The Wasatch Micro Cap Fund is Morningstar's top-performing five-star-rated fund, with 25% annualized return. The fund's portfolio manager, Daniel Chace, shared his investment philosophy -- and his favorite stock picks -- with "Squawk on the Street" viewers.

Chace told CNBC's Mark Haines that his fund seeks "high-quality companies with great managements" and "low turnover." He said the last three years have been "strong" for micro-caps and small caps, but Wasatch has begun to "look more internationally" of late -- particularly in Singapore, where the fund has been "very successful" in finding well-managed small caps.

Chace named his top three stocks:

- SM&A, a consultancy that helps companies bid for and win major procurement deals, particularly in aerospace and defense. Chace notes the firm recently hired a CEO drawn from Lockheed Martin.

- Big 5 Sporting Goods, a "very high quality" retailer of athletic apparel and basic equipment. He lauds its "fantastic" same-store sales growth and store opening schedule.

- VNUS Medical Technologies, which creates devices for "inexpensive" and gentler varicose-vein treatments.