At The Money: Better Results By NOT Investing with Dictators!

Do fundamentals or narratives drive market valuations? That is the question so many are wrestling with in today’s 24/7 algo-based platforms and AI-driven mediascape. Perth Tolle is the founder of the Life and Liberty indexes and the creator of the Freedom 100 EM Index (symbol FRDM). She was named one of 10 to watch in 2020 by Wealth Management Magazine and one of the 100 people transforming Business by Business Insider in 2021. Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 2:14Barry Ritholtz?

  There are many problematic countries on the world stage. Not only are their political behaviors bad, but they're also unhealthy for your investment dollars. Most emerging market indexes, however, invest broadly across all of these countries regardless of their political activity. If only there was a way to avoid authoritarian regimes, dictators, and other bad actors that destroy your investing capital. As it turns out, there's a fun to do just that. Investing in emerging markets without steering money to the worst countries on the planet.

• 2:57Barry Ritholtz?

  I'm Barry Rifelt, and on today's edition of At the Money, we're going to discuss how to avoid those countries that are dangerous to your wealth. To help us unpack all of this and what it means for your portfolio, let's bring in Perth Toll. She is the founder of the Life and Liberty Indices and the creator of the Freedom 100 EM Index, ETF symbol FRDM. She was named one of 10 to watch in 2020 by Wealth Management Magazine and one of the 100 People Transforming Business by Business Insider in 2021.

• 3:35Barry Ritholtz?

  Her Freedom 100 EM Index ETF now manages over $2 billion and has beaten the S&P 500 over one, two, and three years. In 2025, Freedom was up 67% versus the S&P 500 up almost 18%. So Perth, let's just start with the basic concept. Why screen emerging market companies for a concept like Freedom? How does screening out dictators, authoritarians, and other bad actors impact market performance?

• 4:12Speaker 03

  Yeah, thanks, Barry. So I think the problem we're trying to solve here is that emerging markets investors previously did not have a way to get a diversified emerging markets allocation without funneling money to autocracies. So traditionally, the way indices are weighted is by market cap. And so the largest autocracies in the emerging market space, like China, Russia, and Saudi Arabia, historically has gotten the biggest weights. Those three countries prior to the war were all in the top 10 of most EM indices. During the height of COVID,

• 4:52Speaker 03

  China was 41% of the MSCI Emerging Markets Index, and now it is still upwards of close to 30%. So some of these large autocracies get a very large weight in the emerging markets indices. And so that's really the problem that we're trying to solve by freedom weighting instead of market cap weighting.

• 5:17Barry Ritholtz?

  I'm really fascinated by the origin story of the Freedom Index and the ETF. What made you decide traditional emerging market benchmarks were broken?

• 5:31Speaker 03

  Yeah, so I grew up in both China and the US. I was born in Beijing, and I came to the US when I was nine. And then I worked in Hong Kong after college for about a year, and there saw the difference between the US market, the Hong Kong market at the time, this was 2004, and the mainland Chinese market, and saw that policies impacted the future of a society and the future of markets. You know, one policy that really struck me was the one-child policy under which I was born and grew up in China. And that policy has caused the biggest demographic crisis in the world today, and probably we won't

• 6:13Speaker 03

  recover from that in our lifetimes. So that's one of the things that made me realize that governance on the country level actually has an impact on society and markets. But also, coming back to the US, I worked at Fidelity for 10 years as a financial advisor. And I had clients, you know, in the LA and Houston markets who said, I don't want to, for example, I had a Russian client that said, I don't want to invest in Russia because it's like funding terrorism. And that was in 2014. So you can see how prescient that was. And, and this is, this is kind of why I wanted to have a way for allocators to always have that emerging markets allocation without, you know, funding autocracies, which

• 6:58Speaker 03

  is usually not the intention of most investors.

• 7:00Barry Ritholtz?

  Really, really interesting. So you created this Freedom Index with some of your partners. Define freedom for our audience in market terms. When we say this is a freedom weighted portfolio, as opposed to a market cap weighted portfolio, what exactly is being measured? How does that translate into an index?

