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ESG – Filtering for “autocracies” in your emerging market (EM) portfolio.

Join SmartBe Investments Chief Investment Officer Mr. Gavin Graham for a eye-opening conversation about emerging market investing with Perth Tolle, founder of Life+Liberty Indexes and creator of the Freedom 100 EM Index (FRDM). During the dialogue Perth discusses the investment risks brought about by autocratic policies; how the ‘free’ EM countries are benefitting from the western decoupling from large autocracies; and their seventy-nine factor quantitative approach to measuring ‘freedom’. All this and more in this segment of the Gavin Graham Show.

About the Speakers


Perth Tolle is the founder of Life + Liberty Indexes, index provider and sponsor of the Freedom 100 Emerging Markets ETF – a first of its kind strategy that uses personal and economic freedom metrics as primary factors in its investment process. Prior to forming Life + Liberty Indexes, Perth was a private wealth advisor at Fidelity Investments in Los Angeles and Houston. Prior to Fidelity, Perth lived and worked in Beijing and Hong Kong, where her observations led her to explore the relationship between freedom and markets. Perth is a frequent speaker at investment industry events and provides commentary for various financial media including Barron’s, Bloomberg, CNBC, Cheddar, and MarketWatch. The Freedom 100 Emerging Markets ETF (Ticker: FRDM) and its underlying index were voted Best New International/Global Equity ETF and Index of the Year 2019 by Perth was named one of the Ten to Watch in 2020 by Wealth Management Magazine for her work on freedom investing.

About Gavin

Mr. Graham joins SmartBe with over 30 years of experience in Canadian and international markets. A graduate of Magdalen College at the University of Oxford, Mr. Graham has directed investment strategy at numerous institutions, such as the Guardian Group of Funds in the UK and BMO Asset Management in Canada. In addition to his position at SmartBe, he serves as a contributing editor to The Income Investor, a respected online Canadian investment journal. The Gavin Graham Show is a platform for Gavin to share his wealth of knowledge with the SmartBe community, as well as engage in stimulating conversations with peers and thought leaders.


[00:00:00] Gavin: Hello and welcome to The Gavin Graham Show sponsored

by SmartBe Investments. Today we have Perth Tolle from Freedom to talk

about emerging markets. Perth, can I hand it over to you to give us a brief

background on yourself and Freedom? Then we can get into the meat of things

with what's happening in the world?

[00:00:22] Perth: Sure. Well, I started my career at Fidelity after coming back

to the US from Hong Kong after college where I had experienced some things

that made me want to explore the relationship between Freedom and markets.

You know, at Fidelity I was there for about 10 years. I also had clients who said

to me, "I don't wanna invest in my home country." Countries like Russia and

Saudi Arabia, because it's like funding terrorism.

[00:00:41] And I felt the same way about my home country, which is China.

And all the situation that's going on there now. Kind of reversing all the policies

that made them prosperous over the past, you know, decades is making it a more

risky place to invest. And so I wanted to create something where emerging

markets investors could allocate equities and have that exposure without

funding autocracies. And with a freer country set so that they can take

advantage of the, you know, stronger institutions, the rule of law, and the

individual and investor protections that exists in the freer emerging markets.

The emerging markets, as a whole, in the universe is so full of autocracy that

previously without the FRDM, the freedom weighted product that we have, it

was not possible to invest enough index fund without having 40% allocated to

China, Russia, Saudi Arabia, Egypt, Turkey, and so forth.

[00:01:32] That's why we created the Freedom Weighted Solution and the

FRDM index, which is tracked by an ETF here in the US.

[00:01:38] Gavin: How long has it been going, and how much do you have in

the way of assets under management?

[00:01:41] Perth: Well, FRDM Index Strategy has been around since 2017. The

ETF has been around since 2019. So it's just over three years old and we have

currently about 200 million in assets under management.

[00:01:55] Gavin: Excellent. That's a tremendous achievement in a relatively

short period of time, obviously. What's the management fee on the ETF?

[00:02:00] Perth: The ETF management fee is 49 basis points. 0.49%.

[00:02:04] Gavin: And then there's the additional trading expenses and all the

rest of it on top?

[00:02:07] Perth: There's no additional. That's the..

[00:02:08] Gavin: All in charge? Wow!

[00:02:09] Perth: The all in. Yeah. Like, for example, global custody and all of

that, we cover all of that for our investors. And I'm very proud of that because

we do give our investors access to local shares on the local exchanges in each of

the countries. Which costs money.

[00:02:21] Gavin: Yeah, it does.

