Investing in Freedom in Emerging Markets with Perth Tolle, Founder of Life + Liberty Indexes

Episode Summary

Executive Summary: Perth Toll explains how his Life & Liberty Index uses quantitative freedom metrics to build an emerging markets strategy that overweight freer countries and excludes highly unfree ones. The discussion connects personal experience in China and Hong Kong to an investment thesis: freer societies foster more sustainable growth, better capital allocation, and faster recoveries. The episode also covers methodology, rebalance behavior, and ETF launch challenges.

Main Topics: Personal background and the origin of the strategy (Priority: 5/5): Toll describes growing up between China and the U.S., later living in Hong Kong, and witnessing how political and social freedoms affect lives and markets. These experiences formed the basis for the index. Freedom as an investment factor (Priority: 5/5): The Life & Liberty Index is built on the premise that personal and economic freedom are investable drivers of long-term return, especially in emerging markets where dispersion is high. Index methodology and country selection (Priority: 5/5): The index uses third-party freedom scores and applies freedom weighting, exclusion rules, market-cap weighting within countries, security caps, and a freedom-drawdown style rule for rapid declines. Emerging markets vs developed markets (Priority: 4/5): Toll explains that freedom-weighted strategies are most useful in emerging markets because developed markets are already relatively free and homogeneous, making freedom less differentiating there. Performance logic and macro implications (Priority: 4/5): Freer markets are argued to have more sustainable growth, better crisis recovery, more efficient capital/labor use, and less capital destruction or brain drain. ETF-building challenges and investor behavior (Priority: 3/5): The conversation closes with the difficulty of launching and scaling an ETF, especially for a small issuer, and the tendency of investors to cling to benchmarks even when strategies are differentiated.

Key Arguments: Toll argues that freedom is a real, measurable driver of economic and market outcomes, not just a philosophical preference. He believes freer markets grow more sustainably because growth is rooted in human and entrepreneurial freedom rather than state-directed distortion. The index’s exclusion of China, Russia, Saudi Arabia, Egypt, and Turkey is a byproduct of freedom weighting rather than an arbitrary screenset. High-freedom emerging markets offer better diversification and innovation exposure than traditional EM indexes, which are dominated by less free countries. The strategy’s quantitative foundation reduces subjectivity by relying on third-party freedom data and transparent rules. Developed markets are less suited to freedom weighting because they are already relatively free, transparent, and similar on this dimension. Benchmark hugging in ESG and other active products often prevents meaningful differentiation and weakens the strategy’s real-world impact. ETF success depends heavily on scale, making it difficult for small issuers despite the investor benefits of ETFs.

Data Points: Countries scored: 162 - The combined freedom dataset used by the index providers scores 162 countries. Freedom variables: 76 - Freedom scores are based on 76 third-party variables spanning personal and economic freedoms. China weight in typical EM indexes: About 38% - Traditional emerging market indexes are heavily concentrated in China. China weight after A-share inclusion target: Up to 43% - MSCI’s expanded A-share inclusion reportedly raised China’s weight to roughly 43% at one point. Country exclusions: China, Russia, Saudi Arabia, Egypt, Turkey - These are excluded naturally by the freedom-weighting process due to low freedom scores. Top current freedom countries in index: Taiwan, South Korea, Chile - These are identified as the freest countries in the index at the time of the discussion. Security cap: 8% at rebalance - Individual securities are capped to avoid overconcentration, especially in Taiwan and South Korea names like TSMC and Samsung. EM ESG tracking error limit: 100 basis points - The cited large ESG EM fund seeks to stay within 1% of its benchmark, limiting differentiation. Poland ranking change: #1 in 2017 to #4 in 2018 - Example of how freedom deterioration showed up in the index over time. Rebalance outcome: 2020: no countries added or dropped - An example of a low-turnover rebalance year. Rebalance outcome: 2021: 2 countries added, 2 dropped - A more active rebalance year with meaningful changes. India and Thailand: Dropped - They were the two smallest allocations and were removed in a 2021 rebalance. Brazil and Malaysia: Added - They entered the index after relative freedom scores changed. One-child policy demographic impact: 30 million missing women - Cited as an official Chinese think tank estimate illustrating policy consequences. Fidelity tenure: 10 years - Toll worked as a financial advisor at Fidelity before launching the strategy.

Pivotal Quotes: "You can't make a difference if you're not different." — Perth Toll: Used to explain why benchmark-hugging ESG products fail to create meaningful differentiation. "We’re placing a bet on the ones that have the conditions in place on the ground for wealth creation and growth in the long run." — Perth Toll: Summarizes the investment thesis behind freedom-weighted emerging markets. "People worship benchmarks" — Perth Toll: Describes the institutional pressure that leads investors and managers to avoid meaningful deviation from standard indexes.

Implications: The episode suggests investors can express both values and returns by tilting toward freedom-rich markets. It also implies that benchmark-agnostic, rules-based strategies may gain appeal as investors seek more distinct, conviction-driven portfolios.