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At The Money: Investing in Freedom · Masters in Business

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
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  Speaker 2: I want to right for you. I want to I'm
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  Speaker 2: Barry Ridoltson on today's edition of At the Money. We're
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  Speaker 2: going to discuss how to avoid those countries that are
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  Speaker 2: geopolitically dangerous to your wealth China, Russia, Saudi Arabia, Egypt,
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  Speaker 2: and Turkey. To help us unpack all of this and
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  Speaker 2: what it means for your portfolio, let's bring in Perth Toll.
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  Speaker 2: She's the founder of Life and Liberty Indexes and creator
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  Speaker 2: of the Freedom one hundred Emerging Market ETF stock symbol FRDM.
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  Speaker 2: She was named one of ten people to Watch by
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  Speaker 2: Wealth Management Magazine, one of one hundred people transform running
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  Speaker 2: business by Business Insider. Her ETF, the Freedom one hundred
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  Speaker 2: EM index manages over two billion dollars and has beaten
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  Speaker 2: the SMP five hundred over one two and three years.
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  Speaker 2: In twenty twenty five, FRDM was up sixty seven percent.
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  Speaker 2: That's double the MSCI Emerging Market Index, which was up
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  Speaker 2: about thirty three thirty four percent, which itself was double
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  Speaker 2: the S and P five hundred, which was up seventeen
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  Speaker 2: point nine percent. So Perth, before we get into the details,
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  Speaker 2: remind us about the Freedom Index, what gets excluded and why.
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  Speaker 3: Yeah, so, the Freedom Index is basically a freedom weighted
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  Speaker 3: emerging markets strategy that uses third party quantitative freedom metrics
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  Speaker 3: to weight countries instead of using market cap So, with
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  Speaker 3: market capitalization weighted indices, you get a high weighting to autocracies,
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  Speaker 3: and some of the world's biggest autocracies have a very
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  Speaker 3: concentrated weight. With freedom waiting instead, you get a higher
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  Speaker 3: concentration to the freest countries in the world, because we
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  Speaker 3: believe that's where we're going to find the best growth stories.
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  Speaker 2: Going forward makes sense. So I know, the index looks
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  Speaker 2: at three broad categories to screen out different countries civil, political,
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  Speaker 2: and economic concerns. Explain how you ended up on those
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  Speaker 2: three items.
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  Speaker 3: Yeah, so, we felt it was extremely important to encompass
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  Speaker 3: all different kinds of freedoms, not just personal freedoms, not
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  Speaker 3: just economic freedoms, because all freedoms work together. One of
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  Speaker 3: the authors of the data set that we use has
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  Speaker 3: said that freedoms work together like parts of an automobile.
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  Speaker 3: You can't have the steering wheel without the transmission. The
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  Speaker 3: car still won't run. So you have to have both
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  Speaker 3: personal freedoms like civil and political freedoms, encompassing things like terrorism, torture, trafficking,
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  Speaker 3: women's rights, freedom of speech, media expression, assembly of religion,
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  Speaker 3: civil procedure, criminal procedure, judiciary independence, and things like that.
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  Speaker 3: And also the economic freedoms that we're all more familiar
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  Speaker 3: with as investors, things like taxation, rule of law, private
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  Speaker 3: property rights, business regulations, soundness of monetary policy, and freedom
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  Speaker 3: to trade internationally. So all of these things added together
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  Speaker 3: give us a composite country score from our data think tanks,
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  Speaker 3: the Cato Institute and the Fraser Institute, and we use
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  Speaker 3: that composite score on the country level to derive our
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  Speaker 3: country weights.
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  Speaker 2: So I want to dig deeper into those three broad subjects.
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  Speaker 2: But before we do, you know, there's been a lot
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  Speaker 2: of pushback on ESG type investing and you know, morality
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  Speaker 2: based investing. When I hear names like the Cato Institute
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  Speaker 2: and the Frasier Institute, these are very conservative entities, not
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  Speaker 2: the sort of groups you think of as oh, this
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  Speaker 2: is just another woe way of moving money around. Investing
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  Speaker 2: in freedom really is a fairly well defined way to
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  Speaker 2: screen out risk bad players and increase risk, isn't it.
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  Speaker 3: Yeah, So the Cato Institute and the Fraser Institute. I
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  Speaker 3: don't know what you mean by very conservative, however these
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  Speaker 3: are these are uh for example, the Free Frasier Institute
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  Speaker 3: is UH known for their economic freedom data, the Cato
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  Speaker 3: Institute more so for the personal freedom side of it,
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  Speaker 3: more political freedoms and and uh civil civil freedoms. And
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  Speaker 3: these are both entities that take no government grants, so
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  Speaker 3: they don't take any grants from, you know, even the
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  Speaker 3: US or the Canadian governments where they're based. That was
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  Speaker 3: important to me because we all know the World Bank
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  Speaker 3: debacle a few years ago where because they took money
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  Speaker 3: from China and they, you know, under a Chinese coercion
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  Speaker 3: changed some of their scoring. They had to actually scrap
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  Speaker 3: a very useful index which we used, which was the
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  Speaker 3: Doing Business Index. That is something that the community is
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  Speaker 3: still trying to replace. And so this is something that
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  Speaker 3: was important to me that they were independent from government coercion.
