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Emerging Market Investing with Perth Tolle

7investing advisor Matt Cochrane interviews Perth Tolle, the founder of Life and Liberty Indexes, on how to invest internationally.

February 28, 2023 – By Simon Erickson

It’s relatively easy to argue that some type of exposure to emerging markets belongs in most U.S. investor portfolios. Emerging markets represent about 4.3 billion people, 50% of the global GDP, but only a relatively small percentage of global equities’ market cap. Emerging markets are usually defined as a country with a developing economy that shares some, but not all, characteristics with a developed economy. 

To discuss emerging markets more, 7investing lead advisor Matthew Cochrane welcomed Perth Tolle, the founder of Life and Liberty Indexes, to 7investing’s podcast. 

The two coincidentally talked on February 24, 2023, the first anniversary of the Russian invasion of Ukraine. As the conflict began, U.S. investors were forced to quickly confront the geopolitical risks of investing in emerging markets as Russian equities were removed from the emerging market indices at $0. 

Investors in Tolle’s Freedom 100 Emerging Markets ETF (CBOE:FRDM) didn’t face this problem as the ETF had no exposure to Russian securities. The ETF is a freedom-weighted equity strategy that uses personal and economic freedom metrics as primary factors in its investment process. This means it doesn’t have heavy exposure to countries such as China or Russia, markets that traditionally hold larger allocations in emerging market funds. 

Tolle and Cochrane discuss that even as China’s GDP growth has exploded in recent decades, shareholders in Chinese equities have managed to capture very little of that wealth. With China’s government in virtually total control of its economy, it can change laws and regulations on a dime. It will often dictate new rules for businesses as it deems fit. This environment makes it very difficult for shareholders to recognize any profits. 

Tolle and Cochrane also discuss emerging markets that enjoy economic and personal freedoms, such as Chile, South Korea, and Taiwan. Exposure to Chilean markets, for instance, rarely rises above 1% allocations in most emerging market funds. The Freedom ETF enjoys a double-digit allocation that has tremendously boosted FRDM’s returns compared to the emerging market index, contributing to Freedom’s relative out-performance. 


Matt Cochrane  01:07

Greetings, fellow investors. I’m Matthew Cochrane, a lead advisor at 7investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone, listeners. Today. I am very excited to introduce Perth toll and welcome her back to the show. Perth is the founder of life and liberty indexes. It is the home of the freedom 100 emerging markets ETF ticker F RDM. A first of its kind strategy that uses personal and economic freedom metrics as factors in its investment process, Perth with a private wealth advisor at Fidelity Investments in Los Angeles in Houston. Prior to Fidelity Perth lived and worked in Beijing and Hong Kong, where her observations led her to explore the relationship between freedom and the markets. We had Perth on the show a little more than a year ago. And since that interview, I believe her strategy has only been validated more. We’re gonna get into that I can’t wait to talk to her again. So let’s get to it. Perth. Welcome to the show.


Perth Tolle  02:18

Thanks for having me, Matt. It’s great to be back.


Matt Cochrane  02:20

Of course, Perth, let’s just start with this. We are not sure when this show is going to come out. But we’re recording on February 24 2023. Do you know what? Do you know what this is? The anniversary of?


Perth Tolle  02:34

Of course. So it’s the anniversary of Russia invading Ukraine last year?


Matt Cochrane  02:39

That’s correct. So one year ago, today is the day that Russia invaded Ukraine. And while that certainly came with many concerns and global concerns for the world, in a horrible human tragedies, one, you know, downstream effect of it was that in the preceding weeks following that, there were a lot of emerging market ETFs that were exposed to Russia. And they had a lot of headaches with this. I mean, these are just clips of headlines that appeared in the weeks following the invasion if you’re watching on YouTube, if you’re just listening on the podcast, but like, you know, just reading some of the headlines, emerging markets ETFs are in uncharted waters with Russian stock trading on pause, your portfolio might be more exposed to Russia than you’d like Wall Street fund giants face headache as indexes dumped Russia and then of course, you know about a month after the invasion you know, we had the the the headline emerging market ETF suite from net asset values as Russian securities valued at zero which basically was MSCI is decision to remove Russian securities from its emerging market indexes at a price of 0%. You run in emerging markets ETF did you have these problems with your ETF?


Perth Tolle  03:58

We did not we did not have any exposure to Russia, China or other autocracies that are heavily exposed in the emerging markets, indexes that you’re talking about. So we were fortunate in that we never were exposed to those countries.


Matt Cochrane  04:15

Now, but so. So why don’t you tell us why that is? Why don’t you have exposure to Russia? Because, you know, I think it was about a three to 4% You know, in emerging market index, like, you know, 3%, three to 4% of that was exposed to Russia.


