No pause in investors' quest for risk

By Jennifer Ablan

NEW YORK (Reuters) -There's no end in sight for the bull market in riskier assets such as high-yield junk bonds, emerging-market securities and small-cap stocks.

The double-digit returns in these asset classes -- junk bonds at about 12 percent, emerging-market equities up 40 percent and small-cap stocks up 18 percent year-to-date -- have prompted a mad rush into those sectors by money managers and hedge funds.

Even though U.S. economic growth continues to show signs of slowing, an aversion to risk has been largely ignored by investors in the lowest-rated stocks and bonds.

The question now is: how long will the hunt for returns keep the demand for riskier assets afloat? Next week Reuters hosts 14 leading chief investment officers, portfolio managers and hedge fund managers at its annual Reuters Investment Outlook Summit in New York to try to answer that question and others.

Diving into risk has meant huge rewards for those who can pick the gems from among the wreckage of the most damaged industries.

Auto giants General Motors (GM.N: Quote, Profile, Research, Stock Buzz) and Ford Motor Company (F.N: Quote, Profile, Research, Stock Buzz), poster children of the slowing U.S. economic growth, have seen ample demand for their junk-rated paper. Ford's convertible preferred securities, for example, rose 24 percent in the third quarter alone.

Responding to the demand for yield, Ford increased the size of its latest convertible bonds sale to $4.5 billion from the initially planned $3.0 billion.

"Markets are moving in a way that suggests there is too much liquidity," said Greg Jensen, co-chief investment officer at Bridgewater Associates in Westport, Connecticut.

"The rally in global stock markets with emerging market equities hitting new highs this week, the narrowing of credit spreads to unprecedented lows and the rallies in silver and gold are all indicating to us that the world is awash in liquidity."

That cash glut has created a situation where more capital is chasing fewer investment opportunities, feeding the big demand for any security that may produce a benchmark-beating return.

For example, private equity firms are taking advantage of the outsized demand by offering investors huge junk bond deals. The deals, because of their size and risk, offer low double-digit coupons to fund leveraged buyout deals that take often-troubled companies private.

Global high-yield debt issuance vaulted to a record $222 billion through the first week of November, topping the previous record of $211 billion in 2004, according to financial data provider Dealogic.

That came on the heels of hospital operator HCA Inc.'s HCA.N sale of $5.7 billion for its LBO in the second-largest junk bond offering ever.

The week after that, Freescale Semiconductor Inc. FSL.N sold $5.95 billion of debt in the biggest sale for a buyout since 1989 to help finance its $17.6 billion takeover by a Blackstone Group-led consortium.

Beyond bonds, volatile small-cap stocks have posted huge gains as investors focused on their higher returns compared with slow-moving large caps.  Continued...