WEALTH MANAGER-Firms may target more reliable returns

* "Absolute return" funds use hedge fund-like strategies

* "Target return" funds aim for specific returns

* TD launches two target return funds

By John McCrank

TORONTO, Aug 3 (Reuters) - Funds designed to generate modest but reliable returns regardless of market conditions may become more common in Canada.

Financial firms increasingly are looking to balance investors' need for income in a low interest rate environment with their aversion to volatility.

One way of accomplishing that balance is with so-called absolute return funds. They aim to deliver consistent returns through complex instruments that make them more like hedge funds than traditional mutual funds.

Another way is by using "targeted return" funds, designed to deliver a specific return over a specific period.

Both have gained traction in recent years in Britain and the United States among wealthy individuals looking for more security than pure equity plays offer. [ID:nN17236234]

"It's demographics as well," said Al Kellett, senior fund analyst at Morningstar Canada. "We all know the story with the baby boomers looking for income and over the years and we've seen a few things filling that need, whether it's been income trusts, or structured products, or monthly income funds."

"This would be another one in a succession of products that are trying to satisfy that desire for steady income."

With once-ubiquitous Canadian income trusts being phased out next year, absolute and targeted return funds may have even more appeal to some investors, Kellett said.

"There will always be something like this because there is a demand for it so there will always be a supply. With income trusts leaving the scene, this seems as likely as any a candidate to try and fill some of that," he said.

TD TAKES AIM

Toronto Dominion Bank's (TD.TO) discretionary money management arm, Private Investment Council, recently launched two target return funds: the TD Private Target Return, which targets a return of T-Bills plus 3 percent, and the TD Private Target Return Plus, which targets a return of T-Bills plus 5 percent.

Managers of these funds are not limited to any particular investment types or geographies.

"We have a certain objective to meet and however we get there is within the hands of the manger, and we will do what is required to get there," said Bob Gorman, chief portfolio strategist at TD Waterhouse.

The funds are aimed at high-net-worth investors who are concerned about market volatility, but need more returns than the money market can offer in order to meet their regular expenses.

"Over the last decade we've gone through two of the most difficult equity markets since the Depression and the volatility that goes along with that has made a lot of individuals gun-shy, so to speak," Gorman said.

"This may be something that makes sense for a portion of that client's portfolio."

Gorman said TD target funds are being started largely on the fixed income side, with investment grade corporate debt, high-yield corporate debt, preferred shares and emerging market debt. As the market changes, so too will the makeup of the funds.

NO GUARANTEES

Of course, targets are just that and there are no guarantees the fund manager will hit them.

Morningstar's Kellett pointed to hedge funds in 2008, most of which went down with the market. Some weren't sufficiently hedged coming out of the bull market, while others were hurt when credit disappeared and liquidity dried up.

When financial advisers are considering recommending absolute return funds and target return funds to their clients, it is important that they look at more than just the stated yields or the objectives, he said.

"Look through that and look at what type of strategies are being pursued to get that yield, what types of risks are being taken on, and look at the manager and what the manager's track record is." (Reporting by John McCrank; Editing by Frank McGurty)