Perth Tolle  04:33

Yeah. And that’s, that’s a crazy situation that happened. And you know, a lot of people, you know, so so, you know, didn’t see it coming. But autocracy risk is real, and it was always there. People I think, just chose to ignore it, because most of us that work on Wall Street are in you know, financial centers in the world, such as New York, London, Hong Kong, places that maybe aren’t as exposed to The risks that everyday people experience in emerging markets especially so the emerging markets universe is just full of autocracies. It’s by nature. Companies, I mean countries that are either autocracies or coming out of autocracies. There’s a huge divergence in freedom levels in the emerging market countries had the very free countries like Taiwan, South Korea, Chile, Poland, and they had the very unfree countries like China, Russia, Saudi Arabia, Egypt, Turkey, so forth. So it’s just a huge divergence and freedom levels. So when I was an advisor at Fidelity, I had a lot of clients that wanted to invest in China, but didn’t know you know, what was actually going on on the ground there. Kind of just blindly went in. And then I have a lot of clients who came from these other countries. For example, I had a Russian client, who said to me, I don’t want any exposure to Russia, because it’s like funding terrorism. And look how prescient that is now, in light of today, and in fact, it’s funny that you bring this up, because today, you know, even now, a lot of funds, I think a moody in Europe just delisted some of their Russian ETF so we’re still dealing with the repercussions of this in the ETF space around the world. And so what we wanted to do is create a way for investors to get emerging markets exposure abroad, emerging markets, diversified exposure without those autocracies, but also to give them a higher exposure to the Freer countries, because we believe that the Freer markets will outperform in the long run because they have, you know, more sustainable growth instead of debt driven state mandated growth. They have faster recoveries from drawdowns, and we got to see that in live performance in the second half of 2020, where the Freer emerging markets outperformed, you know, broad emerging markets that outperformed emerging markets ESG. And it outperformed even emerging markets X China. So it’s not just a China story. And the Freer markets, they tend to allocate their capital more efficiently. So it’s not one central planner telling you how to allocate capital, it’s actually people on the ground, you know, deciding how best to add value. And so we believe that the Freer markets will in the long run outperform and we don’t want to fund autocracies. So what we did is instead of market capitalization weighting, which is the standard weighting mechanism, in indexes, and in the emerging markets gives you a very high autocracy concentration. So instead of that we do freedom weighting. And we wait according to a country’s level of freedom. So we look at both personal and economic freedoms. And we get these data from third party think tanks like the Cato Institute in the Fraser Institute.


Matt Cochrane  07:47

So we’re gonna pick up on that threat in a minute. But I wanted to start our conversation there by highlighting the longtail risks that maybe some investors overlook, since we’ve basically lived in a time of relative peace and prosperity. You know, in in our US bubble, especially for US investors, where we’re just so used to the rule of law and the protection that gives us we might forget that not the whole world enjoys freedom like we do in the US. But I do want to pivot here. And let’s let’s just go back a little bit. Let’s start at more a basic level. When we talk about an emerging market, what are we talking about? Exactly? What what are we talking about when we say emerging markets? What is an emerging market?


Perth Tolle  08:33

Yeah, so an emerging market is typically a less developed kind of think about third world country. Again, we don’t we don’t determine these classifications. The country classifications in the indexing world is determined by the big indexers like MSCI and footsie mostly MSCI so 95% of the world’s institutions benchmark to MSCI indices, and so MSCI has country classifications for each country. There’s three main types of country classifications for international stocks, there’s developed markets, and that’s your bigger markets like UK, US, you know, Canada, Japan, Germany, and so forth. So those are countries that are all very developed have very open capital accounts, very open trade, movement of people and capital, across borders, and so forth. So very reliable banking systems. So it’s the countries that are already pretty free. So if we do freedom, waiting and develop markets, that would add very little value because all of those, those countries are very free and homogenous in their freedom levels. And then you have the emerging markets. So emerging markets are countries like China, Russia, Saudi Arabia, Brazil. I think people used to use the BRIC acronym for this, which the BRICS acronym is pretty much dead at this point. There was like no, no cohesive commonality between those countries, except that they were all coming from a very low base. And then there’s some very free emerging markets, which Some would argue should be developed like Taiwan, South Korea. So those are what are classified as emerging markets. So they’re smaller than developed markets. And there’s some of them are, they’re not as open, they’re not as easy to move capital across borders, you know, they’re not as they don’t have strong institutions and so forth. So, so those are emerging. And then you have the frontier markets, which are even smaller than the emerging markets. And these are countries like Kuwait, Vietnam, those are some unfree ones, some very free ones are like Estonia, Latvia, Lithuania, Uruguay, and so forth. So those are frontier markets. So we are focusing on the emerging market space, which is the middle of the three that I just mentioned. And because this is a very large allocation, and a lot of investors portfolios, and there is such a high divergence in the freedom levels between these countries.


