Net-Wrecked: The Stormy Crash of Ryan Jacob’s Beautiful Internet Fund

Ryan Jacob used to be famous. Not Andy Warhol famous, perhaps, but in the hothouse world of Internet stocks he was something of a rock star. He was the portfolio manager for America’s first mutual fund for Internet stocks, the Internet Fund, which in 1998 was the top-performing mutual fund around, having started the year with $200,000 and ended with $25 million. He had his own fan club; his pouty visage graced the cover of personal finance glossies; he was a fixture on CNBC, and mothers wanted to set him up with their daughters.

Like many a hot manager in today’s go-go market, Mr. Jacob reaped the benefits of his fame. Today he has his own fund company, called Jacob Asset Management. He has his own fund, too-the Jacob Internet Fund.

But there is a problem: His new fund is down 54.1 percent this year, ranking it dead last out of the 5,509 that fund-tracker Morningstar follows. And with Internet stocks continuing to sink-Priceline.com Inc.’s implosion being the most recent-the immediate prospects for Mr. Jacob’s fund seem bleak.

The Internet boom on Wall Street has made its share of stars. Mary Meeker at Morgan Stanley was nothing more than a well-regarded software analyst before making her name by touting the likes of Netscape, Yahoo and eBay. Henry Blodget was an obscure analyst at CIBC Oppenheimer & Co. before his prescient, headline-grabbing prediction in December 1998 that Amazon would double in price landed him a job as Merrill Lynch & Co.’s Internet guru.

But the Ryan Jacob story seems a touch more bizarre. How did an unassuming middle-class kid from the Philadelphia suburbs end up as an Internet player in New York City in the first place? And how is it that he could fly so high and then plunge so low in just two years?

Mr. Jacob is perky enough as he tucks into a runny-egg-and-cold-potato breakfast in a half-empty dining room at a recent Lehman Brothers Internet Wireless conference at the Roosevelt Hotel in midtown. It’s 7:30 a.m., and Mr. Jacob’s longish black hair has a just-out-of-the-shower look to it. His shirt is crisp and his lips are pursed. He may be 31 years old, but he seems all of 22. Earnest and bright-eyed, he looks a bit like a Slim-Fast version of Matthew Broderick.

No one seems to care too much that he is here. There are no Lehman Brothers salespeople clamoring for a bit of his time; no star-struck shareholders thank him for making them rich. It’s a buzz-free breakfast-just Mr. Jacob and one of the analysts he’s brought along, sitting alone at a big, round table in a cold, cavernous conference hall, listening to the desultory presentation of the chief executive from a company called Comverse Technology Inc.

The day drags on. Mr. Jacob and his team of fresh-faced, twentysomething research analysts are conscientious about their work. They attend most of the meetings that day and are usually the youngest ones in the room. They listen intently as enthusiastic presenters speak of monetizing the value of their infrastructure. They break into huddles now and again.

Mr. Jacob fields the odd call from his trader on a tiny little multi-tasking Motorola. It’s the latest version-thin as a cracker-and Mr. Jacob thrills at the whiz-bang features. The news, however, is not great: Internet stocks are getting whacked. Again. Mr. Jacob is upbeat nevertheless. There is a verve and energy to his every quick step. One would never think that more than $150 million of his and his investors’ capital had gone poof! since March. “We are long-term investors,” he says resolutely.

Seize the Moment

In 1997, Mr. Jacob was churning out copy on initial public offerings for a not- exceedingly-well-known publication called the IPO Value Monitor , run by a small outfit called Horizon Asset Management. All of a sudden-in late 1997- he found himself managing the Internet Fund.

It was a measly little offering then, with about 20 shareholders and $200,000 in assets, and it was run by the brother of one of his colleagues. No one wanted to be associated with it-indeed, it was on the verge of being shut down. So they gave it to the always-eager Mr. Jacob.

Before he knew it, Internet stocks were hot. White hot. And Mr. Jacob held a good chunk of them in his fund. In January 1998, Yahoo reported its first profitable quarter, and investors big and small began snapping up Internet stocks. Internet investing had gone mainstream and, as the hype accelerated, Mr. Jacob found himself at ground zero. Gobs of money were being thrown at him by investors desperate for a piece of the action.

By the summer, the fund was $5 million in size; by the end of the year it was $25 million and counting. When the fund ended 1998 as the best performing fund in the land-up 196 percent for the year-what had been a steady inflow became a whitewater rapid of money. In one month (January 1999), the fund exploded from $25 million to $150 million.

The fund’s back office-a simple suburban house in Babylon, Long Island-was overwhelmed by a deluge of phone calls and check-stuffed envelopes. It was a shoe-string affair: Management consisted of the fund’s founder, Larry Doyle, and his mother (a retired school superintendent). And Mr. Jacob, picking stocks all on his own out of a small office in Manhattan.

