Vish Hindocha: Welcome to the MFS All Angles Podcast. My name is Vish Hindocha, and I am the global head of sustainability strategy here at MFS. The goal of this series is to look at the wonderful world of ESG investing from different perspectives and different angles using the power of conversation.

Disclosure Voice: The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security, or as a solicitation or investment advice from the advisor. No forecast can be guaranteed. Past performance is no guarantee of future results.

Vish Hindocha: In this episode I’m joined by AC Farstad, who is a portfolio manager of a Contrarian Value strategy as well as the cochair of our Climate Working Group. We have a fascinating conversation, which begins in actually talking about what it takes to be a contrarian or deep value investor and translating that into how to think about an issue such as climate change. I hope you find this as illuminating as I did. I think we all hear from investors and about companies where there’s an ESG halo effect, and I think taking an alternative perspective and looking at traditional, quote-unquote “dirty sectors” through the lens of a value, and especially deep value or contrarian value investor, was really, really illuminating for me.

AC, some of our listeners will know you really, really well, but I wondered if we could begin by you giving us a brief potted history of your background and how you got here.

AC Farstad: Okay. I am French-Brazilian-Norwegian, but I’ve lived in the UK since I was about 10 years old. Before that I lived in the US and in Canada. I was actually born in the US but a bit of a mongrel and have sort of lived all over and then went to school here in the UK and then university at Cambridge, where I read literature. And then I went into the city when I was about, I guess, 21, starting out at UBS and then going to a hedge fund and then coming to MFS in 2005. And in 2005, I started out as a European equity analyst covering a whole bunch of different sectors. I was the global sector leader in global telecom for example, but I also covered business services, construction.

And then I was lucky enough to be given European banks and insurance just a few weeks before Lehman went bust. And that was my kind of first experience really of fighting in the trenches as a diehard value investor. And then I became a portfolio manager in 2012, working on one of the core European strategies, and then launched contrarian value in 2016 and international contrarian in 2020.

Vish Hindocha: Great. Thank you so much. There’s so much I want to ask you about. I might ask you about the Lehman experience a little bit later on, but if I could take you back to your time at Cambridge as a literature student, is there anything behind the move into the world of finance from that position? Is that something that you had your site set on or how did you fall into the financial world from studying literature at Cambridge?

AC Farstad: My father had worked in finance, so it wasn’t completely alien. And actually funny enough, I don’t think I’ve told anyone at MFS this, but I was meant to go to law school. I wanted to become a barrister. And then I did work experience at UBS. And I had a very, very charismatic boss who said, "Come on, come to UBS for a year. And if you don’t like it, postpone your place at law school. And if you don’t like it, you can always go back. Like, what will you really have lost? You’ve been studying for the last three, four years, well, arguing for the last 22 years. Why don’t you have a break from studying and just see how you like equities? And then that was it. I mean —

Vish Hindocha: Here we are. The rest is history.

AC Farstad: The rest is history. Exactly. So, yes. And I only really recently thought of the fact that I was meant to go to law school because I was going to law school with someone called Jeremy Briar. And I saw that he’s just been made a Queens counselor just before Christmas. And I thought, golly, last time I spoke to him, he was going to law school. So it’s been a while.

Vish Hindocha: Wow. That’s really fascinating. Thanks for sharing that for the first time. Yeah. So you mentioned obviously the contrarian value strategies and the co-chairing, the climate. I’d love just to hear — how would you describe the breakdown of your day? Like how do you think about your responsibilities over a week? Where do you spend most of your time?

AC Farstad: I spend most of my time looking at companies. And so I’m a co-portfolio manager on the strategy with Zaheed Casam, who’s based in Toronto. And I’d say that we both spend a lot of time looking at businesses that we think might be interesting either today or businesses that we’d like to own in the future. And it’s really a mixture of speaking to the analyst to MFS, speaking to investor relations, reading the annual reports, speaking to senior management and trying to get a really full picture of how the business makes money fundamentally, what are the kind of nuts and bolts of the business, and then things could make it interesting for a contrarian investor. So I’d say that is the vast— that’s where I spend 90% of my time. And I’m lucky that the work I do running the climate group is actually very integrated into the work I do as an investor because that’s really been the MFS approach.