Matt Cochrane  10:54

This is a result of some quick googling. But like I believe, like emerging markets, the population of emerging markets, about 4.3 billion, which is more than 50% of the global population, it’s about 50% of the global GDP. The last decade, I think it’s the result of 66% of global GDP growth. But it’s only equities. And these countries only represent about 15% of the world’s like securities market cap. Yeah, US investors, like ignore these markets too much in at their peril.


Perth Tolle  11:30

Yeah, those are some great stats that you just Google there. Um, so. So I think this is something that, you know, our friends, Rob Arnott and med Faber have always said, is that we are under allocated to emerging markets, given their contribution to world GDP, given their population growth. And we’re talking about the ones that do have favorable population growth, there are some very large emerging markets like China that have very unfavorable population situations. But given all of that, it is an under allocated asset class, according to, you know, if you if you match up those stats that you just mentioned, to the actual allocations that we give them, but yeah, most most US investors I know have between like 12 and 20%, in the emerging market space,


Matt Cochrane  12:18

that we we started off our conversation, let’s like pick it up where we left off, hopefully, but like, you talked about how the freedom ETF differs from other emerging market ETFs. But is this like, Is this is this a moral cause Perth or is there like, you know, will this have a negative impact on investors returns?


Perth Tolle  12:39

Yeah, so we have the fortunate situation right now of having almost four years of live ETF history live fund history to look back on. And then even longer than that for live index history. So when we see in during that time is extremely Stark outperformance by the Freer emerging market set of countries to to the broad benchmarks. So yeah, as you’re showing here, there’s, there’s a 20% or you know, yeah, 20%. Yeah. performance gap again. Yes. That’s great to see, you know, what we like to be is a scorecard for the for your countries. Now, I want to I want to caution here, your investors do not expect this every year, there are going to be times when, for example, China is 35% of em the other fund that you’re showing here, which is the the benchmark for our fund, and when China outperforms, because it’s 35% of that fund and 0% in our fund, it will we will underperform if that happens, and you saw in the beginning of 2020, that that is exactly what happened. So there are if you zoom in on that periods of underperformance, but if you look at the instance Inception history, it is a very stark outperformance story for the emerging markets that are more free. And I think that makes sense. But also it’s dark because of all the extreme events we saw in the last few years COVID The war. This is not something that we would expect every year, although there’s always something in emerging markets.


Matt Cochrane  14:21

Probably accurate, you know, and even more so. So we can talk about your ETFs outperformance which is, like I just said, I believe that is fairly significant performance. But even more than this, and we talked about this the same chart last year. And it just it It blows me away. I don’t know how you can deny this. But when you look at a country like China, which has, by all definitions experienced economic growth the last few decades, where their economic growth has exploded. And yet when you look at shareholder returns over that time It doesn’t even come close to matching that. Like to you, I guess, let me just put the question to you. Why, why why? Why is that? Like, why can’t shareholders capture any of this economic growth?


Perth Tolle  15:14

Yeah, so this chart is extremely is an extremely good illustration. And China’s always exhibit A, of what we’re talking about. Because this, you saw a, like you said, very real growth in the last three or four decades in China. I mean, people lifted themselves up out of poverty after the, you know, artificial restraints under mal were removed. So we went from in China went from extremely bad policies under malware, 10s of millions people died and famine to not so bad policies. And that incremental change in economic freedom, allowed this tremendous growth in the country and created this kind of economic miracle. But investors were not able to capture any of it. And you see that in emerging markets, especially emerging markets like China, because of expropriation, there’s, you know, the companies in China, the the ownership structures are very murky and non transparent, very opaque. Same thing with accounting standards, very opaque, very non transparent does not meet international standards. And you don’t really know when you invest in China, who that who that investment is benefiting. So, we are not sure you know, who all the owners of these Chinese companies are. So if you look up, you know, any Chinese company look up the ownership, you typically see only 60% of the owners. And so we don’t know where the other 40% is. And a lot of times, investments in these companies directly benefit, you know, party members, or people in favor with the government and their, you know, their friends and other people, their associates. So, one is we don’t know where the money goes, when we invest in a country that has very poor transparency and poor economic freedom. And the other is these companies in China, they are not free to put their own interests above that at the state. So companies that operate in a way that have to put state interests above the interests of say, their customers or their shareholders


