Journal of Political Risk, Vol.9, No. 11, November 2021
This JPR interview with Perth Tolle, founder of Life + Liberty Indexes and creator of the Freedom 100 EM Index, was conducted via email between 14 September 2021 and the 25 November 2021.
Corr: Can you please explain what your ETF is for those who have no financial experience?
Tolle: An ETF, or exchange traded fund, is a tradable basket of securities, similar to a mutual fund. But unlike mutual funds, ETFs trade on exchanges, and are known for their transparency, tax efficiency, and lower cost.
Most ETFs track an index. And most indexes are market capitalization weighted – where the biggest companies, and countries, by their market capitalization, get the biggest allocations in the index.
There are three main categories of country classifications for global stocks – developed markets (DM), emerging markets (EM) and frontier markets (FM).
Due to the nature of emerging markets and market capitalization weighting, emerging markets indexes and funds tend to have high allocations (40%+) to the world’s worst autocracies. China alone has a 35% weight in most emerging markets indexes, a drop from 45% at its height about a year ago. This distorted over-concentration exposes investors to the tail risks inherent in unfree markets. (extreme government intrusion into private markets, murky accounting, opaque ownership and entity structures, having to put state interests above interests of shareholders, etc).
We created the freedom 100 EM index strategy (ticker: FRDM index) as an alternative solution for investors who believe in the long term benefits of freedom, and want their EM allocations to reflect that. It’s a way to capture growth potential in the freest emerging markets, while excluding the worst human rights offenders like China, Russia, and Saudi Arabia.
Due to having much more favorable valuations than developed markets, especially the US, emerging markets are an important piece of a diversified portfolio. The FRDM index provides a way to invest in emerging markets without directing capital to autocracies.
We use independent third-party quantitative freedom metrics as primary factors in the investment process.
Corr: What precipitated your decision to start the freedom 100 EM index strategy?
Tolle: I started the fund after my personal experience and observations in China and Hong Kong. After growing up in both China and the US, and living in Hong Kong after college, I saw the difference freedom made in my life and its impact on markets. The One Child Policy had the most profound impact on me, for the way it changed the culture of my generation and contributed to what is now the worst demographic crisis in the world. And I realized that policies and governance matters for the social and economic future of a country.
Also, working at Fidelity as a financial advisor, I had clients from Russia, Saudi Arabia, etc, who did not want to invest in their home countries for the same reasons of lack of freedom. My Russian client told me that investing in Russia would be like “funding terrorism.” Similarly, I didn’t want to fund the atrocities being committed by the governments of China, Saudi Arabia, or any other autocracies. So I created the FRDM index and ETF for other emerging markets investors who feel the same way. It’s a way to capture the growth potential of emerging markets by directing investments toward the freer countries.
Corr: Have you seen a change in investor interest this year as some of China’s equities collapsed under regulatory risk?
Tolle: We’ve seen a surge in investor interest this year, doubling our assets under management in the few months after the Chinese government cracked down on its tech and education sectors. I think investors realized that the risk of the government wiping out future profits overnight is one that breaks the discount model. We excluded China for the precise reason these sectors imploded this year, extreme government intrusion into private market activity. We use economic freedom metrics like size of government and private property rights, as well as personal freedom metrics like disappearances and detainments – all relevant factors in China investing these days.
We prefer to invest in markets with less government interference into private markets and private lives, where people and companies can be free to pursue their own and shareholder interests. There are a lot freer emerging markets out there, and those are the countries that have the conditions in place to be the launchpads for growth in the next decade.
Anders Corr, Ph.D., is the publisher of the Journal of Political Risk, the author of The Concentration of Power: Institutionalization, Hierarchy & Hegemony (Optimum Publishing International, 2021), No Trespassing: Squatting, Rent Strikes, and Land Struggles Worldwide (South End Press, 1999), and editor of Great Powers, Grand Strategies: The New Game in the South China Sea (U.S. Naval Institute Press, 2018).