Federated Investors' Phil Orlando thinks investors should be living large.

After a prolonged period when small cap and value stocks have outperformed large- cap growth stocks, the lead manager of the Federated Large Cap Growth Fund [Ticker: FLGAX] thinks the worm is about to turn. Orlando, who's managed the $215 million fund since joining Federated in May 2003, has a personal interest in that scenario.

The fund has generated annualized losses of 12.4 percent over the five years ended Aug. 31, a reflection of the collapse of the record bull market in March 2000.

Its near-term track record is better -- an 11.9 percent jump in the most recent 12 months and three-year annualized returns of 7.4 percent.

Although the Federated fund outpaced similar large cap growth funds and the Standard & Poor's 500 so far this year with a 2.5 percent return through Thursday, the same can't be said for the last four calendar years, according to Morningstar, which gives the fund two stars.

Large cap stocks tend to outperform three to five years into an economic recovery, when the economy cools down from robust growth but still turns in decent numbers. Most economists believe we've reached that stage, and Orlando agrees.

"This is the classic economic environment that benefits large cap domestic stocks," he says. "This is the sweet spot for large cap growth."

First, a few definitions. Growth stocks are companies whose earnings are expected to grow at a rate faster than the overall market. Value stocks are companies whose shares trade at a lower price than the companies' fundamentals warrant.

Categorizing stocks by capitalization -- the market value of a company's shares -- is more of an art than a science. In general, small caps have a market value of $500 million or less, mid caps have a market value of $1 billion to $5 billion, and large caps have a market value of more than $5 billion.

Historically, small caps have done well when the economy begins recovering from a recession and the Federal Reserve Board is lowering interest rates to stimulate economic activity.

That proved to be the case as the economy emerged from a 2001 recession. Over the five years ended Aug. 31, the Russell 2000, a widely watched small cap index, generated annualized returns of 5.8 percent, vs. less than a 1 percent gain for the Dow Jones industrials and losses of 2.7 percent for the S&P 500.

"Large-cap growth has been out of favor for five or five and a half years," Orlando says.

As a result, small caps are trading at 30 times estimated 2006 earnings, while large caps are trading for 16 times next year's anticipated earnings. That level of out performance by the small caps isn't sustainable, Orlando says.

He says the impact of higher interest rates and oil prices takes a year or more to fully work its way into the economy. That's why the pace of economic growth started slowing in the first quarter, a phenomenon most economists expect to continue, particularly as oil prices continue to move to higher ground.

For Orlando, that's evidence the economy is taking the pause that refreshes large-cap growth stocks.

"We think those [economic growth] numbers are going to continue to trend down over the next six quarters," Orlando says. "The [Hurricane] Katrina effect, if anything, pressures the economy more."

If his hypothesis holds, Orlando says the large-cap growth payoff will be sweetened by an influence that wasn't present in the mid- to late-1990s, the last time the category had its day in the sun -- a preponderance of growth stocks that also pay dividends.

Investors can thank the 2003 tax package that helped jump-start the economy. It included lower tax rates on dividends and, since then, more companies have increased their quarterly payouts or started paying dividends. They include Microsoft and Intel, both of which have increased regular dividends and paid a special dividend over the last year.

"We've now got growth companies paying nice dividends," Orlando says.

He is looking for three large cap growth sectors to shine in the months ahead. They include technology, which he thinks will benefit as companies start replacing equipment they installed in preparation for Y2K, and materials stocks, which will get a boost when the U.S. dollar resumes its fall.

Orlando also is bullish on energy. "Katrina makes this a sharper story," he says. "We think this is a cycle that has another 18 months to run before it begins to top out."

His fund's holdings reflect the preferences. Information technology stocks accounted for 28 percent of the portfolio at the end of the second quarter. Seven of the top 10 holdings were in that category: Intel, Microsoft, Cisco Systems, International Business Machines, Applied Materials, Motorola and Oracle.