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William M. Priest

Given the severe correction, this veteran manager believes markets are fairly valued.

Michael Ryval 7 November, 2008 | 2:00PM
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In a career spanning 42 years, William Priest reckons this bear market is one of the most difficult he has experienced. "This decline, so far, has been the second worst since the 1930s," says Priest, CEO and chief investment officer at New York-based Epoch Investment Partners Inc.

Priest, whose firm oversees about US$2 billion in assets for Toronto-based CI Investments Inc., maintains that markets are affected by three inter-related crises revolving around liquidity, solvency and the real economy.

The liquidity crisis, he believes, has subsided as the so-called TED spread (which measures the relationship between yields on U.S. treasuries and Euro-dollars) has fallen to 220 basis points (bps), after peaking at 400 bps. "It's come down a lot as central banks and the powers that be address the problem. The liquidity crisis can, and will, go away."

The solvency crisis is becoming clearer, yet it is also continuing to grow. "It's not over and will probably not bottom until the U.S. housing crisis is resolved -- which could be the third quarter of next year, I hope."

The crisis around the real economy is the big unknown. "We are looking at several months of horrific economic data," says Priest, adding that U.S. unemployment could rise to 8%. "It could be ugly for six months -- and maybe longer. The question is, how much of that is already discounted by the market, when the Dow Jones Industrial Average was around 9,000 points?"

Given the severe correction, Priest believes markets are fairly valued. "They are not at bargain basement levels, but they are attractive. Not only that, you are being paid to play," says Priest, adding that stocks have twice the upside of 10-year U.S. government bonds. "The valuations are faith-based, I admit, rather than evidence-based. But by the time the evidence is there, you will have missed the spring."

Accordingly, Priest is staying the course, and picking away at the market. A value-oriented investor, he focuses on cash flow rather than earnings, since the former is less susceptible to manipulation. One favourite is National Oilwell Varco Inc. ( NOV/NYSE), an oil service firm that saw its stock slump from US$80 in June to around $30.

"It will earn US$5 to $6 a share this year, and has reported its biggest backlog ever," says Priest. "You're buying the company at a very low multiple of free cash flow. Is this the bottom? I don't know. But we would argue that at $30 it's extremely attractive."

Besides owning National Oilwell in the $292.6-millionCI American Value, he also points to stocks such as Waste Management Inc. ( WMI/NYSE) and Bank of New York Mellon Corp. ( BK/NYSE). "There are many names that fit our model -- companies with strong free cash flow."

At 66, Priest has long been intrigued by equities. He's been buying shares since his teenage years in Steubenville, Ohio. He went to Duke University, where he graduated in 1963 with a bachelor of arts specializing in accounting and political science. He then attended The Wharton School, where he got his MBA in finance in 1965.

In 1966, after a brief spell as a securities analyst in San Francisco, Priest worked as an analyst and portfolio manager at Anchor Corp., an Elizabeth, N.J., mutual fund firm.

In 1972, Priest co-founded New York-based BEA Associates. The partners sold a majority stake to Credit Suisse Asset Management in 1990. Eight years later, the firm became known as CSAM as the parent bought out its remaining share.

As CEO and portfolio manager at BEA Associates, Priest was manager of CI American (later CI Landmark American) from its inception in September 1992 to May 2000.

In March 2001, Priest joined forces with Michael Steinberg and established Steinberg Priest Capital Management LLC. In August of that year, Priest returned to CI and became a co-manager of the $279-millionCI American Managers Corporate Class.

Since September 2002, he has also managed the $347.5 millionCI American Small Companies and the $163.9 millionCI Global Small Companies.

In April 2004, philosophical differences caused Priest and Steinberg to part amicably. Priest took along a number of colleagues and co-founded Epoch Investment Partners.

Adopting a long-term approach, Priest holds stocks for several years. Turnover in the broadly based American equity fund was 34.9% for the year ended March 31. It was 73.9% in the American small-cap fund, although Priest attributes that to high market volatility. Single holdings are limited to about 4%.

Looking ahead, Priest concedes that equity returns will be adversely affected by the meltdown in 2008. Compound returns for the next decade could be around 4%, compared to 6.5% for the 10 years ended December 2007.

"But look at the S&P 500 decade-by-decade," says Priest, noting that the 1930s were by the far the worst over an eight-decade stretch. "When it gets down to 0%, it only happens once. Whatever the worst 10-year period, we won't have another like it. It will be better."

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Michael Ryval

Michael Ryval  Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

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