A investment chief overseeing $294 billion tells us the 3 areas she's using to play defense against rising recession risks - and how she's targeting the growth that remains

• Katie Nixon - the chief investment officer of Northern Trust Wealth Management, where she oversees $294 billion - told Business Insider she's targeting the "lowest-risk risk assets."
• She says they split the difference between investors' desire for safety and for steady returns.
• Nixon says she's found three options that either offer low risk or have the potential to climb as interest rates fall.
• The underlying theme of Nixon's recommendations is the expectation that economic growth will endure, but be sluggish.
• Click here for more BI Prime stories.

With the threat of a recession increasing and the market as unsettled as it's been this year, the chief investment officer of Northern Trust Wealth Management is looking for two major attributes: (1) Lower risk than the broader stock market, or (2) the ability to gain value as interest rates fall.

It's a desirable combination at any time, but the CIO's targets might be even more attractive in the wake of the market's latest gyrations.

"Investors don't know what to do right now," CIO Kate Nixon, who oversees $294 billion, said in an exclusive interview with Business Insider. "They're reluctant to go into bonds because the returns are so low, and they're fearful of risk assets because volatility has risen."

That's guided Nixon to three promising areas that she calls "the lowest-risk risk assets." She says each of them offers steady returns in an environment of weak yields, and still provide the chance for good gains.

Infrastructure

For a lot of investors, "infrastructure" means betting on a boom in building, possibly one created by federal stimulus. Nixon isn't counting on any of that. Instead, she she's focused on city and state assets that are run by private companies and can offer steady returns for a long time.

"These really represent privatizations of toll roads and pipelines and cash flow producing assets," she said, adding that cellphone towers, energy and water utilities, and cable infrastructure also fit into the category. "Any kind of infrastructure really benefits from this kind of environment where growth is modest."

Those stocks are far less cyclical than machinery makers and construction companies: They have very long contracts with municipalities and states that can guarantee them decades of income, and in many cases, Nixon says their payments increase over time to account for inflation.

High yield bonds

Nixon considers high-yield bonds a very appealing option - especially because she treats them as a risk asset rather than a way to play defense.

That helps her get around a divide in opinions about high yield: Some experts see them as one of the few remaining places to find attractive yield, while others see them as risky and vulnerable if the economy slows and credit quality weakens.

But Nixon is focusing on the best quality high yield bonds, and says she them as safe compared to stocks, and with strong returns compared to bonds that are more defensive.

"We like the return of high yield and the lower volatility it brings to portfolios relative to other risk assets," she said.

Read more: A chief wealth adviser overseeing $170 billion told us where he's putting client money as a turbulent environment rocks markets

Real estate

Nixon says that real estate investment trusts are also sensitive to interest rates and are likely to trade higher as those rates fall further. That's consistent with the pattern that's played out in recently: REITs climbed in June after the Federal Reserve signaled it would cut rates.

After a decline, the stocks have rallied again this month as investors fled other stocks and looked for safe options.

"When rates go down they tend to do fairly well because the search for yield pushes investor demand into these areas," Nixon said. "The search for yield is going to continue unabated and it might even increase."

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