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

Episode Summary

Executive Summary: The episode examines Perth Tolle’s Freedom 100 EM Index and FRDM ETF, which replaces market-cap weighting with freedom-based country scoring to avoid funneling capital into autocracies. Using third-party measures of civil, political, and economic freedom, the fund excludes the worst offenders and emphasizes freer emerging markets, arguing this can both align investing with values and improve performance.

Main Topics: Freedom-based investing versus market-cap weighting (Priority: 5/5): Tolle argues that conventional emerging-market indexes overexpose investors to authoritarian regimes because they weight countries by size, not governance quality. Her approach reweights countries by freedom scores. How freedom is measured (Priority: 5/5): The index uses the Cato Institute and Fraser Institute Human Freedom Index, which combines 87 variables across civil, political, and economic freedom to produce country scores used in allocation decisions. Eligibility screens and index construction (Priority: 4/5): The strategy first filters for market size and liquidity, then applies freedom weighting across an eligible country set, and within each country holds the 10 largest liquid stocks while excluding state-owned enterprises. China as a case study of governance risk (Priority: 4/5): Tolle and Ritholtz discuss how China’s state priorities, regulatory control, and surveillance environment make it a poor long-term investment for many foreign investors despite its size and index weight. Russia as proof of autocracy risk (Priority: 5/5): Russia’s inclusion in conventional EM benchmarks before the Ukraine invasion is presented as evidence of the danger of passive cap-weighted exposure to authoritarian states. Performance and opportunity in freer emerging markets (Priority: 4/5): The conversation highlights that freer countries like Chile, Poland, Taiwan, and South Korea can offer meaningful growth opportunities while avoiding politically risky exposures.

Key Arguments: Traditional emerging-market benchmarks are flawed because they automatically allocate large weights to autocratic states with poor governance. Freedom can be operationalized quantitatively using an independent index that captures civil, political, and economic rights. Excluding autocracies is not just ethical positioning; it can reduce tail-risk events like sanctions, invasions, and state interference. Many investors do not intend to fund authoritarian regimes, so a freedom-weighted product gives them a way to access EMs without that exposure. China underperforms for foreign investors partly because companies must prioritize state interests over shareholder interests. Russia’s collapse after the Ukraine invasion demonstrates why political-risk screening matters in emerging markets. Freer EM countries can still provide scale, liquidity, and attractive growth without requiring exposure to the worst governance regimes.

Data Points: Human Freedom Index variables: 87 - The freedom score used by the index incorporates 87 civil, political, and economic variables. Initial emerging-market universe: 24 countries - The strategy starts with a 24-country EM universe before liquidity and size screening. Eligible country universe: About 18 countries - After excluding countries that are too small or illiquid, roughly 18 countries remain eligible for freedom weighting. China weight in MSCI EM during COVID: 41% - China reportedly made up 41% of the MSCI emerging markets index at the height of COVID. China weight in MSCI EM now: Close to 30% - China still represents a very large share of cap-weighted EM benchmarks. FRDM ETF assets under management: Over $2 billion - The Freedom 100 EM Index ETF has grown to more than $2 billion in AUM. FRDM performance over 2025: Up 67% - Tolle cites 2025 performance for the FRDM strategy. S&P 500 performance over 2025: Up almost 18% - Used as a comparison point to highlight FRDM’s strong recent return. China long-term market performance: Down a couple of digits over 30 years; about +100% with dividends - Ritholtz notes Chinese equities have dramatically lagged the S&P 500 over the long run. S&P 500 total return since 1995: +2,700% - Comparative benchmark return cited in the discussion of China’s underperformance. Country holdings in cap-weighted EM indices before war: Top 10 - Russia was among the top 10 country holdings in major EM indexes before the Ukraine war.

Pivotal Quotes: "We don't want to be in the position of directing assets to enable more authoritarianism." — Perth Tolle: Explaining the ethical and investment rationale for excluding autocracies. "The largest autocracies in the emerging market space, like China, Russia, and Saudi Arabia, historically has gotten the biggest weights." — Perth Tolle: Describing the core defect in market-cap-weighted emerging-market indexes. "You are either directing assets for good or in some cases for evil, unfortunately." — Perth Tolle: A broader argument that capital allocation has moral and geopolitical consequences.

Implications: Investors seeking EM exposure may increasingly demand governance-aware products. Freedom-based indexing could reshape portfolio design by linking returns, geopolitical risk, and values, while pressuring index providers to rethink passive exposure to autocracies.