Ryan Jacob once

said he didn't want to become the

Vanilla Ice

of the Internet. Considering his mutual fund's recent performance, those who judge in Internet time might be humming "Ice Ice Baby."

After a brief but stunning turn at the helm of the

(WWWFX) - Get Report

Internet fund, Jacob launched his own firm and fund last year amid a hefty dose of hype. Net stocks and funds have taken a beating in 2000, and

(JAMFX) - Get Report

Jacob Internet has fallen farther than most -- the fund is down more than 40% for the year, even after a recent bounce. Many have been quick to criticize the high-profile manager as the poster boy for Internet-stock excess, but it may be premature to turn away from someone who's made so much money for investors in the very recent past. Beaten but unbowed, Jacob defends his fund and the Internet sector, which he says offers lots of bargains.

1. During the Internet bloodletting earlier this year, your fund took it on the chin more than most -- at one point it was down about 50%. Why was your fund so vulnerable?

Jacob:

I think our fund acted like one would expect. We're a high-risk fund, even for a traditional Internet fund, mainly because we invest in earlier-stage companies. And these companies, while they have higher growth potential, also are higher risk and tend to be more volatile.

Believe it or not, we actually raised some cash going into the February-March time frame. And then once the correction began in earnest, we started to get more aggressive. Even we were surprised at the severity of the correction -- the

Nasdaq Composite

falling over 30% from its highs.

2. Are you sticking with the holdings you had earlier this year?

Jacob:

As the market fell, we became more and more aggressive and tried to focus on those names that had really been hit the hardest. And one of the things the correction allowed us to do was to invest more in infrastructure names that had been extremely hot over the last six months, some companies that we thought were astounding businesses, but we just couldn't stomach the valuations.

There have been positions that we've sold in the portfolio, companies like

Drugstore.com

(DSCM)

,

InsWeb

(INSW) - Get Report

,

NetZero

(NZRO)

. But these companies weren't sold because of the correction, but rather serious fundamental concerns that we had in each of those cases, as they reported their results.

We've probably seen the worst of the correction. The big question is whether we have a situation like we had back in 1997, where many of the Internet companies languished for most of the year, or if we have a situation like we had in late 1998, where many of the companies rebounded quite quickly. We think pricing is very attractive at these levels and we think, at this point, it pays to be aggressive with what we believe to be limited downside risk.

3. What slices of the Internet look best to you?

Jacob:

Given the severity of the correction, every sector that we looked at under the Internet looks attractive. Probably the most attractive subsectors today are infrastructure and wireless opportunities. These are the areas where we've really beefed up our exposure in the fund.

On the wireless side, we've introduced a couple of new names over the past few months --

Aether Systems

(AETH)

and

7/24 Solutions

(SVNX)

-- both of which offer global commerce technologies and solutions, two companies looking to drive transactions on non-PC Internet devices, such as personal digital assistants or phones. These companies have a strong position, an impressive group of investors, and they are in probably one of the fastest-growing areas over the next few years.

4. On the other side of the coin, what are some parts of the Internet that aren't as promising?

Jacob:

Clearly, the e-commerce names struggled even before this latest pullback. And I think they're really going to be challenged by the increasing capital needs to develop their businesses. It's become increasingly clear that the only way to succeed on a pure e-commerce model is to achieve a significant scale. And these companies really are just going to need much more money to get there than they first anticipated.

This is also happening at a time when traditional off-line companies are spending more money on the Web and looking at it as a strategic imperative. This is different from a few years back, when many of the off-line retailers either ignored or didn't understand how quite to approach the Web.

So I think both of these changes in the landscape have really adversely affected their prospects, specifically, I think a lot of the e-tailers that people are aware of, companies like

Egghead.com

(EGGS)

,

Cyberian Outpost

(COOL)

,

CDnow

(CDNW)

. And besides the public companies, there are hundreds more private companies that likely will just have to fold.

5. Looking at some of your latest portfolio holdings, it seems like you're still a bit heavy into the content providers.

Jacob:

I'm not so sure I would agree with that. I think the portfolio is very balanced between content, commerce, infrastructure and communications. And even within those specific areas, even within those groups, we break it down even further, whether in commerce we're looking at business-to-consumer or business-to-business, whether in infrastructure we're looking at various application service providers or hardware companies.

In a lot of the content categories, there are some pretty compelling buys, and many of the companies we own in that area are top-50 Web properties, with strong financial results and deep vertical experience (companies that are leaders in individual content areas, such as

iVillage

(IVIL)

in women's Web issues, which we think will allow them to be lasting businesses.

6. A lot of Internet stocks are selling at or close to their cash position. Do you see these as a buying opportunity, or a cash trap?

Jacob:

I would probably lean toward more of the trap category. It's very difficult to invest in turnaround situations in the Internet sector. Once you fall behind, it's very difficult to get back on your feet. And I think in general, the risks far outweigh the returns. In most cases, these companies will be victims of consolidation, and the best-case scenario is that they would be acquired at around current share prices. And a more likely scenario is further weakness and purchase at even more depressed prices.

7. What do you think of the speculation regarding merger activity within the Internet arena?

Jacob:

You really want to be careful about owning an Internet company in the hopes that it gets taken out. At the end of the day, you should really stick to good businesses, companies that are continuing to build value in the company and for shareholders. And then, if an acquisition offer comes down the road, then it will likely be at a significant premium to their current share prices. If you try to invest in a weak company hoping for an acquisition, while it may happen, it will likely happen at very little, if any, premium.

Many of the companies we own, even if they received offers to be acquired at significant premiums to today's prices, probably would be hesitant, given how far down they've come and given some of their earlier financing.

8. How has your fund held up in terms of redemptions?

Jacob:

Surprisingly, we've had very few redemptions. We have had some money come out of the fund, but I would say it's probably around 5% of our total asset base, which, given the fact that our fund declined considerably, is somewhat heartening. And I think it also really says a lot about our shareholder base. Many investors are willing to give us the benefit of the doubt, given how tough market conditions have been. I think you'll find institutions tend to have a quick trigger finger, but individuals tend to be more patient about long-term investing.

9. What three stocks would you buy today and hold for five years?

Jacob:

I'm looking at this from a longevity standpoint and companies maybe with a lower risk profile:

eBay

(EBAY) - Get Report

,

priceline

(PCLN)

.

I'll go out on a limb with the third one and say

Commerce One

(CMRC)

. Commerce One is definitely riskier than either eBay or priceline, but the upside opportunity is enormous. Many of the companies that are more technology-oriented, although the return potential is very high and a lot of them are very good investments, the amount of risk is very large as well. And with an eBay or a priceline, they've built their brand to a point where they should be able to build on and extend their current businesses and, really, there's very little risk, I believe, in them being displaced.

10. What's the last stock you bought for the fund and what's the last stock you bought for your personal portfolio?

Jacob:

The latest addition to the fund is

Akamai Technology

(AKAM) - Get Report

, the leader in content delivery services on the Web. This is a company that's a little over a year old that, really, in a short period of time has really developed as a strong leader in relieving bottlenecks in Internet traffic and allowing content providers to more efficiently use bandwidth. It's one that we've looked at since their IPO late last year. And it's a stock that's traded down considerably off its highs. In that time since the IPO, the company has really done a tremendous job in solidifying their leadership position for content delivery.

Personally, I haven't bought any stock. I have investments in our fund and really the last stock purchase I made was my subscription in the launch of our fund.

Ilana Polyak owns shares of Jacob Internet.