His largest holdings include Visteon, a plastic auto parts manufacturer; Magnetek, an industrial equipment maker; Del Monte Foods; and Timken, a roller bearing manufacturer.

Small-company stocks have had a strong run since the market crashed in 1999. Over the past four years through June, they have grown at a 10.3% annual rate on average, according to Morningstar Inc., of Chicago. Most of that gain, however, was due to the average 43% gain in small-stock funds in 2003. Small value stocks were the top performers, followed by small blend and small growth.

The performance of small stocks over the past three years is in line with historical data. Data from Ibbotson Associates of Chicago show that since 1954, in the 12 months just following a recession, small-company stocks have outperformed large-company stocks.

A study by Lipper Inc., a New York-based mutual fund analytical firm, found that over the four years ending in the first quarter of 2004, small-cap stock funds outperformed large-cap stock funds. In addition, small-cap stocks were less risky on the downside than were large-cap stocks.

Small-cap funds, particularly funds invested in technology, industrial services and finance companies, registered strong rebounds following the 2000 recession. The rally in small-company stocks was so strong that small-cap electronic technology stocks outperformed large-cap electronic stocks 75% of the time on a weekly, monthly and quarterly basis. And small-cap industrial services funds outperformed their large-cap cousins 87% of the time, according to Lipper.

Over the longer term, however, Lipper data found that large-cap funds outperformed small-cap funds from 1994 through the first quarter of 2004. The growth-stock-driven bull market of the 1990s favored large-company stocks.

Historically, Ibbotson data show that small stocks have outperformed the S&P 500 by two percentage points in total return annually since 1926. However small-company stocks were 60% more volatile.

Ibbotson data also show small-company stocks exhibit a pattern of leading and lagging the S&P 500 for several years at a time. For example, they outpaced the S&P 500 from 1961 through 1968, and then fell behind for eight years. Small-company stocks beat the broad market from 1974 through 1983, while large-company stocks outpaced their smaller cousins for the next seven years. From 1991 through 1993 small stocks outperformed, and underperformed for the next seven years. But from 2000 through 2003, small stocks were the leaders of the pack.

Scott Brayman, manager of the Sentinel Small Company Fund, says quality small-company stocks should dominate the market. In the first half of this year small-cap stocks are tracking the broad market.

"Last year was one of unprecedented stimulus that saw the most dramatic low-quality, high-beta rally I have seen in my career," he says. "Today we have become more discriminating about business risk."

Brayman isn't bullish on small stocks. The reasons: The government's fiscal and monetary stimuli are waning, companies and consumers have high levels of adjustable rate debt and both groups should be hurt by rising rates.