How Did Doyle Do It?

Kinetics Internet Fund is healthy and happy. Really

Peter Doyle, father of the first Internet mutual fund, has seen his fortunes come and go, and come again. In 1996, with $12 million from friends and family, he launched the Internet Fund, "barely knowing what the Information Superhighway was," he recalls now. Two years later, it would be the hottest fund on the planet, up a dizzying 196% in 1998 and 216% more in 1999. By then, its assets had zoomed to $1.5 billion.

Then, in June, 1999, portfolio manager Ryan Jacob--the public face of the fund--left to start his own firm. About eight months later, with no earnings to support them, dot-com stocks began their death spiral. By the end of 2000, Doyle's fund was off 50%.

Yet today, it looks pretty spiffy. Even after the tech boom went bust, the fund's annualized total return for the past five years is 26%. That ranks the $200 million fund, now known as Kinetics Internet Fund (WWWFX ), at No. 3 among thousands, according to Standard & Poor's. Doyle's risk-adjusted returns earned him an "A" rating in BusinessWeek's recent Mutual Fund Scoreboard (Jan. 27).

How did he do it? The 40-year-old Doyle, who prefers a lunch of cold cereal at his desk to schmoozing in Manhattan's swanky restaurants, portrays himself as an old-fashioned value investor in high-tech-fund-manager's clothing. His hero is Benjamin Graham, the father of value investing, whose philosophy is finding stocks with a "margin of safety"--where the price paid for the stock is far less than the underlying value.

One of the fund's first investments, CMGI (CMGI ), once held stakes in about 30 emerging tech companies. No one thinks CMGI is a value stock today, but Doyle first purchased it in 1997. Then, the company had only a $300 million market cap but $1.2 billion in cash and securities on its books. That meant Doyle bought the underlying companies for 25 cents on the dollar, so he had a large margin of safety. By 1998, CMGI's market value reached nearly $3 billion, lifting the value of Doyle's stake tenfold. In 1999, he sold it, along with his shares of America Online (AOL ), eBay (EBAY ), and, which together accounted for about 20% of the fund at the time--and were still rising. CMGI's market value finished the year at $29 billion. Few Net fund managers had the discipline to sell while those stocks were still soaring.

A more recent value play is tech consulting group Giga Information. The shares traded at 65 cents in October, 2002, which gave the company a market cap of $7 million--even though it earned $3 million in the prior 12 months. Giga also had more than $3 million in cash and no long-term debt. Doyle bought 100,000 shares at prices from 75 cents to $1.50. Giga is now being acquired by Forrester Research for $4.75 a share.

It also helps that Doyle is defining "Internet stock" loosely. He views Washington Post Co. (WPO ) as a Net stock because it owns the test preparer Kaplan, which offers Web education. Kroll, another holding, helps businesses protect their online networks.

Doyle doesn't see a margin of safety in big tech companies, so he's shorting Intel (INTC ) and Cisco Systems (CSCO ). "The end is not over for most tech stocks," he says, since prices are still too high and earnings prospects are too low. If he's right, his first-out-of-the-gate Internet Fund may be the last tech fund standing.

By Mara Der Hovanesian

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