Even Garrett R. Van Wagoner admits it takes a strong stomach to remain a disciple of his flagship Emerging Growth Fund through thick and thin. But he has survived, even prospered, from such devotees. Lately, his investors have been prospering, too.

"They are a pretty small congregation," he said after the Emerging Growth Fund soared to the No. 1 position this year among 9,651 U.S. funds monitored by Bloomberg Fund Performance. The fund has returned 112.41 percent this year, and investors who have held on since its low on Oct. 8 have racked up gains of 266 percent.

It's been a rocky road to the top for Van Wagoner, who maintains a messianic belief in the virtues of small-cap stocks and has, in the face of adversity, accumulated the record to prove it.

Over the past three years, Emerging Growth has recorded an average annual return of 23.19 percent, which ranks it in the top 7 percent of all U.S. funds. Still, that return masks the fact that last year the fund returned 7.98 percent for its investors while the Standard & Poor's 500-stock index rose 28.6 percent. In Van Wagoner's most dismal year, 1997, the fund lost 20 percent, compared to a 33.4 percent gain for the S&P 500.

"We started within five months of the top for small-cap growth funds" in 1996, said Van Wagoner. "Then we were down for two years, then back up for the past 10 months. We really focus on true emerging growth companies with a new product or service, serving a marketplace we think is rapidly growing."

For a time, like many of his peers, that meant a focus on the Internet, which Van Wagoner said is "changing the way we all live." Three months ago, though, he turned tail and ran.

"In April, the valuations got so crazy," he said. "They're crazy anyway. But we thought we saw the kinds of prices in stocks and valuations we were not going to see again, so we decided to liquidate AOL, Amazon, eBay." Just in time, apparently. Emerging Growth, while virtually unchanged in the past month, is up 24 percent since mid-April, compared with the 16.5 percent loss posted by the Internet Fund.

Since then, Van Wagoner has played safe--at least, by his standards--moving into health-care and consumer stocks.

"We're waiting for what we think is some healthy correction coming," he said. "If we don't get cleaned up by Labor Day and move on, I'll get real nervous by the fall."

While April was the month for what Van Wagoner called his "big Internet reduction," in June and July there was his "big semiconductor reduction." Instead, he bought health-care and energy stocks.

He's had a hard time, though, weaning himself from the Net. His second-largest holding on June 30 was OnHealth Network Co., a health-care information company that operates over the Internet.

His fourth-largest holding is Key Energy Group Inc., an oil and gas drilling company. This industry has been the No. 1 performer of all S&P 500 index groups this year. Still, small-cap stocks of all varieties remain his passion.

"I remain bullish on the small sector of the market, with one caveat," he said. "I am watching my friend Mr. Greenspan, and I'm concerned with what he is doing with short-term interest rates. If we see three or four raises in interest rates, that could really put a damper on my sector of the market."

Generally, two-thirds of Emerging Growth's holdings have maximum market values of $1 billion. (Van Wagoner Capital Management also has a Microcap Fund with top valuations of $350 million.)

Van Wagoner suggests that investors in his fund take a long-term view of small-cap stocks and expect volatility.

"We understand we are part of someone's portfolio, not all of it," he said. "We should be part of any aggressive portfolio. I'm uncomfortable with saying they should be going to the bank, taking out all their money and sticking it with us. We are a very specialized firm. But we're appropriate for anyone interested in what's propelling the economy."

Emerging Growth is on track to record its first year beating the S&P 500 since 1996. "Like any other sport, there's a definite start and finish," said Van Wagoner. "Right now we're partway through the third quarter, with a nice lead. But we've got to park it in the barn at the end of the game."

Over the past 12 months, the fund has returned 151 percent, almost eight times the 19.1 percent return for the S&P 500.

Van Wagoner is a 1977 graduate of Bucknell University, where he majored in business. He immediately joined the trust department of First American Bank in Washington, moving later to SunTrust in Miami, then to Bessemer Group Inc. in Palm Beach in 1982, "a week before the bull market began," he said. Two years later he returned to New York with Bessemer and became infected with the small-cap bug.

Nine years later he moved to John Govett & Co., where he stayed until 1996, when he left to launch Van Wagoner Capital Management.

The fund has never paid a capital gains distribution, although Peter Kris, a managing director of Van Wagoner Capital Management, said "we will probably see some this year."

Controlling capital gains "is an enormous part of his mind-set," Kris said. "All his own money is in the funds. He is one of our larger shareholders."

Since the fund has had periods of high volatility, capital losses--including losses that can be carried forward to subsequent years for tax purposes--have offset capital gains.

The management fee is 1.25 percent, lower than the average of 1.57 percent for aggressive growth funds, according to Morningstar Inc., a Chicago-based mutual fund research firm. It charges no sales or redemption fees.