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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. There are many problematic

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Speaker 1: countries on the world stage. Not only are their political

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Speaker 1: behaviors bad, but they're also unhealthy for your investment dollars.

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Speaker 1: Most emerging market indexes, however, invest broadly across all of

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Speaker 1: these countries, regardless of their political activity. If only there

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Speaker 1: was a way to avoid authoritarian regimes, dictators, and other

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Speaker 1: bad actors that destroy your investing capital. As it turns out,

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Speaker 1: there's a fund to do just that, investing in emerging

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Speaker 1: markets without steering money to the worst countries on the planet.

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Speaker 1: Pine Barry ridults that on today's edition of At the Mind,

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Speaker 1: we're going to discuss how to avoid those countries that

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Speaker 1: are dangerous to your wealth. To help us unpack all

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Speaker 1: of this and what it means for your portfolio, let's

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Speaker 1: bring in Perth Toll. She is the founder of the

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Speaker 1: Life in Liberty indexes and the creator of the Freedom

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Speaker 1: one hundred EM Index ETF symbol FRDM. She was named

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Speaker 1: what of ten to Watch in twenty twenty by Wealth

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Speaker 1: Management Magazine and one of the one hundred people Transforming

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Speaker 1: Business by Business Insider in twenty twenty one. Her Freedom

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Speaker 1: one hundred EM Index ETF now manages over two billion

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Speaker 1: dollars and has beaten the S and P five hundred

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Speaker 1: over one two and three years. In twenty twenty five,

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Speaker 1: Freedom was up sixty seven percent versus the S and

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Speaker 1: P five hundred up almost eighteen percent. So, Perth, let's

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Speaker 1: just start with the basic concept why emerging market companies

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Speaker 1: for a concept like freedom, how is screening out dictators,

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Speaker 1: authoritarians and other bid actors impact market performance?

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Speaker 2: Yeah? Thanks, Arry, So I think the problem we're trying

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Speaker 2: to solve here is that emerging markets investors previously did

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Speaker 2: not have a way to get a diversified emerging market's

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Speaker 2: allocation without funneling money to autocracies. So traditionally the way

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Speaker 2: induses are weighted is by market cap, and so the

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Speaker 2: largest autocracies in the emerging market space like China, Russia

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Speaker 2: and Saudi Arabia historically has gotten the biggest weights. Those

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Speaker 2: three countries prior to the war were all in the

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Speaker 2: top ten of most em indusies. During the height of COVID,

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Speaker 2: China was forty one percent of the MSCI Emerging Markets Index,

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Speaker 2: and now it is, you know, upwards of close to

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Speaker 2: thirty percent. So some of these large autocracies get a

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Speaker 2: very large weight in the emerging markets indices, and so

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Speaker 2: that's really the problem that we're trying to solve by

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Speaker 2: freedom waiting instead of market cap waiting.

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Speaker 1: I'm really fascinated by the origin story of the Freedom

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Speaker 1: Index and the ETF. What made you decide traditional emerging

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Speaker 1: market benchmarks were broken?

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Speaker 2: Yeah, So I grew up in both China and the US.

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Speaker 2: I was born in Beijing, and I came to the

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Speaker 2: US when I was nine, and then I worked in

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Speaker 2: Hong Kong after college for about a year, and there

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Speaker 2: saw the difference between the US market, the Hong Kong

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Speaker 2: market at the time this was two thousand and four,

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Speaker 2: and the mainland Chinese market, and saw that policies impacted

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Speaker 2: the future of a society in the future of markets.

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Speaker 2: You know, one policy that really struck me was the

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Speaker 2: one child policy under which I, you know, was born

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Speaker 2: and grew up in China, and that policy has caused

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Speaker 2: the biggest demographic crisis in the world today and probably

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Speaker 2: we won't recover from that in our lifetimes. So that's

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Speaker 2: one of the things that made me realize that governance

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Speaker 2: on the country level actually has an impact on society

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Speaker 2: and markets, but also coming back to the US. I

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Speaker 2: worked at Fidelity for ten years as a financial advisor,

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Speaker 2: and I had clients, you know, in the LA and

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Speaker 2: Houston markets who said I don't want it. For example,

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Speaker 2: I had a Russian client that said, I don't want

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Speaker 2: to invest in Russia because it's like funding terrorism. And

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Speaker 2: that was in twenty fourteen. So you can see how

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Speaker 2: pression that was. And this is kind of why I

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Speaker 2: wanted to have a way for allocators to always have

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Speaker 2: that emerging markets allocation without you know, funding autocracies, which

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Speaker 2: is usually not the intention of most investors.

