Horizon Kinetics entered the ETF market in January 2021 with the launch of the Horizon Kinetics Inflation Beneficiaries ETF (INFL), when U.S. inflation was at 1.4%. INFL is an actively managed portfolio that selects its holdings at the global level. It’s unusual for a brand-new issuer to have its sole ETF gather such significant assets so quickly, but by the end of June 2021, INFL was a $600 million fund. A little over a year after its launch, it had $1 billion and was significantly outperforming the broader market as inflation was pushing toward 8%.
ETF.com spoke with Horizon Kinetics Managing Director Andrew Parker about the fund’s holdings and what’s driving its performance. The following interview has been edited for clarity and brevity.
ETF.com: How did Horizon Kinetics arrive at the idea for INFL?
Andrew Parker: We've been worried about inflation for a long time. We think that a better measure of inflation is M2 [a measure of money supply], rather than CPI. When we started to see all of the COVID Assistance and the money being spent, we just thought that the huge rise in M2 was going to start to impact inflation.
None of our funds had [“inflation” in their names]. We considered renaming some of our open-end funds, and we considered starting some private funds, but ultimately, we decided to launch this ETF. Our timing was fortunate, and for our ticker symbol, we were able to get “INFL.” It was basically just a fortunate process.
We think this is a long-term hedge against inflation. We think that if we have inflation this year, next year or the year after, this portfolio will help hedge against it.
But even if we don't [have continued inflation], this portfolio will do just fine over a normal business cycle. And that's what we think is critical: We think this is this something you can put in your portfolio and not have to look at it every month to see if it's correlated with inflation, because ultimately it will be.
ETF.com: What types of stocks does INFL own?
Parker: We're going to see [continued] inflation. There are some people who still think it’s transitory; there are some people who think the Fed is going to cause a recession and that we won't see [anything more than transitory] inflation.
But our view is that, regardless of your opinion about inflation, it's important to own a portfolio that's a hedge rather than a bet. You could go and buy TIPS, you can go and buy commodities, you can go and buy things that are very specific bets on inflation. But that requires you to be right. And it also requires you to have the proper timing.
The kinds of stocks that we own are, first of all, the asset-light businesses, and that is probably Texas Pacific Land. That's a company that owns 900,000 acres or so in Texas, most of which is in the Permian. And they have no debt, they have very few employees. Basically, if any other company drills an oil well, builds a pipeline, builds a road, builds any kind of facility, they pay TPL a royalty. That is the classic capital light business.
We also own companies that we think are indirectly linked to hard assets, like shipping brokers, real estate brokers, grain processors, where basically they get paid more as the prices of assets go up.
The third category is companies that we think don't trade at crazy prices, but [resemble a] traditional Warren Buffett company with a moat around it—companies that have unique products that we think have pricing power.
ETF.com: The current portfolio only has about 40 components. Is that because you want to take high conviction positions? Or is it just that there's not a huge number of stocks that would serve your purposes?
Parker: We've probably got another 80 or 90 [stocks] on deck. Basically, it's a function of conviction and valuation. But we've had that question a few times in terms of, what's your capacity in terms of how much assets could you manage? And at the moment, I think it's a little over 40, but it'll be somewhere between 40 and 60.
ETF.com: INFL took a sharp downturn during late April into early May, but it’s still outperforming the broader market. Do you have any thoughts on what drove that?
Parker: We've told our clients we think this is a long-term hedge. In other words, this is not a bet on inflation—it's a hedge. All these companies are profitable and, in an environment of rising prices, their revenues will grow faster than expenses. As we’ve seen inflation, they’ve become more profitable. These companies should all do well through any market cycle, but they’re equities, and they're going to have some positive correlation with equity markets.
When stocks go down, this portfolio will most likely go down as well. We think that it will recover, but when you own a portfolio of stocks, you have to recognize that it's going to have some correlation with the equity market broadly.
ETF.com: The broad global index is down more than 15% year to date, but INFL is down less than a tenth of a percent. What types of stocks have really been boosting INFL’s performance?
Parker: Probably the biggest component has been energy, plus some other commodities. One of our positions, Archer-Daniels-Midland, has done quite well. Plus, Charles River Labs is one of our moat companies—that's done well. I think [the outperformance] is actually fairly well distributed. The companies that haven't done as well are the ones that are connected with some of the precious metals.
But again, the goal here is to maintain a very diversified portfolio. On balance, probably 40% of the names will be direct beneficiaries connected to hard assets; 40% will be the more indirect beneficiaries; and 20% or so will be special companies that have unique pricing power. Our goal is to have some kind of diversification.
Also, this portfolio is skewed toward the value end of the range, and right now the broad equity indices are still quite skewed toward relatively high PE technology [stocks]. We think this is a thoughtful way to add a little bit of value to your portfolio.
ETF.com: Can you talk about the fact that the portfolio holds the stock of several securities exchanges?
Parker: That's actually one of our indirect beneficiaries, in our view, that I think has been borne out over time. When you have inflation, you end up with more volatile markets, you end up with people hedging interest rates, you end up with more volume on security exchanges.
In some cases, as prices rise, securities exchanges get paid more. Twenty years ago, securities exchanges were a bunch of guys on the floor yelling and screaming with paper tickets, and now they're really just supercomputers. Plus, when exchanges merge, the operations costs of one of the exchanges basically goes away.
Securities exchanges are very different now than most people think they are. Basically, they're just supercomputers. But at the same time, they're difficult to compete with just because of the regulatory process and getting licenses and things like that. We think they are pretty unique assets, and if you take a look over time, they've all done quite well, even without inflation.
Contact Heather Bell at [email protected]