Perth Tolle, Life + Liberty Indexes – If I Was In Hong Kong Right Now, I Would Be Arrested, Definitely, For Doing This | #318

Episode Summary

Executive Summary: In this episode of the MedFavor Show, host Meb Faber interviews Perth Tolle, founder of Life and Liberty Indexes, about the Freedom 100 Emerging Markets ETF (FRDM). Tolle shares her personal journey from growing up in China and the US to creating an index that weights emerging market countries by personal and economic freedom metrics. The fund excludes countries like China, Russia, and Saudi Arabia, focusing on freer nations such as Taiwan, South Korea, and Chile. Tolle discusses the serendipitous meeting with Rob Arnott, the index construction methodology, and the growing interest in freedom-based investing.

Main Topics: Inspiration and Background (Priority: 5/5): Tolle's upbringing in China and the US, and her experience with the one-child policy, inspired her focus on freedom. Her work at Fidelity and conversations with clients who avoided investing in unfree regimes further motivated her to create a freedom-weighted index. Index Construction and Methodology (Priority: 5/5): The Freedom 100 Index uses 76 metrics from the Fraser Institute's Human Freedom Index, combining personal and economic freedoms. Countries are ranked and weighted by their composite freedom scores, with the least free excluded. The index holds the top 10 largest, most liquid securities per country, capped at 8% per security, and excludes state-owned enterprises. Serendipitous Launch Story (Priority: 4/5): Tolle met Rob Arnott by chance on a seaplane to Camp Kotak, leading to his seed investment and support. After failed attempts with other issuers, she partnered with Wes Gray of Alpha Architect to launch the ETF in May 2019. Performance and Differentiation (Priority: 4/5): The fund's exclusion of China, which has a 40% weight in traditional emerging market indices, has driven performance differences. Tolle argues that China's outsized weight is distorted and that freedom-weighted investing reduces risks like capital flight and government interference. Investor Reception and Pushback (Priority: 3/5): Initial pushback about excluding China has faded as negative news about China increased. The fund appeals to both free-market capitalists and human rights advocates. Tolle notes that investors from less free countries often support the fund, while Chinese nationals on social media criticize it. Future Plans and Extensions (Priority: 3/5): Tolle is focused on the flagship Freedom 100 ETF but sees potential for developed market, fixed income, and frontier market versions. She also discusses the idea of a pure-play asset manager ETF or a private equity fund investing in ETF companies.

Key Arguments: Freedom matters for investment returns: Countries with higher personal and economic freedoms have more sustainable growth, transparency, and efficient capital use. China's 40% weight in traditional emerging market indices is distorted and risky, as seen in government interference with companies like Ant Financial. Investing in unfree markets lowers their cost of capital and enriches government actors, while freedom-weighted investing aligns capital with conditions for wealth creation. The Freedom 100 Index provides a way to invest in emerging markets without supporting repressive regimes, appealing to a broad range of investors. Country selection is more important than security selection in emerging markets, as shown by the GMO study on ex-China emerging markets.

Data Points: ETF Launch Date: May 23, 2019 - The Freedom 100 Emerging Markets ETF (FRDM) launched on this date. Number of Countries in Index: 10 - The index currently holds 10 countries after the latest rebalance. Number of Holdings: 100 - The index holds the top 10 largest, most liquid securities per country. China's Weight in Traditional EM Indices: 40% - China makes up about 40% of most emerging market indices like MSCI. Fund Assets Under Management: $50 million - The fund has grown to approximately $50 million in two years. Number of Freedom Metrics: 76 - The Human Freedom Index uses 76 metrics for personal and economic freedoms. Cropland Loss per Minute: 4.8 acres - Between 1997 and 2022, the US lost about 4.8 acres of cropland per minute to urbanization.

Pivotal Quotes: "I had a Russian client who said, 'I don't want to invest in Russia because it's like funding terrorism.'" — Perth Tolle: Explaining the client feedback that inspired the freedom-weighted index. "Freedom is the most important innovation here. So, you should just do that." — Potential investors (paraphrased by Tolle): Feedback that led Tolle to strip out all factors except freedom from the index. "When things are moving upwards, like freedom is getting freer, then it moves very slowly. But when it's declining, it can be very quick." — Perth Tolle: Describing the dynamics of freedom scores and the index's decline momentum rule.

Implications: Freedom-weighted investing offers a differentiated approach to emerging markets, potentially reducing risks from government interference and aligning with ESG values. As awareness grows, such strategies may gain traction among advisors and institutions, challenging traditional cap-weighted indices. The success of FRDM could inspire similar products in other asset classes.