• 7:23Speaker 03

  Yeah. So the first thing is we need those quantitative metrics for freedom. And so we use a third-party index and data set called the Human Freedom Index and Data Set by the Cato Institute and the Fraser Institute. And these are two think tanks that are completely privately funded. They don't take any government money, not even from the US or Canadian governments where they're based. And they look at 87 different variables for freedom. And that includes things like civil freedoms, includes political freedoms, and economic freedoms. So you're looking at both personal and economic freedoms, which was important to me, coming from a

• 8:03Speaker 03

  country that had issues with both. So things like terrorism, trafficking, torture are like in the civil freedoms category, freedom of speech, media expression, civil procedure, criminal procedure, like political freedom category. And then economic freedoms are things we're all more familiar with, like taxation, business regulations, private property rights, rule of law, soundness of monetary policy, freedom to trade internationally, the higher the free trade, the better. And the freedom to hold, you know, off-world bank accounts and so forth. So all of these things added together, 87 different variables and sub-variables. Combine into the composite country score, which we use as the main input into our methodology.

• 8:49Speaker 03

  So with that country score that measures freedom by a third party, we turn that into country weights and allocations and then invest accordingly. So the higher freedom countries get a higher weight, the lower freedom scoring countries get a lower weight, and the worst offenders are automatically excluded as part of the freedom weighting process.

• 9:10Barry Ritholtz?

  So 24 emerging market countries, how many companies do you look at and then how many end up in the index? And in the index, once it's freedom scored, I'm assuming it's also market cap weighted, is that right?

• 9:26Speaker 03

  So on the country level, it is 100% freedom weighted. Before we embark on freedom weighting, though, we do have a screen for market size and liquidity. So markets that are too small or too illiquid are not part of the eligible universe. So we do have a 24-country initial universe and then about an 18-country eligible universe. Because countries like Czech Republic, for example, are very free but not big enough. Peru, very free but not liquid enough. So those are not included in the freedom weighting process. So about 18 countries are left once you have that eligibility process down. And those are 100% freedom weighted.

• 10:10Speaker 03

  So the highest freedom countries have the highest weight. And the way the methodology works is that you have to be above average among those 18 peer countries in your score to be included. So we are providing the freest emerging market countries in the eligible universe.

• 10:32Speaker 03

  And there are some very borderline countries that go in and out every year.

• 10:36Barry Ritholtz?

  Give us some examples.

• 10:37Speaker 03

  So, India is a borderline country. That is, the score for India is just about average among all the 18 country peers. So, this is including countries like Taiwan, Chile, Poland, South Korea on the freer side, and then countries like China, Saudi Arabia, Egypt, Turkey on the less free side, right? So, India is about right in the middle, and so sometimes it's in and sometimes it's out.

• 11:02Barry Ritholtz?

  Really intriguing. And then, once you have this list of countries, how do you screen through all of those companies within the favored top nine, top 10 countries to put together the index? And how many companies go into the index?

• 11:20Speaker 03

  Yeah, so, once we have the Freedom Weighted Country Weights, within each country, we take the 10 largest, most liquid constituents, and those are market capitalization weighted within their Freedom Weighted Country Weights. We do exclude state-owned enterprises, and that's just to bring the economic freedom theme all the way through. So, the less government interference in private markets, the better. And that's the only thing we do on the security level. So, we wanted to really isolate the freedom factor. It's mostly a top-down country-level strategy on this, on this product.

• 11:56Barry Ritholtz?

  So, what first attracted me to this has been China, and obviously, you grew up in China. You worked in Hong Kong. You have a whole lot of insight into this. Whenever I discuss China with investors, they're always shocked when I say, "Hey, you know, over the past 30 years, since 1995, China's markets essentially down a couple of digits. If you want to include total return and dividends, it's up..." You know, about 100%, the total return for the S and P 500 over the same period is plus 2,700%. China has turned out to be a fairly terrible investment for Western investors.

• 12:41Barry Ritholtz?

  Why do you think China has been such a laggard?

• 12:44Speaker 03

  So the main problem with investing in Chinese companies is that these are countries, these are companies that have to put state interests first. So they are, you know, not going to try to succeed the most by providing the best value for their clients. They're going to be trying to curry favor with the government. So when your, when your interests are divided like that, investors are subsidizing the cost of putting the state's interests first. And as we know with China specifically, the state's interests may be, you know, in contradiction with, you know, American interests or, or interests of foreign investors in general. So some of these companies, for example, Tencent, right?