And so I see climate risk, for example, as something that I just put through the lens of all the other risks that I look at for businesses. So there’s balance sheet risk, there’s accounting risk, there’s operating leverage and there’s climate risk. And it’s something that we try in diligence increasingly through our conversations with management and increasingly through our conversations with people beyond management because I think that’s been a real change in our process. So speaking to heads of R and D, heads of sustainability, that kind of thing.

Vish Hindocha: Yeah, great. And AC, you will have to forgive me for the slight interview question here, but I love to ask, especially given what you do, and it always sounds fascinating when I talk to you about the work that you are currently doing. What really motivates and drives you? What is your why? Why do you choose to do this and any regrets about not becoming a Queens counselor or pursuing the law path? What is it that kind of keeps you here and has you kind of driving forward as fast as you do?

AC Farstad: It’s a good question. I mean, there are lots of things I love about the job, and there are things I’ve always loved about the job, which is just how varied it is in getting to look at so many different sectors. And compared to private equity for example, Zaheed and I will spend days looking at a company and talking to the MFS analysts and speaking to the management team. And then if we want to execute on owning a part of that company, we’ll walk into the trading room and we press buy. And that’s so different from having to put the financing in place and having a seat on the board and having to fire the CEO. So I love how short the gap is between the thinking and the execution. That is one of the things I have always loved. And people always say if you love 70% of your job, then you’re laughing, that’s incredible. But I do so little kind of boring stuff, if that’s a fair way to put it. And then I think something that’s really kind of happened more recently is that —

And I know this is something that Barnaby talks about as well, is that the world has changed and we’re able to bring our values into work and our kind of whole selves into work in a sense. And that’s how I feel when I think about the work that we do on climate. And of course, like, I’m not saying for one second that this is a moral crusade. I think this is all about cost of capital and real risks for clients. But I’m fortunate that for me, it also really accords with my private values. And that has definitely given me an additional lease of life on the job I think, because I think for a long time, I felt quite jealous of certain friends who I felt could go out into the field and make a real difference. Lots of my friends from Cambridge, for example were doctors and went off and did Médecins Sans Frontières [Doctors Without Borders] and all of that stuff. And there I was, sat in an office. And so it’s wonderful to feel like you’re part of a positive movement now as well. So all of those things together.

I feel like every year there’s something new that comes into focus that you are always learning, it’s never stagnant. And the job is very different. How we do the job is very, very different to how we did the job back in 2005, for example. The markets are constantly getting smarter, constantly evolving. Things that used to be arbitrageable, 20 years ago are no longer arbitrageable. When you think that my dad’s generation would’ve been doing things with prices from newspapers. Like, things change really, really fast in our industry. And I love that kind of aspect, trying to win against the crowd. And of course, as a contrarian, that’s a very, very emotionally engaging fight.

Vish Hindocha: That’s really interesting. So I love what you said about the vocational component. Maybe we’ll dig in on the aspect of contrarianism. AC, why contrarian investing? What about that appeals to you in terms of sort of taking a different stance to the rest of the players on the field?

AC Farstad: I think ultimately, so something I’ve thought a lot about, I mean, as I’m sure all of the MFS investors think about is what aspect of your process is it that is repeatable and that is different, and that is what truly differentiate it from what other people are doing. And we talked a little bit about it already about things that used to be arbitragable. So when you think back to the early hedge funds and they talk about hedge and they were simply getting the information faster than other people. Well, that didn’t last. The race for hedge played its course. And I think the thing that I love about contrarianism or the reason I have moved increasingly in that direction over time is that the one thing that really hasn’t changed about markets is that ultimately markets have people behind them and people are very emotional.

They are very fearful in times of 2020 in the pandemic, understandably, and very greedy when the going gets good. And although that gets expressed in different ways — and we see markets react to that in different ways, and I’d say things are quite accelerated in the new world relative to when I started — I do think that remains one truly arbitrageable thing. And so the contrarian in me really starts from the belief that that is the repeatable part of my process, that going against the crowd is the thing that really differentiates me as an investor in a sense. And it suits me because —and you can ask my colleagues or my family because I am a bit contrary and I actually kind of rub my hands with glee when everyone else in the room disagrees with me.

