(Ep.14) The Acquirers Podcast: Perth Tolle – Freedom Weight, Life + Liberty In Emerging Markets

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Summary

In this episode of The Acquirer’s Podcast Tobias chats with Perth Tolle, who is the Founder of Life + Liberty Indexes and the Freedom 100 Emerging Markets Index. Perth provides some great insights into how investors can find opportunities in emerging markets utilizing the human freedom index. Other topics include:

– Investors Can Now Invest In A ‘Freedom Weighted’ Emerging Markets Index

– The Distinction Between Absolute And Relative Freedom

– Emerging Markets Provide Investors With Opportunities To Capture A ‘Freedom Premium’

– Why We Don’t Invest In China, Russia, Egypt, and Saudi Arabia

– Investing In ‘Freer’ Countries Helps Avoid Taleb’s Absorption Barrier Risk

– Why We Include Parental Rights In Our Definition Of Human Rights

– How Did Rob Arnott Become My Biggest Seed Investor

– Why We Exclude State-Owned Enterprises

– What Are The 20 Best And 20 Worst Countries To Invest In According To The Human Freedom Index

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Full Transcript

Perth Tolle: Oh, this is the part where you ask, “Are you ready?” Do it again, do it again.

Tobias Carlisle: Are you ready?

Perth Tolle: I am.

Tobias Carlisle: All right. Let’s do it.

Tobias Carlisle: Hi I’m, Tobias Carlisle. This is the Acquirers podcast. My special guest today is Perth Tolle, who’s the founder of Life and Liberty Indexes. It’s the home of the freedom 100 emerging markets index which is now a ETF with the ticker FRDM. I’m going to be talking to Perth right after this.

Speaker 3: Tobias Carlisle’s the founder of a Principle of Acquirers Funds. For regulatory reasons he will not discuss any of the Acquirers funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions Acquirers Funds or affiliates. For more information visit acquierersfunds.com

Tobias Carlisle: Hi, Perth. How are you?

Perth Tolle: I’m good. How are you?

Tobias Carlisle: I’m very well, thank you.

Perth Tolle: Thank you for having me.

Tobias Carlisle: My absolute pleasure. What is freedom weighting?

Perth Tolle: So freedom weighting is a alternative weighting method that we are using in emerging markets. Alternative to market cap weighting the emerging markets. So in the emerging markets indices mostly we see, or what we saw before was market cap weighting which led to a lot of country and regional concentrations. So for example, if you look at any of the largest emerging markets ETFs like EEM or IEMG or PWO which are based on MSCI and FTSE indices. They all have a very large concentration in China and the China region. So in China you’ll see about 35% allocation. China region, if you include Taiwan, Hong Kong and South Korea you’ll see more than 50% allocation in your emerging markets index, and you’ll see 70% in Asia in general in these indices. Even the ESG emerging markets indices will have similar allocations.

Perth Tolle: Having come from China myself and not wanting to invest quite that much into a country that I find a little more risky, and a little more questionable as far as human rights practices and so forth I created the freedom weighted methodology for weighting emerging markets to give the freer countries a higher weight in the index. So the idea there is that freer countries perform better more sustainably, and they use their human an economic capital more efficiently, and they recover faster from draw downs because they’re more innovative and flexible to market trends.

Perth Tolle: So we have very large concentrations still in South Korea and Taiwan which is a happy accident that gives us still high correlation to the benchmark indices because those are highly correlated to China, but we also have very high allocations in the freer smaller countries like Chile and Poland. These are countries that are large enough to trade in an ETF with no issues and they’re very free, but they have about two percent in the other benchmark indices. So in the other benchmark indices I feel like we are missing out on some of these freer more higher potential markets.

Tobias Carlisle: And how are you defining freedom?

Perth Tolle: So we’re defining freedom using, or we basically use a freedom score given to us by our think tank partners. So we’re using the Fraser Institute, Cato Institute and Friedrich [inaudible 00:03:57] Foundation for Freedom combined efforts to basically categorize freedoms into 79 variables and come up with country score for each country. So there’s a combined country score that combines 79 third party variables as far as quantitative freedom variables. So I categorize them into three categories. The rights to life, the rights to liberty and the rights to property and that’s where the name of my company comes from. So the rights to life are things like terrorism, trafficking, internal organized conflict, extended wars in the country and so forth. The rights to liberty are things like rule of law. A lot of people don’t invest in the emerging markets because of though lack or rule law. So we are hoping to provide a solution through these methods.

Perth Tolle: So rule of law, freedom of speech, freedom of the media, freedom of religion, freedom of assembly. Those types of freedoms and then the rights to property are your economic freedoms. So things like taxation, private property rights, contract laws, business regulations, freedom to trade internationally and sound money.

Tobias Carlisle: When you’re constructing these indexes you’re talking about the scores, but I’ve seen you discuss this on Twitter. There’s a distinction between absolute and relative freedom. Can you just talk a little bit about that and how that flows into the index?

