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Interview with Loys boss Ufuk Boydak: "The safety margin provides us with the best capital protection"

To the interview partner: Ufuk Boydak is fund manager and CEO of LOYS AG. In his role as portfolio manager, he is responsible for the LOYS Global System and LOYS Europe System in addition to the LOYS Global L / S.

e-fundresearch.com: With a view to the investment universe of the LOYS Global L / S: What is your conclusion from the previous market developments in 2018?

Ufuk Boydak:As a specialist in value-oriented equity fund management, we are looking at a rather difficult market environment with inconsistent trends this year. Characteristic here are the uncertainty in the interest rate trend and the political uncertainty, which is mainly fed by the escalating trade conflict, but also by the populism of the American president. Added to this is the unresolved debt problem of the industrialized nations, which, in addition to Europe, is becoming more acute for the United States in particular, as the tax reform will tear holes in the state budget and will not develop into a self-sustaining situation. In addition, there is the excessive credit-financed consumption in the country, which in the long run cannot have a lasting effect on the domestic market, which is so important for the USA. While the standard indices trended sideways, the Nasdaq stands out positively with a new all-time high. However, the sporting ratings don't exactly invite us to invest. We are comfortable with the more moderately valued European stocks and have underweighted the American market. From our point of view, we are in a situation in which market participants tend to be more cautious or withdraw from the stock market in anticipation of a correction. After all, we are in a very advanced upward trend and many companies have now built up high valuation premiums. This can be seen, among other things, from the high cash outflows recently measured for European equity funds. Fortunately, we were able to buck the trend with our European fund.

e-fundresearch.com: From trade wars, the rise in oil prices to the further rise in interest rates in the USA: Has there been any significant portfolio adjustments as a result of the changed capital market environment? Where have you intervened most significantly in the past six months?

Ufuk Boydak:The topics discussed have particularly affected economically sensitive companies and in some cases have led to significant price drops. Cyclical stocks in the capital goods sector in particular have lost 20-30% in a very short time. For us, selective investment opportunities arise, as the market wrongly punishes a company in some cases. For us, the valuation of the individual company is the key orientation in managing our portfolio. In this respect, we invest countercyclically where the popularity is temporarily rather low and benefit from the favorable valuations. Conversely, we are consistently reducing overvalued positions in our portfolio. In this sense, our portfolio is in constant flux. The undervaluation in our portfolio provides us with the best capital protection, especially in the current market phase.

e-fundresearch.com: Which positions have turned out to be the most gratifying performance drivers during this period? Where have allocations proven to be more of a burden?

Ufuk Boydak:Our portfolio comprises around 80 stocks, some of which have developed very positively. The companies Computacenter, Amer Sports, Burberry and Ontex should be mentioned here. The last-mentioned title in particular was previously a burden as the share fell like a stone. Now there was a takeover offer that positively eliminated this flaw. In particular, we were thereby confirmed in the correctness of our evaluation analysis for the company. On the other hand, the Deutsche Post has caused us some grief recently, although the share looks attractive again at the current price level. There is a constant work process in the daily review of our calculated valuations for our portfolio positions. As a conservative equity fund manager, we aim to ensure that our portfolio always shows a clear undervaluation. If we find valuation errors in our analyzes or if a changed valuation picture results due to changed framework conditions, we would react to this by selling the position, if possible before this is recognized by the broad market.

e-fundresearch.com: Which areas of your investment universe do you find particularly promising in the current environment and which segments are you currently deliberately avoiding?

Ufuk Boydak:The valuations of many companies have risen disproportionately to their profitability over the past few years and are showing a wider range of overvaluations. This makes it difficult for us to find attractive investments. This is particularly true of the US market, where the problem has been somewhat obscured by the tax reform. In addition, we see an interest rate development here that now offers an alternative to the stock market. In Europe, on the other hand, the equity-friendly zero interest rate environment will remain and, according to our expectations, coupled with the more moderate valuations in an international comparison, will lead to an above-average development of the equity markets. We have therefore underweighted the American market and especially avoid technology stocks that have already priced in a lot of imagination. There are companies here with high quality and very good management, but in most cases price and value do not go together for us, so that an investment is out of the question for us. We look closely at stocks that have disappointed in the short term or have temporary difficulties due to cost inflation. The important thing here is that it is not a structural problem. After the last correction, Deutsche Post is currently a candidate for us to buy. But the shares of Husqvarna and Huhtamaki should also be mentioned here as examples.

e-fundresearch.com: We are at an advanced stage of the economic cycle: What role does the protection or limitation of the downside play in your portfolio management approach? How do you ensure that your portfolio can generate relative outperformance compared to your peer group and benchmark even in downward phases?

Ufuk Boydak:We are now in the tenth year of the upward trend after the great financial crisis. This makes this cycle one of the longest in the history of the stock exchange. The causes and driving factors, as well as the arguments for ending this trend with a major correction, are complex. Of course, we keep a very close eye on the macro situation on the markets and have a well-founded opinion on this. However, we do not derive any investment decisions from this, i.e. we do not try to predict the time of the next correction or the development of the overall market and to use this to control the level of investment or the allocation of our fund portfolios. Our orientation and our support lies in the value of the individual company. We invest in quality companies that, according to our in-depth analysis and evaluation, cost less than they are worth. We always want to keep undervalued companies in our funds. The safety margin, which must be at least 30% of the fair company value calculated by us, provides us with the best capital protection for our equity funds and should provide us with above-average results even in difficult market phases. Consequently, we avoid popular and expensive values ​​that have an increased downside potential in correction phases or in disappointing quarterly reports. It is also important for us to have a good mix of companies that are stable in the market and companies in which we have invested countercyclically.

e-fundresearch.com: What should fund selectors be aware of before a quantitative fund comparison and an analysis of your track record? What are the uniqueness of your approach?

Ufuk Boydak:We make conservative real investment. We are looking for companies that generate sustainable and long-term added value. We do not undertake short-term performance optimization. We invest our own money in our fund and want to ensure long-term equality of interests with our investors. We aim to be among the most conservative of equity fund managers. In this sense, we see our work as a marathon, in which we consistently achieve above-average performance on our invested capital over stock-adequate periods. In the current market phase in particular, we offer a more defensive alternative to aggressively managed equity funds with our funds.

e-fundresearch.com: Opportunities & Risks: Which developments and events should investors keep a particularly close focus on with a view to their asset class in the further course of the year?

Ufuk Boydak:The interest rate development is the big overarching topic. However, almost all companies see cost increases in production and distribution. We will be paying particular attention to the resulting effects on profit growth in the second half of the year. In view of the current valuation levels for individual companies, disappointments could lead to significant price drops. We therefore pay particular attention to the evaluations in our portfolio and keep a close eye on the analysis models for our companies. As already said, we do not think it is possible to time the market and thereby avoid a correction. We see in a well-analyzed portfolio of undervalued quality companies the best protection for the capital invested and the most reliable prerequisite for an above-average expected return. In addition, this is the best preparation for the next significant correction for our equity funds, which we will certainly see in the next few years.

e-fundresearch.com: Thank you for the interview, sirBoydak!

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