It suits me. And I don’t think that that’s very, very different, for example, from my colleagues who run growth funds, who it really doesn’t pay to be a contrarian running growth money, for example. That’s usually not the way to go at all. So I think it really it’s about finding a way forward in investing that suits you as a person that you think will generate value for clients because it’s truly differentiated, and that you think that you kind of intellectually can get behind.

Vish Hindocha: Yeah. I love that. I want to ask you about the emotional, you brought up that, this word, emotional to sort of difficulties a couple of times. Before we go there, is there anything else about your philosophy or your process that is relevant here, before we start digging to sort of climate change specifically? Anything else that you’d get on the table in terms of philosophically or process wise that repeatable process that you referenced?

AC Farstad: Well, I suppose, I mean, one of the things that’s really important to me is valuation. And for me, I’m really thinking about probabilities. I’m never investing in certainties. And I think Zaheed would say, I’m saying I, but I mean, we — Zaheed and I speak as one person, but ultimately I’m a great believer in valuation. I believe that valuation is the reciprocal of probability and that the lower the price you pay, the less certain you have to be. And as I said, I never invest in certainty. I’m investing in probabilities, and therefore inherently something cheap is also less risky. And if you think about that in the kind of contrarian sense, it’s about finding asymmetric risk/rewards where you think a decent company has been thrown out a favor by kind of news flow or whatever.

And so I think that’s really an important part of my investment philosophy. And I suppose then there are all the things that are the enemies of contrarian investing. So a very leveled balance sheet is the enemy of contrarian investing because you have to be right about the journey as well as the destination. And one thing that Zaheed and I say a lot in meetings is that anything that means that we wouldn’t want to add more if the shares were down 20% ultimately means that we probably shouldn’t be there because as a contrarian, you should always be buying more on the down and selling more on the way up. Because if price is a big part of your decision making process and the asymmetry is greater as your downside is more limited and your upside greater, then you really need to stick very firmly in those parameters.

And we’ve definitely found over time that the sorts of assets that we buy have become clearer. So obviously the strategy’s been going since 2016 and we’ve found now that there are certain types of ideas that really suit us better.

Vish Hindocha: Are there are types of ideas that suit the emotional or temperamental differences associated with your investment style? I’m curious as to whether you think Zaheed is also just as difficult as you are, rubs his hands with glee, a contrarian scenario. But how would you describe those kind of emotional difficulties or temperamental things in more detail? Could you unpack that a little bit more for us?

AC Farstad: Well, so this is something I’ve spoken to a few of my colleagues about, and they think it’s quite funny, but I actually personally felt much more comfortable with the portfolio that we owned at the market lows of the Corona pandemic crisis, so March, April, 2020, where by that point we were 25% travel and leisure and gung ho value cyclicals. And by any stretch of the imagination, people would’ve said that we were running an aggressive procyclical, proinflationary bet. And I felt really comfortable with that portfolio, so much so that we begged management to launch the international version of it because we just felt it was such an exciting time to be a contrarian investor. I think that’s very personal. Lots of people would’ve said humankind is in a terrible pickle. I’m locked inside my house with my family.

The news flow is absolutely terrible. I think it’s a very, very personal thing to feel invigorated when you see the opportunity set open up. And I think that really comes from the probabilistic mindset, which is that if you suddenly see a bunch of companies, you’ve always loved going from a kind of 100% upside, 100% downside, or let’s say 50% upside, 50% downside, and suddenly they’ve got 300% upside and 20% downside. That gives me enormous confidence and energy and excitement, whereas actually funny enough, an environment that’s more normal, where we’re not in crisis and where you are making idiosyncratic decisions and there isn’t a kind of single big controversy within the market, I find actually emotionally more difficult. Also, because you don’t own things that are 300% upside and 20% downside, it starts to become more things with 30% upside and 15% downside.