Perth Tolle: Yeah, so we use an absolute freedom level relative to peers. So basically we look at the absolute level of freedom versus the movement or the momentum of freedom in a country. So for example, Argentina is a country that has great potential for improvement and we’ve seen some hope for that in the near past, but we don’t put them in the index just because they have a high improvement potential or high trajectory for freedom. We only take actually the freest countries. So the absolute level of freedom is what we look at, but we also don’t draw a line in the sand as to, “Okay, you have to be above this certain score or this level to be in the index.” We just look at them relative to their peers. So the 10 countries that end up being included in the index are the 10 freest countries relative to the others.

Perth Tolle: So as long as, for example, Philippines is in the index currently. Smaller allocation but obviously some human rights issues there. They have higher economic freedom than human freedom but there’s definitely some issues. But they ranked higher than for example, just slightly higher than Brazil. So in the last reallocation, the rebalance they were added and Brazil was dropped. So it’s whether your absolute freedom score is higher than other emerging markets and that’s what we look at.

Tobias Carlisle: Does Turkey make it into your top 10?

Perth Tolle: No, so Turkey is an interesting case. It was in the index when we started calculating it live in 2017, and at the rebalance in 2018 we rebalance the third Friday in January. So in January Turkey triggered a rule in the methodology that had never been triggered before which is the freedom momentum decline rule. Their freedom score declined too fast and that got them kicked out of the index. So we do look at momentum on the downside as a cell discipline in cases like that where the freedom just declines extremely quickly. So they were kicked out of the index as of January 2018 and they haven’t made it back since.

Tobias Carlisle: And when you’re constructing the index, once you’ve identified the countries that you want to include then you have, you’re identifying individual companies in each country and how do you go about identifying which companies to include?

Perth Tolle: Yeah, so most of our analysis is on the country level. It’s macro approach in that we’re looking at top-down country level freedom scores. The reason for that is governments are in the best position to protect human rights and economic freedoms. You put the same company in two different countries for example. Let’s say you put Nike in North Korea and Nike in South Korea. In what country you’re going to have wealth creation and jobs, and innovation and so forth. In the other country you’re going to have child labor and slavery and all this other stuff. So it’s not the companies themselves that determine the human freedoms that they enjoy in a country, but we do take the economic freedom theme all the way through to the security level by excluding state-owned enterprises which is just taking that economic theme all the way through, because we believe the more government interference the less efficient a company is run. So we exclude state-owned enterprises.

Tobias Carlisle: What-

Perth Tolle: And we-

Tobias Carlisle: Sorry, keep going.

Perth Tolle: Yep. Oh, and we basically to keep it tradable take the 10 largest most liquid stocks on each country minus state-owned enterprises and we market cap weight within the countries.

Tobias Carlisle: What sort of companies do you tend to exclude that are state-owned? Is it banks and airlines, and telecommunications? Do you know the sort of things that get kicked out?

Perth Tolle: Yeah, it depends on the countries. So in Poland there’s a lot of banks that are state-owned that get kicked out. In more South American countries or oil-rich countries there’s a lot of oil companies that would get kicked out. So it depends on the country but mostly what I’ve seen are banks is the biggest thing.

Tobias Carlisle: So I saw that you retweeted something by Meb Fabor which I found really interesting. Meb puts all of his 401K money into emerging markets and Meb’s argument is it’s 85% of the global population, it’s 50%, 50% of global GDP but it’s only 15% by a market cap, and then he says it’s got better demographics, higher growth and that cheaper valuation means that it’s very attractive. So what’s your attraction to emerging markets?

Perth Tolle: Well, first of all, thank you, Meb for that tweet. I think that a lot of people struggle with how much to put into emerging markets and I have a similar approach in my retirement plans, but that’s partly because I’m trying to make my product survive. So thank you, Meb, for that. Shout out to him. As far as why we started with emerging markets it’s because in emerging markets there’s a special opportunity to capture this freedom premium because there’s such a huge discrepancy between freedom levels in these markets that you don’t see in developed markets. So in developed markets we’re looking at what? US, Canada, Japan, Germany. These are all very free countries and they’re fairly homogenous as far as their freedom levels, but when you get to the emerging markets you see huge discrepancies. You’ve got countries like Taiwan, and South Korea, Chile and Poland who are very free and then you have China, Russia, Egypt, Saudi Arabia with all the human rights abuses that have come out recently into the light. So this huge discrepancy in freedom levels is where we think the opportunity is.

Tobias Carlisle: I guess that leads into my next question. Why is freedom so important in emerging markets? Because the levels are so different, but why focus on the freer countries?

Perth Tolle: Yeah, so I have a background from China so I was born in Beijing and I came here to the United States when I was about nine. So I grew up half in Beijing and half in the US. When I was in Beijing I was very, and you’ll hear this from a lot of people that come out of there as a child. I wore the red scarf, I was very indoctrinated into the communist youth league and all of this stuff. I believed everything they told me and then having come to the US and being exposed to freedom was obviously life-changing, and then after that I went back and lived in Hong Kong after college for about a year, and there my eyes were opened to how different my life would have been had I stayed in China. And I realized the difference also between the mainland Chinese market and the Hong Kong market at the time, and I saw that governance and policies have a huge impact on the growth of a country and it’s markets.

