Manager Leaves Internet Fund, the No. 1 Performer in 1998

In a major blow to one of the nation’s leading Internet mutual funds, Ryan Jacob announced that he’s stepping down as manager of the $660-million Internet Fund.

Jacob did not return calls Wednesday. But executives with Kinetics Asset Management, the North Babylon, N.Y., company that runs the fund, said Jacob left to start his own company.

Since taking over the portfolio in 1997, the 29-year-old wunderkind guided it to cumulative returns of 570%. That’s more than 10 times the gains of the benchmark Standard & Poor’s 500 index of blue-chip stocks during that time.

Last year, the Internet Fund was the best-performing fund in the country, with a gain of 196.2%. Thus far this year it’s No. 5, up 97%.

But given Jacob’s departure, and the slide in Internet stocks that sent his fund tumbling 19% since April 13, it’s unclear if it can keep up its torrid pace, analysts say.

They note that a lot of short-term “market timers” came into the fund earlier this year, just as Internet stock prices peaked.

Between the beginning of March and the end of April, the fund, through a combination of new money and market appreciation, grew from $150 million in assets to $748 million, making it the second-largest Internet industry mutual fund behind Munder Net Net, according to Lipper Inc.

“That could flow out just as quickly,” warned Sheldon Jacobs, editor of the No-Load Fund Investor newsletter.

And given the spectacular performance of the fund’s holdings, “if other people bail, there will be massive capital gains,” said George Nichols, an accountant who lives in Atlanta and runs the Internet Fund Fan Club Web site. Major redemptions could also eventually force the fund to sell stocks or keep more cash on hand, which could hurt performance.

Nichols, whose shares of the fund were valued at $4,264.62 when the market closed Wednesday, stuck by the fund during last summer’s market correction and the recent slide. But with Jacob gone, he said, “now I’m thinking of pulling out.”

“If there’s a mass exodus, I want to be the first one out.”

Peter Doyle, co-founder of Kinetics Asset Management and the Internet Fund, assured investors that the fund will not change the way it does business.

“There’s certainly not going to be wholesale changes,” he said.

Doyle noted that he and Steven Tuen, director of research at Horizon Asset Management, will take over the day-to-day management of the fund. Joining Doyle and Tuen will be three research analysts, compared with the one analyst that Jacob had.

But the question is, how much of Jacob’s performance was based on luck and how much was based on skill? “To me, this has been one of the most challenging funds to cover in terms of answering that,” says Morningstar analyst Scott Cooley.

Unlike other Net fund managers, Jacob invested only in “pure” Internet stocks.

For instance, his fund did not take stakes in large, established companies such as Cisco Systems or Microsoft that derive a portion of their revenue from Web-related offerings. Instead, he favored smaller companies such as DoubleClick, Inktomi and Xoom.com.

News of Jacob’s departure follows Kinetics’ decision to call off a planned merger with New York-based money management firm Lepercq, de Neuflize & Co.

Though he isn’t technically an employee at Lepercq, Jacob maintained an office there and worked with a Lepercq employee, according to Frank Alexander, a vice president with Lepercq and a minority shareholder of Kinetics.

Alexander, who ran the Internet Fund before Jacob, said he could not comment on whether Jacob will be taking a job with Lepercq.

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Net Fund Returns

Though Internet stock funds are still among the best performers since the beginning of the year, they’ve fallen on hard times lately. Below are four of the best-known Internet funds and their returns year to date, quarter to date and since the April 13 peak in Internet stocks. All return figures are through Wednesday.

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Fund YTD QTD 4/13 to Total name total total 6/23 assets (ticker symbol) return return total return (in millions)* The Internet Fund (WWWFX) 97.3% 2.2% -18.6% $747.9 Monument Internet (MFITX) 82.9 -4.7 -28.4 41.4 Munder Net Net (MNNAX) 48.0 -3.9 -18.4 949.7 WWW Internet (WWIFX) 31.1 -2.9 -13.5 20.5 S&P; 500 9.1 3.9 -1.0

Fund name Sales (ticker symbol) charges The Internet Fund (WWWFX) No load Monument Internet (MFITX) 4.75% Munder Net Net (MNNAX) 5.50% WWW Internet (WWIFX) No load S&P; 500

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Source: Bloomberg, Morningstar

*Total assets are as of May 31.