And then that feels like there’s much more of the personal and the forecasting and the judgment. Whereas buying airlines in March of 2020, for example, you didn’t have to be exactly right on what the revenue growth was going to be or when the passenger numbers were going to normalize. Was it 22 or 23 or 24? It didn’t really matter, providing these companies were liquid. You just had to assume that it wasn’t going to be COVID for forever. And I actually find those things weirdly less stressful than more normal markets. So I think Zaheed is very similarly built. We never conflict on these particular moments. And his instinct is always to add when things are down, providing we’ve done the work and we feel comfortable that nothing’s changed. So I think we’re very well suited in that sense.

Vish Hindocha: That’s great. We might have to get Zaheed down just to confirm, and also we can ask him what a contrarian he thinks you are. You talked about sort of the investment industry going through its kind of evolution through time. I want to sort of pivot to how you think about ESG integration influencing your process, because obviously it’s been here for a while, but we’re certainly a kind of rapid evolution across our landscape over how much of a hot topic ESG has become. How do you think about ESG integration in your process and the evolution of that through time?

AC Farstad: I don’t really like the term ESG very much because it sort of implies that ESG is this other thing that should be done on the side. We have an ESG team or speak to our ESG analysts. Like this thing that’s outside I think is an unhelpful starting point. So I’m going to push back on that. I think our work as fundamental bottom-up investors who are trying to preserve clients’ capital is to assess all of the risks. That is our role as an active manager. And climate risk is obviously an enormous risk, and that is — I see it very much as part of my job. And it sits very firmly in that 90% of time that we described at the beginning of the podcast, which is spent talking to companies. Of course there’s additional work that comes when you’re thinking about climate, trying to understand natural capital, a whole bunch of things, net zero, what are the options for offsetting?

I mean, there’s lots of kind of specialist work that comes. And the role of specialist is also important because of course there are going to be people who understand certain kind of thematic components better than you do. And I certainly work very closely with Rob and Pooja and Mahesh on some of those things. But I see the responsibility very much as lying with the investor, to do the work and to understand the risks and the opportunities frankly that come from this evolution.

Vish Hindocha: Yeah, that’s great. And I like that. I totally appreciate the pushback. Before I want to ask you, given that you’ve talked about spending a lot of the time on stocks, I want to get into some stories that you might tell in terms of your process that just eliminate for us how you think about, let’s take climate, in that. But before we get there, I put a pin earlier in. You’re talking about being blessed to be given the sort of European insurance companies on the cusp of the Lehman brother collapse. Anything that you’ve learned through that process? Anything that you think about that helped you learn to do things differently? Mistakes made, lessons learned, those kinds of things? We’d be fascinated to hear your perspective on that.

AC Farstad: So many lessons learned, so many bitter tears shed. So a few things that really stand out from that period for me, where I remember, I think it’s Stan Druckeniller, who said, "In general, as an investor, it pays to think that the world is going to keep on turning." I’m misquoting him, but I actually had that on my wall. I posted that on my wall a few days after Lehman went bust because essentially it was, this is the end of capital markets civilization, as we know it and everything is uninvestible. I mean, that was broadly the message. And that turned out not to be the case for a whole host of reasons. The world did keep on turning. The banks were fatally wounded, but not in all cases mortally. So I think that’s probably the first lesson. And I’ve found it very helpful in every crisis since, it’s still on my wall. It was very helpful in Corona, and in the Corona crisis, which was obviously a very, very difficult moment for mankind.

I don’t want to for one second underplay what it meant for humanity, but as an investor, it was a very, very exciting time to be doing our job because any company that was consumer facing fell 60% almost regardless of the quality of the business. And so for someone like me, it’s very exciting to be buying names like Adidas and Richmore that would usually be far too expensive for a wise value investor like me. So that was very exciting. And I think a much more exciting time to be investing frankly than the global financial crisis where basically you had to buy a basket of very highly levered companies that were refinancing and hope that some of them would come through, if you know what I mean.

