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A 53-per-cent rally in stocks from March lows won't be enough to tempt Canadians back into equities in big numbers in 2010, top mutual funds executives say, forcing the industry to focus on more conservative products.

Balanced and bond funds are expected to see strong demand from cautious investors seeking to limit their downside, a trend that will limit the amount of new cash flowing into the sharply rebounding stock market.

"If there were a theme in 2010 it would be investors saying, 'Give me exposure to a conservative asset mix'," said Doug Coulter, president of RBC Asset Management, a unit of Royal Bank of Canada. Royal is one of the country's largest mutual fund managers with about $100-billion of assets.

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"People have taken a real gut check," he added, saying many are moving back to basics in their investing mentality, looking for a lower-risk mix of stocks and bonds with some sort of payout.

Payout, of course, is key as many investors with large amounts of capital are still parked in money market funds offering little or no real yield.

What we are seeing is that volatility is still very much on their minds. Glen Gowland, CEO of Scotia Asset Management

In its most recent published monthly figures, the Investment Funds Institute of Canada said total investment fund assets fell in October by 1.7 per cent from September to $573-billion.

This is still well up from $522.4-billion in October last year when the implosion of Lehman Brothers helped trigger a global stock market meltdown.

The benchmark S&P/TSX composite index has delivered an impressive rally from the multi-year lows seen in March. But fund executives warn the scale of last year's bear market shook investors to the core, particularly baby boomers close to retirement who watched their nest eggs wither.

"What we are seeing is that volatility is still very much on their minds," said Glen Gowland, CEO of Scotia Asset Management, a unit of Bank of Nova Scotia.

Mr. Gowland said that, in the wake of the crisis, investors are changing what they ask of their mutual fund providers, with more onus on protecting wealth and generating income.

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If you have a lot of money on the sidelines, I wouldn't throw it all into the equities markets today. Brent Smith, Franklin Templeton Managed Investment Solutions

He expects some of this demand to be met by balanced funds, with splits of about 60 per cent equity and 40 per cent fixed income.

"The key is that there is nowhere they can just park it, to sit on the sidelines and just wait to get paid," said Mr. Gowland, whose mutual fund company manages more than $20-billion.

Yet many investors are prepared to do just that, fearing an unexpected crisis or double-dip recession could send equities tumbling again. This risk was highlighted last month when Dubai World stunned markets by announcing a standstill on debt payments.

"If there is a theme that's pervasive now it is that investors will continue to be cautious. Investors are going to be watching the markets for real signals of stability," said Tom Dyck, president of TD Mutual Funds. The Toronto-Dominion Bank unit is Canada's third-largest provider of mutual funds.

Investment pros warn the rally has driven up valuations, putting the market at greater risk of a pullback if the recovery stalls.

"If you have a lot of money on the sidelines, I wouldn't throw it all into the equities markets today," said Brent Smith, chief investment officer at Franklin Templeton Managed Investment Solutions in Toronto.

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"We've driven up the equity markets in anticipation of an economic recovery and a recovery in corporate earnings growth," he said. "We really haven't seen a revenue increase and we'd better see that sometime in 2010 or there is going to be a downturn."

Not all industry players are so pessimistic. Norman Raschkowan, chief investment officer at Mackenzie Financial, sees further upside for stock markets as investors work up the nerve to shift capital from conservative assets like bond funds to more growth-related equities.

He said much of the value was in high-quality companies who have not yet fully benefited from the recovery, like big Canadian banks and cable companies.

While acknowledging that equity markets are not cheap, he said they're "not really expensive. So investors can expect high single digit returns."

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