• 13:28Speaker 03

  Um, has an app called WeChat. And, you know, it was well known back in the day when all the Uyghur news was coming out that the government was using WeChat to crack down on dissidents and on the Uyghur population. Of course, WeChat has to give all the data over to the government that they want because their, their, in their own business interests and other interests of their stakeholders do not come first, but the government's interests come first. So these are kind of the dangers of investing in a country where all the companies are more subject to the state's interests than their own.

• 14:04Barry Ritholtz?

  And when we look at an app like TikTok, the question is, how involved is China's state surveillance, security and their, um, their version of the CIA, tracking, managing, manipulating what US teenagers see? This, this is really an issue with Chinese companies, isn't it?

• 14:28Speaker 03

  It is, but TikTok is a whole separate issue altogether where you're talking about interference in foreign interests and foreign governments. And so, yeah, that's a totally different issue that we don't even address in this index. But absolutely, dictatorship and authoritarianism in a globalized world is contagious, but so is freedom. And so, we believe that the more people invest in freedom, especially here in the finance world on Wall Street, we are in a position of privilege and power. It's a position of power to be able to direct assets, whether it's your own assets or

• 15:08Speaker 03

  other people's assets. And in emerging markets investing, there is no neutral. You're either directing assets for good or, in some cases, for evil, unfortunately. And so, we don't want to be in the position of directing assets to enable more authoritarianism. And if we can, we want to be in the places that are promoting freedom in the world.

• 15:32Barry Ritholtz?

  So let's talk a little bit about another country where authoritarianism rules: Russia. I suspect a lot of people first recognized the merit of your approach to emerging market investing when Russia invaded Ukraine. And effectively, their stocks plummeted to zero. If you were holding Russian stocks, they pretty much got marked down to nothing in everybody's portfolio. Tell us a little bit about how Russia has fared in the Freedom Index and what's been going on in that country.

• 16:13Speaker 03

  Yeah, so Russia has never been an included country in the FRDM index. And when Russia invaded Ukraine, we were the only emerging markets index that did not have Russia in it for This particular reason and when you know with with when their market went to zero, no one saw that coming. So this was definitely not something that was priced in at the time as a possibility. It was actually in the top 10 country holdings in the MSCI and

• 16:48Barry Ritholtz?

  Wow.

• 16:48Speaker 03

  indices, emerging markets indices. So, so yeah, investors got hit, you know, quite hard during that time. And that was the time when, as I recall, most investors woke up to autocracy risk.

• 17:02Barry Ritholtz?

  So China, Russia, a lot of countries with state-run economies. Walk us through your decision to, instead of just underweight them, just totally exclude them. What's what's the thinking there?

• 17:18Speaker 03

  Yeah. So, you know, even if we underweight autocracies, you know, we would still be funneling money towards them. I mean, our fund has $2 billion right now in it. MSCI indices has, you know, hundreds of billions tracking them. And so even a little bit in an autocracy is really not what we want. We don't believe that's the best place to invest. And also, you know, we believe that there's so many good opportunities in the emerging markets universe outside of autocracies. You know, people only think of the BRICS because of the BRIC acronym, but there's, you know, countries like Chile, countries like Poland

• 17:59Speaker 03

  that get less than 1% weight in the cap-weighted indices, but that have the market size and liquidity to have scale in a product like an ETF. And investors can participate in the tremendous growth that has gone on in in those countries. And, you know, our investors have been able to benefit from that. We believe those are the countries where you can find the freer countries or the places that have the best growth stories of the future. And that's where we want to be.

• 18:27Barry Ritholtz?

  So to wrap up, if you're an investor that wants exposure internationally, if you want global emerging market exposure, but you don't want to funnel money to countries that really engage in some of the worst behaviors there are on the international stage and have seen their stock markets perform poorly because of it, consider a fund that's based on freedom, on political, civil, and economic freedom to give you that sort of exposure without all of the downsides. Take a look, for example, at the Freedom 100 Index and the ETFR-FRDM. It's really a fascinating story.

• 19:10Barry Ritholtz?

  I'm Barry Ritholtz. This is Bloomberg's At the Money.

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