Matt Cochrane  17:24

in that can change. And that can change at any time, too. Right? Yeah, I mean, like, the state can say, like, now these are our objectives, but then added a second notice, right? They can tell a videogame companies Oh, wait, you’re under this age, you can’t play video games, except for one hour a day. Or if you’re a Chinese educational company, you can’t charge the market rate of what you could charge for your


Perth Tolle  17:48

nonprofit now. Right? Right. So we saw that happen, just in the recent past, where companies were restricted from raising capital, they were restricted from conducting their core business activities. They are restricted from making profits. So this is this is a very poor way to capture growth. Because when any of those three things that we just mentioned happen, and they’ve all happened recently, the company’s value basically goes to zero. And it’s not recoverable until the government says, Okay, you can make profits again, or, you know, it, like you said, it is very capricious. And so that capricious government action risk, and the just the risk of you’re subsidizing companies that are doing business in this manner, which is there’s a cost of doing business this way. That causes that, you know, that returned to be siphoned off to state actors or other people who are not actually the foreign investors in these companies.


Matt Cochrane  18:45

Right, it’s like to say the least, like shareholder returns, is not. It’s not the Chinese government does not care about your shareholder returns.


Perth Tolle  18:55

Now, that’s something that we realized in the last couple of years. It’s not something that we knew before, I think, as an investor community.


Matt Cochrane  19:03

Yeah, no, I think that’s accurate. You know, sir, I’ll say this. It’s certainly something I’ve realized in the last couple of years where I did not realize it before. You know, and for those, I always forget to do this. But if you’re listening on the podcast, the chart showed China’s GDP growth was over the last few decades, basically 30 300% and the China the MSCI China index, had shown a total shareholder appreciation of 47% In that time, purse


Perth Tolle  19:35

which is which is about which is about 0% on annual between zero and 2%.


Matt Cochrane  19:42

It’s amazing, how paltry those returns are


Perth Tolle  19:46

literally worse than treasuries, really, really, really


Matt Cochrane  19:52

trying to be and there’s a lot we can talk about China, but like so China if, if you’re invested in like an MSc I index or another Emerging Market Index, China is like a huge part of those economic market indices, we’ve already indicated that their freedom ETF does not hold China. Like, how does China rank on the human and economic freedom scores?


Perth Tolle  20:14

pretty poorly, so I can look those up. But it’s somewhere around 150 out of 162, out of the emerging market, country set, it is almost the worst. So it’s like the only one that’s worse is Saudi Arabia. Yeah. So you have Saudi Arabia, the worst out of the 24 countries in emerging markets universe, and then China and then Russia, it’s actually Russia ranks higher. So. So it’s very bad. And that’s both personal and economic freedom. So there are countries in the emerging markets, countries that like, you know, like Saudi Arabia, Qatar, UAE, who rank higher on economic freedom, but very poor and personal freedom. So especially women’s freedoms, right, so So that’s, you know, one sided, but in China, it is two sided, like it ranks poorly across the board. And so, especially, I would say personal freedom, but but it’s just it’s very, very poor, personal and economic freedom on, we use a data set that has 83 variables that measure personal and economic freedoms. And I categorize them into three different categories, civil, political, and economic. So civil freedoms are things like terrorism, trafficking, torture, disappearances, women’s rights. So So China has 30 million missing women due to the one child policy. And that’s official Chinese Think Tank estimates, some out there have it as twice that, that’s not recoverable in my lifetime. So that’s a huge demographic time bomb that is starting to go off now exacerbated by COVID, and everything else that’s going on there. And that’s why they had the education companies say, you know, you have to be nonprofits now. Because the cost of raising a child is high. They’re trying to encourage people to have more children due to the lack of population growth due to largely the one child policy. And so, you know, reproductive freedom is a personal freedom, shareholder rights, or an economic freedom, and they’re trying to basically fix one by adjusting the other, you can’t do that, you know, freedoms are like parts of an automobile, you can’t fix the transmission by tearing out the steering wheel, it doesn’t work, right. So. So that’s what’s going on there. And so we look at all of these measures of freedom, you know, civil, we discuss political or things like freedom of speech, expression, media, assembly, civil procedure, criminal procedure, so on so forth, judicial independence, and then economic freedoms are things we’re more familiar with, like private property rights, rule of law, you know, contract enforcement, business practices and regulations, freedom to trade, internationally, soundness of the money supply. So all of these things added together, we’ll use the composite country score for each country to derive our country weights.


Matt Cochrane  23:04

Now, so I would say so economic freedom is it’s fairly obvious, right? Why that’s important to logistics, sticking to and investing. Like, mindset, like, obviously, economic freedom is important, but it might not be as obvious why personal freedom is important. Why are both together? Like needed? Why are both important?


