Three top-down calls

Each week, a professional investor tells us where he'd put his money. This week:James Mee of Waverton Cautious Income.

I invest in a "top-down" fashion. This means we take our cues from macroeconomic and market factors, rather than fundamental, "bottom-up" company analysis. We look at where we are in the economic cycle, at valuations of different assets, and at investor sentiment and positioning. So our key calls relate more to which asset class (equity, bonds, cash or alternatives) to invest in, or what region or style (value or growth, say) to follow, rather than whether to buy Facebook or Twitter. That said, we invest in individual securities where appropriate (that is, when we believe that this is the best means of accessing the investment theme). This is particularly the case within our allocation to bonds and alternative strategies.

This brings me to my recommended investments. The first recommendation is a top-down one buy equities. This is an important asset allocation decision, arising from our reading of the aforementioned top-down factors. Cyclical indicators such as global trade and consumer confidence continue to be consistent with improving growth trends, while earnings expectations for 2017 remain positive, supporting valuations. We also believe that investors are generally defensively positioned, reflecting a scepticism about the durability of recent market trends.

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This recommendation to buy equities is made notwithstanding some of the macro risks often cited both in the media and among investors. There will always be risks (as the current North Korean tensions attest). But a decision to get out of equities should be borne out of fundamental change (or the expectation of such), which we do not see today.

My second and third recommendations come from the infrastructure sector, but they are each distinct, reflecting the importance of diversifying sources of both capital and income. HICL (LSE: HICL) offers consistent returns and dividend growth; government-backed cash flows; a transparent portfolio of investments with 90% of its income linked to inflation; and high-quality management. It also trades on an unusually low premium to its net asset value (NAV the value of the portfolio minus the value of its liabilities).

Finally my third recommendation, 3i Infrastructure (LSE: 3IN), is slightly riskier, but offers potentially higher returns. Management has consistently achieved its stated target of 8%-10% total return, and exits from investments have provided good NAV growth opportunities. We particularly like 3i today (despite its trading on a 15%-odd premium to NAV) because of two prospective asset sales, AWG and Elenia. As well as the potential for NAV growth following these sales, surplus cash may be paid out as a special dividend (as it was following the sale of Eversholt Rail in 2015). On our estimates, the combined sales could result in a special dividend payout to shareholders of 10% or higher in the next 12 to 18 months.