There have been few places for investors to hide during this year’s tumult, but one mutual fund is outperforming by focusing on stocks that previously fell through the cracks. The Horizon Kinetics Spin-off and Corporate Restructuring Fund , which buys stocks shortly before or after a corporate event, has created a narrow portfolio of smaller stocks that is crushing the market in 2022. The fund has gained more than 17% in 2022 even as the S & P 500 fell into a bear market. The fund has also averaged a 17% return over the past five years, despite a negative return in 2018. James Davolos, a portfolio manager at Horizon Kinetics, said that spin-offs can create mispricing of stocks due to market structure. He used an example of an industrial company spinning off its financing arm, creating a smaller stock that can be overlooked as fund managers with different themes or focuses dump it. “Now all of a sudden there is this … small-cap financial services company that is no longer within your mandate. So they are probably going to sell the stock,” Davolos said. Passive investing has “exacerbated tremendously” these mispricings, he said. The new companies can also be in a place for fundamental improvement now that it is a clear focus for management, according to Davolos. “In all likelihood, the core business is being run at the expense of the smaller business, meaning the profitability of the consumer finance division is not really a priority,” he said. The fund has a three-star rating from Morningstar, but its heavy concentration might make many financial advisors nervous. The fund’s top holdings as of June 30 show that just one stock, Texas Pacific Land Corp. , accounts for more than 60% of the fund’s holdings. Its top five positions were about 80% of its holdings. *Welbilt was acquired by Ali Group in July Kinetics “rejects” the idea that diversification, in and of itself, reduces risk, Davolos said, especially for investors with long time horizons. “Diversification might reduce risk if you define risk as volatility, but if you were to think about it objectively all volatility is the variation of a stock price over a defined period of time,” Davolos said. “If you don’t necessarily have to buy or sell that stock, that has no influence on your ability to retire in 30 years.” Kinetics does report a higher beta and standard deviation, two measures of volatility, for the fund relative to the S & P 500. Part of the reason the portfolio has become so lopsided is that Texas Pacific has outperformed so sharply, rising more than 42% this year. “In many cases, we embrace our winners,” Davolos said, pointing to Berkshire Hathaway’s longtime investment in Geico as an example of investment firms being willing to ride with successful holdings over many years. The firm is more than just a passive investor in Texas Pacific. Horizon Kinetics CEO Murray Stahl is on the board of the company. The fund’s other top holdings include Dream Unlimited , a Canadian real estate company, and asset management firm Associated Capital Group . Worker hospitality stock Civeo Corp ., which was spun out from Oil States International in 2014 , has also been a big winner for the Kinetics fund in 2022, gaining more than 40%. However, the company still has a market cap of nearly $390 million, presenting some additional risks for investors. The fund has a low turnover rate, in many cases holding stocks for long after their spin-off event. “In some cases these companies do take many years to hit their cruising speed,” Davolos said. However, it may be difficult for other investors to replicate Kinetics’ success with this strategy going forward. Davolos said that there has also been a “dearth of opportunities” in recent years for new additions to the portfolio, due to high valuations for some spin-offs and other moves that jettison weaker parts of businesses.