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STREET WISE By Amey Stone December 23, 1999 Can This Net Fund Superstar Streak Back to the Stratosphere? Ryan Jacob talks about his buy-and-hold strategy and the first picks for his brand-new Internet fund Internet investing star Ryan Jacob's long-anticipated new fund is up and running. Jacob achieved nearly cult-like status thanks to his knack for identifying Internet hotshots long before other investors while managing the Internet Fund (WWWFX). It was the top-performing mutual fund in 1998, with a 196% return, and was up an additional 113% in 1999 through the end of June, when Jacob resigned after the fund's sale to Lepercq de Neuflize was scuttled. Jacob then founded his own firm, Jacob Asset Management, and spent the next five months clearing the necessary regulatory hurdles to launch Jacob Internet Fund, which started trading on Dec. 13. It has a minimum investment of $2,500, and annual expenses are capped at 2% through Aug. 31, 2000. In its two-week initial subscription period, the new fund raised $150 million in assets. Now, the 30-year-old Jacob will be under the microscope as few other portfolio managers have been. As investors clamor to board his fund, they'll be looking for the same stellar results he achieved before. This time, however, he faces tougher competition. While the Internet Fund was probably the first pure-play Net fund, now there are about a dozen Internet funds, including several based on Internet indexes. After a mere week and a half, the returns of Jacob's fund are flat. But Jacob, who employs a buy-and-hold strategy that's rare in Net stock investing, says he's positioning the fund for 2000 and beyond. Jacob continues to make Internet pure-plays -- companies that take in most of their money directly from the Net, not those that simply have an electronic business component -- the centerpiece of his strategy. And so far, he has stayed away from America Online, Amazon, and Yahoo!. Nor is he particularly emphasizing business-to-business plays, the Internet theme du jour. Infrastructure, the other more mainstream Internet play, isn't his principal emphasis, either. Instead, he's focusing for now on several content-related companies -- some of them battered and years away from earning profits -- that he thinks have plenty of upside potential. Business Week Online Associate Editor Amey Stone talked to Jacob about his strategy and his first stock picks for the new fund. Here are edited excerpts of their conversation: Q: What is the philosophy of your new fund, and how does it differ from the Internet Fund? A: It really is an extension of the same philosophy. We intend to focus on those companies that derive a large majority of their revenues from or on the Internet. We will run a concentrated portfolio of between 25 and 35 names. We intend to keep portfolio turnover to a minimum and are really employing a buy-and-hold strategy. Q: Are some of your former fans at the Internet Fund already buying into Jacob Internet? A: There are clearly some, although I couldn't say how many. The response has been tremendous ever since we filed the initial prospectus in July, and we've had a pretty successful beginning. In the two-week subscription period, we raised over $150 million. Now we're over $170 million. Q: That is a quick ramp-up for a new fund! Do you have a ticker symbol yet? A: Not yet. Nasdaq is no longer accepting applications for symbols this year due to Y2K. We're hoping that in early January we will have a symbol. Q: I know it's hardly a fair question when you've only been up and running for a week and a half, but how have returns been so far? A: So far, we're still around our offering price of $10 a share. But we're really positioning our portfolio for next year, and we're still putting all this money to work. Q: So what is your strategy for investing in the Internet? A: We break down the areas we cover into four subgroups: media and content, commerce, infrastructure, and communications. Our bias today is more toward media and content than any other category. We think these stocks have been somewhat misunderstood by Wall Street, and we think some companies are building very powerful franchises. StarMedia Network (STRM), one of the largest Latin American portals, is in our top 10 holdings now. It is employing more of a horizontal approach [appealing to a broad audience], similar to other major U.S. portals. It is a first mover in a growing region and has already established itself as a leading player. We are also positive on NBC Internet (NBCI). It is NBC's and General Electric's primary Internet vehicle, which was formed by the merger of Zoom.com and Snap.com and a few other NBC Internet assets. It is looking to compete against the other major portals, and I think that as part of the NBC family, it really has an opportunity to catapult forward into the top three or four portals. Q: If you like leading portals, why aren't you interested in Yahoo!? A: We are tending to focus more on small to midsize Internet companies, rather than the very large Internet plays. One of the things that will strike people about the new fund is the fact that we don't own America Online, Amazon, or Yahoo! -- not that I don't think their prospects are very bright. They just don't have the amount of upside we require for the amount of risk we're taking. We're not afraid of taking risks, but we want to be compensated. Q: Why don't they have the upside you're looking for? A: It's a combination of two things. They have really started to cross over into institutional acceptance, which has led to a significant increase in market values. That is combined