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Speaker 1: Really really interesting. So you created this Freedom Index with

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Speaker 1: some of your partners. Define freedom for our audience in

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Speaker 1: market terms. When we say this is a freedom weighted

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Speaker 1: portfolio as opposed to a market cap way to portfolio,

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Speaker 1: what exactly is being measured? How does that translate into

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Speaker 1: an index?

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Speaker 2: Yeah, So the first thing is we need those quantitative

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Speaker 2: metrics for freedom, and so we use a third party

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Speaker 2: index and data set called the Human Freedom Index and

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Speaker 2: data set by the Cato Institute and the Fraser Institute.

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Speaker 2: And these are two think tanks that are completely privately funded.

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Speaker 2: They don't take any government money, not even from the

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Speaker 2: US or Canadian governments where they're based. And they look

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Speaker 2: at eighty seven different variables for freedom, and that includes

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Speaker 2: things like civil freedoms, includes political freedoms and economic freedoms,

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Speaker 2: So you're looking at both personal and economic freedoms, which

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Speaker 2: was important to me coming from a country that had

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Speaker 2: issues with both. So things like terrorism, trafficking, torture are

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Speaker 2: like in the civil freedom's category, freedom of speech, media expression,

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Speaker 2: civil procedure, criminal procedure like political freedom category, and then

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Speaker 2: economic freedoms are things we're all more familiar with, like taxation,

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Speaker 2: business regulations, private property rights, rule of the law, soundness

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Speaker 2: of monetary policy, freedom to trade internationally, the higher the

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Speaker 2: free trade the better, and the freedom to hold you know,

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Speaker 2: off room, make accounts, and so forth. So all of

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Speaker 2: these things added together eighty seven different variables and sub

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Speaker 2: variables combine into the composite country score, which we use

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Speaker 2: as the main input into our methodology. So with that

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Speaker 2: country score that measures freedom by a third party, we

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Speaker 2: turn that into country weights and allocations and then invest accordingly.

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Speaker 2: So the higher freedom country get a higher weight, the

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Speaker 2: lower freedom scoring countries get a lower weight, and the

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Speaker 2: worst offenders are automatically excluded as part of the freedom

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Speaker 2: waiting process.

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Speaker 1: So twenty four merging market countries, how many companies do

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Speaker 1: you look at? And then how many end up in

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Speaker 1: the index? And in the index once it's freedom scored,

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Speaker 1: I'm assuming it's also market cap weighted. Is that right?

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Speaker 2: So on the country level it is one hundred percent

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Speaker 2: freedom weighted before we embark on freedom waiting, though, we

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Speaker 2: do have a screen for market size and liquidity, so

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Speaker 2: markets that are too small or too ill liquid are

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Speaker 2: not part of the eligible universe. So we do have

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Speaker 2: a twenty four country initial universe and then about an

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Speaker 2: eighteen country eligible universe because countries like Czech Republic, for example,

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Speaker 2: are very free but not big enough, Peru very free

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Speaker 2: but not liquid enough, so those are not included in

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Speaker 2: the freedom waiting process US. So about eighteen countries are

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Speaker 2: left once you have that eligibility process down, and those

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Speaker 2: are one hundred percent freedom weighted within so the highest

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Speaker 2: freedom countries have the highest weight, and the way the

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Speaker 2: methodology works is that you have to be above average

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Speaker 2: among those eighteen peer countries in your score to be included.

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Speaker 2: So we are providing the freest emerging market countries in

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Speaker 2: the eligible universe, and there are some very borderline countries

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Speaker 2: that go in and out.

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Speaker 1: Every year are examples.

