Tech Fund on Its Toes

Ryan Jacob was a darling of the tech bubble years. From 1997 to 1999 he ran Kinetics Internet Fund, one of that go-go era's highest-flying tech funds. He quit and launched Jacob Internet Fund (symbol JAMFX; 888-522-6239) in December 1999, just in time for the market collapse. Kiplinger's Personal Finance profiled the young hot shot in May 2000.

How's Jacob doing today? He's back in the groove. Over the past five years through June 30, Jacob Internet returned 15% annualized, besting Standard Poor's 500-stock index by 13 percentage points per year, on average.

A grizzled tech stock veteran at 36, Jacob said he learned some useful lessons from the 2000-02 tech crash, during which his fund plunged 96%. First, he says his funds were too concentrated and his portfolio turnover too low. That's right. Jacob believes that complacency is a dangerous thing in a tech fund. "In the tech sector, low turnover makes no sense," he says. "For an individual to buy a tech stock and put it away for 30 years like an oil stock is stupid. Technology inherently goes through revolutions, so a fund manager must be on his toes."

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Jacob says he's dampened volatility and lowered risk in his fund by adding undervalued tech stocks to the roster of rapidly growing companies. What are undervalued Internet stocks? He defines them as stocks "orphaned" by the market. These are typically "busted" software companies with large amounts of cash on the balance sheet and market capitalizations of one to one and a half times revenues. Jacob looks for bargain-priced companies that are likely to be acquired at a large premium if they fail to restructure themselves.

So what does he favor in this market? In the growth camp he likes online advertising kingpins Google and Yahoo. He figures that these companies will grow over the long term and will hold up even in an economic slowdown. He recently added shares of News Corp., reckoning that the huge growth in traffic of MySpace.com can accelerate News Corp.'s Internet presence (Rupert Murdoch's company recently acquired MySpace, the largest Web social network). Jacob has also sunk 20% of the portfolio into Chinese Web stocks such as CDC and Sohu.com. He believes it's only a matter of time before China's Internet penetration surpasses that of the U.S.

Two of Jacob's "value" stocks are Agile Software, which writes what's called lifestyle-management programs, and Interwoven, which sells content-management applications for compliance needs to law and accounting firms.

No, this fund -- this sector -- is not for widows or orphans. But if you're drawn to investing in this cutting-edge part of the U.S. economy, Jacob does seem to be devising ways to mitigate risk. Still, this is a work in progress.