Through the prism: how investigative journalists can enhance equity research

In 2011 and 2012, Robert Berner made several trips to China with the aim of gaining insights into the soaring Chinese housing market, which was driving the overall economy at the time. On his first trip, Robert found a translator who took him to see a housing riot in downtown Shanghai. Buyers who had paid large deposits for condominiums in a development of residential towers a year earlier had broken into the sales office. The door was smashed, glass shattered everywhere, and models of the project were destroyed. It turned out that the developer had run out of money before finishing the project. That was the first red flag.

The next stop was a visit to the translator’s brother, who was an unofficial moneylender. Robert met with him and 12 other lenders – effectively loan sharks. Their customers were small and medium-sized businesses that were forced to resort to moneylenders that charged inflated rates because they could not access funding from banks as real estate developers and other state-owned enterprises (SOEs) were soaking up most of the banks’ liquidity. That was a second red flag.

Over the course of his extensive travel throughout China – on one occasion clocking 2,500 miles and 15 cities – Robert developed numerous other sources among manufacturers, academics, and economists. Through meetings with an economist for the People’s Liberation Army, the military wing of the Chinese Communist Party, Robert learned that many small businesses and SOEs were investing in real estate rather than their core businesses – and many were defaulting on their loans. That was a third red flag.

By 2012, long before Evergrande’s collapse and news about it had reached the international press, we were questioning China’s real estate market. We heeded early warning signs and, as a result, we were more cautious about investing in China.

One of Quality Growth’s long-standing portfolio holdings is French-based Teleperformance², with global operations that deliver advanced digital business services to its clients. It is the largest employer in Colombia, with 40,000 people operating call centers for large airlines, retailers, and financial companies. Teleperformance’s work for tech companies in content moderation was one of the most controversial parts of its business.

Content moderators are frontline workers that digitally scrape elicit content before it is published on the web. A November 2022 article in Time magazine³ raised serious questions about working practices for those individuals at Teleperformance’s Colombia operation. Claims of intolerable conditions went viral when Colombia’s Deputy Minister of Labor retweeted the story.

In its defense, Teleperformance invited investors to Bogota, Colombia to see its facilities. Mara Der Hovanesian made the trip on behalf of Vontobel. ESG Analyst Marci Richburg accompanied Mara on the trip. The ESG-related goal was to investigate the issues from a human and labor rights standpoint and determine the magnitude and weight of any proven claims.

Before and during her visit to Colombia, Mara spoke with labor economists and historians, the U.S. State Department, Columbia’s Deputy Minister of Labor who had made that tweet, and others. She discovered workplace issues running much deeper than content moderation after speaking locally with three union groups. In fact, the government was inundated with complaints about pay and surveillance. Further, the political situation in Colombia was highly strained, with ongoing tensions between the new left-wing government, right-wing paramilitaries, and union agitators.

While other buy-side and sell-side analysts who visited Colombia were receptive to Teleperformance’s message, what Mara saw struck her as a carefully staged exercise where analysts met content moderators who had been pre-selected for the meetings. She had concerns about the contradictions between what she saw with the company and the situation on the ground.

Armed with firsthand knowledge from the Colombian government and other well-placed sources, we formed an opinion about management creditability and concluded that even if the antagonism between Teleperformance and the union was solved, content moderation issues in other countries and discord with corporate technology customers would continue. This led to our decision to exit the position and the stock price subsequently fell by some 50 percent.

When assessing Schneider Electric, a French-based global manufacturer of low and medium-voltage equipment, Vontobel’s industrial analyst initially viewed the company as not worthy of investment. However, over the past few years, Schneider’s growth accelerated from three percent to eight percent, it became less reliant on mergers and acquisitions, and its business became less cyclical because it reduced exposure to residential construction and became more focused on software. Schneider had become a major provider of equipment and technology for data centers, a fast-growing segment driven by cloud adoption and artificial intelligence, and it warranted closer investigation.

At the request of the portfolio manager, our investigative analyst Robert Berner contacted executives at major data center operators and engineering firms to understand Schneider's competitive position. He discovered that, with a long track record in the industry and a reputation for delivering quality products, Schneider’s biggest advantage was trust. Schneider’s key products were transformers, interruptible power supplies, switches, and panels – in short, mission-critical equipment for data centers. If these pieces fail, the data center shuts down, and Robert found that Schneider was not prone to failures.

In a booming market for data centers, developers can wait up to two years for essential power equipment. Schneider had a reputation for delivering on time. It constructed an assembly facility at the site of a client’s hyperscale data center to ensure even faster delivery. Robert painted a picture of a highly regarded manufacturer in a space that makes up over 50 percent of company sales.

What about the sustainability of end demand? Robert learned that, particularly because of AI, data generation was far outpacing capacity. Not one industry executive anticipated a slowdown in data center construction during this decade. In addition, data centers were struggling to access electricity from the grid and had to wait for new power infrastructure to be built. This slowed data center construction and stretched the demand curve out even further into the future.

Our investigative analyst not only confirmed that Schneider was a strong player, but it also had visible and strong long-run potential, which helped turn an interesting investment case into a compelling one.

Zhangzhou Pientzehuang Pharmaceutical is a well-known traditional Chinese medicine (TCM) company with a proprietary formula for treating liver disease, pro-inflammatory conditions, and cancer in China for hundreds of years. The company enjoys access to a rare ingredient – natural deer musk – that is sanctioned by the state. Deer musk is almost impossible to acquire in the open market and the company has the pricing power to pass on the increasing cost of musk to its consumers, whose demands for premium and branded TCM have grown exponentially in recent years. With a trusted and highly valued product, it is an attractive high-margin business with above-average return on equity. It therefore seemed like a high-quality business.

Concerned with the legitimacy and sustainability of the procurement of natural musk, our investigative analyst Zhen Li spoke with a TCM industry professional, a government official, a wildlife conservation NGO, an environmental lawyer, and some deer musk breeders to check the integrity of Pientzehuang’s supply chain and to understand how the musk trade is regulated.

The government banned the harvesting of musk in 2002, introduced a ration system, and started a breeding program that would become the only legal source of musk. However, poaching of wild musk deer, an animal on the brink of extinction, still exists.

We had reasonable suspicion that some illegally harvested musk has made its way into Pientzehuang’s supply chain due to regulatory and enforcement loopholes.

We did not have high conviction that musk from deer breeding farms would fully meet the fast-growing market demands. The company would face considerable supply constraints when old musk inventory is depleted, and poaching activities are further curtailed. We decided not to invest in the company.