Perth Tolle  23:29

So yeah, so you know, this is why my data providers say, you know, the freedoms are like parts of an automobile, you need every part of the automobile to work for it to run. Sorry. Oh, my gosh, sorry. Edit out this part with my cat. I’m gonna remove him here. Let me let me Oh, my God, let me remove the cat outside. He’s trying to sorry, you’re gonna have to edit that out. Hope you can do that.


Matt Cochrane  23:59

No problem. But yeah, so why? Why are personal freedoms as important as economic freedoms? Because I think it’s fairly obvious, right to investors, you know, in strictly speaking in, in terms of investor returns, that like economic freedoms are important. Why are personal freedoms important to shareholder returns?


Perth Tolle  24:22

Yeah, so personal freedoms are part of that rule of law and the, you know, environment in a country in which all US citizens dwells right. So, right to life, for example, if you don’t have life, you can’t produce economic returns. So that’s important. Women’s rights or if you have 30 million missing women in your country, or women who don’t have rights can’t get an education can Dr. Kim can’t, you know, go out of the country without permission Can’t you know participate in economic activity then that is half of your Basically citizenry that are not going to be productive on an economic standpoint. Things like contract enforcement and rule of law, criminal procedure, Civil Procedures, freedom of speech, media and expression, those things are important because if you don’t have freedom of, for example, freedom of the media, there is no independent verification on any of the data that comes out of companies or governments. Again, China is a shining example, if you don’t have, you know, the free media every year, the China’s China’s Chinese government say our GDP was 7%. Every year that happens, and no one contradicts it, if you contradict it, you’re disappeared, or, you know, so. So it’s, it’s extremely important for all of these types of freedoms, to work together to create an environment that incentivizes true productivity and growth. If you don’t have one kind of freedom, you essentially can’t use the other can’t be half free. Economic freedom. As he said, it’s also very important because I, you know, we’re in the kind of investing world where we care more about economic freedom, but I also work with activists, like our partners at the Human Rights Foundation, who just focus very little on economic freedom, and mostly focus on personal freedom, but I have to remind them, look, if you’re, if you don’t have the freedom to make a living, you know, this is how the Arab Spring started, right? If you don’t have the freedom to provide for your family, unless the government gives you that privilege, you have to be one of the favors view to be able to have you know, economic kind of permission to to provide for your family, then you don’t have freedom. If you depend on the on the government to tell you that you can have a job that you can have a fruit stand that you can participate in the economy, then then that is that is not freedom. So you’re not free, even though you can, you know, assemble or have freedom of religion or freedom of speech, you know, it all the freedoms have to work together, like the parts of an automobile, if you don’t have a steering wheel, but you have a transmission, the car still not gonna run.


Matt Cochrane  27:09

And not just, you know, you give examples of small business owners like fruit stands or restaurant or something like that. But like, in China, it was even like Jack mom, right? The founder of Alibaba, like, oh, you know, like, like a year ago, it was like, Oh, he disappeared in Oh, he’s under house around the roads? Where is Jack Ma? Is he still in control of his company? And, you know, you just have all these rumors come out. And he was, you know, in America, he would have been closer to being celebrated like an Elon Musk, or Jeff Bezos, exactly in China, like, you know, he was like he could seemingly be removed from the multibillion dollar company he founded like, at a moment’s notice.


Perth Tolle  27:53

Yeah, so no one is above the law. In China, you’ve had celebrities who are, you know, akin to like Nicole Kidman, like in China funding being was disappeared. And then, you know, hit with a, like, multi 100 million tax bill. So basically, she had to pay a bribe to get out of disappearance, and she just now recently, and that was like, maybe five or six years ago, and she just now recently did another movie for the first time. You know, right now balafon, who is the he’s a tech titan in China. He he was a he’s an investment banker who had his hand and every important tech deal in China in the last whatever, however many years, and everyone knows him, he is currently missing. So this is this is headlines right now. balafon is missing in China, and his company has been unable to reach him. Nobody knows where he is. So it’s like Jack Ma, before somebody before he resurfaced. Right. So that’s where a ball Fan is right now. I mean, this is insane. And, you know, there’s been reporting by ft that balafon was moving his fortune to Singapore, from China at the time of its disappearance. So he was already seeing the writing on the wall. He was trying to move out and they got him before he moved. I mean, it’s, it’s insane. disappearances, like this are one of our metrics. So no, you can’t conduct business in a way that is benefiting your shareholders. If you’re concerned about becoming disappeared, if you offend the government, right, so so so yeah, that’s, it’s it’s obvious when it happens, but before it happens, nobody even thinks of it as a possibility.


