Freedom As The Source Of Growth

Events in 2021 underscored the need to consider autocracy risk when investing in emerging markets.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

Perth TollePerth Tolle is the founder of Life + Liberty Indexes and creator of the Freedom 100 EM Index, the world’s first freedom-weighted emerging markets equity index strategy.

The Freedom 100 Emerging Market ETF (FRDM), which tracks the index, saw success in 2021, crossing the $100 million milestone after China’s government cracked down on various sectors including tech and education. In this conversation with, Tolle shares her insights on the rationale for using personal and economic freedom metrics as a basis for investment.

The following transcript has been edited for clarity and brevity. Let’s start with the big picture. Why is freedom weighting important, particularly when it comes to emerging markets?

Perth Tolle: The reason we started with emerging markets with the freedom weighting methodology is because in emerging markets, there’s a huge discrepancy in freedom levels between countries.

Half of the countries in most emerging market funds are some of the world’s worst autocracies, committing some of the worst human rights atrocities in the world today. Without these personal and economic freedoms as a foundation for growth, their markets are constrained from growing as quickly or recovering as fast as some of these other markets that are freer.

That’s why we created the Freedom 100 Strategy, because in the emerging markets, there wasn’t any other strategy out there that addressed this heavy autocracy concentration problem. We’re addressing an autocracy risk I think investors are becoming more aware of, especially after last year.

Freer countries grow more sustainably. Instead of having debt-driven or state-mandated growth, they recover faster from drawdowns. They use their personal and economic capital and labor more efficiently, and have less capital flight and capital destruction. We believe that’s a recipe for growth in the long run. Do you think last year was a wake-up call for some investors, in considering their emerging market allocations?

Tolle: I think it was a wake-up call for a lot of investors. We’ve been around since 2019, but last year, our assets tripled. They went from $30 million to over $100 million, mostly in the second half of the year when China carpet-bombed its biggest companies. They were the biggest holdings in a lot of emerging market funds.

Once it hit their holdings, investors realized they may have miscalculated the autocracy risk. And these are risks that break the discount model, because you can't really factor in a risk of the government coming in overnight and saying you have to be nonprofits now.

It’s a worst-case scenario for investors. Look at DiDi for example—now they have to delist. There's no way for investors to recover from that. That's a risk that really breaks the model.

I think Wall Street is going to continue to propagate the China investing story. And they have, for a long time. It's very clear which ones are applying for licenses to operate in China. These are the same ones that are telling investors, “You should triple your China exposure”—at a time when the regulatory crackdown is the worst.

This China narrative hasn't ever really played out. It's always been Wall Street selling it to investors.

If you look at the [index underlying the iShares MSCI China ETF (MCHI)], that includes both onshore and offshore shares, and it's been around since 1992. Since then, the average annual return is about 2.2%. It’s worse than Treasuries.

That’s because they don't have the rule of law and the investor protections and private property rights in place to allow investors to capture value in that market, even when there was a lot of value to be captured over the last 30-40 years. And now that value is going away. It's a growth story of the past. Have there been any events or changes over the past year that you think might shift a country's weighting or inclusion in the portfolio in the next rebalance?

Tolle: China's events over the past year definitely were the biggest story in the emerging markets last year. But that's not going to shift the portfolio, because they're not included. I would expect this rebalance to be a light one.

In the first rebalance we had [in 2020], there were no country changes. In the second rebalance, there were four country changes—two drops and two adds. Can you share a little bit of detail about those?

Tolle:  Last year, the most notable drop was India. That was because of three things. They had some repression of press freedom. They had coerced some journalists more so than the previous years, with jailing or other kinds of government coercion of the media. They had continued their repression of the Kashmir people. And then they blacked out the internet in places that had protests or that were going to have protests.

These things led to a drop in their score. They were a borderline country within our index and were dropped as a result of that decrease in their score. Because they dropped, Brazil got added in.

Our indexing methodology [doesn’t] draw a line in the sand. We run all of the scores through the methodology, and the algorithm will assign negative weights to countries that are to be dropped. The algorithm chooses the line based on the relative freedom score to other countries. You just have to be freer than your peers to be included.

If one of your peers' score decreases and your score doesn't change, you get added. That's what happened with Brazil. The Brazil score did not change, but it was added as a result of India's score decreasing.

The same thing happened with Thailand and Malaysia. Thailand was dropped last year. Malaysia was added. Malaysia is on a good trajectory, and I expect it to be included again this year. Which countries included in the index right now do you think have the strongest outlook going forward?

Tolle: Ironically, Taiwan is the one most people are concerned about because of all the threats constantly coming from China. Most people don't realize that’s nothing new, that people in Taiwan have lived with these threats for years. They actually have invasion drills on the island. This is part of the way of life in Taiwan.

But if you look at their growth trajectory, in both their freedom trajectory and their stock market growth trajectory, you can see that one justifies the other. We look at freedom as a leading indicator. The way that Taiwan has come out of its military dictatorship and become this full-fledged democracy, it's really stunning to see that change in their freedom level and also the tremendous outperformance of their stock market over that time.

Investors should realize that we’re in a position to direct assets, whether that be our own assets or our clients' assets. That’s a position of power, and we can use that power for good.

If you're concerned about something that might happen to a freer market like Taiwan as a result of threats from a more autocratic market like China, you can take part in changing those outcomes. Don't fund the autocracies; support the freer countries instead.

Contact Jessica Ferringer at [email protected] and follow her on Twitter

Jessica Ferringer, CFA, is a writer and analyst for She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.