Talk Your Book: Investing in Freedom

Episode Summary

Executive Summary: Perth Tolle explains her "Freedom 100"-style approach to emerging markets investing: weight countries by personal, civil, and economic freedom, exclude the worst offenders, and use that framework to select securities. The conversation covers why freedom may drive growth, why China is excluded, how ESG fails in emerging markets, and how the index differs from traditional EM benchmarks.

Main Topics: Freedom-weighted emerging markets index (Priority: 5/5): Tolle describes Life + Liberty’s index methodology: countries are weighted by freedom, freer nations get larger allocations, and severe human-rights offenders are excluded entirely. Why freedom matters for returns (Priority: 5/5): The discussion argues that economic, personal, and civil freedoms create the conditions for innovation, wealth creation, and long-term market development. Country selection and annual rebalancing (Priority: 4/5): The index is rebalanced annually using composite freedom scores; countries can be added or removed depending on whether their scores improve or deteriorate relative to peers. China, India, and autocracies in EM (Priority: 5/5): China is excluded and India was dropped after human-rights and press-freedom concerns. The segment emphasizes how deteriorating freedoms can affect index eligibility. Critique of ESG in emerging markets (Priority: 4/5): Tolle argues traditional ESG is ineffective and sometimes hypocritical in EM because it ignores the foundational issue of political and civil freedom and relies on unreliable self-reported data. Sector and security construction (Priority: 3/5): The index still ends up with heavy tech exposure due to Taiwan and South Korea, while state-owned enterprises are excluded and the top liquid stocks in each included country are selected. Frontier-market opportunities and Estonia (Priority: 3/5): The conversation closes with examples of freer smaller markets and frontier-market possibilities, especially Estonia’s digital-citizenship model and openness to business formation.

Key Arguments: Freedom is a better organizing principle for EM investing than traditional ESG because it captures the institutional conditions that enable growth and shareholder protections. Countries should be scored on both personal and economic freedom because political, civil, and economic liberties work together; excluding one weakens the whole system. China remains out of the index because its freedom scores are declining, suggesting the country is moving in the wrong direction for long-term investability. India’s removal illustrates that even large markets can be excluded when rights, internet access, journalism, and regional autonomy deteriorate enough. Traditional EM ESG funds are flawed because they often still hold large positions in autocratic countries while excluding minor controversies elsewhere. Freedom-weighting does not require an absolute threshold; it is a relative framework that favors the freest countries within the EM universe. State-owned enterprises are excluded because they create conflicts between government objectives and shareholder interests and are typically less efficient. Emerging markets can still be a value/growth opportunity, but the strongest long-term upside should accrue to freer countries with better institutional foundations.

Data Points: Freedom variables used: 76 - Composite freedom scoring draws on 76 personal and economic freedom variables from multiple data providers. Data providers: 3 - Scores use data from the Cato Institute, Fraser Institute, and Friedrich Naumann Foundation. Annual rebalance frequency: Once a year - The index is rebalanced annually. Countries added/dropped this year: 2 added, 2 dropped - Tolle notes a high-turnover rebalance in the current year. India status: Dropped from the index - India fell below the threshold after freedom and rights concerns worsened. China weight in MSCI EM: About 37% to 40% - Referenced as the dominant weighting in standard EM benchmarks. MSCI EM sector mix change: Energy and materials fell from 40% to 12.5% - Comparison of 2008 vs end-2020 EM sector composition. Emerging markets share of global GDP: 40% to 50% - Mentioned as EM’s approximate share of world GDP. Emerging markets share of global stock market cap: About 10% - Illustrates the gap between economic output and market capitalization. Security cap at rebalance: 8% - Top holdings like Taiwan Semiconductor and Samsung are capped to avoid concentration. State-owned enterprise cutoff: 20% or more state-owned - Such companies are excluded from the portfolio construction process.

Pivotal Quotes: "We freedom weight the emerging market so that the freer countries get a higher weight, the less free countries get a lower weight." — Perth Tolle: Core description of the index methodology. "Freedom is the basis of all other ESG." — Perth Tolle: Her critique of traditional ESG in emerging markets. "They're literally going the wrong direction at this point." — Perth Tolle: On China’s declining freedom score and why it remains excluded.

Implications: The segment suggests EM investors should rethink index exposure through the lens of institutions and rights, not just GDP growth. It also warns that ESG labels can obscure major political-risk and governance problems in emerging markets.