Massucci's Take: Is tech back? A talk with Ryan Jacob

Ryan Jacob was arguably the most popular mutual fund manager a decade ago when, while still in his 20s, he ran one of the few funds focused on internet stocks. Kinetics Asset Management's Internet Fund was the best performing U.S. equity fund in 1998, enjoying a 198 percent return. It rose over 500 percent in the 18-month span from 1998 through mid-1999.

Jacob, who was clearly in the right sector at the right time, was seen as a wunderkind and admired for his hot hand and ability to manage money in a volatile growth industry. In July 1999, he founded his own investment firm and launched the Jacob Internet Fund (JAMFX) and had $300 million under management within weeks. When the internet bubble burst in 2000, the fund dropped about 90 percent. Since then, the best year for the Jacob Internet Fund was 2003, when it doubled.

Jacob, now 39, has been managing money while the technology industry has skyrocketed, crashed and recovered. He manages the $40 million fund, which has rallied more than 50 percent this year, beating the Nasdaq, which is up almost 30 percent.

I thought it would be a good time to catch up with Jacob to find out if he thinks the tech rally this year will continue and how the current rally is different, or similar, to the growth in the tech sector seen a decade ago.

DailyFinance: Tech has been doing well this year, but your fund has done even better. What's the reason?
Jacob: To be fair, it has been a good year for tech. Specifically internet-related companies. But even among our peers, we're doing very well. The 101 percent performance in 2003 was off a low for tech and the economy, which was coming out a recession. That may sound familiar, if that's what folks are thinking is happening again. Times like these are when you see the kind of year that we're having. So this year's performance is really not that surprising, given the damage the markets took last year.

Overall, why do you think U.S. stocks are up in 2009?
We went through a period late last year where there was a lot of panic, which was justified. Investors became very risk-averse. That's why you had treasuries yielding zero-percent. Investors fled any risky asset class. You had valuations reach extreme levels on the downside. I really wasn't that surprised this year ended up being a good year off of last year's panic-low.

How is this year's tech rally different than the tech bubble seen 10 years ago?
It's completely different. Technology is considered somewhat safe right now, given your other choices. A lot of technology companies have a ton of cash on their balance sheet and very little debt, so there's not a lot of financial risk. Most investors, even the most bullish, feel the economy is going to be weak for awhile; for possibly several years. There are plenty of areas in technology that are showing secular growth that can be very attractive and do well, even in a weak economy.

So investors believe that now is the time to get back in to technology.
The reason people are flocking to tech this time isn't because of out-sized growth expectations. It's because they feel tech can grow, even in a subdued environment -- and grow profitably. Look at your other choices. Are the banks a good investment right now? Are financial services a good investment right now? They might be terrific investments, but they're clearly a lot riskier. And the capital structure is much more tenuous. It's kind of strange to look at tech as a kind of safe haven, but it's still a safe haven for investors who want growth without significant financial risk tied into it.

What has changed for technology companies over the past 10 years?
We had companies 10 years ago that were growing 30- to 40-percent a quarter. It was a hyper-growth phase for most of technology that ended up being unsustainable and causing a lot of volatility in the market. A lot of tech companies have matured enough to manage themselves very prudently. It's a much different environment. A lot of the companies now have the financial wherewithal to justify their valuations.

What are the top holdings in your fund?
Apple (AAPL), Earthlink (ELNK), Google (GOOG) Take-Two Interactive (TTWO), and Yahoo (YHOO). Take-Two has done a pretty good job broadening out from Grand Theft Auto. We expect more consolidation in the video game sector. Google's growth rate has slowed, but still should be able to grow, even in this environment. It has continued to gain share in search, which is impressive. You see little bumps along the way, but it wouldn't surprise me if Google got to 80 percent market share in search.

The valuation is not that expensive, especially for a company of its dominance. The cell phone opportunity for Apple is much larger than the personal computer market opportunity. The iPhone is a product where Apple has a superior product at a competitive price point. There's no reason to believe that its position shouldn't become stronger over time. It could.There are some real strategic advantages that Apple is going to have for a long time, that, if the company doesn't blow it, could be pretty impressive.

Anthony Massucci is a senior writer for DailyFinance. You may follow him on Twitter athianthony.

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