Matt Cochrane  29:41

Well, so when you when you remove a company like China from your ETF, you’re removing a company with several high profile companies, high profile tech companies, I mean, you’re talking about Alibaba 10. Cent jd.com. I mean, you’re probably gonna have like some of the some of the world’s biggest companies. I came, can you still have when you remove a country like that? Can you still have like sector diversity? Across a, you know, from the emerging markets? I know, at least from my, my, my limited knowledge that like, you know, merging markets, a lot of them are heavy in financials or natural resources, commodity type businesses energy. But can you still have sector diversity by removing a country like China?


Perth Tolle  30:29

Yeah, actually, you get better sector diversity with a freedom weighted approach, because the Freer countries tend to be the ones with more diversified industries, versus just relying on one natural resource, right? So Russia is like, I’m sure everyone’s heard. It’s like, a, like a military. It’s like a gas station with the military, or I forgot what the actual phrase was. But it’s something like that, where it’s just oil. And that’s it. And, you know, there’s no other industry, Saudi Arabia is very similar. But with the Freer markets, they have more diversification in their industries, and they’re not just bound to one natural resource, you have countries like Taiwan, with no natural resources. Right? Yet, if you look at a chart of Taiwan’s growth over China’s in the last decades, it’s five times the stock market growth, just looking at the stock market index. So you know, investors captured five times the growth in Taiwan versus China. And all everyone talked about in the last, you know, decade was was China. So yet, you know, as we saw on your chart, they captured no growth there. So, so yeah, you actually get better diversification. Now, we don’t have as many we do have a lot in tech, but the kind of tech is different. So we have a lot of semiconductors, right, so we have Taiwan Semiconductor, we have Samsung, we actually have to cap those companies because they take up such a large part of their economies in those countries. So we cap we have a security cap at 8%. So at the time of rebalance, they had an 8% weight in the index. And that’s their rebalance maximum repellents. Wait, so so so we do have a lot of kind of the semiconductor type of tech, and not so much the some of the, frankly, frothy or more bubbly names in the past couple of years. So that actually helped us. So we’ll see if it continues to help us. But you do actually get a very, very diversified industry set in a freer, freer, country exposure.


Matt Cochrane  32:42

Are there so we talked a lot about China and Russia? I think those are some of the more obvious names when you’re talking about countries that might score low on human and economic freedom scores. Are there any other countries that are left that, that our score particularly low end up? Investors might not be aware of?


Perth Tolle  33:03

Yeah, I think most people are aware of most of the countries that score low now, but Turkey is one that has had a lot of trouble lately, and, you know, a tragic situation with the earthquakes there recently. But they were the only country that has ever triggered our methodology rule that says, if a country falls more than five points on the Freedom House scale, then in any given year, then it is kicked out of the index, or excluded, even though it was previously included. So Turkey triggered that role in the 2018 rebalance. Because remember, the index existed since 2017. The fund existed since 2019, and 2018, Turkey triggered the freedom decline momentum rule, and was excluded, it has never made it back in and during that time, you see this huge decline. And that’s, that’s the catch these very quick declines and freedom levels, we found that when freedom increases, it happens very gradually. But when a decreases, it can happen very quickly. And so we want to catch that very fast decline before. You know, it’s like, we it’s like a stop loss. So basically, it triggered the roll in 2018 never made it back in and we’ve seen Turkey just continue to see extreme declines and their freedom levels from that point on. And we were able to sidestep that due to the freedom decline momentum rule.


Matt Cochrane  34:29

How often do you like in a situation like that? Let’s talk about Turkey. Like how how, how often are the rankings updated? Is it this an annual thing a quarterly thing or that like live in real time? You know, how quickly can you rebalance?


