Money manager got Net message but not investors

Ryan Jacob, whose U.S. mutual fund plunged 95 percent when the Internet bubble burst, now ranks as the top-performing money manager among his peers.

His Jacob Internet Fund rose at an annual rate of 23 percent during the past five years, twice as much as the Goldman Sachs Internet Index and the biggest gain of more than 300 technology stock funds tracked by Chicago-based Morningstar.

It climbed 16 percent in 2006, marking the fifth straight year that returns beat the Standard & Poor's 500 Index.

Still, Jacob struggles to attract investors. The $93.4 million no-load fund, managed from a rented beach house in Redondo Beach, Calif., is less than one-fifth the size of the Munder Internet Fund, which gained 0.4 percent last year and also lost more than 90 percent of its value during the Internet bust.

"I understand there are lingering feelings," Jacob said. "That's legitimate. We should be larger, but it's up to me to make the effort."

Jacob said he has tried to change people's perceptions about the fund by focusing on profitable companies with cash-rich balance sheets. That's a change from 1999 and 2000 when he clung to shares of money-losing stocks as the fund's assets cratered to $16 million from a peak of $300 million.

"The mistakes we made back then were things we didn't do," Jacob said. "We didn't take profits. We didn't manage position sizes."

His fund sagged in 2001 as Intertrust Technologies of Santa Clara, Calif., his biggest holding, plummeted 99 percent from its peak. The second-largest investment, Internet marketing company Be Free, plunged to less than $2 from $56 before he sold his shares. Exodus Communications, another large holding, went bankrupt.

The board of Jacob's fund ordered the money manager to change his strategy Aug. 16, 2001.

"We looked at the indexes and said, 'You have to outperform these people and you have to do it now,' " said director Jeff Schwarzchild.

Now Jacob puts almost half of his fund's assets in companies with lots of cash. One example: Napster, the music subscription service, has $90 million in cash and marketable securities to back its $174 million market value.

Reg Liang, an analyst at Morningstar, said Jacob's fund is risky. Its beta, a measure of volatility, is 10 percent higher than the general market, and expenses are above average at about $42 for every $1,000 invested.

The T. Rowe Price Blue Chip Growth Fund, which invests in tech companies, has fees of $15.

Morningstar gives Jacob's fund its highest rating of five stars.

With the rest of his fund, Jacob bets the Internet will keep growing faster than the economy. He's invested in digital entertainment through Apple and News Corp., owner of MySpace.com. Google is his largest holding, accounting for 5.7 percent.

Jacob's biggest gains in 2006 came from China. Hong Kong-based CDC, which runs the China.com portal, almost tripled. Advertising-services company Tencent Holdings, based in Shenzhen, China, jumped more than threefold.

Jacob has reduced his holdings of CDC and Tencent, and cut his stake in Baidu.com, a Beijing-based Internet search engine, in December after the stock gained 60 percent.

He still makes mistakes. Jacob bought Gibraltar-based Partygaming before a U.S. Web-gambling crackdown. He lost money on Yahoo!, which fell 35 percent last year after surrendering market share to Google.

He said he got rid of Partygaming, and Yahoo! is "on probation."