There were of course also amazing opportunities. You could have bought Heineken at eight times earnings or whatever in March 2010 or whatever. It was like. I mean, I can’t remember exactly what the numbers were, but there were lots and lots of extraordinary opportunities. And you didn’t necessarily have to invest in the eye of the storm and the global financial crisis to make very impressive returns. But yes, that feeling that the world will keep on turning is something I really hold close all the time. And I think it’s part of what helps me be a contrarian, because it’s a kind of fundamental optimism maybe you could say, that at some point — I don’t know when — things are going to be right. So that would be one thing. Other things that I learned from the global financial crisis.

I mean, obviously I’ve made lots and lots of investment mistakes over the years. I don’t think they were particularly in crisis, funnily enough. And it’s funny. I remember speaking to my obstetrician about this and he said doctors, they never screw up in surgery. They screw up by giving antibiotics to someone who’s allergic to them and they haven’t checked the allergies in like a completely normal foreign clinic environment. I do think that’s slightly true of investors. I mean, in crisis your “Spidey senses” are like, tingling because you’re just looking for problems everywhere. Complacency is the big enemy of investors when you think, ah, I’m not going to check the working capital too carefully, because it’s probably fine. It’s usually fine. It’s those moments where something gets missed in the kind of the feeling of okayness in a way.

And that’s also why in a funny way, I felt more comfortable in March, April, 2020 because I thought everything that could have gone wrong is going wrong right now. I can see it, like, in the numbers. So I didn’t feel like it’s that surfing analogy. Isn’t it? Worry about the shark you can’t see. The sharks were circling. I could see them all. So it’s funny, actually. I think probably the bigger mistakes that I’ve made have actually been more in kind of “normal” markets where I’ve misjudged something and got it wrong.

Vish Hindocha: I do love this paradox of you being a fundamentally optimistic contrarian. I need to think about that more as I’m sure that’s also not normal. Maybe if we can move —

AC Farstad: I’m not normal, Vish. I think this we know.

Vish Hindocha: That’s the title of the podcast I think. Maybe — are there any kind of specific cases that come to mind, thinking about things that you’re thinking about now? So less looking back through history but things now, and talking about any specific cases that you think about maybe as it relates to how you think about environmental issues or climate change. Anything that comes to mind in terms of how it sort of plays out for you and how you might look at it now and maybe differently to others?

AC Farstad: I don’t know if I look at it differently to others. I think there’s huge value in doing the work because things are changing very, very quickly. And so one example that I could give is a steel company that I looked at. And I first engaged with them on the subject of climate and their emissions probably about two and a half years ago, and the company was very dismissive of any concerns. And they said, "Well, look, we can’t really be expected to give you any sort of guidance on our emission because there’s so much policy work that needs to happen in Europe and will there be a carbon border adjustment tax? And will we be given hydrogen infrastructure? We really need the governments to kind of come forward on this. We can’t lead the way."

And then we followed up with them several times over the years, and they’re completely transformed and they’re working very closely with science-based targets on creating a framework that they think is really well suited to steel companies because they didn’t like the original framework. They have a net zero target for their European assets for 2030. They have Climate Action 100 benchmarking process. That like we’ve come an incredibly long way. They have a few net zero plants already happening. I mean like — so I think, stee l, the reason I bring it up in response to your question is definitely one of those sectors, those kind of hard to abate sectors that I think everyone sort of thought would be a problem forever when we first started having these conversations on climate maybe four or five years ago.

So I take that one because within the space of two years, that conversation has been absolutely transformed and that there are still problems. I’m not saying that there aren’t still hard-to abate sectors. And there are certain sectors that still don’t have a pathway. But I do think that we’ve come a very, very long way in a very short amount of time. And I also think that that creates some possibility for differentiation in some assets that have historically not been able to differentiate.

Vish Hindocha: That’s really interesting, and interesting to think about their journey over a relatively short period of time to get to that space. What would change your view of that stock now, now that they are where they are? What is left in terms of that engagement that you want to have happened on climate change in their future?

