Kinetics Asset Management of White Plains, N.Y., best known for its flagship Kinetics Internet Fund, which captured more than $1 billion in assets with funds that had eye-popping triple-digit returns in 1998 and 1999, has found its popularity waning. After being passed over in a merger deal with another fund complex for the second time in three years, Kinetics is revaluating its fund offerings, its distribution options and its future.

That soul searching has prompted the fund advisor which, in February of 2000 was named the fastest growing asset management firm by Strategic Insight of New York, to close four of its 11 mutual funds in mid-November amid a lack of investor interest, poor performance and dwindling assets.

Kinetics chose to terminate two of its five Internet-related funds, the struggling $6 million Kinetics Internet Infrastructure Fund, and the $5 million Internet Global Growth Fund. Expense ratios were high and the advisor had been subsidizing the funds, said Steve Samson, Kinetics CEO, in an interview.

The group also closed the Kinetics Asian Technology Fund that debuted just over a year ago and was subadvised by United Overseas Bank in Singapore, and the Kinetics Middle East Fund which launched in March 2000. Both closings were no-brainers, Samson said. The Asian technology fund just never caught on with investors, and once the war in Afghanistan started, investors completely turned their backs on the already under appreciated Middle East Fund, Samson said.

Kinetics has redeployed the funds' managers and analysts to other areas of the company. This includes Kinetics' seven other funds and two hedge funds, one in the U.S. and one offshore, that the company runs and has been seeing much success with, Samson said. "We'll use our best {investment} ideas from these funds elsewhere."

This past April, Samson group said it was on the verge of inking a merger agreement with a small New York-based fund group with complementary capabilities (See MFMN, 4/16/01). But he confirmed that its intended merger partner had backed out of the deal a few months ago, after a year of negotiations. "We couldn't reach a final agreement. We were disappointed," said Samson declining to name the fund group it was hoping to acquire.

This wasn't the first time Kinetics, which was originally founded in 1996, was left at the altar. In March of 1999, Kinetics announced a merger with Lepercq de Nerflize & Co. of New York. But three months later Kinetics abruptly announced in an SEC filing that the impending merger was off, without providing a reason.

Despite being jilted on two occasions, Kinetics is still seeking merger opportunities and is looking for a partner with complementary competencies including fixed-income funds and more conservative equity funds. "We want to be the elite fund group with a broader offering," Samson said.

Right now the remaining fund lineup includes three Internet-related funds, a medical sciences fund, a small cap fund, a U.S. government money market fund, and an energy fund which launched this past January.

The fund group originally built a name for itself as one of the earliest to ride the Internet tsunami. Posting a whopping 196% return in 1998 and an even more impressive 216% return in 1999 according to Morningstar, the Kinetics Internet Fund made a name for itself, attracting more than $1 billion in assets from its October 1996 inception through December of 1999.

When the Internet sector began sinking last year, the fund suffered along with it. According to Morningstar, in 2000 the Kinetics Internet Fund lost more than 51% of its value, and is down another 9.87 percent year to date through Dec. 11. Assets in the Kinetics Internet Fund have fallen to $339 million. The Kinetics funds have about $500 million in assets collectively under management, said Samson.

Despite the Kinetics Internet Fund's fall from grace, Kinetics is still actively trading on its stellar long-term performance record. As of Dec. 10, the fund had the second best five-year annualized return of all domestic equity funds, with an annualized return of 33.44%, according to Morningstar. Moreover, its year-to-date loss of close to 10% has nonetheless placed it ahead of 95% of all other specialty/technology funds.

Still, through October the fund group has seen net outflows of more than $126 million, according to FRC.

This past April, the formerly 100% no-load group added A-shares to its three most popular funds including the flagship Internet fund to satisfy demands from the broker/dealer community. Despite inking 120 selling group agreements, progress has been slow, Samson said. B-shares will be added in early 2002 and Kinetics will add A-shares on its small cap fund by year-end, Samson said.

The group is also expanding the small wholesaling force it created earlier this year to target brokers in the New York, tri-state area.

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