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Speaker 2: So India is a borderline country. That is, the score

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Speaker 2: for India is just about average among all the eighteen

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Speaker 2: country peers. So this is including countries like Taiwan, Chile,

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Speaker 2: poland South Korea on the freer side, and then countries

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Speaker 2: like China, Saudi Arabia, Egypt, Turkey on the less free side. Right,

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Speaker 2: So India is about right in the middle, and so

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Speaker 2: sometimes it's in and sometimes it's out.

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Speaker 1: Really intriguing. And then once you have this list of countries,

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Speaker 1: how do you screen through all of those companies within

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Speaker 1: the favored top nine top ten countries to put together

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Speaker 1: the index and how many companies go into the index.

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Speaker 2: Yeah, so once we have the freedom weighted country weights

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Speaker 2: within each country, we take the ten largest most liquid

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Speaker 2: constituents and those are market capitalization weighted within their freedom

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Speaker 2: weighted country weights. We do exclude state owned enterprises and

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Speaker 2: that's just to bring the economic freedom theme all the

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Speaker 2: way through. So the less government interference in private markets

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Speaker 2: the better, and that's the only thing we do on

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Speaker 2: the security level. So we wanted to really isolate the

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Speaker 2: freedom factor. It's mostly a top down, country level strategy

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Speaker 2: on this on this product.

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Speaker 1: So what first attracted me to this has been China.

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Speaker 1: And obviously you grew up in China, you worked in

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Speaker 1: Hong Kong, you have a whole lot of insight into this.

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Speaker 1: Whenever I discussed China with investors, they're always shocked when

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Speaker 1: I say, hey, you know, over the past thirty years,

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Speaker 1: since nineteen ninety five, China's markets essentially down a couple

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Speaker 1: of digits. If you want to include total return and dividends,

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Speaker 1: it's up, you know, about one hundred percent. The total

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Speaker 1: return for the S and P five hundred over the

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Speaker 1: same period is plus twenty seven hundred percent. China has

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Speaker 1: turned out to be a fairly terrible investment for Western investors.

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Speaker 1: Why do you think China has been such a laggard?

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Speaker 2: So the main problem with investing in Chinese companies is

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Speaker 2: that these are countries. These are companies that have to

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Speaker 2: put state interests first. So they are, you know, not

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Speaker 2: going to try to succeed the most by providing the

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Speaker 2: best value for their clients. They're going to be trying

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Speaker 2: to curry favor with the government. So when your interests

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Speaker 2: are divided like that, investors are subsidizing the cost of

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Speaker 2: putting the state's interests first. And as we know with

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Speaker 2: China specifically, the state's interests may be you know, in

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Speaker 2: contradiction with you know, American interests or interests of foreign

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Speaker 2: investors in general. So some of these companies, for example,

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Speaker 2: ten sent Right has an app called we Chat, and

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Speaker 2: you know, it was well known back in the day

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Speaker 2: when all the weaker news was coming out, that the

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Speaker 2: government was using we chat to crack down on dissidents

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Speaker 2: and on the weaker population. Of course, we Chat has

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Speaker 2: to give all the data over to the government that

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Speaker 2: they want because they're they're in their own business interests

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Speaker 2: and other interests of their stakeholders do not come first,

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Speaker 2: but the government's interests come first. So these are kind

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Speaker 2: of the dangers of investing in a country where all

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Speaker 2: the companies are more subject to the state's interest than

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Speaker 2: their own.

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Speaker 1: And when we look at an app like TikTok, the

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Speaker 1: question is how involved is China's states surveillance security and

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Speaker 1: their their version of the CIA tracking, managing manipulating what

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Speaker 1: US teenagers see. This This is really an issue with

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Speaker 1: Chinese companies, isn't it.