Perth Tolle: So for example, I had a friend in Shanghai who, we called her Maggie but she was my same age. I was 23 at the time. She was a extremely intelligent woman. She didn’t exist on paper. So she has no birth certificates, no school records, no hospital records, no state benefits because she was born a second child. So I’m a child of the one-child policy generation, and that policy completely changed the culture of my generation and how we think, and how my generation in China really live now and our level of respect for individual freedoms, and human right and just the value of individual life. So that had a huge impact on why I chose to do this.

Tobias Carlisle: The one-child policy was that you were allowed to have a child and there are top-down macro statistics about the number of girls that are missing in China relative to what we know the average, there should be roughly equal numbers of girls and boys, but there are something like 30,000,000 girls missing from those statistics. Is it that partially they just haven’t been registered? That’s the more hopeful outcomes?

Perth Tolle: So yeah, so I recently talked with Dan Crosby on his podcast about this and he raised that question, and so I went to Mei Fong who is a writer and reported on this to see what the answer to that is. Are these 30,000,000 women, are they missing from the registries or are they literally gone? And she said that if they were just missing from being registered when the one-child policy became a two-child policy we should’ve seen an uptick in that, or we should’ve seen a decrease in that number or more women, or girls being born but we didn’t actually see that change since 2015. So the official theory is that those are women who are actually missing from the population due to the one-child policy and the selective births as a result of that just because in China, like my friend, her parents registered her brother for school and for existence and she was one of the lucky ones. So by that theory she’s not one of the 30,000,000 missing women.

Tobias Carlisle: They must have an enormous impact on not just the economy but just the culture of the country over that period of time.

Perth Tolle: Yeah, no it really changed the culture of the whole generation and now even though that they’ve loosened the policy to allow two children, no one is having two children because everybody grew up as an only child. That’s the culture now. There’s no huge value placed on a large family. It’s just not something that people really value now.

Tobias Carlisle: So besides China you also exclude Russia and Saudi Arabia. So can you go through the reason perhaps for Saudi Arabia?

Perth Tolle: Yeah, I’m glad you brought this up because I don’t actually exclude them. I just use the scores. So I can’t game the system and say, “Oh, I don’t like Saudi Arabia. So I’m going to kick them out because they-

Tobias Carlisle: Or your methodology excludes them perhaps.

Perth Tolle: True. So my methodology takes the freedom scores for a country by Fraser, Cato, and Friedrich [inaudible 00:16:53] Foundation and it runs the countries through in iterations. There are three iterations that eliminates the bad actors. So the algorithm basically will give you negative scores for countries whose scores are too low, and through three iterations of that it’s how these countries get excluded from the index.

Tobias Carlisle: And what are the particular reasons for excluding Saudi Arabia?

Perth Tolle: So Saudi Arabia has very poor human freedom scores on their human freedom [inaudible 00:17:33]. So they end up having a score that is lower than average in emerging markets. And so that’s basically… I mean, obviously there’s women’s rights issues. There’s freedom of the press issues. We saw with the Khashoggi killings recently that the whole situation is extremely dire as far as press freedoms. There is basically monarchy rule. So there’s not a lot of checks and balances on the government. They did allow women to drive recently which is great. My friend, Manal al-Sharif, who was the like the Rosa Parks of Saudi Arabia who 11 years ago was jailed for driving and basically filming herself driving, and putting it on YouTube to start the women to drive movement. She recently did a drive for freedom in the United States to bring attention to her friends in the movement who were jailed right around the time that women started being allowed to drive.

Perth Tolle: So it’s not that they were loosening up on women’s freedoms. If they were, why would they jail the activists who campaigned for women to be able to drive? So there’s these four women that are in jail now that are her friends basically arbitrarily because they campaign for the freedom for women to drive, and now women are allowed to drive and they’re still in jail. In fact, they were arrested around the timer that women started being allowed to drive. So there are still some issues obviously in Saudi Arabia that we’d like to see improvements on before we can include them into the index. Saudi Arabia is a beautiful, huge country with huge potential and obviously women are a big part of that and so I hope to see more reform there. I believe Manal wrote the Time Magazine people of the year article on MBS when he was Time people of the year last year. She had huge hopes for reform when he came into power, and she maybe has lost some of that hope now, but I still think there’s a lot of potential there as with China and with all of the emerging markets. I hope they all make it into the index, right? I want this alpha to disappear.

Tobias Carlisle: Well, I agree and I’m with you there. Russia is an interesting case study too I think because Russia is one that appears in there’s a lot of value investors that think that Russia is unusually undervalued as an index but it’s one that you exclude for human rights reasons. What are the particular ills of Russia?

Perth Tolle: Yeah, so again, I’m not excluding them.

Tobias Carlisle: Well, the methodology does.

