How this portfolio manager delivered a 33% return YTD

David Steinthal: Great to be here, Ally

David Steinthal: Valuation's really important. You can overpay for a really high-quality business, but for us, you've got to get quality first and then we consider valuation. So it's quality and valuation, but it's got to meet our quality thresholds first.

David Steinthal: To a degree, but you can also overpay for some things as well.

David Steinthal: Sure, so the fund is up over 30% this year, and what's really pleasing is it's been really broad-based contributors. We invest in a whole range of industries, small-cap companies, $1-2 billion companies, all the way up to the biggest companies in the world.

So some of the large-cap tech companies like Microsoft (NASDAQ: MSFT) have certainly contributed. But Booking Holdings (NASDAQ: BKNG), the world's largest online travel agent, which owns Booking.com - its share price almost doubled this year. Last year, its share price was trading at a crazy low price. If you go back to where its share price was last year, it was lower than what it was after COVID hit - before we had vaccines. In those days, we were all scared to leave our house and go to the supermarket. Last year, the market was just saying, there's going to be a deep recession. No one's going to go on a holiday again. So that company has almost doubled over the past 12 months. 

Even some of our cyclical businesses that are exposed to infrastructure and housing spending, particularly in the US, have done really well in this environment. So it's been really broad-based.

David Steinthal: We really think about downside protection and pleasingly over the past 12 months there have been really no significant detractors. The one area that's been a bit soft is healthcare equipment and services. A lot of those companies did really well during COVID-19, and there was a lot of spending on the healthcare industry.

What we've found is some of that equipment's been repurposed. It was used for COVID analysis and the like, and their customers have found ways to repurpose it. So demand has been a bit softer. And coming out of COVID, China was really a strong growing market for those companies, and it's been really soft, which is really interesting. So those companies have disappointed us a bit. Not disasters by any means, they're still really good businesses. They've just underperformed a bit.

David Steinthal: So firstly, we have conviction in our entire portfolio, we only own about 25 companies. Our top 10 is about 60% [of the portfolio]. So we have pretty large positions in all our companies. One of our companies, which is actually just outside of our top 10, but is the one that we've been adding to the most recently is HCA Healthcare Inc (NYSE: HCA). 

It used to be called Hospitals Corporation of America, but it's the largest for-profit hospital company in the US. It owns about 180 hospitals, mainly in Florida and Texas, and the states where people are either moving to for jobs or a lot of retired people are moving there for the weather. So it's benefiting from population growth and also an ageing population, as older people go to hospitals more. 

It's just a "steady eddy" compounding type of business. You just need to believe what's happened over the last couple of decades will continue to happen. A couple of percent more people every year go to their hospitals. They're building new hospitals to support that demand. The price per hospital visit goes up about 3%. It's kind of like inflation because people are going to hospital for more complicated things. 

They're growing, so they're getting a little bit of margin expansion. They produce huge amounts of cash flows, they're building new facilities, not just hospitals, but outpatient centres and those kinds of things. So it can compound its earnings at 10%, we think, for a very long period of time. 

It's trading on a P/E of 12 times or a 6% free cash flow yield, which is half the multiple of an Australian company like Ramsay Health Care (ASX: RHC). So we think that's a really safe compounding opportunity in this market. Not very macro-sensitive at all.