At The Money: Better Results By NOT Investing with Dictators! - Masters in Business Recap

Podcast: Masters in Business

Published: 2026-01-14

Duration: 17 min

Summary

The episode discusses how emerging market investments often inadvertently support authoritarian regimes, and introduces a fund that specifically avoids these countries to enhance portfolio performance.

What Happened

In this episode of Masters in Business, host Barry Ritholtz speaks with Perth Toll, founder of the Life in Liberty indexes and creator of the Freedom 100 EM Index ETF (FRDM). The conversation centers around the growing need for investors to navigate emerging markets without inadvertently funding authoritarian regimes. Perth highlights that traditional emerging market indices often weight countries by market cap, leading to heavy investments in autocracies like China, Russia, and Saudi Arabia. This misalignment poses a significant risk to investors who may not want their capital supporting oppressive governments.

Perth explains the origin of the Freedom Index, noting her unique insights shaped by her experiences growing up in China and the U.S. She stresses that governance at the country level directly impacts societal and market outcomes. The Freedom Index aims to give investors a diversified emerging market allocation while excluding countries with poor human rights records and oppressive regimes. This innovative approach is gaining traction, as evidenced by the ETF's impressive performance, which has outpaced the S&P 500 by a significant margin in recent years.

Key Insights

• Emerging market indices broadly include countries regardless of their political climate, leading to potential ethical investment dilemmas.
• The Freedom 100 EM Index ETF aims to provide a diversified investment in emerging markets while excluding authoritarian regimes.
• Perth's background in China and the U.S. informs her understanding of how governance affects market performance.
• The ETF utilizes the Human Freedom Index to assess and weight countries, focusing on both civil and economic freedoms.

Key Questions Answered

What is the Freedom 100 EM Index ETF?

The Freedom 100 EM Index ETF (FRDM) is a fund created to allow investors to gain exposure to emerging markets while intentionally avoiding investments in countries with authoritarian regimes. Perth Toll emphasizes that this ETF is designed to provide a diversified allocation without the ethical concerns that typically accompany traditional emerging market investments. The fund manages over two billion dollars and has shown remarkable performance, beating the S&P 500 over one, two, and three-year periods.

How does the Freedom Index differ from traditional emerging market indices?

Traditional emerging market indices often weight countries by their market capitalization, leading to significant investments in autocratic nations like China, Russia, and Saudi Arabia. In contrast, the Freedom Index employs a freedom weighting methodology that prioritizes countries based on their governance and human rights records. This innovative approach allows for a more ethical investment strategy that aligns with the values of socially conscious investors.

What metrics are used to assess freedom in the Freedom Index?

The Freedom Index utilizes the Human Freedom Index developed by the Cato Institute and the Fraser Institute. This index evaluates countries based on 87 different variables encompassing civil liberties, political freedoms, and economic freedoms. Important aspects measured include freedom of speech, media expression, property rights, and the rule of law. Countries are then scored and weighted accordingly, with those scoring higher receiving greater investment weight in the index.

What was Perth Toll's motivation for creating the Freedom Index?

Perth Toll's motivation for creating the Freedom Index stems from her personal experiences growing up in China and working in financial markets. She observed firsthand how government policies can drastically impact societies and markets. Additionally, as a financial advisor, she encountered clients who were uncomfortable with investing in countries like Russia due to ethical concerns. This led her to develop a way for investors to access emerging markets without unintentionally funding oppressive regimes.

How does the Freedom Index ensure companies meet investment criteria?

The Freedom Index begins with a universe of 24 emerging market countries, from which it screens for market size and liquidity to ensure eligible investments. From this eligible pool, about 18 countries are selected, which are then weighted based on their freedom scores. The methodology includes a requirement that only those countries that score above average among their peers can be included, ensuring that the index reflects a commitment to ethical investment while still providing a diversified portfolio.