COMMENTARY

January 9, 2012

Dear Investors,

Even with the global economic news offering glimmers of hope, stock markets here and abroad are still interpreting events in an extremely negative light. It is understandable that investors would be turned off by the constant hand wringing of the media and volatility that seems to increase by the week. While Europe's problems are far from solved, it is looking more likely that coordinated efforts to stabilize the situation are working. This coupled with impressive growth from emerging markets, and surprisingly resilient U.S. economic numbers, lead us to believe that we will exit this period in far better shape than most prognosticators. Valuations across-the-board are still very inexpensive based on historical measures, and we believe that our portfolio holdings should be positioned to prosper in 2012. While we have evaluated many different stocks for potential addition to the funds, most of our recent purchases have been to increase existing weightings.

We had one new holding in the quarter for the Internet fund, TripAdvisor. This stock was actually spun out of our Expedia holding, and we subsequently added to the position. TripAdvisor is the world's largest network of travel review sites with 20 million members, and over 50 million reviews contributed from 188 countries. TripAdvisor has benefitted from a substantial network effect, whereas sites with the most comprehensive content offering attract the most traffic, which in turn leads to more members and reviews. This virtuous cycle also means that little has to be spent on traditional marketing. In addition, with no editorial costs, TripAdvisor should be able to enjoy above-average margins well into the future.

In the Small Cap fund, besides also adding a position in TripAdvisor, we purchased stakes in three new energy companies; Magnum Hunter Resources, Carrizo Oil & Gas and Energy XXI. Like some of our existing exploration and production holdings, both Magnum Hunter and Carrizo are focusing on the promising energy potential in the Texas Eagle Ford shale play. In addition, Magnum Hunter has substantial acreage in the Marcellus shale region in the Northeast, and the Bakken shale region in the upper Midwest. Although more activity is leading to higher well costs and other expenses, $100/barrel prices for oil should result in Magnum and Carrizo generating very high returns. Even if oil prices were to decline modestly, the returns from their drilling activity should be in line with most analyst expectations. Conversely, if oil prices were to rise from these levels, their earnings leverage could be substantial. Our final new addition, Energy XXI, is different from our other energy holdings as it is a traditional deep water drilling company operating in the Gulf of Mexico. Normally, we would not be interested in these types of plays as they tend to be more mature. However, Energy XXI through acquisitions and partnerships has positioned itself to significantly ramp up production in the next few years. With one of its more promising plays (Davy Jones) about ready for production, Energy XXI is both attractively valued and has a catalyst in 2012 that should lead to a higher valuation for its shares.

In the Wisdom fund, we added one new holding, MasterCard. The company's payment programs, which are facilitated through its brands, include consumer credit, debit, and prepaid programs, and commercial payment solutions. With 85% of the world's transactions still done with cash, the secular growth opportunities for electronics payment remain extremely attractive. MasterCard appears well positioned to benefit from this trend, particularly given its outsized exposure to faster-growing international markets and its relatively low exposure to the currently problematic U.S debit card business. With the tremendous operating leverage inherent in the payment processing model, MasterCard should be able to steadily expand its operating margin as revenues continue to grow.

Ryan Jacob
Portfolio Manager
Jacob Internet Fund & Jacob Small Cap Growth Fund

Frank Alexander
Portfolio Manager
Jacob Wisdom Fund

www.jacobmutualfunds.com

 

 

Mutual fund investing involves risk. Principal loss is possible. There are specific risks inherent in investing in the Internet area, particularly with respect to smaller capitalized companies and the high volatility of internet stocks. All three funds may invest in foreign securities, which involve greater volatility and political, economic and currency risks, and differences in accounting methods. The Small Cap Fund and Wisdom Fund will invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Wisdom Fund may invest in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities Please refer to the prospectus located at www.jacobmutualfunds.com for more complete information including risks, fees and expenses.

Click here to view the holdings for the Jacob Internet Fund, as of November 30, 2011.
Click here to view the holdings for the Jacob Small Cap Fund, as of November 30, 2011.
Click here to view the holdings for the Jacob Wisdom Fund, as of November 30, 2011.
Please note that these holdings are subject to change and should not be considered a recommendation to buy or sell any security.

Click here to view the performance for the Jacob Internet Fund.
Click here to view the performance for the Jacob Small Cap Fund.
Click here to view the performance for the Jacob Wisdom Fund. Past performance does not guarantee future results.

Must be preceded or accompanied by a prospectus.

Quasar Distributors, LLC, Distributor 1/12