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NEW YORK (TheStreet) -- James Small Cap (JASCX) - Get James Small Cap Report has been on a tear. During the past year, the fund returned 10.9%, ranking as the top-performing small, value fund, according to Morningstar. James outdid the No. 2 finisher by 5 percentage points.

The strong showing can be attributed partly to luck. James prefers stocks with solid earnings, which have been in favor lately. But the fund has delivered successful returns in a variety of market conditions. During the past decade, James Small Cap returned 8.8% annually, outdoing 86% of competitors.

James Balanced: Golden Rainbow

(GLRBX) - Get James Balanced: Golden Rainbow Ret Report

, which holds many of the same stocks as the small-cap fund, also boasts a strong record. During the past decade, the balanced fund returned 7.4% annually, outdoing 98% of its peers in Morningstar's conservative allocation category.

The James funds follow a strategy developed by Frank James, who founded James Investment Research and now runs the company along with his son Barry. For his Ph.D. dissertation in the 1960s, Frank sought the Holy Grail of investing: a simple system that could pick winning stocks.

While James never found a perfect solution, he did notice a helpful phenomenon. When a stock outperformed the market for more than a year, odds were good that it would continue topping the benchmark for the next six months or so.

Over the years, other researchers have reported similar findings. As a result, a number of funds now emphasize stocks that have been showing strong relative strength or momentum. But the approach has never been widely used because it can fail during downturns.

"When the market corrects, the first things to go down are stocks that have been doing the best," Barry James says. "When they see the bad results, people think that relative strength doesn't work. But relative strength can be helpful if you understand when it works."

Since the strategy is not foolproof, the James managers combine relative strength with other indicators. For Barry James, the ideal stock has good relative strength, solid earnings and a low price. Because stocks that meet all the criteria are rare, he also takes shares that have only some of the desirable attributes. The resulting portfolio changes over time, landing in the value box some years and at other times fitting in the blend category.

The James managers seek to pick stocks that stand to benefit from global economic trends. These days they expect the dollar to be strong as investors flee the uncertainty of Europe and take shelter in U.S. assets. The strong dollar will make it cheaper for U.S. companies to buy overseas goods. That should help increase the profit margins of retailers, says Barry James.

A favorite holding is

Dollar Tree

(DLTR) - Get Dollar Tree, Inc. Report

, a big discounter that specializes in food, beauty products and housewares. With earnings improving, the stock has been showing good relative strength, and Barry James figures that the company should continue reporting good news. "With one out of eight people on food stamps, Dollar Tree should have plenty of loyal customers," he says.

Another stock he likes is

TheStreet Recommends

Eli Lilly

(LLY) - Get Eli Lilly and Company Report

. Although the stock has been strengthening lately, the shares still only sell for a price-earnings multiple of 10. The stock pays a dividend yield of 4.7%. Barry James says that the company has several promising drugs in the pipeline that could boost earnings.

An unloved stock he likes is


(HFC) - Get HollyFrontier Corporation Report

, a domestic refiner that has a P/E ratio of 4. Refiners buy oil and use it to produce gasoline and jet fuel. When oil prices were climbing earlier this year, refiners were facing rising costs and slimmer profits. But James argues that oil prices should soften as the economy remains sluggish.

For his balanced fund, James holds a mix of stocks and bonds. When stocks look risky, he emphasizes bonds. Last spring James grew wary and shifted 65% of assets to bonds, with the rest in stocks. "We just had a 100% run-up in stocks over two years, and everybody was saying that happy days were here again," recalls James. "That was almost a sure sign that we were going into a correction."

The bond position helped the fund weather the market turbulence of last summer. Since then, James has turned more bullish on stocks, lowering his bond allocation to 50%. He says that these days investors are less optimistic. That is helping to keep a lid on share prices, even though retail sales and other indicators are improving. "It looks likes the economic indicators will be OK for the next quarter or so," he says.

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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.