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Speaker 2: It is? But TikTok is a whole separate issue altogether,

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Speaker 2: where you're talking about, you know, interference in foreign interests,

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Speaker 2: in foreign governments, and so yeah, that's that's a totally

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Speaker 2: different issue that we don't even address in this in

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Speaker 2: this index. But absolutely dictatorship and authoritarianism is in a

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Speaker 2: globalized world is contagious, but so is freedom. And so

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Speaker 2: you know, we believe that the more people invest in freedom,

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Speaker 2: and especially you know here in the in the finance

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Speaker 2: world on Wall Street, you know, we are in a

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Speaker 2: position of privilege and power. You know, it's a position

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Speaker 2: of power to be able to direct assets, whether it's

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Speaker 2: your own assets or other people's assets. And in emerging

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Speaker 2: markets investing, you know, there is no neutral you're either

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Speaker 2: you know, directing assets for good or in some cases

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Speaker 2: for evil unfortunately. And so we don't want to be

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Speaker 2: in the position of directing assets to enable more authoritarianism,

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Speaker 2: and if we can, we want to be in the

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Speaker 2: places that are promoting freedom in the world.

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Speaker 1: So let's talk a little bit about another country where

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Speaker 1: authoritarianism rules, Russia. I suspect a lot of people first

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Speaker 1: recognized the merit of your approach to emerging market investing.

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Speaker 1: When Russia invaded Ukraine and effectively their stocks plummeted to zero.

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Speaker 1: If you are holding Russian stocks, they pretty much get

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Speaker 1: marked down to nothing in everybody portfolio. Tell us a

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Speaker 1: little bit about how Russia has fared in the Freedom

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Speaker 1: Index and what's been going on in that country.

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Speaker 2: Yeah, so Russia has never been an included country in

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Speaker 2: the FRDM index. And when Russia invaded Ukraine, you know,

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Speaker 2: we were the only Emerging markets index that did not

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Speaker 2: have Russia in it for this particular reason. And when

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Speaker 2: you know, with when their market went to zero, no

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Speaker 2: one saw that coming. So this was definitely not something

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Speaker 2: that was priced in at the time as a possibility.

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Speaker 2: It was actually in the top ten country holdings in

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Speaker 2: the MSCI and the Emerging markets in decease. So so yeah,

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Speaker 2: investors got hit, you know, quite hard during that time.

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Speaker 2: And that was the time when, as I recall, most

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Speaker 2: investors woke up to all talk course risk.

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Speaker 1: So China, Russia, a lot of countries with state run economies.

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Speaker 1: Walk us through your decision to instead of just underweight them,

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Speaker 1: just totally exclude them. What's what's the thinking there.

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Speaker 2: Yeah, So you know, even if we underweight AUTOGRAZI, you know,

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Speaker 2: we would still be funneling money towards them. I mean,

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Speaker 2: our fund has two billion dollars right now in it

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Speaker 2: MSCI indices, has you know, hundreds of billions tracking them,

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Speaker 2: and so even a little bit in an autography is

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Speaker 2: really not what we want. We don't believe that's the

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Speaker 2: best place to invest. And also, you know, we believe

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Speaker 2: that there's so many good opportunities in the emerging markets

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Speaker 2: universe outside of autocracies. You know, people only think of

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Speaker 2: the bricks because of the brick acronym, but there's you know,

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Speaker 2: countries like Chili, countries like Poland that get less than

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Speaker 2: one percent weight in the cap weighted indices, but that

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Speaker 2: have the market size and liquidity to have scale in

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Speaker 2: a product like an ETF and investors can participate in

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Speaker 2: the tremendous growth that has gone on in those countries.

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Speaker 2: And you know, our investors have been able to benefit

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Speaker 2: from that. We believe those are the countries where you

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Speaker 2: can find the freer countries are the places that have

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Speaker 2: the best growth stories of the future, and that's where

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Speaker 2: we want to be.

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Speaker 1: So to wrap up, if you're an investor that wants

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Speaker 1: exposure internationally. If you want global emerging market exposure, but

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Speaker 1: you don't want to funnel money to countries that really

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Speaker 1: engage in some of the worst behaviors there are on

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Speaker 1: the international stage and have seen their stock markets perform

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Speaker 1: poorly because of it. Consider a fund that's based on freedom,

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Speaker 1: on political, civil and economic freedom to give you that

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Speaker 1: sort of exposure with out all of the downsides. Take

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Speaker 1: a look, for example, at the Freedom one hundred index

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Speaker 1: and the e T F R F R d M.

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Speaker 1: It's really a fascinating story. I'm Barry Rudolts. This is

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Speaker 1: Bloomberg's at the Money