* Clients still demand fixed income, shun stocks
* Wealth managers fear clients will never find return
* Balanced or packaged products may help force diversity
By Andrea Hopkins
Oct 5 (Reuters) - For the folks on the front lines of mutualfund management at Canada's top two banks, investor focus onfixed income and aversion to equities is fueling concern thatclients may never risk enough to get the returns they need.
Four years after the start of the financial crisis andsubsequent bear market, wealth managers at both Royal Bank ofCanada and Toronto-Dominion Bank have a hardtime convincing clients they need to stop clinging to fixedincome funds.
"You've seen the stats - they continue to pour their moneyinto fixed income, and in a low-rate environment, frankly(returns are) not going anywhere soon. That's a dangerousproposition in the long term," said Sandy Cimoroni, president ofTD Mutual Funds at Canada's second-largest bank.
"We've got to get clients thinking differently."
In the first three years after 2008, Canadian investors fledfrom equity funds and poured themselves into bonds and balancedproducts, searching for safety after seeing their portfoliosstaggered by the market sell-off.
Some C$56.5 billion flowed into fixed income funds andC$24.2 billion into balanced funds from 2009 to 2011, whileC$15.1 billion flowed out of equity funds, according to datafrom research firm Investor Economics.
But while global stock markets have mostly regained theirprevious levels - Canada's TSX still lags - the flight to safetyhas persisted in 2012. Year-to-date flows into fixed income wereC$21.5 billion at the end of August, while C$3.0 billion wentinto balanced funds and equity funds saw C$3.7 billion in netredemptions.
"Right now, clients want fixed income," said DaveRichardson, vice-president at RBC Global Asset Management.
"They continue to be nervous about equity markets, so we'reseeing very much a skew in our sales towards fixed incomeproducts and even deposit products in our investment book."
That's right - deposit products, Canadian grandmothers'investment tool of choice, otherwise known as GuaranteedInvestment Certificates, or GICs. Major banks offer a rate ofreturn of about 1 percent for a one-year GIC, on a good day.Factor in inflation, and investors are risking negative realreturns on their money.
Richardson is especially concerned about relatively younginvestors who believe they can stay safe by sticking to fixedincome products.
"I worry most about investors in their 20s, 30s and 40s whoare taking a very very conservative approach because their earlyexperience as investors is that bonds perform just as well asstocks without the same risk."
As they travel from branch to branch and talk to advisersand clients, both Cimoroni and Richardson have found thatselling the growth potential of stocks is met with skepticism.Just as investors overloaded on equities in the market run-upearly in the millennium, now they overload on bonds.
Rather than try to convince anyone to buy equities, advisersand product designers are working together to give clients whatthey want, if not what the necessarily ask for. That is, fixedincome products that diversify a portfolio by adding inhigh-yield, emerging market or corporate debt, or balancedproducts that offer better returns with a side of equities.
"Not to be flippant, but clients don't necessarily know whatthey want - they know what they are trying to solve for. So youtry to come up with a solution," said Cimoroni. "An example wehave is our Target Return funds."
A concept originally offered only to institutionalinvestors, the TD funds focus on achieving a defined targetreturn over the medium-term, leaving a retail client to picktheir outcome, not their asset class.
At RBC, Richardson endorses a similar approach, sayingadvisers have more luck diversifying a client away from fixedincome if they start with what the investor wants to accomplish,and work backward from there.
"It's an easier way to broach the conversation about needingto have that equity exposure than just slapping an equityproduct in front of them and saying 'Hey, if you don't have acertain amount of growth you are not going to meet your goals,'"Richardson said.
"It's a financial planning approach to investing."
While diversifying fixed income products from the inside outand bulking up the equity side of balanced funds will helpclients find returns at the margins, nobody is sure how long itwill take to really draw clients back to growth.
"2008 changed everyone's perspective and the ongoinguncertainty hasn't minimized," said Cimoroni. "People are veryapprehensive - and for some good reasons, right?"
Richardson believes that it may take bad news in fixedincome markets - worse even than scant returns - to push thependulum back to a stock market strategy.
"Every year investors get better and better educated abouthow markets operate and try to take the emotions out of theirinvesting, to look forward instead of looking back," he said.
"But I think this is going to be the hardest one forinvestors to get over. And it may take some challenges in fixedincome markets before you see clients look back at equities moreoften - or as much as we think they should."
(Reporting by Andrea Hopkins; Editing by Gary Hill)
Keywords: CANADA INVESTING/DEBT