Perth Tolle  34:45

It is annual, so because we are using third party data by the Cato Institute and the Fraser Institute, they are also using third party data from 100 Think tanks in their freedom network around the world. So there’s two levels of third party objectivity. But that also causes this kind of you can’t it’s not real time, right? It is, it is an annual situation. And also, it’s slower than even some of the other data providers out there. So Freedom House, for example, is a little faster than Fraser and Cato, just because they’re not a transparent methodology. They’re kind of a black box where it’s the committee making these decisions. Also, they don’t, they don’t cover economic freedom. So it’s just political freedom, basically. And so we wanted a comprehensive data set that covers all freedoms, personal and economic, you know, the economic part being half of the metrics, so very important. So, so but to have this transparent methodology, it does cause a little delay in the data coming in. So it is annual, and so we rebalance annually. But what I have seen is that this, this works that way. So you know, it doesn’t have to be real time. And that was one of one of the concerns that was brought up to me. When I first created the index by colleagues in the you know, Freedom econometrician kind of community, and they were like, well, obviously, it’s not going to be real time. So you know, is that going to work because stock market reacts in real time. And what we found is that, it takes a couple of years actually, for policies to affect markets. And when you have an instant reaction, like with elections, it’s often priced wrong. So what we seen is that, for example, Poland, right, elected the pi s government around 2016. And they gained constitutional majority, and they rolled back some of the very important freedoms, like, constant in like a judicial independence and women’s freedoms. Over the the next several years, it coincided with the Trump years in the US. And the year before that happened, or as it was happening, we had a freedom meeting with a lot of these 100 think tanks, the Polish delegate was there. And he spoke to me, and he said, Hey, I know you have a lot of Poland in your index, I just want to tell you, we’re about to you like this kind of crazy, super extremist government. And they’re gonna, you know, do some crazy things. And it’s gonna be bad for you know, these freedom metrics, but it won’t show up in the market for several years. And it happened just as he said, 2016 2017 poll is till 2016, they come into power 2017, Poland is the top performing emerging market. And number one in our index 2018, they dropped to number four. And they’ve, they’ve remade it number number four since then. So it took a couple of years for these policies to show up in the markets and show up in the scores. And so that that has been the way that a lot of this has worked out. You know, we included Brazil a couple of years back, when India dropped out, Brazil got bumped up. Right. So it wasn’t Brazil score, you know, that changed, it was India, but anyway, it was they’re both very borderline countries and Brazil, you know, people were concerned about the changes there, you know, with the government as well, again, took a couple years for it to affect markets, and it’s still in the index now. So those are just some examples of you know, it does take a while for actual policies to be enacted on the ground to actually affect economic conditions on the show, so until that happens, we don’t we don’t make changes.


Matt Cochrane  38:44

Okay. Yeah, I can see why there would be a lagging indicator there. Yeah, I would


Perth Tolle  38:51

say it’s still a leading indicator. So it’s still a leading indicator. But there’s a lag in the data from, you know, when we expect a policy change to when it actually affects markets.


Matt Cochrane  39:02

Gotcha. You’re right. You said that better than I did. You mentioned India, you know, that’s often the other for lack of a better term, like economic powerhouse, or at least Yeah, potential economic powerhouse that people think of when they we, you know, when investors are talking about emerging markets. You know, I don’t think it’s happened yet, but I think they’re expected to exceed China and population sometime in the next few years. How does India rank on the your, your, your freedom metrics,


Perth Tolle  39:36

it’s about it’s about in the middle, so it’s borderline country between the 24 countries, it’s, it’s like number 13. So so it’s, India is a very interesting market for me. I love India. It was in the index when we first launched the fund in 2019. And we have a lot of fans in India of our of our strategy. And I think that comes partly from the India China rivalry I so we don’t have China. So India likes us, you know, that’s but but also I think India is a high potential market extremely high. And the demographics are extremely favorable. They also have some, you know, similar to China, they have a son preference, which means there is a lot of bad things happening to baby girls and so forth, just like in China, but it’s not as bad. It’s not like forced by the government. But the problem that we’re encountering in the scores with India, we’ve always encountered problems with their trade score. So their, their freedom to trade has always been lower than other relatively low than the other more free included markets, because they’ve had high trade barriers, both tariff and non tariff trade barriers. So they’re very protectionist country. And in the ETF role, do you see this as well, it’s extremely difficult to trade, you know, Indian stocks, we, you know, an open that account in India, and it’s extremely difficult. So most in our index has this rule that we only use ADRs in India, right. So most indexes will have that rule, you’ll see that because it’s very difficult to access those local stocks. So that’s economic freedom, but also we’ve seen in the past several years, and this is how they dropped out of the index. They had increased repression of the Kashmir people, which is a territory that they control. They had more coercion of the media. And we’ll talk about that in a second. And they blacked out protests a couple of years ago, in places that had they blacked out the internet in places that had protests, like we’re expecting, they were expecting farmers protests that they blacked out the internet. So no one would hear about it. press freedoms recently, they rated the BBC office, because there was a documentary done on Modi. This documentary was also banned across college campuses, universities, and so forth. So this is extreme coercion of media and expression. And, you know, this is not something that we expected to see even in India. And so it was surprising that it was this blatant, but you know, things like this cause their score to go down. And as far as India, like, after we’re talking about the war, when Russia invaded Ukraine, and they’ve been, you know, they haven’t been as clear as the rest of the countries around the world to say, okay, you know, right war with Ukraine, you know, we’re going to sanction Russia, whereas the rest of the world is very clear, it was very clear, coordinated effort on the part of the West, or the allies to do so. China, obviously, it was, you know, on the other side of that, in India, kind of trying to be Switzerland, like, you know, so it’s, it’s, it’s been very disheartening, what’s happening there. But I have huge hopes for India, I love India, as a country as a market. I think it has huge potential, I think, much better potential than China. And I don’t want to equate, you know, what they’re doing with, you know, with, for example, the Kashmir people with what China is doing, for example, with the Uyghurs no comparison, but still, it’s, it’s, you know, you have to be relatively freer in the, in the, you know, emerging markets universe to be included, and there are currently barely not, so it’s, it’s a borderline country, it could be included at any time every year. I expect it, but we haven’t seen it yet.