Perth Tolle: It’s the score. Yes. So Russia has some similar issues. They have elections but there’s really no chance for anyone to win other than whoever’s already in power. I don’t want to say too many bad things against autocrats in public, but there’s obviously some issues there. If anyone wants to learn more about investing in Russia I would recommend Bill Browder’s book Red Notice. I retweet Bill Browder often. Just this morning I retweeted him and he had tweeted something about Morgan Stanley is now out of Russia and I don’t know why it took so long. It’s a un-investible country. So just to give you an example. Bill Browder was a hedge fund manager who went to Russia to invest when they were just starting to privatize everything. So there was huge arbitrage opportunities. He made a killing and then Russia basically, their oligarchs somehow stole the tax money that he paid to the government. So they stole from their own government. There’s some kind of scheme that his lawyer Sergei Magnitsky uncovered.

Perth Tolle: So they ended up torturing and killing Sergei Magnitsky, and as a result Bill Browder gave up his [inaudible 00:21:58] as an investor, as a professional investor, as a hedge fund manager and became a human rights activist. He is speaking in about two weeks from the time of those filming at the Oslo Freedom Forum and he speaks everywhere on behalf of Sergei Magnitsky, and the Magnitsky act which basically provides a form of accountability for human rights abusers around the world.

Perth Tolle: So Russia I know is very attractive as far as valuation, and I know you are deep value investors so I don’t know if that’s attractive to you as well, but I will quote Bill Browder here when I say, he says he doesn’t invest in emerging markets at all like Russia because there’s no rule of law, and you have to have rule of law to have an investible country.

Tobias Carlisle: I agree. Rule of law, incredibly powerful and necessary to invest in any country.

Perth Tolle: Yeah, but that’s a good point and I just one to point one more thing. Sorry to interrupt.

Tobias Carlisle: Please.

Perth Tolle: This is why freedom should be part of the conversation when it comes to investing, especially in emerging markets because there is so much discrepancy in the freedom levels, and so coming from a freer country we sometimes project our optimism onto these countries because we just have no idea what goes on there. It’s incomprehensible to us. So one of our missions is to bring freedom into the conversation as a criteria for evaluating emerging markets investments. That is a perfect example because otherwise Russia, Turkey all have very, very attractive valuations.

Tobias Carlisle: Let me just play devil’s advocate for a moment. You and I had lunch with Larry Swedroe who’s the factor king, and I hope to have Larry on this show at some stage. Larry said that, and this is a truth in a lot of investing. You’re rewarded for taking risks. You’re rewarded for taking on. That’s sort of what deep value investing is. You’re taking on the risk that these companies look like they’re trending towards zero, and so there should be some premium in the fact that many of these countries that are more difficult to invest in, or aren’t investible from various other perspectives look like they’re undervalued. But your research seems to show something else.

Perth Tolle: Yeah, so our research does show that freer countries over the long run do have more sustainable returns and the investors in those countries get more of those returns. So for example, in China we saw a huge run up in the last 30 years because they absolutely went from abysmal policies, right? To just bad policies, but not abysmal and that has created an economic miracle. And illusion of one of sorts, but investors in their stock market got very little of that over the last 30 years. We’ve seen obviously huge growth there. So that’s an issue where in the freer countries investors do capture more of that growth. There is something to be said for risk versus reward. As far as that I would quote Nassim Taleb where he talks about the absorption barrier risk. I don’t know if you’re familiar with that or…

Tobias Carlisle: No.

Perth Tolle: I actually didn’t read the book. I heard a podcast that he did with EconTalk where he talks about absorption barrier risk. That is the risk where, the risk that completely takes you out. So if you’re in a casino it’s like where you run out of money. Basically it’s a risk that you cannot recover from, and so that’s the kind of risks that we’re avoiding in emerging markets by investing in the freer countries, because I mean, think about it if you’re in a very unfree country and then something like the government decides to basically I don’t know, blanking on the word here but true opposite of privatize.

Tobias Carlisle: Yeah, it’s not to take them public because that’s not the right word but to take them over.

Perth Tolle: Right, basically they decide the state now owns your company or something like that, and then your investors are screwed. So that is the absorption theory risks, or your lawyer gets killed and tortured, right? Like Magnitsky. Those are absorption barrier risks that you deal with when you have no rule of law. So we would say that, “Yeah, the rewards should be great for those kinds of risks.” So I don’t actually agree with him. Sometimes, especially in the short-term you’re going to see maybe a slightly lower return. We have very high, we have very low sorry. Low tracking error to the benchmark indices so it doesn’t deviate quite a lot. So I would say the risk is too far off there.

Tobias Carlisle: On the upside you say that there’s a relationship between freedom and human rights, and innovation.

Perth Tolle: Yeah. So freer countries are basically faster to innovate, and so faster to recover from draw downs, or faster to pivot according to market needs. Sometimes they even benefit from the market trends in unfree countries. So for example, Chile is a very high, they have very high trading with China. They’re a very prolific trading partner with China. They do about 25% of their trade with China. So Chile being one of the freest countries and China being one of the most unfree in the emerging markets by these metrics. Last year China had a smart car or a electric car revolution that’s still going on now where the government is subsidizing a lot of electric car companies, manufacturers and so forth. There’s this huge demand now for the batteries that go in these cars, right? Which are made from lithium. And so that’s an investing trend that you’ve seen globally, is investing in these types of batteries.

