One on One: "I never let the good publicity get to my head, and the bad publicity never really bothered me"

Ryan Jacob, the 33-year-old mutual fund manager who became a whipping boy for the Internet crash, has returned to the top of the charts.

The $100 million Jacob Internet Fund is listed by Morningstar Inc. as the second-best-performing technology fund for the one-year period ended July 14, up 124.59%. That’s closely trailing the No. 1 fund, ProFunds Ultra Internet.

The Jacob Internet Fund’s gain dating back to Oct. 9, when the bear market hit its trough, was even more astounding. The fund, which has seen its assets seesaw from a high of nearly $300 million to a low of $10 million during the course of the past several years, was up 142% through the end of June.

But Mr. Jacob is taking it all in stride.

He readily acknowledges that his style of extreme investing comes with huge risks and, therefore, should play a minimal role in any asset allocation strategy. He also cautions that investors shouldn’t necessarily expect the fund to post triple-digit returns in the latest stock market rally.

“You have to be realistic in terms of the kind of market we are in,” Mr. Jacob says. “Even though the market has had a good first half, we are not seeing the kind of levels that we saw in the late 1990s.”

At the same time, Mr. Jacob is optimistic that brighter days lie ahead for technology companies -especially those that focus on the Internet.

To take advantage of that projected uptick, Mr. Jacob has pared his fund of its holdings in industry bellwethers such as Amazon.com Inc. (AMZN) and eBay Inc. (EBAY).

That’s because they no longer offer as much bang for the buck as they did in the heady days of the late 1990s.

Instead, he’s focusing on lesser-known small- and mid-cap companies.

But that’s just one example of how Mr. Jacob’s stock-picking strategy has evolved during the market downturn. Another is the fund’s turnover ratio, which Chicago-based Morningstar pegged at 1,081% in 2002 – stunningly higher than the 200% clocked for the average technology fund.

It appears Mr. Jacob has become much more aggressive about selling shares in the portfolio, both on the upside and downside.

Still, there are plenty who believe investors would be better served playing the slot machines than investing in the Jacob Internet Fund.

“Ryan Jacob is a very smart guy, and he knows his companies very well,” says Dan Culloton, a mutual fund analyst at Morningstar.

“But this fund is so narrowly focused that it really is of very limited use to most investors. Most people can live long and happy lives without ever holding a fund like this,” Mr. Culloton says.

Q Did you ever get tired of being referred to as a “whiz kid” or “wunderkind” in the late 1990s?

A It was flattering at the time, but it wasn’t really central to what we were doing here.

I think it was more of a fascination with the fact that I was in my late 20s when we put up some performance numbers that attracted interest.

Q How did you feel about all the bad publicity you got when the bottom fell out of the tech market?

A I never let the good publicity get to my head, and the bad publicity never really bothered me.

Q Do you think tech stocks are in the middle of a bona fide rally here?

A I think so. I think we probably saw the lows in the market late last year.

Where we go from here is a bit uncertain, but the bounce we’ve seen has been justified in terms of stabilizing and slightly improving fundamentals.

Q This isn’t the first time technology stocks have rallied over the past three years. What makes you think it’s for real this time?

A The other “rallies” lasted, on average, two or three months. This rise has been really over the past nine months, and it’s been quite dramatic on a percentage basis.

Q How are the companies in which you’re investing today different from those of a few years ago?

A Many of the companies we’re investing in today are either [break-even] businesses or profitable. That’s completely different from the kind of environment in the late 1990s, when many of the companies we invested in were more venture opportunities.

Q Given the market’s recent run-up, are there still a lot of good companies in which to invest?

A Yes. There are a lot of companies that went public in the late 1990s that have still managed to hang on. Out of that vast group, a small percentage really does have a unique business model and good strategic positioning in their markets.

Q Could you name a couple?

A There’s a company called webMethods Inc. (WEBM) and another called Netegrity Inc. (NETE). Both represent reasonable valuations.

We also think they could have a significant upside even [with] a slight increase in economic activity. Another plus is the fact that we think these companies, because of their unique positioning in the market, are attractive acquisition candidates.

Q Are you expecting to see a lot more consolidation among Internet companies?

A Even in a terrible market, we’ve seen consolidation. We think, as the market improves, the pace of that consolidation will pick up significantly.

Q Is there any company out there that you think is poised to become the next eBay?

A There is one company that is still below the radar and has a modest valuation: Monster Worldwide Inc. (MNST), the old TMP Worldwide Inc.

Given the trials and tribulations of the other TMP businesses, its stock has been depressed. But now that it’s been spun off as a pure Internet property, we think it has a lot of potential.

Q Is there any particular sector in which you are investing for the first time?

A One of the newest areas we’ve looked at is video game companies.

Q Are you buying or just looking at this point?

A Companies that we’ve recently bought are Electronic Arts Inc. (ERTS) and Take-Two Interactive Software Inc. (TTWO). Both are leaders in the video game market for consoles and PCs.

Q But haven’t we been hearing about the video game industry for a while, particularly online gaming?

A I think we are finally at that point where this holiday season we could see a significant pickup in these kinds of services.

SNAPSHOT

Ryan Jacob, 33, chairman and chief investment officer of Jacob Asset Management LLC in New York since 1999

Career: 1997-99, portfolio manager of Kinetics Asset Management Inc.’s Internet Fund in North Babylon, N.Y.; 1994-98, partner at Horizon Asset Management Services LLC in New York; 1992-94, assistant portfolio manager at Bankers Trust Co. in New York

Education: bachelor’s degree in finance from Drexel University in Philadelphia, 1992

Jacob Internet Fund (assets, $103 million): year-to-date return, 71.25%; one-year, 124.59%; three-year, -36.18%

Average technology fund: ytd, 35.35%; 1-yr, 21.97%; 3-yr, -32.43%

Returns as of July 14; periods over one year annualized

Source: Morningstar Inc.