Q&A with Hodges Funds' Eric Marshall

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Q&A with Hodges Funds' Eric Marshall

Eric Marshall headshot
We had the pleasure of speaking with Eric Marshall, the co-portfolio manager for Hodges Small Cap Fund (HDPSX). The fund, which has been running since 2007, currently has $1.7 billion in total assets.
Below, Eric Marshall discusses his investment strategies, including how a small-cap fund deals with skyrocketing valuations.

For more information on Hodges Funds, please click here.

Insights from Eric Marshall

We have been in a low interest rate environment for the last 5 years. Do you see this continuing? How does this impact the way that you manage your fund?

We see future interest rates as biased to the upside, which could result in a wall of money coming out of bonds and into stocks over the next two to three years. Many retail investors that have focused on fixed income for safety over the past decade may not realize the risk to bond prices because interest rates have been in a declining trend for so long.

What is your investment strategy?

As for the equity strategies that we manage at Hodges Capital Management, we are focusing on individual business fundamentals instead of the near-term direction of interest rates. We would emphasize that this is the time to focus on well run businesses that control their own destiny without being dependent on the Federal Reserve or artificial stimulus.

What areas of the markets do you see as most attractive as far as new investor capital? Are there areas of the markets that you feel do not offer an attractive risk/reward?

We see equity valuations as attractive with the S&P 500 around 14-15X 2015 estimated earnings. The inverse of this multiple is an earnings yield around 7% compared to the 10-year treasury yield at 2.5%. This historically wide risk premium indicates the potential reward for holding stocks outweighs the underlying downside risk.

What percentage of cash do you usually keep for buying opportunities?

Our cash positions can vary depending on the day and fund. In general, our philosophy is that the best time to invest in good businesses at reasonable valuations is when you have the money to invest.

With valuations for the markets going higher, how difficult is it for you as a small cap fund manager to watch some of your top holdings begin to become mid-cap stocks? How do you handle those holdings?

Watching a small cap holding turn into a mid-cap is a high class problem. In the Hodges Small Cap Fund (HDPSX) and the Hodges Small Intrinsic Value Fund (HDSVX), we have up to 20% of the portfolios reserved for such positions that appreciate beyond the definition of a small cap. This allows us to let our winners run.

Going forward, what do you think will be the biggest impact on the financial markets and how they perform over the next 3-5 years?

As for equity markets, the biggest factor will be the trajectory of future earnings. Stock prices in the long-run are merely the present value of future earnings.

The Bottom Line

In the eyes of Eric Marshall, more investors may be shifting their focus from bonds to stocks going forward. While some investors fear an upcoming rise in interest rates, Hodges Capital Management has been focusing on individual business fundamentals.

Another interesting point that Marshall noted was that it is best for investors to invest when they have the money to invest. He noted that future earnings are a very important part of investing as they have a direct impact on current prices.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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Eric Marshall headshot

Q&A with Hodges Funds' Eric Marshall

We had the pleasure of speaking with Eric Marshall, the co-portfolio manager for Hodges Small Cap Fund (HDPSX). The fund, which has been running since 2007, currently has $1.7 billion in total assets.
Below, Eric Marshall discusses his investment strategies, including how a small-cap fund deals with skyrocketing valuations.

For more information on Hodges Funds, please click here.

Insights from Eric Marshall

We have been in a low interest rate environment for the last 5 years. Do you see this continuing? How does this impact the way that you manage your fund?

We see future interest rates as biased to the upside, which could result in a wall of money coming out of bonds and into stocks over the next two to three years. Many retail investors that have focused on fixed income for safety over the past decade may not realize the risk to bond prices because interest rates have been in a declining trend for so long.

What is your investment strategy?

As for the equity strategies that we manage at Hodges Capital Management, we are focusing on individual business fundamentals instead of the near-term direction of interest rates. We would emphasize that this is the time to focus on well run businesses that control their own destiny without being dependent on the Federal Reserve or artificial stimulus.

What areas of the markets do you see as most attractive as far as new investor capital? Are there areas of the markets that you feel do not offer an attractive risk/reward?

We see equity valuations as attractive with the S&P 500 around 14-15X 2015 estimated earnings. The inverse of this multiple is an earnings yield around 7% compared to the 10-year treasury yield at 2.5%. This historically wide risk premium indicates the potential reward for holding stocks outweighs the underlying downside risk.

What percentage of cash do you usually keep for buying opportunities?

Our cash positions can vary depending on the day and fund. In general, our philosophy is that the best time to invest in good businesses at reasonable valuations is when you have the money to invest.

With valuations for the markets going higher, how difficult is it for you as a small cap fund manager to watch some of your top holdings begin to become mid-cap stocks? How do you handle those holdings?

Watching a small cap holding turn into a mid-cap is a high class problem. In the Hodges Small Cap Fund (HDPSX) and the Hodges Small Intrinsic Value Fund (HDSVX), we have up to 20% of the portfolios reserved for such positions that appreciate beyond the definition of a small cap. This allows us to let our winners run.

Going forward, what do you think will be the biggest impact on the financial markets and how they perform over the next 3-5 years?

As for equity markets, the biggest factor will be the trajectory of future earnings. Stock prices in the long-run are merely the present value of future earnings.

The Bottom Line

In the eyes of Eric Marshall, more investors may be shifting their focus from bonds to stocks going forward. While some investors fear an upcoming rise in interest rates, Hodges Capital Management has been focusing on individual business fundamentals.

Another interesting point that Marshall noted was that it is best for investors to invest when they have the money to invest. He noted that future earnings are a very important part of investing as they have a direct impact on current prices.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next