Perth Tolle: Chile historically has been a huge miner of copper. So one of their companies that are in our index, SQM is a Chilean mining company and they basically pivoted from mining copper to now mining a lot of lithium, and their stock price benefited as well. So a lot of these more freer countries can quickly adjust to market trends. Even the trends in their trading partners who are less free.

Tobias Carlisle: Shout out to all my Chilean amigos. My mother in law’s Chileno.

Perth Tolle: Really?

Tobias Carlisle: Yeah.

Perth Tolle: That’s awesome. We should go visit. Do some, you know [crosstalk 00:29:07]

Tobias Carlisle: I’d love to. [inaudible 00:29:08] got to Valparaiso and have a look at that gigantic people.

Perth Tolle: That’s awesome.

Tobias Carlisle: So you have some very high profile backers. Who are they and how did you meet them?

Perth Tolle: Thank for this question. It’s something I am in awe of every day. So for example, Rob Arnott is my biggest seed investor and he as my first seed investor. So I’ve been a fan of Rob’s since I guess when I first, when this all first started because he was one of the first to do non-market cap weighting indices. So at the time I was actually working at Fidelity in Pasadena when I first became aware of Rob’s work, and he was on the same street. So we were both on South Lake Avenue. So there’s been times like on a weekend I would just walk over to his building being, “Oh, it’s the research affiliates building.” So I literally stalked his building because I was such a fan of their work, and then when I left Fidelity and eventually started this company I called them and I said, “Hey, do you guys want to partner on this?” And they’re like, ‘Please go away.” I could not get through to Rob. There was no chance.

Perth Tolle: So the first year I started trying to get an idea of the ETF market and what was going on, I went to obviously etf.com’s inside ETF conference which is the biggest ETF conference, right? So the first place I went to get an idea, a feel of the ecosystem. At this time there was a inter-conference tweeting app where you can tweet out stuff to the other attendees, and somebody tweeted while they were in a China talk. They were like, “I can’t believe this guy’s talking about China and saying nothing about the one-child policy and its impact on social and economic impact on China.” And I was like, “Wow, somebody else knows and cares about the one-child policy.”

Perth Tolle: So I tweeted back and we ended up meeting and he is the president of this tiny, like 20 person CFA society in Tennessee, and he’s like, “Hey, come speak for our 20 person CFA society.” And I’m just starting out so I’m like, “Sure, that be awesome.” And so I really thank him and I just want to give a shout out. His name is Ralph Lehman in Tennessee there. The CFA society and-

Tobias Carlisle: Good work, Ralph.

Perth Tolle: Yes, thank you, Ralph. So he had me speak at Chattanooga and in Knoxville, and after that they recommended me to go speak in Tampa which is a much bigger society for their forecast dinner. Which as you know is like the biggest event of the year. So I was on the forecast dinner panel. This is my first year doing this. I barely had everything figured out and just had no idea what was going on, and I was on the panel with Black Rock Morning Star and this guy named David Kotok who was in the business for long, long time. So after the panel David Kotok invites me to this thing he hosts called Camp Kotok, and this is basically 30 economists, or sorry, 50 economists and financial people who fish for three days in a remote part of Maine. Almost in Canada with no Wifi. Now there’s wifi but at this time there was no wifi [crosstalk 00:32:35].

Tobias Carlisle: Do you fish Perth?

Perth Tolle: I don’t actually fish. So when I got this invitation I was like, “Who does this?” But my friends were like, “You should go. These are really cool people and David Kotok is super cool.” So I did go and you had to take a very small, a seaplane to get into the campsite. The other way to get there is by car. You drive two and a half hours from the Bangor airport and so I at first was planning to drive, but I had some meetings before hitting the camp that I was tired and so I was like, “Oh, you know, I’m just going to take a seaplane if it’s still available.” So I called. I was flying from LaGuardia to Bangor. I called on my way to LaGuardia, the seaplane company and I was like, “Hey, is it too late to get seaplane?” And they were like, “No, you can share with Rob Arnott.” I’m like, “What?” So I literally shared a seaplane. It’s a two-seater, right? So [inaudible 00:33:31] I shared sea plan with Rob Arnott. They were like, “Yeah, just intercept him at the Bangor airport. Here’s his flight number.”

Tobias Carlisle: Yes.

Perth Tolle: And I was like… So I literally intercept Rob Arnott at the airport. I’m like, ‘Hey, did they tell you we were riding together?” And Rob was like, “Yeah.” So that’s how I met him and he ended up being super cool. We fished together, all of us for three days and he after the camp did a call with me and a potential client, and after that he said, “I’ll invest.”And so he became the first investor. His investment from that time to now has grown and I’m just so thankful for that. See, and he doesn’t actually go every year. So when I tell you the story sometimes I leave this part out. He doesn’t go to this camp every, that was my first year but he was only there that year and he’s never gone again since. [inaudible 00:34:18] only that year to pay a bet that he lost to Barry [Redholds 00:34:23]. So he lost, I don’t know, if I should be telling this. He had lost-

Tobias Carlisle: Yeah, tell it.

