Ryan Jacob, whose Jacob Internet Fund is the top performer among similar funds during the past three years, is selling money-losing stocks...

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Ryan Jacob, whose Jacob Internet Fund is the top performer among similar funds during the past three years, is selling money-losing stocks faster than ever and focusing on shares that are inexpensive relative to earnings.

“Cutting your losses makes a lot of sense,” said Jacob, 35. “It really helps you manage risk a lot better.”

Jacob, along with co-manager Frank Alexander and research director Darren Chervitz, said he learned the importance of shedding losers after 2000, when the fund plunged 79 percent. The fund is investing more assets in companies such as IAC/InterActiveCorp that are cheap relative to earnings and other financial yardsticks than most Internet stocks.

The $65 million Jacob Internet Fund rose at an annual average rate of almost 28 percent in the past three years, ranking first of 25 Internet and telecommunications funds tracked by Bloomberg. The gains were helped by investments in Ask Jeeves and Sina, developers of Internet search engines, and Plumtree Software, a maker of business software.

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Investors who have owned shares in Jacob’s fund since it opened in December 1999 are stuck with losses because of declines in 2000 and 2001. An investment of $10,000 when the fund first opened is worth $1,882 today.

“How much risk?”

“Twenty years from now, this fund may make it all back and make people rich,” said Dan Culloton, an analyst at research firm Morningstar in Chicago. “The question you have to ask is: How much risk are you willing to endure along the way?”

Jacob’s fund rose 6.3 percent in the past 12 months, placing 10th of 25 competing funds. The competing ProFunds Mobile Telecommunications UltraSector Fund is up 25.5 percent.

Jacob has experienced the peaks and troughs of the stock market firsthand. The graduate of Philadelphia’s Drexel University almost tripled investors’ money in 1998 and then endured what he calls “the rough years” from 2000 to 2002.

The Jacob Internet Fund reached a peak on March 10, 2000, when the Nasdaq Composite Index closed at an all-time high. The nadir was Oct. 9, 2002, when the index fell to its lowest level in more than six years. During that period, the fund lost 97 percent of its value.

Jacob said the bear market has made him a more active trader. The fund now sells winning stocks before they peak and gets rid of declining shares before they plunge, he said.

Higher costs

While higher transaction costs are paid by investors, Jacob said this method can stem losses. The fund has risen fourfold from its low point.

Jacob uses his own financial models to place a value on a company’s cash flow and earnings, an easier process than in the late 1990s, when few Web-based firms had substantial revenue.

“The methods we use are probably more traditional than you might expect,” said Jacob, who holds 40 to 50 stocks.

IAC, with a market value of $15.5 billion, is among the largest companies in Jacob’s fund. Chairman Barry Diller plans to create a separate travel unit, centered around Expedia, in the next three months. The combined value of the spinoff, IAC’s remaining businesses and its almost $6 a share in cash is as much as $40 a share, almost double the stock’s current level, Jacob said.

Search engines

Jacob expects more acquisitions in the software industry. Companies are undercutting one another, creating unsustainable losses or break-even results that should make them susceptible to takeovers, he said.

His biggest holding is Plumtree Software, a San Francisco-based maker of portal software for businesses. Plumtree, which has a market value of $148 million, sold $84.1 million of products last year and had a net loss of $9.6 million.

“There are a lot of technology companies that are sitting on a lot of cash right now,” including Plumtree, which has $65 million, Jacob said.

Internet search firm Ask Jeeves, his No. 2 holding, is trying to challenge Google and Yahoo! The fund doesn’t own any shares of Google or Yahoo, which dwarf Ask Jeeves.

“Online advertising right now is a very interesting area,” Jacob said. The total worldwide market for ads linked to search results is expected to grow by 45 percent to $8.44 billion this year, according to a recent research report published by New York-based Goldman Sachs Group.

China investment

Jacob invests about 10 percent of the fund’s assets in China, where the government said 94 million people used the Internet last year, an 8 percent increase. China should pass the United States in Internet use within five years, Jacob said.

“China is obviously more than an Internet play,” Jacob said. “You’re looking at an expanding middle class.”

Four years ago, Jacob bought shares of Sina, a Shanghai-based company that operates China’s most popular search engine. The company has expanded its content for mobile-text messaging, including so-called multimedia messaging, which enables handset users to send photos and sound bites.

Jacob also owns shares of Shanghai-based Shanda. Sina has introduced a so-called poison pill to try to rebuff any takeover by Shanda, which now owns 19.5 percent of Sina.