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Top 1% mutual fund: small caps aren’t overvalued

A recent study from the S.&P. Dow Jones Indices found that only two stock mutual funds out of 2,862 were consistent top performers year after year, five years in a row, relative to peers. Craig Hodges, president of Hodges Capital Management, manages one of them -- the Hodges Small Cap fund -- and gave us his market outlook in the video above.

Related: This mutual fund is 1 of only 2 that repeatedly trounce the competition: Here’s how

While Fed Chair Janet Yellen mid-month voiced concern about stretched valuations in small caps and momentum stocks, Hodges tells us he doesn't see any real issues with market levels now. He says some sectors like social media (which Yellen named) could be a little stretched, but his fund is able to find plenty of small and mid-cap stocks with attractive valuations. He says he’s also able to get out of risky stocks and into those with a good risk-reward ratios.

For context, year-to-date the Russell 2000 (^RUT) small cap index is down 0.63% year-to-date, while the Hodges Small Cap fund has gained 6.64%.

Hodges is still bullish on stocks more broadly, and thinks gains of 10% to 12% would be a best-case scenario for the year (after last year's lofty 30% returns), but he cautions that he's not good at predicting the market.

He says he's optimistic because much of the investing public is not in the market, citing the historically low individual stock ownership.  "We rarely get to extended bubble parts of a market when a big majority of people aren't in [the market] or feel like they've missed the move up." He says at every opportunity investors like him have been going in and buying dips and there have been big opportunities with that strategy.

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