4/4/2014 2:15 PM ET|
Internet fund avoids Facebook, Twitter
Burned by the dot-com crash, fund manager Peter Doyle knows to ignore hype. Instead, he looks for value-priced tech and media stocks with deep-pocketed management.
Have you heard the one about the Internet fund that's afraid of dot-coms?
It sounds like a bad money manager joke, but that's actually the best way to describe the Kinetics Internet Fund (WWWFX). "Truthfully, if we changed the name, we'd probably get more money," says cofounder and portfolio manager Peter Doyle, jacket slung over a chair in a conference room at his midtown Manhattan office.
Doyle's quip has two meanings: His Internet Fund was once the darling of Wall Street -- one of the top-performing mutual funds of 1998 and 1999. But it crashed and burned a lot of investors, falling from $1.4 billion in assets in early 2000 to as low as $188 million by 2002.
But Doyle is not just referring to his fund's lingering tech-bubble taint -- he's also speaking about his alternative approach.
Despite its seemingly self-evident name and legacy as the first ever Internet-focused mutual fund, there aren't many websites left in Doyle's 56-company portfolio today. Instead Doyle is proving that in the current bubbly environment for stocks of social networks and mobile apps, the best way to make money from the Net is old-fashioned: value stocks with long product life cycles, deep content libraries, ample cash flow -- and ideally a billionaire behind the wheel.
Kinetics Internet has a mere $180 million in assets and is one of eight mutual funds, including the much larger Paradigm Fund (WWNPX), run by $9.7 billion Horizon Kinetics. In 2013 it ranked among the top-performing equity mutual funds, logging a 44 percent gain. Since its inception in 1996, the fund's 16 percent average annual return has more than doubled that of the S&P 500 ($INX). Its 1.8 percent expense ratio is steep, but that has more to do with its size than costs. Turnover at the no-load fund is a mere 8 percent.
Kinetics Internet doesn't own any Facebook (FB) stock because Doyle, 51, says he doesn't feel comfortable investing in a site so exposed to the whims of popular opinion -- let alone one that is spending $19 billion on WhatsApp, a messaging service with only $20 million in revenues.
"Maybe WhatsApp is a great investment," he says. "But I've got my doubts, and certainly handing over $15 billion in stock tells you what they think about their company. They're not interested in buying back their shares; they're giving them away."
Beyond the lofty valuations, Doyle is wary of any company that has too much tied up in the current technological paradigm. Microsoft (MSFT) and Intel (INTC) ruled the computing world a decade ago but missed out on the transition to tablets and smartphones. (Microsoft owns and publishes MSN Money.) Doyle believes Apple (AAPL) is a declining star in the same vein. "All these great companies have very short product life cycles," he says. "People in a garage can displace your entire business, and now it's global."
Instead Doyle belongs to the "content is king" camp of Internet investing. Rather than value the likes of Time Warner (TWX), Starz (STRZA), and Disney (DIS) on the strength of current revenues, Doyle focuses on the media libraries they've amassed. The product life cycle he's so concerned with in technology is comparatively endless in the world of content. A hit movie like Disney's 1937 classic "Snow White" has already been reissued in theaters, repurposed for videogames and amusement park rides, rereleased on VHS and DVD, Blu-ray and iTunes -- and it should continue to generate more money on new distribution platforms for decades to come.
A year ago Doyle bought into movie studio DreamWorks Animation (DWA) at less than what he valued its media library was already worth. Its "Shrek" franchise, for example, including its last theatrical release, "Puss in Boots," has brought in $3.5 billion in box office revenues since 2001. But when one considers ancillary products, Shrek will be a cash cow for years. The stock is up over 60 percent since Doyle bought it.
Media studios and cable networks are not as sexy as apps that seem to attract hundreds of millions of users overnight, but they do produce more restful sleep.
Sleeping well is a top priority for Doyle given his fund's history. Kinetics Internet Fund was born in 1996 in a Long Island kitchen with a $100,000 investment from Doyle's sister, Maura. It was the first mutual fund for Doyle, a St. John's graduate and former Bankers Trust portfolio manager, who formed the firm in 1994 with four other ex-Bankers Trust employees, including cofounder and CIO Murray Stahl.
They started publishing stock research but seized on the tech IPO boom by launching the Internet Fund, which came under the direction of one of their junior analysts, Ryan Jacob. The twenty-something analyst got caught up in tech stock fever, investing in IPOs like TheGlobe.com and iVillage. In 1998 the Internet Fund had a return of 196 percent, and in 1999 it gained 216 percent. Assets swelled to $1.4 billion.
"Suddenly we were managing a lot of money for people, and the names in there were making me a little uneasy." After trying and failing to sell the Internet Fund, Doyle and hotshot fund manager Jacob parted ways, with the latter leaving to start his own Internet fund. Doyle was stuck holding the bag when the tech bubble collapsed.
Instead of throwing in the towel on the fund, Doyle was quietly buying stocks like Liberty Media (LMCA) and the Washington Post Co. Meanwhile, the rest of Horizon Kinetics, including a separately managed accounts business and several other mutual funds, was thriving. Doyle's Internet Fund is still a small piece, but its stellar performance and fresh five-star rating look promising.
Avoiding bubbly tech stocks is just one of Doyle's rules. Central to his strategy is following big money -- stocks owned and operated by billionaires. Indeed, nine of the fund's top 10 stocks are billionaire-controlled, including John Malone's Liberty Media, Sumner Redstone's Viacom (VIAB), and Larry Page and Sergey Brin's Google (GOOG).
Doyle's billionaire theory rests on three pillars. The first grew from the financial crisis, when most companies hunkered down and hoarded cash. Doyle believes this is a basic agency problem -- executives are more interested in keeping their high-paying jobs than in taking risks for the long-term good of shareholders. Driven by opposite incentives, many owner-operators profited from the crisis by doubling down. Doyle cites John Malone's $530 million loan to Sirius XM (SIRI) in 2009, which turned into a stake that's worth over $12 billion today.
Of course, not many had the resources to make that bold move, which reveals another reason to invest with billionaires: They have access that other managers don't. "Their positioning, intellectual capital, ability to influence policy is unrivaled," says Doyle. "If John Malone wants to meet with the head of the FCC, chances are he'll get on his calendar." When a major opportunity presents itself, the titans of industry are frequently in the right place, and they rarely have to pass on a good investment.
The third pillar of Doyle's billionaire bet is valuation. He says many owner-operator stocks are cheap today as a result of money flowing away from active management and into passive ETFs. Most ETFs weight their portfolio by market capitalization and free float, which inherently penalizes stocks like Viacom, where Sumner Redstone controls nearly 80 percent. Says Doyle, "You're basically putting on sale the people who are best at allocating capital, have the best access to information and lowest cost of capital."
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