Perth Tolle: $10,000 bet to Barry Redholds. I believe the bet was that Hillary Clinton would be the Democratic nominee. So Barry won the bet and he brought $10,000 in cash wrapped like a brick and presented it to Barry at dinner. So that’s the only reason that he was there. So I have a lot of people to thank for this. This is not something I could’ve orchestrated. I thank Barry for winning the bet. Ralph for leading the way with the CFA introductions that lead to Camp Kotok, obviously David Kotok. Just the people that have resonated with this idea along the way blows me away every day, and that’s just one story. I met Steve Cucchiaro also at an inside ETFs one year and he is now a supporter, and they’re tactical so when they’re long he is with us. And Steve Cucchiaro is obviously, he’s the founding father of ETF strategist, or he’s the one who sold Wind haven to Schwab and now he has his own firm, 3EDGE. I mean just amazing. The people that have…

Perth Tolle: Oh, my lead market maker. Reggie Brown. Thank you, Reggie. So funny story about Reggie Brown. So he was one of the first people that I made a point to meet at the first ETF conference because the month that I left Fidelity was April of 2014, and that’s when Reggie Brown was on the cover of Bloomberg Markets Magazine as Mr ETF. So I don’t know if you remember this cover but it was just his face and it said Mr ETF. So obviously I was like, “Oh, this is really cool. Who is this guy?” So that’s first time I read about Reggie and made a point to meet him at the-

Tobias Carlisle: Reggie’s the godfather of ETFs, right? That’s the-

Perth Tolle: Yeah.

Tobias Carlisle: That’s how Reggie’s described.

Perth Tolle: Yes. So I’m just honored and obviously Wes and the team at Alpha Architect. Funny story about meeting them too. I actually asked them partner with me a year before they actually came up with the idea of partnering together. So that conversation happened twice. The first time was my idea, the second time was Wes’s idea. So yeah.

Tobias Carlisle: So you have this serendipitous flight with Rob Arnott, and you manage to in the time that you’re in the plane you manage to pitch him and get him persuaded, but sort of it illustrates just the things about starting a business, launching a business that you have to be hustling. And I think you’re an incredible hustler, networker. You’re one of the very few women in this industry and you’re the founder and face of this. How do you find it negotiating with lots of different people who are mostly men, and pitching your idea which I think is very compelling. What’s your experience doing that?

Perth Tolle: I’m actually a horrible negotiator. And just to correct you, I didn’t pitch Rob Arnott on the plane.

Tobias Carlisle: You didn’t?

Perth Tolle: It was a 20 minute ride. It took quite a bit longer but he did resonate with it right away, at camp. So I could tell that he was resonating with the idea and he ended up deciding to invest over time. So it wasn’t that fast, but I’m grateful and as far as negotiating. I’m really bad at it. It took me a long time to do this. We’ve had the index live for years now and there has been times when I almost went into a partnership with an issuer or several times like that and something fell through. Either I negotiated terribly or we came to a deal and they backed out. Just a lot of this has happened and I think that and we just talked about this morning how nerve-wracking it is to actually be at this point, right?

Perth Tolle: So it’s super fun being an entrepreneur but it’s also super scary, but I think a couple of things helped me get through this. So one is, I really feel called to do this. I really feel that there should be a freedom weighted index. Especially in emerging markets and also in other parts of the world, but I had a lot of confirmation in the beginning that this was something that needed to happen. So when things didn’t go well or and it was super sad. Some of those times when a partner would back out or something like that. I knew that enough things had happened as you called serendipitously or what I call something that was orchestrated in a way that I could not have done that I knew that I could go on, right?

Perth Tolle: So I didn’t give up and the other thing that helps me a lot is people like you. Other people who are doing the same thing and you’re both scared, and so it’s like somebody else is going through the same and you see the genius of these other people like you, and Wes and these people and I’m like, “How am I in this group?” Because you guys are so awesome, and the hustle that you guys… You know, Phil. You’ve had him on your show Phil [Bach 00:40:26]. That guy can hustle. So it’s just like, these people that just have so much fun with this whole experience of entrepreneurship. This whole experience of being in indexing and ETFs which is an extremely fun group. And so that also keeps me going. So thank you for that.

Tobias Carlisle: Likewise, Perth. It’s always a pleasure running into and talking to you on Twitter too.

Perth Tolle: Oh yeah, Twitter also helped.

Tobias Carlisle: You may be not allowed to say this but Alpha Architect, they’re going to be providing the underlying ETF. You provide the index, the underlying ETF and the ticker again is FRDM. I have to very careful about the way that I pronounce there because Australians slur through our words. So I always do the American pronunciation for the R which I know gets me a lot of grief back home. But FRDM, freedom is the ticker. One of the things that when we first met I didn’t quite realize there was an emerging market focus for your first fund. We discussed and something that I’m very interested in, which are the freest countries in the world?

