C-Quadrat: 'We wanted to bring [Wall Street] to Austria'

Most fund managers are cautious about admitting to any form of misdemeanour. Alexander Schutz, the candid chief executive of Austria's largest independent fund house, C-Quadrat, is an exception.

Mr Schutz, who in his early twenties founded the Viennese asset management company from his living room, is unusually forthright about falling foul of Austrian regulatory requirements on a monthly basis.

The breach in question occurs because C-Quadrat, which is best known for its computer-driven fund of funds, has a banking licence and is consequently subject to lending rules. The €5bn fund company breaks these rules every month when the performance fees it generates exceed a certain limit.

Visibly irritated, the 48-year-old, who came close to merging the company with UK asset manager F&C in 2010, says: "Every month when we have good performance, we get a penalty from the financial authority of [up to] €10,000. It is not killing us, but it is stupid."

Has Mr Schutz taken the matter up with the regulator? "Yes, but they do not care," he says. "They just get the money."

The Linz-born executive's frustration with the domestic regulator is by no means unusual. Small and midsized asset managers around the world frequently complain that overzealous regulators are driving costs up and stifling the ability of start-up fund companies to challenge incumbents, without necessarily improving investor protection.

Mr Schutz goes one step further, accusing the Austrian regulator of putting too much emphasis on minor breaches while failing to spot serious financial catastrophes. He cites the collapse of Hypo Alpe Adria, the Austrian regional bank nationalised in 2009 after a multibillion-euro capital shortfall and allegations of criminal activity, as an example.

"There are some crises in Austria, like with Hypo Alpe Adria, where [the regulator] should have seen what was happening. [Billions of euros] disappeared [from Hypo]. They should have put a bit more effort into [monitoring that bank] instead of giving us a penalty every month for having good performance. It is crazy. They focus on stupid things."

In light of the increasingly stringent regulatory environment at a domestic and European level, Mr Schutz believes he would struggle to survive today as an entrepreneur in Austria's asset management industry, which is largely dominated by banks.

"I am not sure I would succeed if [I] started from scratch [now]," he says. "We are heavily regulated and I would say we are over-regulated compared with other European markets. If you look at the efforts of our company, 30 per cent of our focus is given to compliance with regulators."

The supervisory landscape was more or less non-existent when Mr Schutz founded C-Quadrat with Thomas Riess, a friend and colleague at the Vienna arm of Barings Asset Management, nearly 25 years ago.

Setting up the company, which originally operated as a distribution platform for international funds, was a period the chief executive describes as fun but intense. "We were working 20 hours a day and we had one computer that we shared, so we were always fighting [to use it] and the other one had to use the telephone. But that is how you started a company," he says.

It was the 1987 Hollywood blockbuster Wall Street, which showcases ruthless financier Gordon Gekko, that inspired him to enter the fund industry in the first place.

"This movie looked very fancy [and] was really quite exciting. So it was nice to go to London to see professional asset management companies. There was nothing comparable in Austria so, for us, it was the window to the world and we wanted to bring this world to Austria."

The company won its first investment of 100,000 schillings (roughly £7,000) from another friend of Mr Schutz: the son of Johann Graf, the Austrian billionaire who owns Novomatic, the international casino and gaming company.

Subsequent investor mandates were harder to secure, however. It took the company 15 years to reach the €1bn milestone of assets considered necessary for companies to break even. "It took forever - it felt like 100 years," admits Mr Schutz.

Since then C-Quadrat has expanded through a series of acquisitions to become a multi-boutique house with a particularly strong presence in Germany and eastern Europe. The best known of the boutiques is Arts, which joined the group in 2003 and runs a computer-driven fund of funds tracking more than 10,000 funds worldwide.

The remaining three subsidiaries are C-Quadrat Asset Management (Vienna), which runs another computer-driven fund of funds, C-Quadrat Asset Management (UK), a credit manager acquired in 2013 and QC Partners, a Frankfurt-based equity and bond house bought in 2013.

Although the Arts funds, which account for the bulk of C-Quadrat's assets, have performed well, they are expensive. Morningstar, the data provider, notes that the company charges "very high fees on nearly all products", which is "very investor unfriendly".

The C-Quadrat Arts Best Momentum fund had an ongoing charge of 2.88 per cent in 2014 alongside a 2.77 per cent performance fee.

Morningstar adds that the majority of the companies' assets are "concentrated on the Arts funds range, [and] except for [these] funds, most of the C-Quadrat products are unimpressive".

Mr Schutz acknowledges that his company needs to reduce its reliance on Arts, despite the fact that it has already branched into credit, equities and microfinance. He wants the company to expand into property and private equity to help it achieve the next milestone for boutique asset managers: €100bn.

The chief executive hopes to drive this growth by focusing on far-flung investors, from the Armenian government to sovereign wealth funds in Uganda and Botswana.

C-Quadrat last year opened an office and hired four staff in Yerevan, the Armenian capital, after winning a mandate to manage a chunk of the state pension fund's assets. Ever the opportunist, Mr Schutz rented a car and drove to Tbilisi, the capital of Georgia, to inquire about its pension system while pitching for the Armenian business.

The company has also hired its first employee in Hong Kong, and Mr Schutz says his group "has to improve" in terms of sales in France, Spain and the UK.

He says: "I don't want to wait another 100 years to have €100bn."

. . .

Born1967

Total pay€347,000

Education Business administration, Vienna University of Economics and Business (not finished)

Chartered investment consultant

Career 1988-91 Assistant to the management board, Vienna Portfolio Management

1991 Founder, C-Quadrat

2004 - present Management board, C-Quadrat Investment, Vienna

2004 - present Managing director, Arts Asset Management

2006 - present Member of the supervisory board, C-Quadrat

2012 - present Managing director, C-Quadrat Deutschland

Founded 1991

Assets under management €5.2bn

Employees 85

Headquarters Vienna, Austria

Ownership Listed on Frankfurt Stock Exchange (prime standard) and Vienna Stock Exchange (standard market auction)

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