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  Speaker 3: The other thing about them is one thing that I
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  Speaker 3: noticed working with them all these years. And by the way,
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  Speaker 3: we're completely independent from each other, so I have no
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  Speaker 3: influence into their country scoring. They have no influence into
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  Speaker 3: our country allocations. And it's it's you know, completely separate,
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  Speaker 3: but having you know, had permission to use their data set,
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  Speaker 3: having had some insight into how they work. One thing
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  Speaker 3: that really impressed me was, you know, going into twenty sixteen,
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  Speaker 3: going into kind of twenty twenty four, a lot of
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  Speaker 3: the more conservative so called voices were kind of going
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  Speaker 3: along with the political environment, whereas these guys never did,
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  Speaker 3: and they called out the dangers of what they saw
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  Speaker 3: in the American political situation from pre twenty sixteen. And
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  Speaker 3: so this is this is a group that is extremely,
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  Speaker 3: in my opinion, unbiased toward any government due to the fact,
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  Speaker 3: partly due to the fact I'm sure that they are
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  Speaker 3: completely privately funded and I've seen their kind of third
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  Speaker 3: party independence firsthand through this work, this data set which
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  Speaker 3: is completely third party for them, and also we're using
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  Speaker 3: their third party measurements, so there's two layers third party
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  Speaker 3: objectivity in there. So I've been really impressed with the
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  Speaker 3: way that they've been very unbiased and very neutral and
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  Speaker 3: very you know, i would say even centrist when it
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  Speaker 3: comes to kind of looking at the government situation in
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  Speaker 3: both the political situation in both the US and outside
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  Speaker 3: of the US, and their commentary there so.
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  Speaker 2: We'll talk a little bit about the US later. I
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  Speaker 2: want to dive into these three broad subject matters that
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  Speaker 2: drive the index, some of which seem a little obvious,
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  Speaker 2: some of which not so much. Let's start with the
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  Speaker 2: civil freedoms, where where you're looking at violent conflict, organized crime,
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  Speaker 2: disappearance detainments, torture, terrorism, all those things sound like they're
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  Speaker 2: not related to economics, but also seem to create a
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  Speaker 2: terrible environment to do business.
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  Speaker 3: Then yeah, I mean, if you can't walk down the
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  Speaker 3: street without being concerned about being shot, then you can't
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  Speaker 3: really be doing business. So and that's the idea there.
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  Speaker 3: So if you want to use a kind of a
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  Speaker 3: more colloquial way of looking at it, it's the right
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  Speaker 3: to life, the right to liberty, and the rights to property.
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  Speaker 3: So if you don't have life, we don't have anything else.
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  Speaker 3: So that is the basis of all the other freedoms. Actually,
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  Speaker 3: so the right to life, which I'm putting in the
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  Speaker 3: civil freedoms category.
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  Speaker 2: And now let's talk about political freedoms. Some of these
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  Speaker 2: make a whole lot more sense. Rule of law, due process,
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  Speaker 2: independent judiciary, multiple political parties, not single party rule, freedom
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  Speaker 2: of the press, freedom of expression, how do all of
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  Speaker 2: these things translate into better investment returns.
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  Speaker 3: Yeah, so I'm going to focus on freedom of press
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  Speaker 3: and expression for a moment here, and without freedom of
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  Speaker 3: press or freedom of expression, there's no independent verification for
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  Speaker 3: where any data, whether it comes from governments or whether
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  Speaker 3: it comes from companies, whether any of that data is
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  Speaker 3: accurate or complete. So you see in some of these
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  Speaker 3: autocratic countries, they're not putting out data anymore. They're not
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  Speaker 3: publishing some of their economic data because they don't want
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  Speaker 3: that third party scrutiny from other countries, and in their
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  Speaker 3: own countries they've already quashed it. So without third party
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  Speaker 3: verification of data, which is what investors use to measure
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  Speaker 3: the impact of their investments, you know, there's no way
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  Speaker 3: to actually measure the true impact of your investments, or
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  Speaker 3: whether you know your analysis of the investments is even correct.
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  Speaker 2: Let's stay within political freedoms and talk about the rule
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  Speaker 2: of law and an independent judiciary given the sanctity of contracts,
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  Speaker 2: and how important it is to manage that. How significant
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  Speaker 2: is an independent judiciary to the sort of index?