with the fact that we're starting to see signs of maturity in their growth. Q: Maturity in their growth? Does that really mean you see a slowdown coming? A: Well, the beginning of slowing growth. That will make it difficult to maintain the valuations those companies enjoy today. They may maintain current levels, but we're looking for companies where we believe there is a lot more upside, even if there is a bit higher risk. As portfolio managers, that's where we add value. Q: What are you looking for in the commerce area? A: Companies that provide something unique to that market, that are opening up a new wave of commerce, and that really couldn't exist if wasn't for the Internet. eBay (EBAY), the category killer in consumer-to-consumer auctions, is one example. In terms of market opportunity, it's tough to find a company that has more of an opportunity than it does. Another example is Priceline.com (PCLN), which enables companies to sell inventory, such as airline seats and hotel rooms. Now they are offering home mortgages, automobiles, and groceries, which have caught on very well. Before Priceline, it wasn't possible for companies to sell excess inventory without damaging their current pricing structure. Q: eBay and Priceline are both companies whose high valuations analysts have questioned. A: Maybe so, but no one questions the amount of brand awareness they've been able to create. The fact that there is still a question mark as to whether they will be successful long term creates an opportunity for us. We think they will. Q: Progressing through your list of subthemes, what about infrastructure stocks? A: There I'd mention Critical Path (CPTH), which is far and away the leader in outsourced e-mail services. More and more companies will be looking to outsource e-mail. As big a market as it is today, it will get much bigger. Q: It has been a very volatile stock, though. A: In many ways it was a typical Internet IPO. It started off with such high expectations that it built an enormous valuation. I always liked it since it first went public but didn't buy it then because of its valuation. Today the valuation is quite a bit less than when it went public, yet they have almost nine months more experience under their belt and have really demonstrated their ability to execute their strategy. By waiting, we got to look at more of a track record and got a lower price. Priceline was the same way. Q: What about a communications pick? A: A good example there is NetZero (NZRO). This is a very controversial idea -- offering Internet access for free and planning to make money purely on advertisements. We happen to think this is where the market is heading. Telecommunications costs, the major cost to the company, continue to decline. Meantime, the amount of ad revenue they can generate per user has been rising. The model doesn't work today, but that is irrelevant. The question is: Will the model work a year or two from now? I think the answer is yes. By then, NetZero will have established a dominant position. Q: Is your belief in free Net access one reason you've avoided AOL? A: I think AOL would survive in a free ISP environment. But it wouldn't enjoy the same stock market valuation. Q: So far, you haven't used one of the current top Internet investing buzzwords: business-to-business. Are you less impressed with that theme than other money managers? A: There are a number of interesting companies we're looking at in that category. Unfortunately we're seeing a period of euphoria around B2B. As we saw earlier with e-commerce stocks, euphoria took everything up to absurd levels, and eventually we had a little bit of a shakeout. But there are some in our portfolio. Ask Jeeves (ASKJ) is one. And Critical Path is another. Q: You also don't seem as hooked as some Net-stock fund managers on infrastructure names, with companies like networking giant Cisco Systems (CSCO) or broadband chipmaker Broadcom (BRCM) as the prime examples. A: Infrastructure can be defined in so many ways. I've always owned infrastructure names, but I have had a bias away from traditional tech names. I've worried about risks like a shortening product cycle and a company's ability to monetize the technology before it becomes outdated. Plus, there's always the danger that a competitor leapfrogs. Q: It sounds like you see the infrastructure plays as riskier than pure Internet names. Most money managers I talk to see this subsector as safer. A: I do think I'm in the minority. I tend to like companies where the technology isn't the driving factor determining success or not. For example, there may be other companies with better technology than eBay, but eBay still has the dominant brand. Q: I know you have a buy-and-hold strategy, but given the run many tech stocks have enjoyed in 1999, are you concerned that there could be a correction in the beginning of next year? A: The Nasdaq has had a terrific run, but I really just don't engage in market timing. I'm building the portfolio for the long term. I have a three-to-five-year outlook, and I still see tremendous opportunity. A correction isn't something we can predict. I've dealt with a lot of volatility, and we will continue to have a lot of volatility. It is something you have to live with. Stone is an associate editor at Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					Amey Stone covers the markets and investing for Business Week Online RELATED ITEMS BW e.biz, July 29, 1999: "Suddenly, It's a Free-For-All in Internet Funds" WEB POINTERS To visit some of the sites mentioned in the story, click here: Jacob Internet Fund StarMedia The Internet Fund NBCi Priceline Critical Path NetZero Ask Jeeves eBay