AC Farstad: I mean, there’s a lot left because they don’t have net zero plans for their non-European assets and there’s still a lot of work to be done. But I think what was notable about that engagement was that they were very willing to engage with Climate Action 100 Plus with investors. This was a company that absolutely wanted to change and that saw it as completely essential to their future. So I think I’d put it slightly differently, if you don’t mind, Vish. I think I would say that their willingness to engage meant that they remained investible because — and then you still have all sorts of risks and valuations and things, obviously if the stock got to be expensive, I may divest from it. That’s the nature of my strategy and also the nature of that sort of an asset. But I think what’s important there is -  had we had continued interactions with them in which they sort of kicked the can down the road.

I think it would’ve been difficult to have faith that the company management really knew what they were doing, frankly, because the environmental liabilities could be absolutely enormous. And so in terms of thinking about managing downside risks for clients, you can’t really put client money to work with companies who are taking the ostrich approach to risks in exactly the same way that you want them to have audited and respectable accounts. This is just something companies need to do in order to be allowed to continue to do business. And obviously if they’re not going to be allowed to continue to do the business, then we shouldn’t put our clients’ money there. So there’s still a number of different things that could mean that the stock goes one way or another way and our investment goes one way or another way. And as I said, climate is just one risk that this company faces. It’s obviously enormously economically cyclical. It’s a commodity product. I mean, there are huge unknowns with steel stocks in general, but at least it’s investible, which it may not have been had it not done this work.

Vish Hindocha: Yeah, no, totally understood. I think that sometimes the subtlety or nuance that gets lost a little bit in my experience people think that they’re sort of good and bad. And that that’s where the story ends, but actually being open to it and understanding the appetite or the awareness and the ability to engage with difficult topics is often such a good indicator of whether a management company is going to opt for the challenge that we will have ahead of us. Sticking with climate.

AC Farstad: Can I just follow up on that?

Vish Hindocha: Sure.

AC Farstad: What you just said there, because this is something that I end up talking to clients about a lot. And I say, look, with a strategy like Contrarian Value that can go anywhere, that can buy anything, that is tilted towards is sometimes tilted. Certainly in March 2020 it was tilted towards capital intensive and by definition kind of polluting value-type assets. We have the potential to engage with these companies and drive a change in real world emissions. And we wouldn’t have that potential if we didn’t own those assets, if we simply divested of anything that had carbon intensity above X, Y, Z, we wouldn’t be having those conversations. And so I do think that was an important part of, if you look at the climate working group at MFS, I’m lucky enough to co-chair that with Nicole who obviously, you know very well, Vish. Nicole runs Transformational Capital, which is a strategy that’s really geared towards, I mean, as the name suggests…

And I run a strategy that’s very different to that. And it’s a very deliberate move, I think, to have us working together because she brings an enormous amount of expertise in the field of climate more generally. But I’m the one who’s meeting with the miners, some of the industrial — some of those more difficult companies that wouldn’t fit her mandate. So I think I strongly believe that there isn’t good and bad per se but that you have to engage with these companies. And I know that’s very much the road that MFS has been going down, but I feel certain that a pure investment strategy will not result in better outcomes either for clients or for our planet.

Vish Hindocha: Yeah. On-the-road economy now. Absolutely. Totally agree. And maybe then the climate working group, which we’ve referenced a couple of times, I’d love to know anything that you think of in terms of sort of key pieces of work or stake to the ground or actually how that’s benefited you as a member and co-chair of that group. But in your day-to-day kind of responsibility, what are some of the things that that group has been able to bring to the global research platform at MFS?

AC Farstad : Well, so in terms of the climate working group, it’s mostly made up of members of the investment team. I think you are also on it, Vish, and we’ve got a few other people.

Vish Hindocha: I am, yes.

AC Farstad: And the climate working group is really there to try and advance our work, the integration of climate work into the global research platform. So it’s really been about doing “the work.” What does that look like supporting the analysts as they do the work, and really at the beginning of the journey that’s been helping specific sectors do the work. So staples did a lot of work on plastics, for example. Industrials did a lot of work and did specific kind of sustainability road shows with their companies and really kind of trying to deepen the work that we all do on climate. And then obviously it also involves things like writing the MFS climate manifesto, sending out a letter to our 700 biggest holdings and emitters sort of setting out our stall on climate saying, “This is what our approach was going to be.”

