* 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 For the folks on the front lines of mutual
fund management at Canada's top two banks, investor focus on
fixed income and aversion to equities is fueling concern that
clients may never risk enough to get the returns they need.
Four years after the start of the financial crisis and
subsequent bear market, wealth managers at both Royal Bank of
Canada and Toronto-Dominion Bank have a hard
time convincing clients they need to stop clinging to fixed
"You've seen the stats - they continue to pour their money
into fixed income, and in a low-rate environment, frankly
(returns are) not going anywhere soon. That's a dangerous
proposition in the long term," said Sandy Cimoroni, president of
TD 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 fled
from equity funds and poured themselves into bonds and balanced
products, searching for safety after seeing their portfolios
staggered by the market sell-off.
Some C$56.5 billion flowed into fixed income funds and
C$24.2 billion into balanced funds from 2009 to 2011, while
C$15.1 billion flowed out of equity funds, according to data
from research firm Investor Economics.
But while global stock markets have mostly regained their
previous levels - Canada's TSX still lags - the flight to safety
has persisted in 2012. Year-to-date flows into fixed income were
C$21.5 billion at the end of August, while C$3.0 billion went
into balanced funds and equity funds saw C$3.7 billion in net
"Right now, clients want fixed income," said Dave
Richardson, vice-president at RBC Global Asset Management.
"They continue to be nervous about equity markets, so we're
seeing very much a skew in our sales towards fixed income
products and even deposit products in our investment book."
That's right - deposit products, Canadian grandmothers'
investment tool of choice, otherwise known as Guaranteed
Investment Certificates, or GICs. Major banks offer a rate of
return of about 1 percent for a one-year GIC, on a good day.
Factor in inflation, and investors are risking negative real
returns on their money.
Richardson is especially concerned about relatively young
investors who believe they can stay safe by sticking to fixed
"I worry most about investors in their 20s, 30s and 40s who
are taking a very very conservative approach because their early
experience as investors is that bonds perform just as well as
stocks without the same risk."
As they travel from branch to branch and talk to advisers
and clients, both Cimoroni and Richardson have found that
selling the growth potential of stocks is met with skepticism.
Just as investors overloaded on equities in the market run-up
early in the millennium, now they overload on bonds.
Rather than try to convince anyone to buy equities, advisers
and product designers are working together to give clients what
they want, if not what the necessarily ask for. That is, fixed
income products that diversify a portfolio by adding in
high-yield, emerging market or corporate debt, or balanced
products that offer better returns with a side of equities.
"Not to be flippant, but clients don't necessarily know what
they want - they know what they are trying to solve for. So you
try to come up with a solution," said Cimoroni. "An example we
have is our Target Return funds."
A concept originally offered only to institutional
investors, the TD funds focus on achieving a defined target
return over the medium-term, leaving a retail client to pick
their outcome, not their asset class.
At RBC, Richardson endorses a similar approach, saying
advisers have more luck diversifying a client away from fixed
income 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 needing
to have that equity exposure than just slapping an equity
product in front of them and saying 'Hey, if you don't have a
certain amount of growth you are not going to meet your goals,'"
"It's a financial planning approach to investing."
While diversifying fixed income products from the inside out
and bulking up the equity side of balanced funds will help
clients find returns at the margins, nobody is sure how long it
will take to really draw clients back to growth.
"2008 changed everyone's perspective and the ongoing
uncertainty hasn't minimized," said Cimoroni. "People are very
apprehensive - and for some good reasons, right?"
Richardson believes that it may take bad news in fixed
income markets - worse even than scant returns - to push the
pendulum back to a stock market strategy.
"Every year investors get better and better educated about
how markets operate and try to take the emotions out of their
investing, to look forward instead of looking back," he said.
"But I think this is going to be the hardest one for
investors to get over. And it may take some challenges in fixed
income markets before you see clients look back at equities more
often - or as much as we think they should."