Perth Tolle: Yeah, so some of the Nordic countries are very free. Hong Kong and Singapore are considered very free. So Hong Kong, Singapore-

Tobias Carlisle: Hong Kong?

Perth Tolle: Norway. Hong Kong yeah because remember there’s a slight time lag in the data. So Hong Kong is still considered very free by especially economic freedom standards. They’re number one as far as economic freedom in the world, tied with Singapore. We are expecting to see that come down as China gains influence in the region, but as far as economic [inaudible 00:42:18] they’re still the highest out there.

Tobias Carlisle: And where does the US rank?

Perth Tolle: I have to look that up but I believe it’s somewhere around 18. Let me look it up.

Tobias Carlisle: Well, I looked it up this morning.

Perth Tolle: Okay.

Tobias Carlisle: And I saw your tweet about [inaudible 00:42:34].

Perth Tolle: You’re just testing me then?

Tobias Carlisle: No, no, no. Well, a little bit.

Perth Tolle: I only look at emerging markets.

Tobias Carlisle: You’ve got give me the top 100 from one to 100, go. No, I wouldn’t do that to you.

Perth Tolle: Exactly.

Tobias Carlisle: Do you know the reasons why? So why is America at 18 and not sort of say closer to the very top?

Perth Tolle: Yeah, so one of the things I’ve heard from the people that compile this index, who are great. Is that the war on drugs and the war on terror caused our scores to go down. So in the last recent years. So a lot of government spending and interference and things like that. That’s what I heard.

Tobias Carlisle: And because 10% of my listeners are Australian. Where does Australia rank? Do you know?

Perth Tolle: Very high, it’s very high.

Tobias Carlisle: Now war on drugs or terrorism.

Perth Tolle: Why don’t you tell me since you looked it up? But it is very high.

Tobias Carlisle: I’m happy to hear that.

Perth Tolle: Yeah. I’m going to actually look that up right now since you’re testing me and now I’m curious where Australia… At least I know it’s really high. So I can’t actually see the screen right now. Don’t do anything weird. If anyone else wants to look this up there’s a couple ways [inaudible 00:43:53]. This is done by Fraser, Cato and Friedrich [inaudible 00:43:57] so if you go any of those you can find it, and right now I am going to Cato and I’m just pulling the data and then I will rank. Source countries. So Australia they have a human freedom score which is the composite score. Eight point five eight out of 10. Their rank is four.

Tobias Carlisle: Four. Human freedom?

Perth Tolle: [inaudible 00:44:27]. Number four. So extremely free.

Tobias Carlisle: So who’s one, two, three? New Zealand.

Perth Tolle: [inaudible 00:44:35].

Tobias Carlisle: Chile.

Perth Tolle: No, Chile is not. Chile is below Australia. This is a whole 160 countries, so I’m going to just sort by rank. New Zealand, Hong Kong, Switzerland, Australia.

Tobias Carlisle: Wow, that’s a good outcome. Behind New Zealand. Shout out to my kiwi buddies. You’ll be able to remind me of that one next time we see each other.

Perth Tolle: Yeah.

Tobias Carlisle: It’s probably based on how you play rugby which unfortunately Australia’s not doing well there.

Perth Tolle: No, this is the composite score. So this includes human freedom and economic freedom. If you look at just economic freedom, Hong Kong is number one.

Tobias Carlisle: Good sevens rugby there too. So thanks very much for that, Perth. That’s very interesting. When someone’s thinking about using your index or the ETF what’s the use case or how should they be thinking about it?

Perth Tolle: Yeah, so I’ll just share how people are using it that I know of. So our first investors are basically using it as a complement to their current emerging markets holdings. So just to get a different exposure to different emerging markets than they currently have. So it’s a very good complement because of the kind of… We have some high allocations to freer countries that the benchmark indices have very low allocations in, and we have no allocation in certain countries that they have high allocation in. So it’s a very good complement to those types of existing emerging market strategies. I use it exclusively for my emerging markets allocation, but I don’t expect anyone else to have that kind of dedication at the beginning stage of the strategy.

Perth Tolle: So most of the people that I know that are using it are using it as a complement to their existing emerging markets holdings.

Tobias Carlisle: But you say it also tracks reasonably closely to the benchmark. What is the benchmark for emerging markets?

Perth Tolle: I use the MSCI emerging markets index. Something people could also use FTSE. The only difference there is the FTSE has more A shares and they have no South Korea. So MSCI has South Korea and are adding A shares now.

Tobias Carlisle: Excuse me. Does FTSE treat South Korea as a developed market?

Perth Tolle: Yes.

Tobias Carlisle: That’s why it’s not included, I see. That’s an interesting idea that you get little tracking error even though you’ve got quite a different allocation.