And it’s been enormously rewarding I think, because I think the kind of work we are all doing has changed very dramatically in the last few years. I mean, we’re on a journey of course, and I wouldn’t argue for one second that we’ve arrived at any sort of destination, but I’m seeing really good, fundamentally driven bottom up work in the climate space, which is really exciting. And it’s exciting to be a part of that. And just from a personal perspective, there’s something quite nebulous about being a portfolio manager. What’s wonderful about the climate group and about the work that we’ve been doing is that it feels like you’re part of building something as well, which I think when you build something, that’s kind of assets based, it’s nice to see something more tangible and to see the result of it in meetings and in notes. And it’s been personally rewarding as well. I’ve really loved it.

Vish Hindocha: Yeah. Likewise, like you said, I’m lucky to be a member of the group. It’s been fascinating and a huge learning experience, just the conversations we’ve had around things like CA 100 Plus, the climate manifesto, but even the carbon offset market and the kind of vagaries that are there in both supply/ demand and the exchange mechanisms in between. Really, really fascinating and really exciting to see how it sort of permeates across the platform and see the bottom-up work happening. AC in those calls, you and I recently met with a group from the PRI, in fact, the inevitable policy response. And I thought you asked a great question to the presenter, which I’m going to turn the tables on you now and ask you.

Vish Hindocha: So you asked about where they perceive the greatest area of either misunderstood or mispriced risk and opportunity to be in the landscape as they evaluate things. What about you? So thinking about that fundamental bottom-up perspective and the work that you’re doing bottom up, like, what excites you right now, either as a contrarian or not, but observing the kind of climate space or talking to the companies that you’re talking to?

AC Farstad: It’s a good question. And I think the truth is — and this really came out of the meeting we have with PRI as well — is that we are still missing a lot of the data that allows us to really assess climate risk at the company level, at the portfolio level, at the global level, frankly. Even, I mean, one of the things we discussed in that particular meeting was natural capital where we don’t know how much carbon we can store in soils. We don’t know how much carbon we can store in blue carbon. There are a lot of areas that still need a lot of research. And even once they’re researched, it will take a while for that data to percolate into a system that we are able to use. The data’s come in leaps and bounds in the last two years, getting a lot of climate data on Bloomberg and everything else.

But a lot of the emissions data that we get is still very backward looking, which makes it difficult to assess. If we asked portfolio managers to assess companies on earnings from 18 months ago, it would make for a slightly odd discussion and particularly with environmental data, I think we still don’t have everything we need. As a contrarian investor, I think a lot about capital cycles. I tend — one of my obsessions is therefore “avoiding bubbles.” And so you look at areas that a lot of fresh capital is going into, and logic dictates that over time the returns will be very high and that’s what attracts all the capital, but that the returns will fall over time. And so that mindset makes it much more difficult for me to invest in the kind of sexy momentum of certain environmental categories.

So for example, I’m more wary when it comes to looking at renewable stocks, for example, because of the multiple and because of the amount of capital that’s flowing in. Every European oil and gas business wants to become a renewables business. And my guess is — I don’t know the exact time frame— but my feeling is that that won’t be good for returns over time. I’m sure there are plenty of people at MFS who take the other side of that debate. So one of the things I notice particularly is that there are certain areas of so-called ESG-friendly stocks that look extremely expensive to me now and that I would be cautious about. And that, again, brings me back to outcomes for clients from divestment because if we’re trying to drive changes in the real world economy, if we’re trying to drive, for example, a fall in real-world emissions, I think we can do a better job for clients and for the world by engaging with a broader range of companies and some of the companies that don’t necessarily look good at the outset, but to try to drive for positive change.

And as a contrarian, I’m always going to be fishing in those pools rather than the all clean, all shiny, all bright and glowing, the halo, fully sparkling in the sunlight. That’s not where I hunt.

Vish Hindocha: I think such an important message to deliver. AC, I’m conscious of time, really grateful for the time you spent with us. So I’m going to ask you a couple of questions just to end, just to kind of bring this back a little bit more to you. I’d like to know if there’s a book or article or a piece of literature that you have shared or recommended to your friends or your colleagues the most.