“In a million years, they could not have expected that kind of tsunami of activity. We had to install new phone lines. It was crazy,” he recollects, leaning back in his chair in his spare, midtown office. By then Mr. Jacob had become a celebrity of sorts, at least within the demimonde of the mutual fund industry. “The volume of press was unbelievable. I was on the cover of Kiplinger’s “-a teen-beat shot of a moody Mr. Jacob running his hand through his dark locks-”and you know I’m really not that kind of guy.”

Bouncing out of his chair, he pulls out a raft of clippings-some framed-chronicling his 15 minutes of fame. One can’t be too sure if it’s pride or irony that he is feeling as he regards this weird time in his life. One magazine dubbed him the Internet’s sexiest fund manager. Girls he didn’t know sent flowers to his office. E-mails came as well from misty-eyed mothers: I saw you on TV the other day, please see the attached photo of my daughter , they would write.

“It was a great story. You had the Internet. Me being 29 years old. The news outlets couldn’t get enough of it,” he explained.

His social life flourished too. He had recently broken up with his girlfriend, but he was dating a couple of times a week. “Everyone was looking to set me up,” he remembered.

Internet stocks continued to boom in 1999. Soon the Internet Fund was up to $600 million. The owners, who had inked a deal to sell the fund, reversed course. The fund’s future was up in the air. Mr. Jacob figured it was time for him to leave. So in June 1999, he resigned. It was big news: CNBC broke into its programming to make the announcement.

Now Mr. Jacob was his own man, ready to leverage his fame. Which he did: He would start his own fund company. Be his own boss. Registering with the Securities and Exchange Commission proved to be cumbersome, though, and there was also a scrap with his former employer; they disputed the degree to which he took responsibility for the fund’s astonishing record.

Finally, by December 1999, the Jacob Internet Fund was open for business. Investors stepped right up, and in two weeks Mr. Jacob had raised more than $150 million. Just like that-no road show or TV appearances. His fund administrators had to hire extra employees to keep up with the barrage of mail (up to 1,000 overnight packages a day) and phone calls.

Included in the $150 million was $100,000 of his own money, not to mention contributions from friends and family members far and wide.

He quickly started putting his money to work. He bought favored Internet names iVillage, Delia’s and AskJeeves. The money kept flowing in, and by March the Jacob Internet Fund peaked at $300 million in size. In late March and early April, when the Internet bubble burst and the Nasdaq swooned, Mr. Jacob did not shy away. He bought more. Buy the dips, his short experience as a fund manager so far had taught him.

But the dips kept dipping. “You come in every day and the market is down big, and you just say to yourself, ‘Man, this is bad.’ And then it’s down big again and again, until you just ask yourself, ‘My God, when is this going to stop?’”

He knows where he went wrong, though. “We bought too early,” he says, pointing to a Nasdaq chart on his Bloomberg. “We thought it was going to be a correction. It wasn’t. It was a crash,” he concluded with some resignation.

A Loyal Guy

Quite so. At $110 million-almost a third its peak size-the fund has never been smaller. Outflows from the fund, while modest at $1 million to $2 million per month, have begun. Key stocks in Mr. Jacob’s portfolio, such as iVillage and AskJeeves, are trading at all-time lows.

Yet Mr. Jacob remains nothing if not steadfast. Take iVillage, Mr. Jacob’s third-largest holding. It peaked at $100 per share in April 1999 and is trading at around $3 now. When Mr. Jacob bought it early this year, it was around $20.

In many respects, iVillage has become a symbol of all that has gone wrong for Internet stocks: overly hyped, badly managed, with a business plan-that content for women will pull in ad dollars-still very much in question.

But Mr. Jacob remains an iVillage believer, insisting gamely that “iVillage is creating a significant Internet brand. It is providing a targeted audience for advertisers. Don’t forget: 80 percent of discretionary household spending is made by women companies. These companies are having no problems selling ad space.”

So why has iVillage tanked? “The stock has underperformed, not the company. Every company was lifted with the rising tide, now they are getting trashed.”

And the cash crunch these companies are facing? A lot of these companies actually have a fair amount of cash, Mr. Jacob maintains. “They raised money before the crash and could even make it to profitability. And some will even try to do that.”

Mr. Jacob has staked out a lonely position. Even such noted Internet cheerleaders as Merrill Lynch’s Mr. Blodget have recanted on the likes of iVillage: Mr. Blodget downgraded the company to a neutral rating in August.

Although Mr. Jacob has lived in the city since 1995, he does not consider himself a New Yorker. “I’m from Philadelphia. I was brought up not to like New York. I hesitated about moving up here in the first place.” Even so, he seems to fit in: He shares a midtown apartment with four women.

Yet there is a very un-New-York-like gee-whiz sensibility to him, a Jimmy Stewart– grade optimism that remains irrepressible.

“My core beliefs have not been shaken.” Mr. Jacob paused. “Well, maybe shaken a little bit. But I just know it’s a matter of time.”

Meanwhile, the last two years seem like a bit of a dream.

“In a million years, I never could have expected to have my own fund company by the age of 30.”