Kinetics also owns all 23 publicly traded exchanges within its broader family of funds. That group includes Intercontinental Exchange (NYSE: - ), a top-performing stock with strong earnings that's found its way into many growth portfolios.

ICE has hiked its earnings growth from 67% in 2004 to 140% in 2005 and 150% in 2006. Since the company derives its revenue from electronic transactions, its cost of doing business is minimal.

That's enabled sales growth to surge from 16% in '04 to 44% in '05 to 101% in '06.

The stock has rocketed from 26 at its November 2005 IPO date to a high above 180 just two years later.