AC Farstad: So I’m a big reader of nonfiction. And I’m trying to think probably the book that I have recommended the most over the last 20 years, and weirdly, I think Barnaby may have originally given me, my first copy, is Albert Speer. It’s a biography of Albert Speer and I think it’s called His Search for Truth. And it’s a very — it’s by Gitta Sereny, and it’s an incredible account of, well— I suppose we’ve all asked ourselves, how could the Holocaust have happened? Like, how could this horror, how could so many people have sort of allowed it? Why didn’t people rise up? And I think that’s the best book I’ve ever read that goes some way to trying to explain that. Can’t be explained, but it’s an interesting exposition of it.

AC Farstad: And on a similar note, I also really love Stasiland by Anna Funder on East Germany. And I also love Nothing to Envy by Barbara Demick on North Korea. I’m quite drawn to books about these very, very difficult places to live in. And actually, very recently, I was amazed to hear from our new head of stewardship, who obviously grew up in East Germany and whose family lived through Stasiland really. So I know those are three wonderful books that I would recommend to anyone.

Vish Hindocha: Excellent. The one from North Korea is not one that I’ve come across before, but that’s been added to the list. Thank you for that. What is the kindest thing that anyone has ever done for you?

AC Farstad : I mean, I think in a work context, the kindest thing that anyone’s ever done for me is give me some really difficult feedback. I think it’s very easy at work in particular, but I think actually at home as well to sort of retreat from a conflict or to allow someone to continue in a particular vein without doing anything about it. And I think it really takes enormous kindness and guts frankly, to say, look, I think you would do better if you didn’t do X, Y, Z. And I’ve been lucky enough that I’ve had a few wonderful mentors at MFS who’ve always been really, really honest with me and that’s allowed me to get better, I think.

Vish Hindocha: That really resonates. Thanks.

AC Farstad: Tough love, tough love.

Vish Hindocha: Yeah, absolutely. And so outside of MFS then maybe just a last question before we close. Anything else that you sort of devote your time to? What do you do when you’re not thinking about taking a contrarian stance on stocks or climate change and its impact on the economy? What do you do AC outside of MFS?

AC Farstad: So I have three children and I’m married and I’d say we spent a lot of time in nature. So in a way the climate change stuff is probably quite closely aligned to the things that I love most in the world, whether it’s kind of oceans or soils or forests. So I think that’s probably where I spend most of my time when I’m not in the office. I like being outside and in nature with my family or reading books about weird dictatorships.

Vish Hindocha : Great crisis of humanity.

AC Farstad: I’ve also, as anyone will tell you enormously greedy. I love to eat. And so I spend quite a lot of time thinking and planning delicious meals. That is really what I love to do as well. I love feeding people as well.

Vish Hindocha: I have to say your recommendations on ice cream have gone down exceptionally well in my household. Yeah, absolutely.

AC Farstad : Gelato Amazing. I had to share it with you guys as soon as I had it.

Vish Hindocha: Thanks. AC, very last thing. Is there anything that you would like to leave the audience with as a result of this conversation? Anything that you would want to share with them, for them to keep in mind as we move through this kind of very complex series of topics?

AC Farstad: Value investing is not dead. That would really be the thing. I mean, I find myself, it’s amazing how often I’m told in meetings that value investing is dead. And I disagree for so many reasons. We need a whole other podcast, Vish-

Vish Hindocha : Yeah, let’s do.

AC Farstad: ... on why I disagree, but I think that’s a really important thing because as a contrarian, I see a lot of consensus in how people are positioned. And it’s not just that I’m willing to take the other side, it’s that I really, really believe that being diversified and having some value in your portfolios is going to be crucial for the next regime. That’s my plug.

Vish Hindocha : Great. Thank you so much.

AC Farstad: Not a very spiritual ending to your podcast, Vish.

Vish Hindocha: But no, I like it. I like it a lot. Thank you so much, AC, really, really appreciate your time with us today. And to the audience, thank you for listening. And next time, given how big a topic climate is, I think we’re going to ask Nicole to come on to give us the other side of the climate change working group and the halo effect from her portfolios. So thank you so much, AC and everyone at home for listening.

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