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Villere Balanced Fund (VILLX) has amassed an outstanding track record of returns within the Morningstar Moderate Allocation category for mutual funds. Its co-manager, George Young, shares some investment ideas with MoneyShow.com, and describes why these stocks caught his eye.

Kate Stalter: I am speaking today with George Young. He is the co-manager of the Villere Balanced Fund, which has a five-star rating from Morningstar.

George, let's start off with a description of your fund's objective and your investing philosophy.

George Young: Our fund is Villere Balanced Fund. The name implies that we have to have between 20% and 40% in bonds. We have to have between 60% and 70% in equities.

As for our objectives, we pride ourselves on having more small-cap orientation, and the reason we do that is we think there is more value in small cap over the long term. We don't have big turnover-maybe 25% turnover in the course of the year-so we like to buy what we know and hold on to those things.

• Also read: A Balanced Fund for All Seasons

Kate Stalter: You just mentioned that the bulk of the portfolio does happen to be in equities. Talk about your view of domestic versus overseas equities, and versus fixed income.

George Young: Sure. We don't necessarily have anything against international investments. The problem we find, though, is that if you stay domestic, you can rely on GAAP accounting, and you can rely on a set of legal rules that you are familiar with. You can rely on management that has the same culture, if you will.

So I don't have a problem investing overseas, but that just doesn't fit for us. So we prefer to stick to what we know. We have ventured abroad from time to time.

Don't forget that our holdings, like a lot of other holdings, have some exposure overseas, meaning we get revenues in euros. A lot of our companies we get revenues in other foreign currencies.

But today we can rely on GAAP. We can rely on rules that we are familiar with, and rules that make sense to us, so we stick to what we know.

Kate Stalter: And how about being overweighted in equities vs. fixed income at this time? Say a little about that.

George Young: Sure, glad to. Fixed income we think of as a necessary evil.

The reason I say that: Everybody is aware that bonds are at a historically low yield, and we are very nervous that at some point you are going to have inflation come back roaring into this economy.

I said earlier that we don't have much turnover in our stocks, and we certainly don't have much turnover in our bonds. By order of the prospectus, we have to have a certain amount in bonds, but we think of that as a necessary evil, so we are trying to stay at the shorter term, which would be the less volatile side of the bond holdings. We are buying what we have to buy.

We are able to buy 10% of our bond holdings in junk, and that is where we are right now. When I say junk, you can call them less-than-investment grade, but that is where we find that we have got a little bit of an edge on our research.

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Kate Stalter: A lot of our listeners today are retail investors, and I am sure that they are going to be very interested in some of the individual holdings and how you select these.

You are known as bottom-up stock pickers and you have a number of small caps that maybe don't show up in every portfolio. Talk to me about some of the major holdings, George, and how you selected them.

George Young: Sure. I think one thing is important to keep in mind: If you buy smaller-cap stocks, you have got a possibility that those things can grow and those things can grow into household names, and also ultimately, you have somebody that buys those out.

If you buy the larger-cap stocks of the world, you are not able to realize the investment growth that you can in the smaller-cap stocks.

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