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  Speaker 3: Yeah, so all the variables, there's eighty seven variables that
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  Speaker 3: go into the country level composite score. An independent judiciary
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  Speaker 3: is one of those, and it's just as important as
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  Speaker 3: all the others. Like I said, you know, all the
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  Speaker 3: freedoms work together like parts of an automobile. I would
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  Speaker 3: say that, you know, it is of most importance, especially
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  Speaker 3: in business, because if you don't know if your contracts
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  Speaker 3: are going to be upheld, then how do you even
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  Speaker 3: enter into tractual agreements? How do you even start that
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  Speaker 3: business relationship? So that is extremely important, and also on
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  Speaker 3: the you know, on the on the kind of more
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  Speaker 3: extreme level of that, in emerging markets where there is
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  Speaker 3: no independent judiciary, where there is no kind of rule
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  Speaker 3: of law at play, anybody can be arrested, disappeared, or
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  Speaker 3: you know, detained for any political reason that has nothing
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  Speaker 3: to do with your actual business. So we saw this
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  Speaker 3: when Jack mad disappeared again using China as a prime example,
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  Speaker 3: because he said something the government didn't like at a
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  Speaker 3: conference and then his you know, I pos got scrapped
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  Speaker 3: and things like that. I think it's it's quieting down out,
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  Speaker 3: but many other tyche entrepreneurs have disappeared since then. So
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  Speaker 3: so in countries without rule of law, without judicial independence
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  Speaker 3: and due process, you know, in China, ninety nine percent
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  Speaker 3: of offenders are convicted.
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  Speaker 2: That's a pretty substantial conviction rate, isn't it. Man. They
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  Speaker 2: must have some great prosecutors of that.
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  Speaker 3: So yeah, that's kind of like very basic fundamental things
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  Speaker 3: that you need in order to conduct both life and
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  Speaker 3: business that I think most of Wall Street overlooks.
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  Speaker 2: So let's talk about the third leg of the stool,
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  Speaker 2: economic freedoms. These include property rights, sound monetary policy, independent
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  Speaker 2: central bank, free trade, business, credit and labor regulations, and
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  Speaker 2: then the degree of government interference in private markets. All
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  Speaker 2: of these are obviously so significant to operating a business
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  Speaker 2: and investing in public glue trading companies tell us about
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  Speaker 2: economic freedoms in the emerging market world.
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  Speaker 3: Yeah, I think economic freedoms, of all the freedoms, get
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  Speaker 3: kind of a bad rap because, you know, capitalism has
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  Speaker 3: its critics, But if you don't have the freedom to
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  Speaker 3: conduct business, if you don't have the freedom to you know,
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  Speaker 3: use your own resources as you see fit to contribute
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  Speaker 3: to the world, then you don't really have freedom. If
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  Speaker 3: the government tells you what your occupation is to be,
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  Speaker 3: or whether you can sell fruit on the street like
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  Speaker 3: we saw in the Air of Spring, you know, whether
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  Speaker 3: you can provide a living for your family. If you're
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  Speaker 3: if you're dependent on the government to give you that
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  Speaker 3: that fundamental right, then you're not really free. So without
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  Speaker 3: economic freedom, you have no freedom. And then as far
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  Speaker 3: as all the other things you mentioned in the economic freedom,
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  Speaker 3: you know, data set, the private property rights, the you know,
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  Speaker 3: free trade, soundness of monetary policy, you know, all of
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  Speaker 3: those things are things that I think Wall Street has
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  Speaker 3: traditionally taken for granted because we usually work in countries
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  Speaker 3: that have all of these things already. So and that's how,
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  Speaker 3: you know, we can be kind of myopic to the
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  Speaker 3: freedom premium in emerging markets because in emerging markets these
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  Speaker 3: things that cannot be taken for granted because not all
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  Speaker 3: the emerging markets have them.
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  Speaker 2: So how do you really think about the Freedom index?
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  Speaker 2: Is it a value based fund, is it a risk
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  Speaker 2: management tool or is this simply a pure return seeking strategy.
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  Speaker 3: Ninety five plus percent of our clients, I would say,
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  Speaker 3: are using it as a purely you know, freedom premium.
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  Speaker 3: We believe that freedom freer countries will outperform in the
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  Speaker 3: long run type of strategy. We do have some investors
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  Speaker 3: who came in in the early days when ESGU was
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  Speaker 3: a big thing and they have these ESG portfolios, but
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  Speaker 3: I think that's that's going away a little bit. So
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  Speaker 3: most of our clients do use this as a you know,
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  Speaker 3: we believe it will outperform type of strategy. And of course,
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  Speaker 3: you know, now after the outperformance that we've had in
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  Speaker 3: the out of sample in the actual live performance of
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  Speaker 3: the fund, most I think most people are using it
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  Speaker 3: in that in that manner as their core emerging markets strategy.
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  Speaker 2: So to wrap up, Hey, if you're a US or
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  Speaker 2: Canadian based investor and you're interested in getting exposure to
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  Speaker 2: emerging markets via an ETF, and you don't want a
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  Speaker 2: funnel money to autocrats and dictators, and you want to
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  Speaker 2: invest in the freest countries because it's a value based decision,
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  Speaker 2: it's a risk management decision, or it simply has demonstrated
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  Speaker 2: over the past few years to be a return seeking strategy.
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  Speaker 2: Then take a look at the Freedom one hundred M
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  Speaker 2: index ETF symbol f r DM. I'm Barry recalls you're
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  Speaker 2: listening to Bloomberds at the money. I've got to recree