[00:02:22] Perth: But we are very proud to give them that local share exposure

to get, you know, the best representation of the markets in those countries.

[00:02:28] Gavin: No, that's important point in terms of investing in markets

with restricted liquidity for foreign investors. And it's also, that's a remarkably

low charge for a fund which has all of these sort of local hoops to jump through.

So, again, many congratulations on that. How's it done in terms of performance?

[00:02:43] Perth: So we've had some pretty stark outperformance since

inception, and I think that's due to some extreme events. You know, we

launched in 2019. In 2020 we had Covid. 2021 we had the China tech crash.

And then 2022 we had the Russian invasion of Ukraine.

[00:03:00] So as each of these events occurred, more and more freedom issues

became a part of the conversation. You know, when we first launched, it wasn't

a part of the conversation at all in emerging markets investing. And now it's

becoming much more commonplace. Investors are waking up to autocracy risk

in their emerging markets exposures. After they saw what happened with China

in 2021 with the tech companies, the IPO getting scrapped, founders getting

disappeared, very profitable online education companies told to be non-profits

overnight. And then what happened with Russia this year. The instant

worldwide sanctions that they were hit with after the invasion, and then their

stock market getting marked down to zero. It's now becoming almost

impossible to ignore the autocracy risk in the emerging markets universe.

[00:03:44] Gavin: As part of the whole enthusiasm for ESG, one of the major

things was governance, and one of the best indicators of quality of governance

was rule of law. The ability to actually have some confidence in the numbers

that you're looking at, and then to be able to actually trust that if there were

issues they would be dealt with in an appropriate fashion. Looking at what's

been happening, as you said, it's led to a much greater appreciation of the

importance of the rule of law and governance and things like that. What's your

major weights now within Freedom Fund? Which are the countries that you feel

score attractively on your methodology?

[00:04:17] Perth: So our biggest holdings are Taiwan, South Korea, Chile, and

Poland. Currently, Chile is the top weight, not because of its freedom score. It's

because it's outperformed relatively this year, so much more than the other

countries because of their commodities exposure.

[00:04:32] As far as the freedom metrics we use, you know, we just use third

party quantitative metrics from the Cato Institute and the Frazier Institute. We

use these composite country scores with permission for this purpose and, you

know, they use 79 different freedom variables including personal and economic

freedoms. We use the composite country score and derive our weights from

there. We are using, you know, all third party independent data. We don't

determine who are the freest markets. The data itself does that and we are

independent from the generation of that data.

[00:05:04] The freedom waiting algorithm naturally excludes the worst

offenders. So China, Russia, Saudi Arabia, Egypt, Turkey, and so forth have

never been in the FRDM index. We've been able to sidestep a lot of that tail risk

that we've seen in emerging markets in recent years. But in addition, we do give

a higher weight to the freer markets. Those freer markets are Taiwan, South

Korea, Chile, and Poland.

[00:05:26] Gavin: And second rank behind that, what would be the next four or

five countries?

[00:05:30] Perth: So right now it would be South Africa, Brazil, Indonesia,

Malaysia, Thailand, Mexico.

[00:05:36] Gavin: You essentially have a fair exposure to South and East Asia

and also at the same time to Latin America?

[00:05:43] Perth: Yeah, so we are a broad emerging markets exposure covering

multiple continents. It was designed to be kind of a core emerging markets


[00:05:49] Gavin: By adding it to your broader asset allocation, you would

presumably be getting some advantages from non correlation or low correlation

with major developed markets. Has that proved to be the case in the three years

you've been going?

[00:06:01] Perth: You know what? The correlations are becoming more

intertwined. They're becoming more correlated. Recently, as we've seen in this

draw down, everything was drawing down basically at the same time. Emerging

markets actually performed better than developed markets in this draw down. At

least the freer emerging markets. They also have the benefit, the freer emerging

markets, have the benefit of recovering faster. We saw that in the 2020 recovery

when the freer emerging markets outperformed market cap waited EM,

EMESG, and also EMX China. So it wasn't just a China story.

[00:06:33] In the time of draw down, you know, we try to find safe haven in the

places that have strong institutions, rule of law, individual and investor

protections. And we think those are not only safe havens, but also places will

find the growth stories of the next decade. Just because these are the places that

foster growth and innovation. So we try to focus on those areas. You know,

these are also markets in a time of inflation that have lower historical inflation.

They have sound money. Sound money is one of our metrics in the data that we

use. So we try to focus on the country set that will give investors the freest

country exposures in the emerging markets to try to capture those growth stories

of the future.

