Visit with Peter Doyle of Horizon Kinetics Asset Management
We recently visited with Peter Doyle, who is the President of Kinetics Mutual funds and portfolio manager on the flagship Paradigm Fund. Our discussion centered around the process Horizon Kinetics uses when selecting investments, the market conditions today and the current positioning of the fund. More information may be obtained by visiting the two websites the firm maintains. One is for the mutual fund and the other is for the institutional portfolios they manage.
The funds process is based around the idea of the equity yield curve. This curve is created by short term expectations by many in the investment community. It drives down the returns expected to occur in a short period of time, and offers larger returns for those willing to wait 3-5 years into the future. They also believe investing is social science. They use History, Economics, Philosophy and Sociology to provide context for investment decisions. They do not use or frankly believe in the efficient market hypothesis. They do not trade often as they believe the frictional cost of making trades far outweighs gains that potentially may occur. It also does not fit into the time horizon with which they make investments.
The market as of January 2017 is fully valued to Peter’s eye. The fund was approaching 20% in cash due to a lack of opportunities offering the risk reward features they look for in an investment. In particular, some of the more “blue chip” stocks names may be among the most expensive and therefore most risky. Many of these companies including McDonald’s and Exxon are amassing debt in order to fund dividend distributions instead of expanding their business. Low interest rates have driven people to focus on yield producing stocks and it also has allowed companies to amass debt with low levels of current service. Peter questions what happens if rates would rise reversing both of these factors.
We did discuss three or four areas that Peter does think will provide very acceptable levels of return. The fund’s largest position is Texas Pacific Land Trust. This trust was created as the result of a divestiture of land parcels from a railroad. The trust owns large parcels of land and the mineral rights in the Southwest United States. They are retiring shares with the cash flow each year. As drilling techniques improve he says they extract more revenue from existing land.
Howard Hughes is a real estate company that was spun off from General Growth Propertiesin 2008. They are currently developing multiple higher end mixed use properties in major population centers across the country. The company is currently using it’s free cash flow to develop it’s portfolio of properties. The stock therefore does not currently pay a dividend. The great demand for income has resulted in may investors passing over this security because the income production is still int he future. Peter believes that the company’s South Street Seaport property could support the valuation of the entire company by itself.
The last and maybe most interesting discussion centered around the topic of cryptocurrencies. These are electronic currencies that are not issued by government entities. There many of these currencies and the most popular one is Bitcoin. Bitcoin currently holds about 85% of the market share of the cryptocurrency market. Horizon Kinetics believe for various reasons, that the price of each Bitcoin will rise substantially, although they acknowledge considerable risk is involved. The other interesting aspect is the technology behind Bitcoin and other cryptocurrencies. Blockchain technology is an open ledger system that allows for secure transactions to occur. This technology has applications for any type of secure record keeping. This will disrupt the credit card, banking, healthcare and legal industries.