INTERNET FUND COMMENTARY

January 7, 2011

Dear Investors,

The markets have settled down a bit after a solid advance in the second half of 2010. Most economic data continues to be positive, although still not as robust as you would normally see coming out of a recession. Longer-term interest rates have started to rise recently, and while this could be construed as a positive byproduct of an improving economy, it still bears watching. Stock prices have made substantial gains over the last few quarters, yet most companies have seen rising sales and earnings to keep valuations from becoming excessive. While we are pleased with the weightings and holdings in all three funds, we are still aggressively seeking out new opportunities for portfolio additions.

In the Internet fund, we added one new name in the quarter, NetSpend. NetSpend is a leader in the rapidly growing prepaid debit card market, mainly targeting people who are not being served by traditional banks. With its focus on increasing penetration of direct deposit accounts, NetSpend is positioning itself as a viable alternative to a traditional bank. Their wide distribution network, full-featured Internet service and proprietary processing platform are significant competitive advantages. Recent banking reform has led to a rise in fees, which is making prepaid card accounts even more attractive compared to checking accounts. With the addressable market expected to grow significantly over the next several years, NetSpend should participate nicely in this growth.

In the Small Cap fund, besides also initiating a position in NetSpend, we added some additional names in the healthcare and energy industries. One of our larger holdings, Amarin, is developing a drug to lower triglycerides in patients while keeping other cholesterol levels stable. Early trials have been very encouraging and we expect more promising data in 2011. Another addition, Aeterna Zentaris, is a partner with another one of our existing holdings (Keryx Pharmaceuticals) in the development of the cancer drug Perifosine, which is in Phase III testing. Aeterna Zentaris has the non-U.S. rights to the drug as well as its own pipeline, which we believe is not reflected in its current stock price.

In the energy sector, we have bought several companies that have land positions in the Alberta Bakken region, which encompasses parts of southern Canada and Montana. Rosetta Resources is one of the leading companies in trying to develop this promising region. In addition to significant assets in Texas, the company has over 200,000 acres in some of the most promising Alberta Bakken areas and is aggressively drilling exploratory wells. In addition to Rosetta, we've also identified and purchased several small Canadian companies (Bowood Energy, DeThree Exploration, Primary Petroleum) with significant land holdings in this region. If the Alberta Bakken region results in major energy finds, all of these companies could see the value of their holdings increase dramatically.

In the Wisdom fund, we initiated a new position in Unilever, NV. Unilever is one of the world's leading companies in fast-moving consumer goods. It manufactures close to 400 brands spanning fourteen sub-categories across food, home care and personal care products, including detergents, deodorants, hair care, ice cream, frozen foods, and spreads.

Unilever is often compared to Procter & Gamble, one of the fund's largest holdings, since both are dominant global marketers of fast-moving consumer products. There are, however, significant differences between the two companies. Procter & Gamble almost exclusively sells personal and home care products, with negligible sales coming from packaged foods. Unilever, meanwhile, has close to half of its sales coming from the food category, which translates into a lower margin profile. However, Unilever has a higher return on invested capital, a higher dividend yield, and has about 50% of its sales coming from emerging markets around the world as compared to about 30% for Procter & Gamble. Selling for about 13 times next year's prospective earnings, Unilever is attractively priced and makes a fine complement to our current Procter & Gamble holding.

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

Frank Alexander
Portfolio Manager
Jacob Wisdom Fund

www.jacobmutualfunds.com

 

 

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. Small- and Medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. 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, 2010.
Click here to view the holdings for the Jacob Small Cap Fund, as of November 30, 2010.
Click here to view the holdings for the Jacob Wisdom Fund, as of November 30, 2010.
Please note that these holdings are subject to change and should not be considered a recommendation to buy or sell any security.

For performance information, click on Performance. Past performance does not guarantee future results.

Must be preceded or accompanied by a prospectus.

Quasar Distributors, LLC, Distributor 1/11