[00:07:11] Gavin: No that's an important point given the recurrence of inflation

everywhere, especially in the developed markets. I mean, looking at places like

Germany coming in with a 10% number. Or 8% or 9% in North America is

obviously a very, very big change from the last couple of decades. Do you think

that this is maybe a sort of paradigm shift in that we now are maybe in an

environment where there is higher inflation? Partially because of the increase in

geopolitical risk from things like Russia's invasion of Ukraine and sanctions,

and the potential of China and Taiwan and things like that?

[00:07:40] Perth: Yeah, it certainly looks that way. We are also seeing a

paradigm shift in a kind of a decoupling in our supply chains from some of

these larger autocracies. You know, Russia exported oil, and that is being hugely

weaponized now to create inflation in Europe and other places. But China

exports cheap manufacturing, which is less likely or less useful for

weaponization. So that's good. But they're still very entrenched in supply chains

globally. And that is becoming more decoupled now and companies are

disentangling themselves. But that will take time.

[00:08:18] That being said, we are investing in countries that are set to benefit

from that. So countries like Indonesia, Mexico, Brazil, Malaysia, Thailand are

hugely benefiting from this kind of decoupling out of China as far as supply

chains go. And these are countries that have better trade policies, that have more

rule of law, and investor and IP protections. And so they're actually more

attractive places for trade. There is a bifurcation going on in the world for sure.

[00:08:45] Gavin: One of the reasons, maybe, for markets like Vietnam or

Indonesia becoming more interesting is that things got pretty expensive in

China. In terms of rising wages and things like that. But it is interesting that you

do see that bifurcation and that move. And obviously Mexico, which is as you

were saying one of your major markets, is a major, major beneficiary from

nearshoring or reshoring, whatever you call it.

[00:09:03] Perth: This was a trend that was happening long before this

geopolitical shift. Long before even Covid. I remember being at Fidelity, I had

clients who did business in China that were saying, "Well, it's too expensive

now. We're, you know, moving to Mexico." So that was, you know, 10 years

ago. I think this trend was just accelerated and hopefully we'll capture some

benefits from that in our freer markets.

[00:09:21] Gavin: And would there also be an issue that if we are seeing the

weaponization of commodities by Russia after the invasion of the Ukraine, that

would benefit emerging markets? Because, again, a number of them are major

commodity exporters. Correct?

[00:09:32] Perth: It's possible. Though the free emerging markets tend to be

less resource dependent, so they tend to be less, you know, completely

dependent on on one resource. So they are more flexible to respond to market

trends as well.

[00:09:44] Gavin: Have you found that companies paying dividends is a feature

of the freer markets in that that's a way of rewarding minority shareholders and

to do so means that you actually are being transparent in terms of cashflow and

things like that?

[00:09:56] Perth: You know what? I haven't actually dug into that. I should

probably read your book . I have a feeling that's in there. We used to have

dividends, and yield, and all of those other factors on a prior iteration of our

index. We took all of that out. We stripped it all down to just Freedom. And

that's because nobody was using the freedom metric in the center. And most of

our feedback from potential investors at the time was, "Hey, you know, if we

wanted a dividend EM fund or a Value fund, we could get it elsewhere. Your

main innovation is freedom. So that's really all we would like to see." And so

we isolated the freedom factor for this flagship product. That is all we do. It's a

hundred percent freedom weighted. There are no other factors in there.

[00:10:36] On the security level, you know, we are market cap weighted inside

the freedom weighted country weights. And the only thing we do is exclude

state owned enterprises, and that's just to bring the economic freedom theme all

the way through. So we are not actually looking at dividends, although we've

had a lot of requests do so.

[00:10:52] Gavin: Well that might be a possibility in the sense of have a

Freedom dividend fund because you put that dividend screen back in. Now that

you proved to be the validity of the freedom concept. Just from limited

experience. If the management's prepared to actually give cash to outsiders, then

a, it's profitable cuz you can't fake the cash for long. But secondly, also, we are

willing to actually share it with non-family members, non insiders. So it was an

additional sort of, as it were, quality screen.

[00:11:16] Perth, that has been an excellent summary of where we are. Thank

you so very much for taking the time. It's a pleasure. I hope we can do this again


[00:11:22] Perth: Absolutely! Thanks so much for having me.

[00:11:29] Gavin: Thank you very much for listening to The Gavin Graham

Show sponsored by SmartBe Investments. If you would like to learn more about

the subjects discussed today, please go to our website, at or @smartbeinvestments on any social media platform.

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