Perth Tolle: Yeah, no that’s a happy accident actually. I like that about the outcome and that’s just because it just so happens that Taiwan and South Korea are highly free markets, and are always in the top four country allocations. So they’re highly correlated to China and they get a very high allocation in the index. So kind of a good proxy I guess for China without being invested in China itself. So for me, I work with human rights activists a lot. I see a lot of human rights issues in China. Like right now we see the [foreign language 00:48:07] issue. What’s happening with religious freedom, what’s happening with press freedoms and basically any treatment of any human rights activism, or people that criticize the government. But you don’t see anyone around the world talking about this, right? You don’t see governments talking about it. You see what’s happening in Hong Kong as well and the new extradition laws that may come into plays, and people getting kidnapped for selling books about politicians from different countries.

Perth Tolle: So a lot of these things that go on that are very obviously going on that no one disputes, no one is talking about. So in the trade deal between US and China, did human rights come up once? I doubt it. Does it come up from the UK as far as what’s going on in Hong Kong with all that the UK has invested in Hong Kong over the years? No, never comes up, why? Because of the economic clout that China has and what China needs more of is more foreign investment and they’ll have even more economic clout. So we’ve given them a lot of foreign investment already and that has given them this kind of almost immunity from anything that they want to do as far as human rights because nobody will ever mention, because if they want to do business in the country. And in fact, I don’t know if you saw this article. MSCI, when they started adding A shares. First of all, in 2015 when China had that huge stock market collapse one of the people they blamed was MSCI. They were like, “Because you didn’t add us, you didn’t add A shares we had this huge draw down. This crash and it’s your fault.” Or whatever. They blamed a lot of people, MSCI was one of them.

Perth Tolle: But now they have, a story came out in Wall Street Journal by Mike Bird that they actually pressured MSCI to add A shares. So this is obviously not something to knock on MSCI. China does this with everyone. So yeah, so that’s another reason why I feel in my investing I don’t want to be supporting the immunity of regimes that commit human rights abuses with my investment dollars, and hopefully there’s others who feel the same way and maybe some institutions who do as well though it’s harder I think for institutions to take that stand because a lot of them do get funding from these countries.

Tobias Carlisle: One of the rights that I saw which I thought was a little unusual and it hadn’t occurred to me was parental rights. So why include parental rights in your definition of human rights?

Perth Tolle: That is an excellent question.

Tobias Carlisle: Thank you.

Perth Tolle: So, to give you an example, and parental rights is basically what rights a parent has to a child after divorce, or even during a marriage. This is one of the five proxies for women’s rights that are used in this index. The other proxies include missing women which we talked about and inheritance rights. So parental rights, to give you an example, again, using my friend’s story, Manal al-Sharif, from Saudi Arabia. Her first marriage in Saudi Arabia she ended up getting a divorce and she has basically now no rights to her child that she had in that marriage. So her first son is still in Saudi Arabia even though she has been self-exiled to Australia. So she’s in Australia now with her second son from a second marriage, but the two sons have never met because one of them is not allowed to go into the country, and the other one’s not allowed to come out. That’s one example of what could happen.

Perth Tolle: So basically parental rights is if a woman decides to leave a marriage, does she have any rights to her children? And so that obviously is huge thing for women’s rights in the country, because there’s a lot of mothers who would stay in a terrible situation to stay with their children. So that’s why that’s in there.

Tobias Carlisle: It’s unimaginable. If you’ve got kids to be separated from them.

Perth Tolle: Yeah. You know that as a dad, I don’t know if I’m biased but I think as a mom it’s possibly worse.

Tobias Carlisle: Possibly.

Perth Tolle: Yeah, so we do use that as a… And typically in these very repressive regimes it’s obviously the woman who loses out if she leaves. So that’s a proxy for women’s rights. Excellent question.

Tobias Carlisle: If folks want to get in contact with you what’s the best way to do that?

Perth Tolle: So the website is lifeandlibertyindexes.com and you can get a lot of information there. I’m on LinkedIn and Twitter. My Twitter handle is perth_tolle.

Tobias Carlisle: Which is T-O-L-L-E.

Perth Tolle: Yes. Perth like Australia and then-

Tobias Carlisle: Yeah, why are you Perth?

Perth Tolle: Oh, my dad went there, he did a translation work in Australia before I was born. I actually didn’t talk with him, my dad growing up. He wasn’t there growing up but eventually when I met him I found out that he had never actually been there. I always thought that he had been there, he never went there. He just heard about. He was in Australia, he like [inaudible 00:53:45] somebody told him about Perth.

Tobias Carlisle: That’s a good enough reason. And the ticker for the index is FRDM and it’s also the same ticker for the ETF that tracks it which is, you’re assisted there by Alpha Architect. It’s incredibly inspiring, Perth and I think you’re incredibly courageous. Not only because you’re launching an ETF almost single-handedly but also because you’re shining a light on some of these autocratic regimes around the world. I really do wish you the very best of luck in the launch.

Perth Tolle: Thank you so much. I couldn’t [inaudible 00:54:25] any of this without the support of all our partners and people like you. So definitely not doing it alone. I thank you for that.

Tobias Carlisle: My pleasure. Thanks, Perth.

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