Investing in Emerging Markets Without Funding Dictators: Perth Tolle on Freedom Index

The Problem with Traditional EM Indexes

• 🎯 Traditional emerging market indexes are often weighted by market capitalization, leading to significant investments in authoritarian regimes like China and Russia.
• 💡 This practice funnels capital to countries whose political and economic policies can be detrimental to investment capital and foreign investor interests.
• ⚠️ Many investors do not intend to fund dictatorships, yet current index methodologies often force this outcome.

The Freedom Index Methodology

• 🔑 Perth Tolle created the Freedom 100 EM Index (FRDM) to offer a diversified emerging markets allocation that screens out authoritarian regimes.
• 📊 The index uses the Human Freedom Index from the Cato Institute and Fraser Institute, which assesses 87 variables across civil, political, and economic freedoms.
• ⚖️ Countries are weighted based on their composite freedom score, with higher-scoring countries receiving a larger allocation and the worst offenders being excluded.
• 🚫 State-owned enterprises are also excluded to further emphasize economic freedom and minimize government interference.

Performance and Rationale

• 📈 The Freedom 100 EM Index has outperformed the S&P 500 over one, two, and three-year periods, with a 67% return in 2025 compared to the S&P 500's nearly 18%.
• 🧠 The rationale is that countries with greater freedom tend to offer better long-term growth stories and investment opportunities.
• 🌍 By investing in freedom, investors can achieve international exposure without inadvertently supporting oppressive regimes and their associated market risks.

Case Studies: China and Russia

• 📉 China's market has significantly underperformed the S&P 500 over the past 30 years, largely because Chinese companies must prioritize state interests over shareholder value.
• 🚫 Russia has never been included in the FRDM index, and its market's collapse following the invasion of Ukraine highlighted the significant 'autocracy risk' that investors often overlook.
• 💡 The FRDM index focuses on countries like Chile and Poland, which offer market size and liquidity but are often underweight in traditional cap-weighted indexes.

Directing Capital for Good

• 🚀 The finance world has the power to direct assets, and there is no neutral position; capital can either promote freedom or authoritarianism.
• ✅ The Freedom Index aims to direct assets towards countries promoting freedom, offering investors a way to align their portfolios with their values and potentially achieve better investment outcomes.