Matt Cochrane  43:47

I think correct me if I’m wrong. I think you said another borderline country that is currently in the index is Chile, and was even responsible for like some of your outperformance the last year or two. But am I really but it might be in danger of not making the index anymore.


Perth Tolle  44:06

So So Chile is not a borderline country. It’s okay. I’m sorry, hi, Freedom country. But it is a very small country. So in the MSCI based indexes and funds like em or AMG or even VWO, which is a footsie based, it has less than 1% weight, typically, but in our index current, you know, at rebalanced time had 18% weight last year that weight went up to as high as 25. So the reason why is that so so chili is interesting in that, you know, freedom, kind of the fear freedom community, especially economic freedom community looks at Chile and is seeing just a huge risk because they recently elected a new government that had the people were concerned would roll back their business friendly policies that Chile has enjoyed for many years. And that led to their prosperity. So this new government has been in power since December 2021. Over the course of 2022, you know, because they have such a high weight in our index, you know, a lot of our clients, I got a lot of emails about this, you know, we’re very concerned. And, but, you know, we go by the scores. So, you know, we follow, it’s literally a rules based methodology follows the scores. And so we still had a high weight in there, and I said, Look, you know, just have to see, you know, how it goes, we hit the test that their institutions and their institutions tested. Well, last year, none of the referendums put out to Fort to a vote, were voted in, in fact, they were very voted out on a very high margin. So Chilean voters came out. And very adamantly said, we do not want these policies that would be anti business. You know, we like these proof, you know, business friendly policies. And they came out and voted in droves for that. And I have Chilean friends here in the United States, who live, for example, in New York, and they went down to Miami to vote, you know, against these referendums. And so. So I think what we saw in Chile is, yeah, they elected, you know, one branch of government, that was very anti business, and there are still to this day, a lot of concerns about, can we keep up that economic freedom as the, you know, beacon of economic freedom in South America, in Chile. But so far, we’ve seen their strong institutions, you know, that play, and they have not enacted any of those policies that are suggested by the US government. And we’ll see how it goes going forward. But typically, in the Freer emerging markets, there are stronger institutions, they’re stronger rule of law, there is there’s more respect for, you know, individual rights, shareholder rights, and so forth. And that makes them kind of the safe havens in a crisis situation. As far as I know. Yeah.


Matt Cochrane  47:11

No, I’ll just say it again, you said this was in a typical emerging markets index, Chile has is 1% 1%. And in your index, it’s, you know,


Perth Tolle  47:21

in the present, and last year, that added a lot that to our returns, because Chile has a very diversified commodities exposure. So their world’s top producer of copper, lithium, and so forth. And they, they strongly outperformed in the inflation trade. And not only that, but this year, year to date, we’re seeing strong performance and show it again, partly because, ironically, of China, because they do a lot of trade with China. And remember, we don’t penalize free trade, we actually think the freer the trade, the better, right. So because China had a reopening bounce, surely benefited from that as much as China did, because of that trade. And it’s a way of kind of participating in a balance and even these unfree markets. Without that direct autocracy risk where the company, you know, the, you know, the, the government can come in and tell the company, so, your nonprofit net, we don’t have that risk in Chilean companies, they can choose to do the trade, or they cannot do the trade, right? They can trade with this country, or they can trade with another country. So they call the shots, they are free to do what’s in the best interest of their shareholders. And as a result, when they do trade with these unfree markets, we can benefit from that trade without direct autocracy risk.


Matt Cochrane  48:42

We talked about so many negative countries. I think Chile is a great positive note to end on. Perth. If people are interested in the freedom ETF or they’re interested more in following you. Where can they find more information?


Perth Tolle  48:56

Yeah, so the index site is life and liberty indexes.com. The fund site is freedom etfs.com and I am on Twitter at Perth underscore toll.


Matt Cochrane  49:10

And we’ll include those links in our in our podcast notes and in the article on the site accompanying the episode. Perth, thank you so much for joining us again.


Perth Tolle  49:20

Thanks for having me.


Matt Cochrane  49:22

Again, I’m Matthew Cochrane. We’re 7investing and we’re here to empower you to invest in your future. Have a great day.

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