Small cap funds took a breather this past week, as the sharp divergence between big- and small-cap performance finally lightened, a bit.

Of the seven U.S. diversified fund groups tracked by

Lipper Analytical Services

, only small company growth funds were in the black--as a group--for the week ending Thursday, Jan. 2, with a 0.26% average return.

S&P 500

index funds, which just two weeks ago trounced the small caps, lost 2.49% this past week, as the S&P 500 index took a 2.5% dive, from 755.82 to 737.01.

Small cap manager Jay Tracey attributes the turnaround in small caps, and dip in larger caps, to an inevitable correction following opposite runs for each group.

"They're both two sides of exactly the same coin." says Tracey, manager of Oppenheimer's

Discovery

fund, which gained 1.49% for the week, placing it in the top 2% of diversified U.S. equity funds.

The tide turned for small caps in the year's last three trading days, as the

Russell 2000

small-cap index climbed to its highest close since June 3. But the joy was short-lived. The index plunged the day after New Year's, giving up much of the gain tallied just before the holiday. And the funds felt it. Discovery, for example, lost 0.85% on Jan. 2, after having gained 2.34% in the preceding three days.

"The correction between the 27th and the 31st was deserved," Tracey says, "because you'd had persistent selling pressure in small cap stocks up to that point." After that sharp rise, Tracey says, it was "normal that they should then have such a quick, partial retracement."

Still, small cap funds on the whole have not been keeping up with their Russell 2000 index. For the fourth quarter, the index climbed 4.7%. But in that same period, Lipper's index of small company growth funds declined 0.88%, Tracey notes. "It was a very unusual quarter, and basically a painful one for those of us who manage money."

The emerging markets funds have not had a much better time of it this past year, returning only 6.71%. But the week was good. Emerging markets funds, along with Pacific ex-Japan funds, topped the Lipper charts.

Lexington Crosby SC Asia

(LXCAX) posted nearly a 5% gain, while

Sit Developing Markets

returned 3.16%.

The number-one fund of the week was

American Heritage Fund

(AHERX), a $15-million fund that swings between the top and bottom of the charts but sports a negative return for the last one-, five- and ten-year periods.

At the bottom of the barrel were three

Steadman

funds, clinging to their all-too-familiar turf.

By Jamie Heller